Chapter 2: Salaries.

 Computation of Income under the head Income from “Salaries”.

1.) The first head of income is income from “Salaries”.
2.) Sections 15, 16 and 17 of the Income-tax Act deals with the computation of Income
under the head “Salaries”.
Sec 15 - chargeability
Sec 16 - deductions.
Sec 17 - definitions.

 Basis of Charge Sec 15:

A. Any salary due from an employer of a former employer to an assessee in the
previous year, whether paid in that previous year or not;
B. Any salary paid or allowed to him, in the previous year, by or on behalf an employer
or former employer, though not due or before it became due to him;
C. Any arrear of salary paid or allowed in the previous year, by or on behalf of
employer or former employer, if not charged to income-tax in any earlier previous
year.
 Characteristics of Salary:
1.) Relationship of employer and employee
2.) Salary from more than one employer.
3.) Salary from present, past or prospective employer,
4.) Tax free salary

 Employer and employee relationship:

1.) An income can be taxed under the head “Salaries” only if there is a relation of an
employer and employee between the payer and the payee.
2.) If this relationship does not exist, then the income would not be deemed to be
income from salary.
3.) The relation of employer and employee should be of master and servant.

For example, in the case of a lecturer of a college who is also appointed warden of the
college and gets wardenship allowance, the allowance would be taxed under the head
“Salaries” because it is being received from the employer by the employee although for
non-academic work. However, if this lecturer sets the Question Paper of University, the
remuneration which he receives for setting the paper will not be taxable under the head
“Salaries” as the university is not the employer of the lecturer. Such remuneration
would, however, be taxable under the head “Income from other sources”.

A member of Parliament is not a government employee and therefore, remuneration

received by him is not taxable as salary income, but as income from other sources.

Any salary, bonus, commission or remuneration due to/received by an assessee from a

firm, in which he is a partner, shall not be taxable under the head “Salaries” as there is
no employer-employee relationship. It will, however, be taxable under the head “Profits
and Gains of business or profession”.

 Allowance Sec 17(3):

 1.) A sum of money paid regularly to a person to meet needs or expenses. As such
allowances are given in cash along with salary by the employer.
2.) These allowances are given to an employee to meet some specific type of loss or
expenditure of the employee or to help him to meet certain type of expenses.
 These are divided into three categories on the basis of their tax treatment:
i. Fully Exempted.
ii. Fully Taxable
iii. Partially Taxable.

A. Fully Exempted Allowances:

a.) Foreign allowance only in case of government employees posted outside India.
b.) House rent allowance.
c.) House rent allowance given to judges of high court and supreme court.
d.) Sumptuary allowance given to judges of high court and supreme court.
e.) Allowance from U.N.O
f.) Allowance to teacher or professor from SAARC member states.
g.) Allowance to member of union public service commission.
 Foreign allowance given by Govt. to its employees posted abroad.
 House Rent allowance given to Judges of High court and Supreme Court.
 Sumptuary allowance given to Judges of High Court and Supreme Court.

B. Fully Taxable Allowance:

1.) Dearness Allowance.
2.) City Compensatory.
3.) Capital Compensatory Allowance.
4.) Lunch Allowance.
5.) Tiffin Allowance.
6.) Marriage Allowance.
7.) Family Allowance.
8.) Deputation Allowance.
9.) Warden Ship Allowance.
10.)Non-Practicing Allowance.
11.)Project Allowance.
12.)Overtime Allowance
13.)Fixed Medical Allowance.
14.)Servant Allowance.
15.)Entertainment Allowance for non-government employees.
16.)Water and Electricity Allowance.
17.)Holiday trip Allowance.
 Dearness Allowance: As it is clear by its name, this allowance is paid to compensate the
employee against the rise in price level in the economy. Although it is a compensatory
allowance against high prices, the whole of it is taxable.
 City Compensatory Allowance: This allowance is paid to employees who are posting in
big cities. The purpose is to compensate the high cost of living in cities like Delhi,
Mumbai etc. However, it is fully taxable.
 Lunch/Tiffin Allowance: It is fully taxable. It is given to employees for lunch as coupons
or added as part of salary.
C. Partially Taxable Allowances:
1.) Housing Rent Allowance:
The amount of Exemption is to the extent of least of the following figure:
i. HRA actually received.
ii. Rent paid -10% of salary = Excess.
iii. 50% of Salary, if the employee is staying in Metropolitan cities and 40% of
salary if the employee is staying in cities other than metropolitan cities.
Where salary = BS + DA + Commission.
2.) Entertainment Allowance:
A. Central/State Government Employee
Least of the following is exempt from tax:
i. Rs. 5,000
ii. 20% of Salary
iii. Actual entertainment allowance received.
B. Non-Government Employee:
Fully taxable.

