Income Tax Law & Practice

Code  : BBA-301
Unit – 2

Ms. Manisha Sharma

Asst. Professor
OBJECTIVES 

After going through this lesson you should be able to understand:

 Meaning and scope of Salary
 Perquisites and its types
 Allowances and its types
 Retirement Benefits
 Income from House Property
 Income from Profit and Gains from Business and Profession
 Income from Capital gains
 Income from other sources
 Before learning the provisions, it is essential to understand the important concepts relating to
Salaries.
  (1) Employer-employee relationship: Every payment made by an employer to his employee for
service rendered would be chargeable to tax as salaries. Before an income can become chargeable
under the head ‘salaries’, it is vital that there should exist between the payer and the payee, the
relationship of an employer and an employee. 
 Example 1: Sujata, an actress, is employed in Chopra Films, where she is paid a monthly
remuneration of ` 2 lakh. She acts in various films produced by various producers. The remuneration
for acting in such films is directly paid to Chopra Films by the different producers. In this case, ` 2
lakh will constitute salary in the hands of Sujata, since the relationship of employer and employee
exists between Chopra Films and Sujata.
 (2) Full-time or part-time employment: Once the relationship of employer and employee exists,
the income is to be charged under the head “salaries”. It does not matter whether the employee is
a full-time employee or a parttime one. If, for example, an employee works with more than
one employer, salaries received from all the employers should be clubbed and brought to charge for
the relevant previous years. 
 (3) Forgoing of salary: Once salary accrues, the subsequent waiver by the employee does not absolve him from liability
to income-tax. Such waiver is only an application and hence, chargeable to tax. 
 (4) Surrender of salary: However, if an employee surrenders his salary to the Central Government under section 2 of the
Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered would be exempt while
computing his taxable income. 
 (5) Salary paid tax-free: This, in other words, means that the employer bears the burden of the tax on the salary of the
employee. In such a case, the income from salaries in the hands of the employee will consist of his salary income and
also the tax on this salary paid by the employer. However, as per section 10(10CC), the income-tax paid by the employer
on non-monetary perquisites on behalf of the employee would be exempt in the hands of the employee. 
 (6) Place of accrual of salary: Under section 9(1)(ii), salary earned in India is deemed to accrue or arise in India even if
it is paid outside India or it is paid or payable after the contract of employment in India comes to an end. If an employee
is paid pension abroad in respect of services rendered in India, the same will be deemed to accrue in India. Similarly,
leave salary paid abroad in respect of leave earned in India is deemed to accrue or arise in India.
SALARY
 BASIS OF CHARGE (SECTION 15)

 (i) Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis
or on ‘receipt’ basis, whichever is earlier. 
 (ii) However, where any salary, paid in advance, is assessed in the year of payment, it cannot
be subsequently brought to tax in the year in which it becomes due.
 (iii) If the salary paid in arrears has already been assessed on due basis, the same cannot be
taxed again when it is paid.
 Example: If A draws his salary in advance for the month of April 2023 in the month of
March 2023 itself, the same becomes chargeable on receipt basis and is to be assessed as
income of the P.Y.2022-23 i.e., A.Y.2023-24. However, the salary for the A.Y.2024-25 will
not include that of April 2023. 
 Meaning of Salary

 The meaning of the term ‘salary’ for purposes of income-tax is much wider than what is
normally understood. The term ‘salary’ for the purposes of Income-tax Act, 1961 will include
both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as
non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans
etc.).
 Section 17(1), defined the term “Salary”. It is an inclusive definition and includes monetary
as well as non-monetary items. 
 PERQUISITES

