Income from Salary [Sec 15 to 17]

⇒ An income earned is chargeable to tax under the head "Salaries" if and only if there exists an
employer - employee relationships between the payer and the payee.

⇒MLA's and MP's are elected representatives and not the govt. employees, therefore the salary
received by them will be taxable under the head “Income from other sources”.

⇒Payment of salary to the ministers, the pray and allowances received by the CM from state govt. is
chargeable to tax as “Income from Salary”.

Charge of Salaries [Sec. 15]

⇒Following income shall be chargeable to income tax under the head ‘Income from salary’.
(a) Salary taxable on due basis.
(b) Advance salary taxable on receipt basis.
(c) Arrears of salary taxable on receipt basis.

Therefore salary is taxed on due basis or receipt basis (Whichever is earlier).

⇒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 purpose of this section.
[It Chargeable under PGBP]

⇒Director’s remuneration chargeable under "Income from other Sources”

⇒Advance salary is taxable whereas loan or advance against salary is not taxable.

⇒Foregoing of salary: It means that the employee waives his salary after it becomes due or accrues
to him. It is taxable in the hand of employee. [Before due- Fully exempt; After due- Fully taxable]

⇒Surrender of Salary: It means that the employee surrenders his salary to the C. Govt. The salary
so surrendered shall be exempt from tax.

⇒Advance Salary :- (i.e. Received but not due) It will be taxable in the year in which same was
received.
⇒Accrued Salary – (i.e. Due but not received) It will be taxable in the year in which same was due.

⇒ Arrear of Salary-(i.e. Not Due and Not received) It will be taxable in the year in which same will be
actually received.

⇒ Fixed pay scale and graded pay scale: In fixed pay scale, the employee receives a certain fixed
amount of salary for a specified period whereas in case of graded pay scale, the employee gets an
annual increment in his salary on the basis of the grade in which he is placed.

⇒Tax-free salary: It means that the employer takes the burden of the tax which is to be paid on the
salary of the employee.

⇒Advance Salary v/s Loan or advance against salary: Advance salary means that the employee
receives the salary before it becomes due to him and hence it is taxable on receipt basis in the year
in which it is received.
Whereas,
Loan against salary-It means that the employee takes loan from his employer and agrees to pay the
same in specified number of installments and such installments may be deducted out of salary of the
employee due to him in subsequent months.
Advance against salary- It means the employee takes advance against his salary and agrees to get
the same adjusted from his salary subsequently.

Thus, while advance salary is taxable; loan or advance against salary is not taxable.

⇒Foregoing of salary / Surrender of salary:

Foregoing of salary -It means that the employee waives his salary after it becomes due or accrues
to him. It is taxable in the hand of employee.
Surrender of salary - It means that the 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 shall be exempt from tax taxable in the hands of employee.

⇒Annuity: Annuity means the yearly sums payable to a person. It may be received from the present
employer or past employer or a person other than employer.
(a) If received from present employer- taxable as 'salary' irrespective of the fact whether it is
voluntary payment or in pursuance of any contractual obligation.
(b) If received from past employer - taxable as 'profits in lieu of salary'.
(c) If received from a person other than employer – taxable as 'income from other sources'.

⇒Place of accrual of salary income- Income under the head salary is deemed to accrue or arise in
India if the same is payable for services rendered in India. Further, salary paid by Government to an
Indian citizen for services rendered outside India is also deemed to accrue or arise in India. The
provisions of Section 9(1)(2) & (iii) are summarized below -
(It has been assumed that the salary is paid at the place where service is rendered)
Employee Employer Where service Whether taxable in India
is rendered Salary Perquisite/allowance
Case1:Indian citizen Govt. Outside India Yes No
(resident or non- resident) [Exempt u/s 10(7)]
 Case2:Non-resident or Any Outside India No No
Not ordinarily resident In India Yes Yes
(other than Case 1)
Case 3: Resident (other Any anywhere Yes Yes
than case 1 and 2)

