Income under the head Salary
- Calculation of Income under the head Salary
- Basis of Charge
- Meaning of Salary
- Annuity or Pension
- Fees, Commission, Perquisite or Profits in lieu of Salary
- Leave Salary or Leave Encashment
- Provident Fund
- Pension Scheme
- Profits in lieu of Salary
- Deductions from Salary
- Relief under Section 89
Calculation of income under the head salary
|1. Fees, Commission and Bonus||—|
|4. Retirement Benefits||—|
|5. Fees, Commission and Bonus||—|
|Less: Deductions from Salary||—|
|1. Standard Deduction(upto Rs. 40,000)||—|
|2. Entertainment Allowance u/s 16||—|
|3. Professional Tax u/s 16||—|
The provisions pertaining to Income under the head “Salaries” are contained in sections 15, 16 and 17.
Basis of charge (Section 15)
- Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier.
- 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.
- If the salary paid in arrears has already been assessed on due basis, the same cannot be taxed again when it is paid.
(1) Advance salary
Advance salary is taxable when it is received by the employee irrespective of the fact whether it is due or not. It may so happen that when advance salary is included and charged in a particular previous year, the rate of tax at which the employee is assessed may be higher than the normal rate of tax to which he would have been assessed.
(2) Arrears of salary
Normally speaking, salary arrears must be charged on due basis.
Points to consider:
a) Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is earlier.
b) Existence of relationship of employer and employee is must between the payer and payee to tax the income under this head.
c) Income from salary taxable during the year shall consists of following:
i. Salary due from employer (including former employer) to taxpayer during the previous year, whether paid or not;
ii. Salary paid by employer (including former employer) to taxpayer during the previous year before it became due;
iii. Arrear of salary paid by the employer (including former employer) to taxpayer during the previous year, if not charged to tax in any earlier year;
Exceptions - Remuneration, bonus or commission received by salary to partners from the firm is not taxable under the head Salaries rather it would be taxable under the head business or profession.
Salary, perquisite and profits in lieu of salary (Section 17)
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.
‘Salary’ under section 17(1), includes the following:
- any annuity or pension,
- any gratuity,
- any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages,
- any advance of salary,
- any payment received in respect of any period of leave not availed by him i.e. leave salary or leave encashment,
- Provident Fund: - the portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognized provident fund to the extent it is taxable and - transferred balance in recognized provident fund to the extent it is taxable,
- The contribution made by the Central Government or any other employer in the previous year to the account of an employee under a pension scheme referred to in section 80CCD.
|Fully Taxable||Partly Taxable||Fully Exempt|
|(i) Entertainment Allowance
(ii) Dearness Allowance
(iii) Overtime Allowance
(iv) Fixed Medical Allowance
(v) City Compensatory Allowance (to meet increased cost of living in cities)
(vi) Interim Allowance
(vii) Servant Allowance
(viii) Project Allowance
(ix) Tiffin/Lunch/Dinner Allowance
(x) Any other cash allowance
(xi) Warden Allowance
(xii) Non-practicing Allowance
|(i) House Rent Allowance [u/s 10(13A)]
(ii) Special Allowances [u/s 10(14)]
|(i) Allowance granted to Government employees outside India.
(ii) Allowance granted to High Court Judges
(iii) Sumptuary allowance granted to High Court or Supreme Court Judges
(iv) Allowance paid by the United Nations Organization
(v) Compensatory Allowance received by a judge
Understanding the allowances
House rent allowance (HRA)
HRA is a special allowance specifically granted to an employee by his employer towards payment of rent for residence of the employee. HRA granted to an employee is exempt to the extent of least of the following:
The deduction available is the least of the following amounts:
- Actual HRA received;
- 50% of [basic salary + DA] for those living in metro cities (40% for non-metros); or
- Actual rent paid less 10% of basic salary + DA
For detailed discussion and calculation of HRA exempted, use Hostbooks online HRA calculator
Children education allowance
-Rs. 100 per month per child upto a maximum of two children.
