INCOME UNDER THE HEAD
“SALARIES”
Ms. Harmanpreet Kaur
Assistant Professor
Department of Commerce
BASIS OF CHARGE [SECTION 15]
-Salary due
- paid or allowed, though not due
- Arrears of Salary
DEDUCTION [SECTION 16]
-Standard deduction
- Entertainment Allowance
-Professional tax
MEANING [SECTION 17]
- Salary
-Perquisite
-Profits in lieu of salary
IMPORTANT CONCEPTS
❏ Employer-Employee relationship must exist between payer and payee
For example: - Mr. X is an employee of Deloitte, lecturer working in college etc.
- Member of Parliament or State Legislature are not a Govt. Employee and therefore
remuneration received by them is not taxable as salary income but as income from
other sources
- Salary received by Ministers working in Govt. Dept. is taxable under head Salary
- Salary, bonus, commission or remuneration by whatever name called due to/received
by partner of a firm shall not be regarded as Salary
IMPORTANT CONCEPTS
❏ Full time or Part-time Employment - it doesn’t matter
❏ For example: if employee works with more than one employer, all the
salaries should be clubbed together for chargeability under the head salary
❏ Surrender of Salary - 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.
IMPORTANT CONCEPTS
❏ Foregoing of Salary - It means waiving the right to receive the salary i.e. work
has been performed and salary has accrued but employee voluntarily says that
he will not take salary. It is treated as application of income and thus would be
taxable in the hands of an employee.
❏ Tax Free Salary - it means the employer has paid the tax on salary due to such
employee. Thus, the amount paid as tax by employer would also be considered
as income of the employee and will be added in his salary.
IMPORTANT CONCEPTS
❏ Place of accrual - place where services are rendered
Exception- In case a Citizen of India who is Govt. employee and renders services
outside India, salary received by him would be treated as income deemed to
accrue or arise in India
Example: Mr. Z an Indian citizen posted in UK as Indian Ambassador, salary
received by him for rendering services outside India shall be treated as deemed
to accrue or arise in India
IMPORTANT CONCEPTS
❏ Salary paid by Foreign Govt./Enterprises - to its employees is taxable under the
head salaries unless it is specifically exempt under section 10 like 10(6)
BASIS OF CHARGE [SECTION 15]
(a) any salary due (b) any salary paid or (c) any arrears of
from an employer or allowed to him in the salary paid or
a former employer to previous year by or allowed to him in the
an assessee in the on behalf of an previous year by or
previous year, employer or a former on behalf of an
whether paid or not employer though not employer or a former
due or before it employer, if not
became due to him; charged to income-
tax for any earlier
previous year.
where any salary paid in advance is included in the total income of any person for any previous
year it shall not be included again in the total income of the person when the salary becomes due.
Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by,
a partner of a firm from the firm shall not be regarded as "salary" for the purposes of this section.
NOTES:
Salary is chargeable to tax either on “due” basis or on “receipt” basis, whichever is
earlier.
Any amount received as arrears of salary is taxable in the year of receipt, if it was not
taxed earlier.
Accounting method of an employee is not relevant
Example 1.1 Mr. Suresh is an employee of Alpha Ltd. getting a salary of ₹ 60,000 which is due on
the last day of month but is paid on the 7th of next month. Salary for which months will be taxable
for A.Y. 2020-21?
Example 1.2: In the above case, assume that salary becomes due on 1st of next month and is paid on
the 7th of next month. Salary for which months will be taxable for A.Y. 2020-21?
Example 1.3: In the example 1.1, assume that salary of April, 2020 and May, 2020 in advance in
March, 2020. What will be his gross income for the A.Y. 2020-21?
SALARY IN GRADE SYSTEM
Example 1.4: Mr. Y joined service on 1.8.2016 in the grade of ₹12000-300-13,800-400-17,800 and
his salary was fixed at ₹ 14,200 from the date of joining. Compute the basic salary for the A.Y. 2020-
21.
