SALARY

The meaning of term salary for the purposes of income tax is much wider
than what is normally understood. Every payment made by an employer to
his employee for service rendered would be chargeable to tax as income
from salaries. The term ‘salary’ for the purposes of Income-Tax Act will
include both monetary (example:-Basic salary, bonus etc.) as well as non-
monetary facilities (example housing accommodation, medical facilities etc.)

The following are the essential conditions for income to be treated as salary
income:-

• There must be relation of employer and employee between the payer

of income and receiver of income.
• Salary may be from more than one employer.
• Salary may be received from not just the present employer but also a
prospective employer and in some cases even from a former employer
for example pension received from a former employer.
• Salary income must be real and not fictitious there must an intention
to pay and receive salary.
• Forgoing of salary ie if an employee surrenders his salary to the central
government, then the salary so surrendered will not be treated as
taxable income of the employee.
• Salary paid tax free - Tax free salary means the salary on which
income tax is borne not by the employee but by the employer. Tax free
salary is also taxable in the hands of the employee.

BASIS OF CHARGE:

1. Section 15 of the Act deals with basis of charge. Salary is chargeable to

tax either on ‘due’ basis or on ‘receipt’ basis whichever is earlier.
 2. 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.

3. If the salary paid in arrears has already been assessed on due basis,
the same cannot be taxed again when it is paid.

INCOMES FORMING PART OF SALARY:

Section 17(1) gives an inclusive definition of ‘Salary’

Salary includes-

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;

vi) any payment received by an employee in respect of any period of leave

not availed by him;

vii) the annual accretion to the balance at the credit of an employee

participating in a recognized Provident Fund, to the extent to which it is
chargeable to tax (i.e. employer’s contribution to RPF in excess of 12%
of employee’s salary and interest credited in excess of 9.5%);

viii) the aggregate of all sums that are comprised in the transferred
balance of the employee participating in a recognized P.F. to the extent
to which it is chargeable to tax;
 ix) the contribution made by the Central Government or any other
employer in the previous year, to the account of an employee under
notified pension scheme referred in section 80CCD.l

Although above incomes are included in salary, but there are certain
incomes mentioned above, which are either tax free or fully exempt or
exempt, upto a certain limit. The aggregate of above incomes, after the
exemption (s) available, if any, is known as ‘Gross Salary’. From the
gross salary, the following two deductions, are allowed under section
16:

i) Deduction for entertainment allowance[sec 16(ii)];and

ii) Deduction on account of any sum paid towards tax on employment [sec
16(iii)].

The amount arrived at, after allowing the above deductions, is the
income under the head ‘Salaries’

TREATMENT OF VARIOUS INCOMES TO BE INCLUDED IN

GROSS SALARY:

A. Wages:

Conceptually there is no difference between salary and wages.

Therefore, wages are treated just like salary and are taxable on the
same basis as salary.

B. Annuity:
 It is an annual income received by the employee from his employer. It
may be paid by the employer as voluntarily or on account of
contractual agreement. It is not taxable until the right to receive the
same arises. Under section 56, Income Tax Act, 1961 other annuities
come under a will or granted by a life insurance company or accruing
as a result of contract which comes as income under from other
sources.

C. Leave Encashment:

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.

D. Bonus:

Bonus is taxable on the due basis. Therefore, it will be included in the

gross salary only in the year in which the bonus is received. If the
bonus is received in arrears, the assessee can claim relief under
section 89.

E. Salary in lieu of Notice period:

 This is taxable in the previous year in which it is received.

F. Fee and Commission:

Any fee or commission paid/payable by employer to the employee shall

be fully taxable and thus would be included in Gross salary.
Commission may be the fixed amount or a percentage of turnover or
net profit etc. But it will be taxable under the head of ‘Salaries’ only
when it is paid/payable by employer to employee.

G. Overtime Payments:

Any payment made by the employer to the employee for working

beyond the office hours is taxable and therefore included in the Gross
Salary.

H. Gratuity:

Gratuity is a payment made by the employer to an employee in

appreciation of the past services rendered by the employee. Gratuity
can either be received by the employee himself at the time of his
retirement or the legal heir on the event of the death of the employee.

Gratuity received by an employee on his retirement is

taxable under the head ‘Salaries’ whereas gratuity received by legal
heir of the deceased employee shall be taxable under the head
‘Income from other sources’. However, in both the above cases,
according to section 10(10) gratuity is exempt upto a certain limit.
Therefore, in case gratuity is received by employee, salary would
 include only that part of the gratuity which is not exempt under section
10(10).

I. Pension:

It is a payment made by the employer after the retirement/death of

the employee as a reward for past service.

Pension is normally paid as a periodical payment on

monthly basis but certain employers may also allow an employee to
forgo a portion of pension. This is known as commutation of pension.
The pension may be fully or partly commuted i.e. in lieu of the pension,
a lumpsum payment is made to the employee. The treatment of these
2 kinds are:

a. Uncommuted pension is fully taxable in the hands of all the

employees.

b. Commuted pension is fully exempted in case of the Government

employees or employees of local authorities or statutory corporation
under section 10(10A)(i). But in case of the other employees it is
exempt upto an extent >[u/s 10(10A)(ii)].