3.) A.) Allowances covered under Sec 10 {14} (i) i.e., Official Allowances:
i. Helper Allowance: It is exempted up to actual amount spent on engaging a
helper required to perform the official duties.
ii. Uniform Allowance: It is also exempted up to actual expenditure incurred on
acquiring or maintaining of the official uniform. Excess, if any, will be
taxable.
iii. Academic Research Allowance: it is exempted up to actual expenditure
incurred for research. Excess, if any, will be taxable.
iv. Conveyance Allowance: it is exempted up to actual expenditure incurred in
performance of official duties. In case amount received is more than actual
expenditure, excess, if any will be taxable.
v. Travelling, Transfer or Daily Allowance: It is exempted up to actual
expenditure incurred for the purpose of employment. Excess, if any, will be
taxable.

So, exemption shall be the least of following two amounts:

a. The amount of allowance received.

b. The amount actually spent by the employee for the purpose for which
the allowance is given.

B.) Allowance exempt under Section 10 {14}(ii):

i. Children education allowance: Amount exempted is Rs. 100 per month

per child up to the maximum of two children.
ii. Hostel Expenditure allowance: Amount exempted is Rs. 300 per month
per month per child up to maximum of two children.
iii. Transport allowances granted to meet the expenditure of commuting
between place of residence and duty of Rs. 800 per month. And for
physically disabled employee it is Rs. 1,600 per month.
 iv. Underground allowance paid to employees working in underground
mines is Rs. 800 per month.
 Perquisites [Section 17(2)]:
Perquisites can be summaries and studied under 3 heads:
a.) Perquisite taxable in case of all employees:
i. The value of rent-free accommodation provided to the assessee by his
employer;
ii. The value of any concession in the matter or rent respecting any
accommodation provided to the assessee by his employer;
iii. Any sum paid by the employer in respect of any obligation which, but for
such payment, would have been payable by the assessee;
iv. Value of any other benefits amenity such as interest free or concessional
loan, usage of moveable asset, transfer of moveable asset.
b.) Perquisites taxable only in case of specified employees: Specified employee means a
director of the company. He has substantial interest in the affairs of the company
i.e., he holds at least 20% of the voting power in the company. He is monetary
annual salary income is more than Rs. 50,000 p.a.
i. Car, or any other automatic conveyance.
ii. Services of domestic servants including sweeper, watchman, gardener,
personal attendant provided by employer.
iii. Gas, water and electricity facility.
iv. Education facility for children.
v. Free transport allowed by employer engaged in transport business.
vi. Medical facility.
c.) Perquisites not taxable at all:
i. Cost of medical treatment in a hospital maintained by the employer,
provided to an employee or any member of his family.
ii. Re-imbursement of medical expenses incurred by employee on medical
treatment of himself or his family member in a hospital maintained by the
Government or any local authority or approved by Government.
 Profit in Lieu of Salary: It includes the following
i. Compensation for termination of employment.
ii. Compensation for modification of terms and conditions relating to employment.
iii. Payments from employers or provident or any other fund over and above the
employee’s own contribution and interest there on.
iv. Receipts from Keyman Insurance Policy
 Pension:
1.) Uncommuted i.e., in instalments
↓

Taxable For All

2.) Commuted i.e., Lump sum

A. Other Employees:
i. If employee doesn’t receive Gratuity - half of pension is exempt.
ii. If employee receives Gratuity - ⅓ of pension is exempted.
B. Government Employees:
↓
 Full Exempt

 Gratuity:
1.) Government Employee:
↓

Full Exempt

2.) Non-Government Employees: (Payment Gratuity Act 1972)

A. Act Applicable:
i. Amount Received.
ii. Rs. 20,00,000/-
iii. 15 ÷ 26 x Last Drawn salary x No. of Years of services in excess of 6
months.
B. Act not Applicable:
i. Amount received
ii. Rs. 10,00,000
iii. 15 ÷ 30 x Avg. salary of 10 months x No. of completed years.
 Year of Chargeability:
1.) Salary is chargeable to tax either on due basis or on receipt basis whichever is
earlier.
2.) Salary due in a previous year is taxable whether it is received or not during that
previous year.
3.) Salary received in advance during the previous year is taxable even if it is not due.
4.) Arrears of salary received during the previous year is taxable if it was not taxed in
earlier years.
5.) Loan taken from employer is not taxable even if it is subsequently recovered from
salary, therefore advance of salary is taxable but advance against salary is not
taxable.

 Place of accrual:
1.) The place of accrual of salary is the place where the services are rendered.
2.) Even if a NRI is paid salary outside India in respect of services rendered in India, it is
deemed to accrue or arise in India.

