UNIVERSITY INSTITUTE OF LEGAL STUDIES

PANJAB UNIVERSITY, CHANDIGARH

“SALARY ( SEC 15-17)”

A PROJECT REPORT SUBMITTED AS A PART OF CURRICULUM OF [Link].B(HONS.)

IN THE SUBJECT OF

“PRINCIPLES OF TAXATION LAW”

SUBMITTED TO: SUBMITTED BY:

Ms. MANIKA A. CHAUDHARY LOVEPREET KAUR

(FACULTY OF LAW) ROLL NO. 69/20

UILS, PANJAB UNIVERSITY 10th SEMESTER

SECTION ‘B’

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 ACKNOWLEDGEMENT

The success and final outcome of this project required a lot of guidance and assistance from
many people. I am overwhelmed to acknowledge my indebtedness and deep sense of gratitude
to all those who have helped me to put these ideas, well above level of simplicity, and into
something concrete.

I take this opportunity to express my profound gratitude and deep regards to my teacher, Ms.
Manika Chaudhary, University Institute of Legal Studies, Punjab University, Chandigarh for
giving me the opportunity to do this project on “INCOME FROM SALARY (SEC 15-17)”. I
respect and thank her for her exemplary guidance, monitoring and constant encouragement
throughout the course of my project.

Any attempt at any level can’t be satisfactorily completed without support and guidance of my
parents and friends. So, with due regards, I express my gratitude to them.

Lovepreet kaur

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 Table of Contents

INTRODUCTION .................................................................................................................... 4

HEADS OF INCOME ( SECTION 14) .................................................................................. 5

INCOME FROM SALARY (SEC 15-17) ............................................................................ 6

• Meaning of “ Salary” ................................................................................................... 6

• Some Characteristics of salary ................................................................................... 6

➢ BASIS OF CHARGE ( SECTION 15) ....................................................................... 8

• MEANING AND SCOPE OF SALARY UNDER (SECTION 17)........................... 9

SALARY 17(1) .................................................................................................................. 9

PERQUISITE 17(2) ....................................................................................................... 11

Rules For Valuation of Perquisites Under Section 17(2) ............................................ 13

ALLOWANCES ............................................................................................................. 15

Difference between Perquisite and Allowance............................................................. 16

PROVIDENT FUND ..................................................................................................... 16

PROFITS IN LIEU OF SALARY [SECTION 17(3)] ................................................. 18

➢ DEDUCTIONS UNDER SEC 16 .............................................................................. 19

➢ Computation of taxable salary .................................................................................. 20

CONCLUSION ...................................................................................................................... 21

BIBLIOGRAPHY .................................................................................................................. 22

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 INTRODUCTION

Government has to play an important role in all round development of society in the modern
era. It has not only to perform its traditional functions (defence, maintenance of law and order)
but also to undertake welfare and development activities such as health, education, sanitation,
rural development, water supply etc. It has also to pay for its own administration. All these
functions require huge public finance. Taxes constitute the main source of public finance
whereby government raises revenue for public spending. Taxes have been broadly categorized
into direct and indirect taxes.

Income tax is the most important of all direct taxes and with the application of progressive rate
schedule, provision of exemption limit and incorporation of a number of incentive provisions.
Tax is a fee charged by a government on product, income or activity. There are two types of
taxes – direct taxes and indirect taxes. If tax is levied directly on the income or wealth of a
person, then it is a direct tax e.g. income-tax. If tax is levied on the price of a good or service,
then it is called an indirect tax e.g. excise duty. In the case of indirect taxes, the person paying
the tax passes on the incidence to another person.

Income tax is levied by the Central Government under entry 82 of the Union of Schedule VII
to Constitution of India. This entry deals with „Tax on income other than agricultural income‟.
This task is achieved by the enactment of the Income Tax Act, 1961. The Act provides for the
scope and machinery for levy and collection of Income Tax in India. It is supported by Income
Tax Rules, 1962 and several other subordinate rules and regulations. Besides, circulars and
notifications are issued by the Central Board of Direct Taxes (CBDT) and sometimes by the
Ministry of Finance, Government of India dealing with various aspects of the levy of Income
tax. In this project report, we will deal with provisions concerning income from salary and what
is taxable under the head salary as per Income Tax Act, 1961.