Any allowance granted to an employee to meet the hostel expenditure on his child
-Rs. 300 per month per child upto a maximum of two children.
Any transport allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty shall be exempted to the extent of 1,600 per month. For person who is blind or deaf and dumb or orthopedically handicapped with disability of the lower extremities of the body, to meet his expenditure for commuting between his residence and place of duty shall be exempted to the extent of 3,200 per month.
City compensatory allowance
City Compensatory Allowance is normally intended to compensate the employees for the higher cost of living in cities. It is taxable irrespective of the fact whether it is given as compensation for performing his duties in a particular place or under special circumstances.
This allowance is given to employees to meet the expenses towards hospitality in receiving customers etc. The Act gives a deduction towards entertainment allowance only to a Government employee.
Allowances which are fully exempt
(1) Allowances granted to Government employees outside India
Allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India for services rendered outside India are exempt from tax. Students may remember that in such cases under section 9(1)(iii), the income chargeable under the head ‘Salaries’ is deemed to accrue in India. The residential status of the recipient will, however, not affect this exemption.
(2) Allowance to High Court Judges
Any allowance paid to a Judge of a High Court under section 22A(2) of the High Court Judges (Conditions of Service) Act, 1954 is not taxable.
(3) Sumptuary allowance granted to High Court or Supreme Court Judges
Sumptuary allowance given to High Court Judges under section 22C of the High Court Judges (Conditions of Service) Act, 1954 and Supreme Court Judges under section 23B of the Supreme Court Judges (Conditions of Service) Act, 1958 is not chargeable to tax.
(4) Allowance paid by the United Nations Organisation (UNO)
Allowance paid by the UNO to its employees is not taxable by virtue of section 2 of the United Nations (Privileges and Immunities) Act, 1947.
(5) Compensatory allowance received by a judge
Compensatory allowance received by judge under Article 222(2) of the Constitution is not taxable since it is neither salary not perquisite—Bishamber Dayalv. CIT  103 ITR 813 (MP).
Understanding annuity or pension
Meaning of annuity
As per the definition, ‘annuity’ is treated as salary. Annuity is a sum payable in respect of a particular year. It is a yearly grant. If a person invests some money entitling him to series of equal annual sums, such annual sums are annuities in the hands of the investor.
Annuity received from a present employer is to be taxed as salary. It does not matter whether it is paid in pursuance of a contractual obligation or voluntarily.
Annuity received from a past employer is taxable as profit in lieu of salary.
Annuity received from person other than an employer is taxable as “Income from other sources”
Pension is of two types: commuted and uncommuted.
- Uncommuted Pension:Uncommuted pension refers to pension received periodically. It is fully taxable in the hands of both government and non-government employees.
- Commuted Pension: Commutation means inter-change. Commuted pension means lump sum amount taken by commuting the whole or part of the pension. Many persons convert their future right to receive pension into a lumpsum amount receivable immediately.
Exemption in respect of Commuted Pension
(a) Employees of the Central Government/local authorities/Statutory Corporation/ members of the Defence Services: Any commuted pension received is fully exempt from tax.
(b) Non-Government Employee: Any commuted pension received is exempt from tax in the following manner:
If the employee is in receipt of gratuity,
Exemption = 1/3rd of the amount of pension which he would have received had he commuted the whole of the pension.
If the employee does not receive any gratuity
Exemption = ½ of the amount of pension which he would have received had he commuted the whole of the pension.
Gratuity is a voluntary payment made by an employer in appreciation of services rendered by the employee. Now-a-days, gratuity has become a normal payment applicable to all employees. In fact, the Payment of Gratuity Act, 1972 is a statutory recognition of the concept of gratuity. Almost all employers enter into an agreement with employees to pay gratuity.
Exemption in respect of Gratuity
Fees, commission, perquisite or profits in lieu of or in addition to any salary or wages
Payment in the form of fees or commission by the employer to the employee are fully taxable. Commission may be paid as fixed percentage of turnover or net profits etc. Section 17(2) and 17(3) contains the provisions relating to perquisites and profits in lieu of salary, respectively.