⇒Concept of ‘Salaries' is as follows-

(a) Commission on a fixed percentage of sales comes in the ambit of salary.
(b) For taxing an income under the head Salaries', it is irrelevant whether the assessee is in part-
time employment or full-time employment with his employer.
(c) If an employee receives salary from more than one employer during any previous year, then
the salary from each employer is taxable under the head "Salaries".
(d) Any deductions made by the employer from the employee's salary like PF deduction, Tax-
deduction at source etc. shall also be included in the salary.
(e) Salary is taxed on "due" or "receipt" basis, whichever is earlier, therefore, the date when
salary becomes due decides whether it is taxable in the previous year or not. In some cases,
salary becomes due on 1ª day of the next month. Therefore, when salary becomes due on 1 st
day of next month in such a case, salary from March 2024 to February, 2025 shall be taxable
for the AY 2025-26.
(f) Place of accrual of salary: Income which falls under the head "Salaries" shall be deemed to
accrue or arise in India if it is earned in India. i.e. Service rendered in India. "Salaries" payable
by the Government to a citizen of India for service rendered outside India shall also be
deemed to accrue or arise in India. Allowances and perquisites to Government Employee's
being Indian Citizen for services rendered outside India is exempt from tax.
(g) Salary received from UNO - Exempt: Salary, emoluments and pension received from the
UNO is exempt from tax under section 2 of the United Nations (Privileges and Immunities)
Act, 1947.

⇒Salaries Exempt from Tax - Individual assessee who are not citizens of India are entitled to the
following exemptions in respect of remuneration/ salary received by them under section 10(6):

(i) Remuneration received by officials of Embassies etc. of Foreign States [Section 10(6)(ii)]:
The remuneration received by a person for services as an official of an embassy, high commission,
legation, commission, consulate or the trade representation of a foreign State or as a member of the
staff of any of these officials is exempt.

(ii) Remuneration received for services rendered in India as an employee of foreign enterprise
[Section 10(6)(vi)] -Remuneration received by a foreign national as an employee of a foreign
enterprise for service rendered by him during his stay in India is also exempt from tax.
Conditions:
(a) The foreign enterprise is not engaged in any business or trade in India;
(b) The employee's stay in India does not exceed 90 days during the previous year,
(c) The remuneration is not liable to be deducted from the employer's income chargeable to tax under
the Act.
(iii) Salary received by a non-citizen non-resident for services rendered in connection with
employment on foreign ship [Section 10(6) (viii)]: Salary income received by or due to a non-
citizen of India who is also non-resident for services rendered in connection with his employment on a
foreign ship is exempt where his total stay in India does not exceed 90 days during the previous year.

(iv)Remuneration received by Foreign Government employees during their stay in India for
specified training [Section 10(6) (xi)]: Any remuneration received by employees of foreign
Government from their respective Government during their stay in India, is exempt from tax, if such
remuneration is received in connection with their training in any establishment or office of or in any
undertaking owned by –

(a) the Government, or

(b) any company wholly owned by the Central or any State Government(s) or jointly by the Central
and one or more State Governments, or
(c) any company which is subsidiary of a company referred to in (b) above, or
(d) any statutory corporation, or
(e) any society registered under the Societies Registration Act, 1860 or any other similar law,
which is wholly financed by the Central Government or any State Government(s) or jointly by
the Central and one or more State Governments. Now, let us discuss the chargeability under
section 15, the provisions explaining the meaning of Salary, Perquisite and Profits in lieu of
salary contained in section 17 and the deductions under section 16.

Note:-Exemption u/s 10(6) and 10(7) would be available to an assessee irrespective of the
regime under which he pays tax.

⇒Deductions from salaries [Section 16]: The income chargeable under head "Salaries" shall be
computed after making the following deductions –

(i) Standard deduction [Section 16(ia)]: A deduction of Rs.50, 000 [Rs.75,000 in case where
income-tax is computed under default tax regime u/s 115BAC] or the amount of the salary,
(whichever is less).

(ii) Entertainment allowance [Section 16(ii)]: Only Government employees are entitled to avail
deduction on account of entertainment allowance. Entertainment allowance is first included in the
gross salary and thereafter deduction is given.