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 HEADS OF INCOME ( SECTION 14)

Income tax is payable by an assesee on his total income from all the source of income. Each
source has its own unique features and requires specific treatment for correct computation of
income from that particular source. Naturally, rules and method for computation of income
from each such source are different according to the nature of the source.

Under chapter 4 of Income Tax Act, 1961 (Section 14), income of a person is calculated under
various defined heads of income. The total income is first assessed under heads of income and
then it is charged for Income Tax as under rules of Income Tax Act. According to Section 14
of Income Tax Act, 1961, there are following heads of income under which total income of a
person is calculated:

➢ Income from salary (sec 15-17)- which includes rate, register pension, etc. given by an
employer to the employee working under him.
➢ Income from house property (sec 22-27)- this type of income includes rent from any
property.
➢ Income from profit or gains from business and profession ((Section 28 – 44) - this
includes income from any business or profession like lawyer etc.
➢ Income from capital gains (Section 45 – 55) - This includes games from the sale of any
capital assets.

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 ➢ Income from other sources (Section 56 – 59) - this includes income which is not covered
under the above heads for example remuneration lottery etc.

Each head of income provides a different scheme of computation of taxable income under that
head depending upon the nature of income and the complexities attached with that head of
income. It is therefore, necessary that an income belonging to a specific head must be computed
under that head only. If an income cannot be placed under any of the first four heads, it will be
taxed under the head “Income from other sources.”

INCOME FROM SALARY (SEC 15-17)

• Meaning of “ Salary”
Salary, in simple words, means remuneration of a person, which he has received from his
employer for rendering services to him. Income under heads of salary is defined as
remuneration received by an individual for services rendered by him to undertake a contract
whether it is expressed or implied. It also includes the monetary value of those benefits and
facilities provided by the employer. A salary is a form of payment from an employer to an
employee, which may be specified in an employment contract1.

But receipts for all kinds of services rendered cannot be taxed as salary. The remuneration
received by professionals like doctors, architects, lawyers etc. cannot be covered under salary
since it is not received from their employers but from their clients. So, it is taxed under business
or profession head.

• Some Characteristics of salary

1. Every kind of remuneration of every kind of servant, public or private, and however highly
or lowly placed he may be, is covered under the scope of this term used in the Income – tax
Act, there is no difference between the wages of labourer or high officials. The Act makes no

1
Salary available at [Link]

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 distinction between salary and wages, though generally salary is paid for non-manual work
and wages are paid for manual work.
2. The relationship of payer and payee must be of employer and employee for an income to
be categorized as salary income. If an employee does any work for his employer which is not
connected with its service then the remuneration for such work shall not be treated as salary.
For example, examiner’s remuneration received by a University teacher from his University.
In Amar Dye Chemicals Ltd and another vs. Union of India and others 2 Salary –
Managing Director of Company whether servant or agent – Test – Assessee appointed as
Managing Director to manage business of company in terms of and within powers prescribed
in articles of association and under terms of agreement he could be removed for not
discharging work diligently or not acting in interest of company – Assessee held was servant
and not agent of company and hence remuneration payable to assesse would be salary.
In Cit vs. Navnitlal Sakarlal3, agreements between the company and its Managing directors
entitled them to remuneration but also empowered the Board of Directors to resolve in respect
of any year not to pay any remuneration to them. For the previous rear relevant to AY 1973-
74, the Board of Directors resolved that “the amount of commission payable to each of the
Managing directors” should be expended to purchase single premium deferred annuity
policies on their lives.
The said resolution neither referred to the provision in agreement for non-payment of
remuneration nor saying that the Managing Directors should not be paid any remuneration or
part thereof. In such circumstances, it was held that the amount of commission did accrue to
the Managing Directors and could not be said to have been diverted. Therefore, it constituted
part of their remuneration and was includible in their hands as salaries.
3. Salaries and Professional income - If the employment is merely incidental to the profession
the gains from such employment would be professional earning under section 28 and not
under section 15. For instance, a professional lawyer may be engaged in a case. His earning
from this engagement will be taxable as professional earning under section 28; but if he is
employed by a mill company as its legal adviser and also to work as standing counsel for the
company, the remuneration received by him would be taxable under the head “Salaries”.
4. Receipts from persons other than the employer – Perquisites or profits or any
remuneration received from person other than the employer would be taxable under the head