SECTION 17
SALARY
[SEC. 17(1)]
PERQUISITE
SEC. 17(2)]
PROFITS IN LIEU OF SALARY
SEC. 17(3)]
SALARY [SETION 17 (1)]
It is an inclusive definition and includes monetary payments as well as non-monetary
facilities.
(i) wages;
(ii) any annuity or pension;
(iii) any gratuity;
(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or
wages;
(v) any advance of salary;
(va) any payment received by an employee in respect of any period of leave not availed of
by him;
SALARY [SETION 17 (1)]
(vi) the annual accretion to the balance at the credit of an employee participating in a
recognised provident fund, to the extent to which it is chargeable to tax
(Excess of employer’s contribution over 12% of salary is taxable and excess of interest
over 9.5% is taxable)
(vii) the aggregate of all sums that are comprised in the transferred balance of an
employee participating in a recognised provident fund, to the extent to which it is
chargeable to tax
(viii) 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;
INCOMES TO BE INCLUDED IN GROSS SALARY
DIFFERENT RECEIPTS TAX TREATMENT
Wages/ remuneration/basic Taxable
salary
COMMISSION
Annuity from employer Taxable
Bonus Taxable on receipt basis if
not taxed earlier on due basis BASED ON %
FIXED OF
Salary in lieu of notice period Taxable TURNOVER
Fee and Commission Taxable
Overtime Payments Taxable
Allowances Taxable unless specific
exemption is provided
Retirement benefits Taxable in some specified
cases*
DEARNESS ALLOWANCE/PAY
paid by the employer to its employees as well as a pensioner to offset the impact of
inflation. It is fully taxable.
D.A.
Forming part of salary/ Not Forming part of salary/
forming part of retirement benefits/ Not forming part of retirement benefits/
if terms of employment so provides if terms of employment not so provides
PENSION
LEAVE
GRATUITY
ENCASHMENT
RETIREMENT
BENEFITS
VOLUNTARY RETRENCHMENT
RETIREMENT COMPENSATION
ALLOWANCES
It is fixed monetary amount paid by employer to the employee in addition to salary for
meeting some particular expenses whether personal or for performance of his duties.
They are generally taxable on receipt or due basis whichever is earlier unless specific
exemption is provided.
• Entertainment Allowance; Dearness Allowance;
FULLY TAXABLE Overtime Allowance; Medical Allowance; City
Compensatory Allowance; Lunch/Dinner/Tiffin
ALLOWANCES Allowance; Family Allowance; Warden Allowance;
Servant Allowance; Project Allowance Etc.
• House Rent Allowance [Sec 10(13A)]
PARTLY TAXABLE • Special Allowances [Sec 10 (14)]
ALLOWANCES
• Allowances to high court judges;
• Allowances paid by United Nations Organisation
• Compensatory allowance received by judge
FULLY EXEMPT • Sumptuary allowance given to High Court and
Supreme Court judges
• Allowance given to Govt. employees outside India
HOUSE RENT ALLOWANCE [SEC 10(13A)]
HRA is given by employer to employee to meet the expenses in connection with rent of
the accommodation which the employee might have to take for his/her residence.
HRA given to an employee is exempt to the extent of minimum of the following:
Metro Cities (i.e. Delhi, Mumbai, Other Cities
Chennai, Kolkata)
1. HRA actually received 1. HRA actually received
2. Excess of Rent paid over 10% of salary 2. Excess of Rent paid over 10% of salary
i.e. (Rent paid – 10% of salary for relevant i.e. (Rent paid – 10% of salary for relevant
period) period)
3. 50% of the salary for the relevant 3. 40% of the salary for the relevant
period period
Notes (for HRA):
1. Salary includes basic salary + D.A. (forming part of salary) + commission (if based on
%of turnover)
2. Exemption is not available to an assesse who lives in his own house or in house for
which he has not incurred the expenditure of rent
3. Relevant period means the period for which the said accommodation was occupied
the assesse during the previous year
4. Salary to be taken on due basis in respect of which rented accommodation is
occupied by the employee in the P.Y. Advance salary should be ignored.