Leave salary or leave encashment
Generally, employees are allowed leaves during the period of service. Employee may avail such leaves or in case the leaves are not availed, then the leaves may either be lapsed or accumulated for future or may be allowed to be encashed every year or at the time termination/retirement. The payment received on account of encashment of unavailed leave would be form part of salary.
Exemption in respect of leave encashment
Understanding provident fund
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 contribution 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.
Contribution under pension scheme referred to in section 80CCD
National Pension scheme is a scheme approved by the Government for Indian citizen aged between18-60 years. Subscriber of the NPS account contributes some amount in their account. In case of any employee, being a subscriber of the NPS account, employer may also contribute into the employee’s account.
Employer’s contribution to NPS account would form part of salary of employees.
However, while computing total income of the employee-assessee, a deduction under section 80CCD is allowed to the assessee in respect of the employer as well as employee contribution under a pension scheme referred therein.
Profits in lieu of salary
(i) Compensation on account of termination of his employment
The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment.
(ii) Compensation on account of modification of the terms and conditions of employment
The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the modification of the terms and conditions of employment. Usually, such compensation is treated as a capital receipt. However, by virtue of this provision, the same is treated as a revenue receipt and is chargeable as salary
(iii) Payment from provident fund or other fund
Any payment due to or received by an assessee from his employer or former employer from a provident or other fund other than Gratuity, Pension, Compensation received by a workman under Industrial Disputes Act, 1947, from provident fund or public provident fund, from recognized provident fund, from approved superannuation fund, any House Rent Allowance, to the extent to which it does not consist of employee’s contributions or interest on such contributions.
(iv) Keyman Insurance policy
Any sum received by an assessee under a Keyman Insurance policy including the sum allocated by way of bonus on such policy.
(v) Lumpsum Payment or otherwise
Any amount, whether in lumpsum or otherwise, due to the assessee or received by him, from any person –
(a) before joining employment with that person, or
(b) after cessation of his employment with that person.
Understanding deductions from salary
Standard Deduction has been reintroduced in the 2018 budget. This deduction has replaced the conveyance allowance and medical allowance. The employee can now claim a flat Rs. 40,000 deduction from the total income, thereby reducing the tax outgo.
Entertainment allowance received is fully taxable and is first to be included in the salary and thereafter the following deduction is to be made:
However, deduction in respect of entertainment allowance is available in case of Government employees. The amount of deduction will be lower of:
- One-fifth of his basic salary or
- 5,000 or
- Entertainment allowance received.
Amount actually spent by the employee towards entertainment out of the entertainment allowance received by him is not a relevant consideration at all.
Professional tax on employment
Professional tax or taxes on employment levied by a State under Article 276 of the Constitution is allowed as deduction only when it is actually paid by the employee during the previous year.
If professional tax is reimbursed or directly paid by the employer on behalf of the employee, the amount so paid is first included as salary income and then allowed as a deduction u/s 16.
Relief under section 89
(1) On account of arrears of salary or advance salary: Where by reason of any portion of an assessee’s salary being paid in arrears or in advance or by reason of his having received in any one financial year, salary for more than twelve months or a payment of profit in lieu of salary under section 17(3), his income is assessed at a rate higher than that at which it would otherwise have been assessed, the Assessing Officer shall, on an application made to him in this behalf, grant such relief as prescribed. The procedure for computing the relief is given in Rule 21A.
(2) On account of family pension: Similar tax relief is extended to assessees who receive arrears of family pension as defined in the Explanation to clause (iia) of section 57. “Family pension” means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death.
(3) No relief at the time of Voluntary retirement or termination of service: No relief shall be granted in respect of any amount received or receivable by an assessee on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or a scheme of voluntary separation (in the case of a public sector company), if exemption under section 10(10C) in respect of such compensation received on voluntary retirement or termination of his service or voluntary separation has been claimed by the assessee in respect of the same assessment year or any other assessment year.