2
AIR 1974 SC 636.
3
AIR 2001 SC 235.

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 “Income from other Sources” even if they accrue to the employee by reason of his
employment . For example, remuneration received by a professor of a college for acting as a
examiner in a University or Board.
5. Payments received by Legal Heirs of a Deceased Employee: Any ex-gratia payment or
compensation given to widow or legal heirs of an employee who dies during service is not
taxable as salary income but family pension received is taxable under ‘other sources’4.
6. Voluntary foregoing: Voluntary foregoing of salary by an employee is simply an application
of income by him and, therefore, any voluntary foregoing of salary is taxable when it is due,
whether paid or not (Section 15). The salary which is voluntarily foregone must be actually
due in the name of the employee.
7. Salary of a Member of Parliament – This is not chargeable under the head “salaries” as a
Member of Parliament is not a government employee. The relation between him and the
government is not of a servant and master. It is taxable under the head “Income from other
Sources”.
8. Salary must be real – Salary must be real and not fictitious i.e., the intention to pay and
receive should be there. In case there was an agreement between the employer (governing
body of school) and employee (school teacher) under which a certain salary was given to a
certain employee and there was an another agreement whereby an identical sum was to be
returned by the employee as a donation to employer’s institution, it was held that in reality
there was no intention to pay or receive so it was not a real salary5.

➢ BASIS OF CHARGE ( SECTION 15)

According to Section 15, the following income shall be chargeable to income – tax under the
head “Salaries”:

Due Basis:- Whenever salary becomes due from employer it will be chargeable to tax even if
it is not received by the employee, i.e. salary will be included in the total income of the
employee of the previous year when it becomes due (when service is rendered).

4
Important Points / Characteristics for Computing Salary Income available at,
[Link]
[Link].
5
Reade v. Brealey (1933) 17 TC 687.

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 Received basis - Whenever salaries received it would be chargeable to tax even if it has not
become due to the employee i.e. advance salary will be included in the total income of an
employee of the previous year when it is received even if it has not become due.

Arrears of salary - would be taxable on received basis if not fixable earlier on due basis.

Example: Any increment in the salary (according to Pay commission) is given retrospectively
with effect from 1-1-2006 and arrears are received by the employee in July, 2015 i.e. The
previous year 2015-16 then it would be taxable on I received basis because these were not
taxable earlier on due basis6.

Salary will be chargeable to tax either on due basis or receipt basis, whichever is earlier.
However, it cannot be taxed twice once on a due basis and another on a received basis, either
in same previous year or in different previous years.

• MEANING AND SCOPE OF SALARY UNDER (SECTION 17)

SECTION 17

SALARY 17(1)

PREREQUISITE 17(2)

PROFITS IN LIEU OF
SALARY 17(3)

SALARY 17(1)
The term “salary” has been defined under section 17(1). According to this section, “Salary”
includes the following:

• Wages – The term “salary” includes wages. “Wages” means pay given for labour, usually
manual or mechanical, at short stated intervals, as distinguished from salaries or fees.

6
[Link] Rattan, Taxation Laws, 6th Edition, Bharat Publisher (2015-16).