The deduction is allowed to the extent of least of the following –

(a) Actual amount received; or
(b) ₹5,000; or
(c) 20% of basic salary (salary exclusive of any allowance, benefit or other perquisite)

(iii) Employment tax [Section 16(iii)]: An assessee is allowed deduction of any sum paid by him
on account of a tax on employment within the meaning of Article 276(2). Under the said article
employment tax cannot exceed 2,500 per annum.
 Note:-Deduction for Entertainment allowance for Government employees and Professional tax are
allowable only under the optional tax regime i.e., if the employee exercises the option of
shifting out of the default tax regime provided us 115BAC (1A). The same are not allowable
under the default tax regime under section 115BAC.

Question: Rajesh Kumar, an Indian citizen, is posted in the Indian High commission at London during
the previous year 2024-25. His emoluments consist of basic pay of Rs.1,40,000 per month and
overseas allowances of Rs.40,000 per month. Besides, he is entitled to airfare for going from and
coming to India and also to free use of Government's car at London. He has no taxable income
except salary income stated above. His employer did not deduct Tax at source. Rajesh Kumar argues
that –
(i) he is not liable to pay tax on salary earned and received outside India since he is a non resident
during the previous year 2024-25, and
(ii) even if any tax is due, it is the duty of his employer to deduct tax at source and as such he has no
responsibility to pay the tax.
Discuss whether his contention is correct. Will it make any difference if Rajesh Kumar is a foreign
citizen? Give reasons.
⇒House Rent allowance (HRA) [Section 10(13A)]:
HRA is an allowance granted to an employee for the payment of rent of his residence. Section
10(13A) provides exemption to the assessee who is in receipt of HRA from his employer. Least of the
following shall be exempt -
S.No. In other cities In Mumbai, Delhi, Chennai
and Kolkata
1. Actual HRA received Actual HRA received
2. Rent paid Less 10% of Rent paid Less 10% of
salary salary
3. 40% of salary 50% of salary

Exemption not applicable: This exemption shall not apply in a case where:-
(a) the residential accommodation occupied by the assessee is owned by him: or
(b) the assessee has not actually incurred expenditure on payment of rent in respect of the residential
accommodation occupied by him.

Notes:-
(a) Salary= Basic pay+ Dearness Allowance (if it enters into retirement benefits) + Percentage-wise
fixed commission on turnover.
(b) Salary is taken on due basis for the period for which HRA is granted.
(c) Exemption u/s 10(13A) would be available to an assessee only if he exercises the option of
shifting out of the default tax regime provided u/s 115BAC(1A).It is not available under the default
tax regime u/s 115BAC.
Question:-Computation of exempted House rent allowance: Arun, a resident of Meerut, receives
38,000 per annum as basic salary. In addition, he gets ₹ 12,000 p.a. as dearness allowance, which
does not form part of basic salary, 5% commission on turnover achieved by him (turnover achieved
by him during the relevant previous year is Rs.6,00,000) and Rs.7,000 per annum as house rent
allowance. He, however, pays 8,000 per annum as house rent. Determine the quantum of house rent
allowance exempt from tax if assessee has opted out of the provisions of Section 115BAC.
⇒ Different allowances and their taxability

(1) Fully Taxable Allowances:

➤Dearness allowance; ➤Tiffin allowance;

➤Servant allowance, ➤Interim Allowance
➤Non-practicing Allowance, ➤Medical allowance,
➤Project allowance, ➤Overtime allowance,
➤City Compensatory allowance, ➤Warden allowance,
➤Family allowance, ➤any other cash allowance etc.
➤ Transport allowance to employee other than blind/ deaf and dumb/ orthopedically handicapped
employer

(2) Partly Taxable Allowances:

(a) Allowances exempt from tax to the extent of amount expended for the purpose for which they are given
[Section 10(14)(i)]: Allowances granted to meet expenses wholly, necessarily and exclusively incurred in
the performance of the duties of an office or employment of profit, to the extent such expenses are
actually incurred for that purpose:

(i) Travelling Allowance to meet cost of travel on tour or on transfer (including any sum paid in
connection with transfer, packing and transportation of personal effects on such transfer).