SPECIAL ALLOWANCES [SEC. 10(14)]
Granted to meet his
Granted to meet expenses incurred
PERSONAL EXPENSES [SEC.
wholly, necessarily and exclusively
10(14)(ii)]
in the
Either at the place where the duties
PERFORMANCE OF OFFICIAL
of his office or employment of profit
DUTIES [SEC. 10(14)(i)]
are ordinarily performed by him or at
the place where he ordinarily resides
EXEMPT to the extent of the EXEMPT to the extent of the
minimum of the following: i.e. minimum of the following:
Actual Allowance Received whiche Actual Allowance Received
Actual amount spent for official ver is Specified limit
purpose less
Actual expenditure in the above
case has no relevance
SPECIAL ALLOWANCES [SEC. 10(14)]
[Section 10(14)(i)]
1. Travelling Allowance
2. Daily Allowance
3. Conveyance Allowance
4. Helper Allowance
5. Academic Allowance
6. Uniform Allowance
SPECIAL ALLOWANCES [SEC. 10(14)]
[Section 10(14)(ii)]
NAME OF ALLOWANCE EXTENT TO WHICH ALLOWANCE IS
[Section 10(14)(ii)] EXEMPT
Children Education allowance ₹ 100 p.m. per child upto maximum of 2 Children
Hostel expenditure allowance ₹ 300 p.m. per child upto maximum of 2 Children
Transport allowance ₹ 3200 p.m.
(for the purpose of commuting between place of residence to
place of his duty) In the case of an employee who is blind or
deaf and dumb or orthopedically handicapped
Underground allowance ₹ 800 p.m.
Tribal area/Scheduled area allowance ₹ 200 p.m.
Allowance for transport employees working in any 70% of such allowance
transport system to meet his personal expenditure during his Or Whichever
duty performed in the course of running of such transport from ₹ 10,000 p.m. is lower
one place to another
Treatment of Entertainment Allowance
● Entertainment allowance received is fully taxable and is first to be included in salary income
under the head “Salaries” and thereafter a deduction is given.
● Deduction in respect of Entertainment allowance is available from Gross Salary only to
Government employees. The amount of deduction will be lower of :
1. ₹ 5,000
2. 20 percent of basic salary i.e. exclusive of any allowance, benefit or other perquisite; or
3. Amount of entertainment allowance received during the previous year
● In the case of a non-Governmental employee entertainment allowances is not deductible.
● Amount actually spent towards entertainment (out of entertainment allowance received) is not
taken into consideration.
GRATUITY
RECEIVED AT THE
RECEIVED DURING
TIME OF
THE SERVICE
RETIREMENT/DEATH
EMPLOYEES OF
FULLY TAXABLE GOVT./LOCAL OTHER EMPLOEES
AUTHORITIES
FULLY EXEMPT COVERED UNDER NOT COVERED
PAYMENT OF UNDER PAYMENT OF
U/S 10(10)(i) GRATUITY ACT, 1972 GRATUITY ACT, 1972
GRATUITY (OTHER EMPLOYEES)
COVERED UNDER PAYMENT OF GRATUITY NOT COVERED UNDER PAYMENT OF
ACT, 1972 GRATUITY ACT, 1972
Gratuity is exempt from tax to the extent of Gratuity is exempt from tax to the extent of
minimum of the following: minimum of the following:
1. Actual Gratuity received 1. Actual Gratuity received
2. ₹ 20,00,000 2. ₹ 20,00,000
𝑴𝒐𝒏𝒕𝒉𝒍𝒚 𝒔𝒂𝒍𝒂𝒓𝒚∗ 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒔𝒂𝒍𝒂𝒓𝒚∗
3. ×15×Completed year of service 3. ×Completed year of service
26 2
or part thereof in excess of 6 months
Note: *Salary= Basic salary + D.A. (forming
Note: *Salary= Basic salary + D.A. part) + Commission (%of turnover)
* Salary is based on last 10 months average
salary immediately preceding the month of
retirement or death