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• Annuity or pension – The term “salary” includes any annuity or pension. Annuity means
periodical payment given by the employer to his employee either under contract of employment
or voluntarily it would be taxable under the head salary.
Pension is a periodical allowance or a stipend granted on account of past services beyond
exempted limit is taxable under head salary.
• Gratuity – “Salary” also include gratuity. A gratuity may be understood as a payment made by
the employer to the employee for the services rendered by him to the employer. Certain
gratuities are exempted under section 10 (10).
• Fees, commission, Perquisites or Profits in lieu of or in addition to salary or wages: Fees
may be understood to mean “reward or compensation for services rendered or to be rendered
especially payment for professional services. Commission means the percentage or allowance
made to a factor or agent for transacting business for another. Commission is generally given
to achieve target. Perquisites mean any casual emoluments, fees or profit attached to an
office in addition to salary and wages. Perquisites under given under sec 17(2) and profits in
lieu of salary under sec 17(3).
• Any advance salary
• Leave encashment is the salary received by an individual for leave period. It is a chargeable
income whether he is a government employee or not. Under section 10(10AA) (i) there is
also a provision of exemption in case of leave encashment depending upon whether he is a
government employee or other employees.
• 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, and
• Transferred balance in a Recognized Provident Fund to the extent to which it is taxable
under the law
• 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.
• The contribution made by the central government to the Agniveer Corpus Fund
account7

7
Inserted by the Finance Act,2023.

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PERQUISITE 17(2)
Perquisites mean any casual emoluments, fees or profit attached to an office in addition to
salary and wages. In simple words, it’s a personal advantage. It does not cover a mere
reimbursement of any expenditure incidental to the employment. For example, car, rent free
accommodation, free and concessional education to children of employee and free and
concessional medical facility by employer to employee.

Perquisites may be provided in cash or in kind. However, perquisites are taxable under the head
“Salaries” only if they are

a. allowed by an employer to his employee;

b. allowed during the continuance of employment;

c. directly dependent upon service;

d. resulting in the nature of personal advantage to the employee; and

e. derived by virtue of employer’s authority.

As per Section 17(2) of the Income Tax Act, perquisite in salary includes the following:

i. Value of Rent-free Accommodation provided by the employer.

ii. Value of Concession in the rent on accommodation provided by the employer.
iii. Value of any benefit or amenity supplied free of cost or at the concessional rate by the
employer to the employee.
Example: free or concessional service of gas, electricity, water for household
consumption.
iv. Any obligation paid by the employer on behalf of the employee.
Example: a watchmen is engaged by employee and the salary of watchmen is paid by
the employer.
v. Any life insurance or deferred annuity premium payable by the employer. In case of
CIT v. Lala Shri Dhar8, it was held that the premium paid by the employer on an
accident policy taken by it in respect of employee would not be a perquisite.
vi. Value of sweat equity shares allotted or transferred at a concessional rate or free of cost
to the employee.

8
(1972) 84 ITR 192 (Del).

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vii. Employer contribution to PF, NPS or superannuation fund exceeding Rs. 7.5 lakhs.
viii. Annual accretion by way of interest or dividend to the account of Provident fund, NPS
or Superannuation fund to the extent of employer contribution.
ix. Value of any other fringe benefit or amenity. These are prescribed under Rule 3(7)

• Specified employee : it means an employee mentioned under section 17(2)(iii) which

includes the following:
✓ A director of a company who is an employee of that company.
✓ An employee who has a substantial interest in the company i.e. owner of equity
shares carrying 20% or more voting power.
✓ An employee drawing in excess of Rs. 50,000.

In case of specified employee, all perquisites are given under sec 17(2)(i)-(viii) shall
be taxable.

• Non Specified employee : it means any employee who is not specified is a not specified
is a non specified employee.
Perquisites under sec 17(2)(iii) are not taxable in their hands.
Section 17(2), read with Rule 3 of the Income Tax Rules, provides for the valuation of
perquisites for computing taxable income under the head ‘Salary.’

Perquisites exempt from tax in all cases:

1. Medical facility or medical reimbursement by the employer as per proviso to sec 17(2)
inside or outside India is tax free perquisite.
2. The Indian government provides its citizens with certain perquisites included in Section
10(7) of the Income Tax Act, which are also tax-exempt perquisites.
3. Payment of annual premium by employer on personal accident policy effected by him
on the life of the employee.