 “Perquisite” may be defined as any casual emolument or benefit attached to an office or

position in addition to salary or wages.
 “Perquisite” is defined in the section 17(2) of the Income tax Act as including: 
 (i) Value of rent-free/accommodation provided by the employer.
 (ii) Value of any concession in the matter of rent respecting any accommodation provided to
the assessee by his employer.
 (iii) Any sum paid by employer in respect of an obligation which was actually payable by the
assessee.
 (iv) Value of any benefit/amenity granted free or at concessional rate to specified employees
etc.
 (v) The value of any specified security or sweat equity shares allotted or
transferred, directly or indirectly, by the employer, or former employer, free of
cost or at concessional rate to the assesssee.
 (vi) Any sum payable by the employer, whether directly or through a fund other
than a recognized provident fund or an approved superannuation fund to effect an
assurance on the life of the assessee or to effect a contract for an annuity.
 (vii) The amount of any contribution to an approved superannuation fund by the
employer in respect of the assessee, to the extent it exceeds one lakh rupees; and
(viii) The value of any other fringe benefit or amenity as may be prescribed
 TAXATION OF PERQUISITES
 Perquisites can be divided in the following 3
categories:
 1. Perquisites taxable in all cases
 2. Perquisites not taxable
 3. Perquisites which are taxable only in the hands
of specified Employees. 
ALLOWANCES

 Different types of allowances are given to

employees by their employers. Generally
allowances are given to employees to meet some
particular requirements like house rent, expenses
on uniform, conveyance etc. Under the Income-tax
Act, 1961, allowance is taxable on due or receipt
basis, whichever is earlier.
Provident fund

1. Provident fund scheme is a scheme intended to give substantial benefits to an

employee at the time of his retirement. Under this scheme, a specified sum is
deducted from the salary of the employee as his contribution towards the fund. The
employer also generally contributes the same amount out of his pocket, to the fund.
 The contributions of the employer and the employee are invested in approved
securities. Interest earned thereon is also credited to the account of the employee.
Thus, the credit balance in a provident fund account of an employee consists of the
following: (i) employee’s contribution (ii) interest on employee’s contribution (iii)
employer’s contribution (iv) interest on employer’s contribution. The accumulated
balance is paid to the employee at the time of his retirement or resignation. In the
case of death of the employee, the same is paid to his legal heirs. 
 Income from House Property

 CHARGEABILITY [SECTION 22]

 (i) The process of computation of income under the head “Income from house property” starts with the determination
of annual value of the property. The concept of annual value and the method of determination is laid down in section
23.
  (ii) The annual value of any property comprising of buildings or lands appurtenant thereto of which the assessee is the
owner is chargeable to tax under the head “Income from house property”. 
Exceptions: Annual value of the following properties are chargeable under the head “Profits and gains of business or
profession” -
(i) Portions of property occupied by the assessee for the purpose of any business or profession carried on by him
(ii) Properties of an assessee engaged in the business of letting out of properties.
PROFITS AND GAINS OF BUSINESS OR
PROFESSION
Income under the Capital Gains

 Capital gains shall be chargeable to tax if following conditions are satisfied:

 a) There should be a capital asset. In other words, the asset transferred should be a capital
asset on the date of transfer;
 b) It should be transferred by the taxpayer during the previous year;
 c) There should be profits or gain as a result of transfer.
TRANSFER: WHAT IT MEANS? [SECTION
2(47)]
 The Act contains an inclusive definition of the term ‘transfer’. Accordingly, transfer in
relation to a capital asset includes the following types of transactions— (i) the sale,
exchange or relinquishment of the asset; or (ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law; or (iv) the owner of a capital asset
may convert the same into the stock-in-trade of a business carried on by him. Such
conversion is treated as transfer; or (v) the maturity or redemption of a zero coupon bond;
or (vi) Part-performance of the contract: Sometimes, possession of an immovable property
is given in consideration of part-performance of a contract.
Income from other
sources
 Any income which is not
chargeable to tax under any other
heads of income and which is not
to be excluded from the total
income shall be chargeable to tax
as residuary income under the
head “Income from Other
Sources”.
 Basis of Charge [Sec. 56]:

a) Income received from subletting a house property by a tenant

b) Insurance commissions received by you (i.e., assessee)
c) Casual income
d) Family pension payments received by the lawful heirs of dead employees
e) Interest earned on deposits with companies and bank deposits
f) Interest on loans
g) Remuneration received by the Members of Parliament (MP)
h) Rental income earned from a vacant plot of land
i) Agricultural income received from an agricultural land situated outside of India
j) Interest paid out by the Government on excess payment of advance tax