 Foregoing of salary:
Once salary has been earned by an employee, it becomes taxable in his hands though he
may subsequently waive the right to receive the same from the employer. The waiver of
salary by the employee would be treated as application of the income and salary though
waived would be taxable in his hands.
 Meaning of Salary Sec 17(1):
1.) Wages;
2.) Any annuity or pension;
3.) Any gratuity;
4.) Any fees, commissions, perquisites or profits in lieu of or in addition to any salary or
wages;
5.) Any payment received by an employee in respect of any period of leave not availed
by him;
6.) Any advance of salary;
  Provident fund:
1.) The sum total of all the above components is termed as gross salary.
2.) From the gross salary, the following three deductions have to be made:
a.) Standard Deduction [Sec 16(1)];
b.) Entertainment Allowance [Sec 16(2)];
c.) Deduction on account of any sum paid towards tax on employment/
Professional tax [Sec 16(3)].
A. Entertainment Allowance:
1.) Entertainment allowance is not eligible for exemption but it qualifies for deduction.
2.) Entertainment allowance is first included in the gross salary and then deduction is
allowed.
3.) Treatment of Entertainment allowance:
a.) W.e.f. assessment year 2002-03, this deduction is allowed only to a
government employee. Non-Government employee shall not be eligible for
any deduction on account of any entertainment allowance received by
them.
b.) Such entertainment allowance to the extent of minimum of the following
three limits:
i. Actual entertainment allowance received during the previous year.
ii. 20% of his salary exclusive of any allowance, benefit or other
perquisite.
iii. Rs. 5,000 is also qualifies for deduction.

Salary for this purpose means only basic salary and excludes all allowances and perquisites.

B. Profession Tax under Sec 16 (3):

1.) Deduction is allowed in respect of any sum paid by the assessee on account of a tax
on employment.
2.) In case the profession tax is paid by the employer on behalf of the employee, the
amount so paid shall be included in the gross salary as a perquisite and then
deduction is allowed.

C. Standard Deduction under Sec 16 (1):

Standard deduction is Rs. 50,000 for the FY 2021-22.

 Format for Income of Salaries:

Name of the Assessee
Residential Status: Resident & Ordinary Resident
Assessment year: 2021-22
Previous Year: 2020-21

Sr. No Particulars Amount (Rs.)

1. Basic Salary or Wages XX
2. Allowances:
i.) Dearness Allowance XX
ii.) Entertainment Allowance XX
iii.) Leave Travel Allowance XX
 iv.) House rent Allowance XX
v.) Expense Allowance XX
3. Annuity XX
4. Pension XX
5. Gratuity XX
6. Fees & Commission XX
7. Perquisites XX
8. Profit is Lieu of Salary XX
9. Leave Encashment XX
10. Provident Funds XX
Gross Taxable Salary XXX
(-) Deductions under Sec 16 XX
i. Standard Deduction under Sec 16 (i) 50,000
ii. Entertainment Allowance under Sec 16 (ii)
Least of the following:
(a) Rs. 5,000
(b) 20% of the Basic Salary
(c) Actual Entertainment Allowance XX
iii. Professional Tax XX
Net Salary XXX

Example:
Mrs. Arora is a lecturer in Swami Vivekanand College, Pune. She furnishes you the following details:

i. Monthly salary Rs. 3,600.

ii. House rent allowance Rs.450 per month (of which Rs. 200 per month is exempted).
iii. Allowance for looking after the evening shift of the college Rs. 500 per month.
iv. Examinership fees Pune University Rs. 2,000 and from Baroda University Rs. 1,200.
v. Expenditure on books for her employment Rs. 3,700.
vi. Professional tax deducted at source Rs. 600.
vii. Expenditure on attending a seminar at Goa Rs. 1,750 was re-imbursed by college.

You are required to compute income from salaries of Mrs. Arora for assessment year 2021-22.

Solution:
Given:

Name of the assessee: Mrs. Arora Residential Status: Resident and Ordinary Resident.

Previous Year: 2020-21 Assessment Year: 2021-22

Computation of Income from Salaries

Sr. No Particulars Amount Amount

1. Salary (3,600 x 12 months) - 43,200
2. House Rent Allowance (450 x 12 months) 5,400 -
(-) Exempted (200 x 12 months) 2,400 3,000
3. Allowances for evening shift (500 x 12 months) - 6,000
4. No entry (Refer Note below) - -
5. No entry (Refer Note below) - -
6. Professional tax deducted at source - 600
7. No entry (Refer Note below) - -
Gross salary 52,800
(-) Deductions under Sec 16
i) Standard Deduction under Sec 16 (1) 50,000 -
ii.) Professional Tax under Sec 16 (3) 600 50,600
Net Salary (Gross salary - Deduction) - 2,200

Note:
i. Examinership fees Pune University and from Baroda University, Expenditure on books for
her employment and Expenditure on attending a seminar was re-imbursed by college is not
to be taxable under income from salaries.