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 4. Refreshment provided to all employees during working hours in office premises,
Subsidized lunch or dinner provided to an employee.
5. Recreational facilities, including club facilities, extended to employees in general i.e.,
not restricted to a few select employees.
6. Telephone provided by an employer to an employee at his residence, Goods sold by an
employer to his employees at concessional rates.
7. Transport facility provided by an employer engaged in the business of carrying of
passengers or goods to his employees either free of charge or at concessional rate.
8. Officials like the Union Minister, judges of the High Court or Supreme Court,
Parliament officials, etc., receive rent-free accommodation from the government.
9. If you take out interest-free or concessional loans to treat diseases included in Rule 3A,
it is a tax-exempt perquisite. Moreover, if you get a loan of less than Rs 2,00,000, tax
will not be calculated on it.
10. Amount spent by the employer on training of employees or amount paid for refresher
management course including expenses on boarding and lodging9.

Rules For Valuation of Perquisites Under Section 17(2)

The Income-tax Rules, 1962 contain the provisions for valuation of perquisites. It is important
to note that only those perquisites which the employee actually enjoys have to be valued and
taxed in his hand. For example, suppose a company offers a housing accommodation rent- free
to an employee but the latter declines to accept it, then the value of such accommodation
obviously cannot be evaluated and taxed in the hands of the employees. For the purpose of
computing the income chargeable under the head “Salaries”, the value of perquisites provided
by the employer directly or indirectly to the employee or to any member of his household by
reason of his employment shall be determined in accordance with new Rule 3.

9
Perquisites in Income Tax: Meaning, Examples, Types, Taxability & Exemption available at,
[Link]

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Here are some of the perquisites and their valuation as per Rule 3

• Value of Rent-Free Accommodation

1. For Central and state government employees, the assessment is based on the
residence's license fees, adjusted by the individual's rent.

2. For non-government employees residing in cities with a population exceeding

25 lakh, the perquisite value stands at 15%. In cities with a population between
10 lakh and 25 lakh, it is 10%, while in cities with a population below 10 lakh,
it is 7.5%. This value is determined by either the rent paid by the organisation
or 15% of the employee's salary, whichever is lower.

3. The value mirrors that of furnished housing, with an additional 10% calculated
on the cost of furniture. If the furniture is leased, the rates are adjusted to include
the organisation's rental expenditure.

4. The value of this perquisite equates to 24% of the employee's salary or the hotel
charges, whichever is lesser.

• Value of Perquisities by way of the use of a motor car to the employee from an employer

1. If the employer owns the car and it's used only for official duties, Value of the
perquisite will be considered as zero, provided proper documentation is
maintained.

2. If the employer covers all running and maintenance costs for private use, the
value varies based on cubic capacity: Rs. 1,800 plus Rs. 900 for a chauffeur for
up to 1.6 litres, and Rs. 2,400 plus Rs. 900 for over 1.6 litres. If the employee
covers these costs, it's Rs. 600 plus Rs. 900 for up to 1.6 litres and Rs. 900 plus
Rs. 900 for over 1.6 litres.

• Health insurance or medical benefits: The employer's provision of health insurance or

medical benefits is valued at the actual cost borne by the employer.

• Interest-free or concessional loans: The value of interest-free or concessional loans

extended by an employer is determined by the discrepancy between the prescribed
interest rate and the interest rate charged by the employer.

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 • Club membership: The employer's offering of club membership is appraised at the
expense undertaken by the employer.

ALLOWANCES
Allowance is a fixed monetary amount paid by the employer to the employee (over and above
basic salary) for meeting certain expenses, whether personal or for the performance of his
duties. Allowance is the regular cash payment to meet the expenses incurred while rendering
the job.

These allowances are generally taxable and are to be included in gross salary unless specific
exemption is provided in respect of such allowance. For the purpose of tax treatment, we divide
these allowances into 3 categories:

I. Partially exempt cash allowances ; if the assessee receives an exempted or deducted

allowance that is beyond the exempted limit then the balance would be taxable. For example :
House Rent allowance, entertainment allowance, children education allowance.

II. fully exempt cash allowances :

i. Foreign allowance: This allowance is usually paid by the government to its employees
being Indian citizen posted out of India for rendering services abroad. It is fully exempt
from tax.
ii. Allowance to High Court and Supreme Court Judges of whatever nature are exempt
from tax.
iii. Allowances from UNO organisation to its employees are fully exempt from tax.