(ii) Daily Allowance granted on tour or for the period of journey in connection with transfer, to meet
ordinary daily charges incurred on account of absence from his normal place of duty.

(iii) Conveyance Allowance to meet expenditure incurred on conveyance in performance of official duties
if free conveyance is not provided by the employer.

(iv) Uniform Allowance to meet expenditure incurred on purchase or maintenance of uniform or wears
during the performance of the duties of an office or employment of profit

(v) Research Allowance for encouraging the academic, research and training pursuits in educational and
research institutions.

(vi) Helper Allowance to meet expenditure incurred on a helper where such helper is engaged for
performance of official duties or employment of profit.

Note: An employee, being an assessee, who is under default tax regime of the provisions of section
115BAC would be entitled for exemption only in respect of travelling allowance, daily allowance and
conveyance allowance.

(b) Allowances exempt from tax to the extent of amount notified in the Rules [Section 10(14)(ii)]:
Allowances granted to the assessee either to meet his personal expenses at the place where the duties of
his office or employment of profit are ordinarily performed by him or at the place where he ordinarily
resides, or to compensate him for the increased cost of living, to the extent as may be prescribed -

Allowances Amount Exempt

1 Any Special Compensatory Allowance in the ₹ 800 or ₹ 7,000 or 300 per month
nature of Special Compensatory (Hilly Areas) depending upon the specified
Allowance or High Altitude Allowance or locations
Uncongerial Climate Allowance or Snow
Bound Area Allowance or Avalanche
Allowance
2 Any Special Compensatory Allowance in the Rs.1,300 or Rs.1,100 or Rs.1,050
nature of border area allowance or remote or ₹750 or Rs.300 or Rs.200 per
locality allowance or difficult area allowance month depending upon the
or disturbed area allowance specified locations.

3 Transport Allowance to employees of i) 70% of Such allowance, or

transport system: (i Allowance granted to an ii) Rs.10,000 p.m.
employee working in transport ( system to ( whichever is lower)
meet his personal expenditure incurred in
course of his official duty of running the
transport from one place to another, provided
he is not in receipt of daily allowance.

4 Tribal Area Allowance: (in states of MP, Tamil Rs.200p.m.

Nadu, UP, Karnataka, Tripura, Assam, West
Bengal, Bihar, Orissa]

5 Transport Allowance: Transport allowance ₹3,200 p.m.

granted to an employee, who is blind or deaf
and dumb or orthopedically handicapped for
commuting between the place of residence
and the place of duty

6 Underground Allowance: It is granted to the 800 p.m.

employees working in unnatural climate in
underground mines

7 Children Education Allowance 100 p.m. per child for maximum 2

children

8 Hostel Expenditure Allowance 300 p.m. per child for maximum 2

children

9 Compensatory Field Area Allowance 2,600 per month in specified areas

Note: An employee, being an assessee, who is under default tax regime of the provisions of section
115BAC would be entitled for exemption only in respect of transport allowance granted to an employee
who is blind or deaf and dumb or orthopedically handicapped with disability of the lower extremities of
the body to the extent of Rs.3,200 p.m.

(3) Wholly Exempt Allowances:

(a) Allowances which are fully exempt only under the optional tax regime (i.e., the normal provisions of
the Act)
(i) Allowance to Supreme Court/ High Court Judges: Any allowance paid to a judge of a High Court and
Supreme Court under section 22A(2) of the High Court Judges (Conditions of Service) Act, 1954 and
section 23(1A) of the Supreme Court Judges (Salaries and Conditions of services) Act, 1958, respectively,
is not taxable under the optional tax regime (i.e., normal provisions of the Act).

(ii) Allowance received from United Nations Organisation (UNO): Salary and 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. Besides salary, any pension covered under the United Nations (Privileges and Immunities) Act
and received from UNO is also exempt from tax under the optional tax regime (i.e.. normal provisions of
the Act).

(b) Allowances which are fully exempt under both regimes:

Allowances payable outside India [Section 10(7)]: 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.