III. Fully taxable cash allowances :

i. Dearness Allowance and Dearness Pay 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.
ii. City Compensatory Allowance: paid to employees who are posted in big cities. The
purpose is to compensate the high cost of living in cities like Delhi, Mumbai etc.
iii. Tiffin / Lunch Allowance: It is fully taxable. It is given for lunch to the employees.

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 iv. Deputation Allowance: When an employee is sent from his permanent place of service
to some place or institute on deputation for a temporary period, he is given this
allowance.
v. Overtime Allowance: for extra hours over and above his normal hours of Duty.
vi. Other allowances: like family allowance, project allowance, marriage allowance,
education allowance, and holiday allowance etc. are not covered under specifically
exempt category, but are fully taxable.

Difference between Perquisite and Allowance

There are two views regarding this question:

Allowances and perquisites are the same and Allowances are perquisites in cash.

Allowances and perquisites are different and the following are the differences:

(a) Allowances are fixed monetary amounts received by the employee from his employer for
the specific purpose which may be official or personal whereas perquisites are casual
emoluments or benefits attached to an office ar position given in addition to salary or wages.

(b) Allowances are not taxable under Income-tax Act, 1961 but under Income-tax Rules, 1962
whereas Perquisites are taxable under section 17(2) of the Income-tax Act, 1961.

(c)Allowances are always in cash whereas perquisites can be in cash or kind.

(d) Allowances are always given under the contract of employment whereas perquisites can be
given either voluntarily or under the contract of employment.

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:

• employee’s contribution

• interest on employee’s contribution

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• employer’s contribution

• 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. The provident fund
represents an important source of small savings available to the Government. Hence, the
Income-tax Act, 1961 gives certain deductions on savings in a provident fund account.

There are four types of provident funds:

(i) Statutory Provident Fund (SPF) : The SPF is governed by Provident Funds Act, 1925. It
applies to employees of government, railways, semi-government institutions, local bodies,
universities and all recognised educational institutions.

(ii) Recognised Provident Fund (RPF): Recognised provident fund means a provident fund
recognised by the Commissioner of Income-tax for the purposes of income-tax. It is governed
by Part A of Schedule IV to the Income-tax Act, 1961. This schedule contains various rules
regarding the following: Recognition of the fund, Employee’s and employer’s contribution to
the fund, Treatment of accumulated balance etc.

A fund constituted under the Employees’s Provident Fund and Miscellaneous Provisions Act,
1952 will also be a Recognised Provident Fund.

(iii) Unrecognised Provident Fund (URPF) : A fund not recognised by the Commissioner of
Income-tax is Unrecognised Provident Fund.

(iv) Public Provident Fund (PPF) : Public provident fund is operated under the Public
Provident Fund Act, 1968. A membership of the fund is open to every individual though it is
ideally suited to self-employed people. A salaried employee may also contribute to PPF in
addition to the fund operated by his employer. For getting a deduction under section 80C, a
member is required to contribute to the PPF a minimum of ` 500 in a year. The maximum
amount that may qualify for deduction on this account is ` 1,00,000 as per PPF rules.

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The tax treatment is given below:-

PROFITS IN LIEU OF SALARY [SECTION 17(3)]

Profit in lieu of salary or in addition to salary includes the following

(a) The amount of compensation due to or received by the employee from his employer or
previous employer at the time of or in connection with the termination of service.

(b) The amount of compensation due to or received by the employee from his employer or
previous employer in connection with the modification of terms and conditions of employment.

(c) Any lump sum amount received by the employee prior to employment or after cessation of
employment.

(d) The lump sum amount received by an employee from the Unrecognized Provident Fund to
the extent of the employer's contribution and interest on that

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 (e) Any amount (including bonus) received by the employee under a Keyman Insurance Policy
(KIP) taken by the employer on the life of an employee.

(f) Any lump sum due to or received by an employee from his employer or previous employer
beyond the exempted limit in the following cases,

• retrenchment compensation under Section 10(108)

• Recognized Provident Fund (RPF) under Section 10(12)
• approved superannuation fund under Section 10(13)
• HRA under Section 10(13A)

➢ DEDUCTIONS UNDER SEC 16

Under the Income Tax Act, 1961, certain deductions are allowed when computing a person's
total income. Section 16 of the Income Tax Act deals with deductions that are allowed to be
deducted from a person's gross salary.

1. Standard Deduction (Section 16(ia)): Employees in India are eligible for a standard
deduction. This deduction is either Rs. 50,000 or their total salary, whichever amount is lower.
It is a flat deduction that you can deduct from your salary.
2. Entertainment allowance [Section 16(ii)]: 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:
(i) One-fifth of his basic salary or
(ii) ` 5,000 or
(iii) 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.
3. Professional Tax [Section 16(iii)]: The professional tar paid by the assessee during the
Previous Year is deductible from the Gross annual salary. According to Article 276 of the
Constitution, the maximum professional tax which can be levied by the local authority is
₹2,500.
If tax is paid by the employer on behalf of the employee then it would be added to the salary
of the employee as perquisite under section 17(2) i.e., (the obligation of the employee paid by
the employer and then the employee would claim deduction under section 16(iii).

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➢ Computation of taxable salary

COMPUTATION OF INCOME FROM SALARY

1. Basic pay ( wages or fees) xx

2. Dearness allowance xx
3. Bonus xx
xx
4. Commission
xx
5. Advance salary xx
6. Arrears of salary
7. Taxable allowances (city compensatory xx
allowance, overtime allowance etc.)
8. Taxable perquisites xx
9. Profit in lieu of salary xx
xx
10. Annuity or pension
xx
11. Taxable portion of commuted pension
xx
12. Taxable portion of Gratuity
13. Taxable portion of encashment of earned leave xx
14. Annual accretion to recognised provident fund xx
(employer’s contribution & interest)
15. Transferred balance in recognized provident fund xx

Total (A) xxx

DEDUCTIONS (u/s 16)

1. Standard deduction (Rs.50,000) xx

2. Entertainment allowance xx
3. Professional tax
xx

Total (B)
xxx

INCOME FROM SALARY = ( A-B)

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 CONCLUSION

Under the Income Tax Act 1961 there are five heads of income and salary is one of them. alary
means any remuneration paid by the employer to the employee for service rendered. The
meaning of salary for tax purpose is very wide. It not only includes the cash received but also
the monetary value of facilities and benefits attached with the office of employment. Income
from salary means gross annual salary -Deductions. Gross Annual Salary means basic salary
and it includes various items such as wages, pension gratuity, etc., as mentioned under Section
17(1). It also includes perquisites as mentioned in Section 17(2), profit in lieu of salary
mentioned under Section 17(3), and allowances mentioned under Income Tax Rules 1962.
Significantly, perquisites are taxable and tax-free. Similarly, allowances are deducted or
exempted or fully or partly taxable Perquisites are different from allowances. Lastly, it includes
any other amount neither mentioned under Section 17 nor exempted such as bonus and
overtime salary. Deductions are mentioned under Section 16. Earlier only two deductions are
permitted, i.e., deductions regarding entertainment allowance and professional tax. However,
presently standard deduction of ₹50,000 is allowed to the employee.

With the introduction of the new tax regime, taxpayers now have a choice that can impact their
take-home income and financial planning. For salaried individuals, understanding how their
income is taxed under this head is crucial for financial planning, availing deductions, and
ensuring compliance with tax laws.

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 BIBLIOGRAPHY

Books referred

• Rattan, Jyoti, “Taxation Law”, 6th Edition, Bharat Publisher (2015-16).

• Ahuja, Girish, “ Bharat’s Professional Approach to Direct Tax” Bharat Law House,
23rd ed.

Bare Act referred

• Income Tax Act, 1961.

Websites referred

• Computation of Income Under the Head 'Salary' [Section 15 to 17] available at

[Link]
Reckoner/GTI/Salary/[Link]#e.
• CA Mohammad, Perquisites in Income Tax: Meaning, Examples, Types, Taxability &
Exemption available at
[Link]
• Income under the head salary, available at
[Link]
• Dr. Gurminder Kaur, Lesson 1 Income under the head salaries – I ,available at
[Link]

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