J. Allowance:
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. 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. Fully taxable cash allowances
II. Partially exempt cash allowances
III. Fully exempt cash allowances

I. FULLY TAXABLE ALLOWANCES

This category includes all the allowances, which are fully taxable. So, if
an
allowance is not partially exempt or fully exempt, it gets included in
this category.
The main allowances under this category are enumerated below:
(i) Dearness Allowance and Dearness Pay: As 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. When a
part of Dearness Allowance is converted into Dearness Pay, it
becomes part of basic salary for the grant of retirement benefits
and is assumed to be given under the terms ofemployment.

(ii) City Compensatory Allowance: This allowance is 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. However, it is fully taxable.

(iii) Tiffin / Lunch Allowance: It is fully taxable. It is given for lunch to

the employees.
(iv) Non practicing Allowance: This is normally given to those
professionals (like medical doctors, chartered accountants etc.)
who are in government service and are banned from doing
private practice. It is to compensate them for this ban. It is fully
taxable.

(v) Warden or Proctor Allowance: These allowances are given in

educational institutions for working as a Warden of the hostel or
as a Proctor in the institution. They are fully taxable.

(vi) 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. It
is fully taxable.

(vii) Overtime Allowance: When an employee works for extra hours

over and above his normal hours of duty, he is given overtime
allowance as extra wages. It is fully taxable.

(viii) Fixed Medical Allowance: Medical allowance is fully taxable even

if some expenditure has actually been incurred for medical
treatment of employee or family.

(ix) Servant Allowance: It is fully taxable whether or not servants

have been employed by the employee.

(x) Other allowances: There may be several other allowances like

family allowance, project allowance, marriage allowance,
education allowance, and holiday allowance etc. which are not
covered under specifically exempt category, so are fully taxable.
II. PARTIALLY EXEMPT ALLOWANCES
This category includes allowances which are exempt upto certain limit.
For certain allowances, exemption is dependent on amount of
allowance spent for the purpose for which it was received and for other
allowances, there is a fixed limit of exemption.
(i) House Rent Allowance (H.R.A.): An allowance granted to a person
by his employer to meet expenditure incurred on payment of
rent in respect of residential accommodation occupied by him is
exempt from tax to the extent of least of the following three
amounts:
a) House Rent Allowance actually received by the assessee
b) Excess of rent paid by the assessee over 10% of salary due to
him
c) An amount equal to 50% of salary due to assessee (If
accommodation is situated in
Mumbai, Kolkata, Delhi, Chennai) ‘Or’ an amount equal to
40% of salary (if accommodation is situated in any other
place).
Salary for this purpose includes Basic Salary, Dearness Allowance (if it
forms
part of salary for the purpose of retirement benefits), Commission
based on fixed
percentage of turnover achieved by the employee.
The exemption of HRA depends upon the following factors:
(1) Basic Salary
(2) Rent paid
(3) Place of residence
(4) HRA received
If an employee is living in his own house and receiving HRA, it will be
fully
taxable.
 (ii) Entertainment Allowance: This allowance is first included in
gross salary under allowances and then deduction is given to
only central and state government employees under Section 16
(ii).

(iii) Special Allowances for meeting official expenditure: Certain

allowances are given to the employees to meet expenses
incurred exclusively in performance of official duties and hence
are exempt to the extent actually incurred for the purpose for
which it is given. These include travelling allowance, daily
allowance, conveyance allowance, helper allowance, research
allowance and uniform allowance.

(iv) Special Allowances to meet personal expenses: There are certain

allowances given to the employees for specific personal purposes
and the amount of exemption is fixed i.e. not dependent on
actual expenditure incurred in this regard. These allowances
include:
a. Children Education Allowance
b. Children Hostel Allowance
c) Transport Allowance
d) Out of station allowance

III. FULLY EXEMPT 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.

K. Perquisites:
A perquisite is any casual emolument, fee or profit attached to an
office or position in addition to the salary or wages. In other words,
perquisites are the benefits in addition to normal salary to which the
employee has a right by virtue of his employment.

Types of perquisites: Perquisites may be divided into three broad categories:

(1) Perquisites taxable in the case of all employees

(2) Perquisites exempt from tax in the case of all employees
(3) Perquisites taxable only in the hands of specified employees.

(1) Perquisites taxable in the case of all employees:

The following perquisites are chargeable to tax in all cases.

(i) Value of rent-free accommodation provided to the assessee by his
employer [Section 17(2)(i)]; Exception : Rent-free official residence
provided to a Judge of a High Court or to a Judge of the Supreme
Court is not taxable. Similarly, rent-free furnished house provided to
an Officer of Parliament, is not taxable.

(ii) Value of concession in rent in respect of accommodation provided to

the assessee by his employer [Section 17(2)(ii)]
 (iii) Amount paid by an employer in respect of any obligation which
otherwise would have been payable by the employee [Section 17(2)
(iv)].

(iv) Amount payable by an employer directly or indirectly to effect an

assurance on the life of the assessee or to effect a contract for an
annuity, other than payment made to RPF or approved
superannuation fund or deposit-linked insurance fund established
under the Coal Mines Provident Fund or Employees’ Provident Fund
Act. However, there are schemes like group annuity scheme,
employees state insurance scheme and fidelity insurance scheme,
under which insurance premium is paid by employer on behalf of
the employees. Such payments are not regarded as perquisite in
view of the fact that the employees have only an expectancy of the
benefit in such schemes.

(v) The value of any other fringe benefit or amenity (excluding the fringe
benefits chargeable to tax under Chapter XII-H) as may be
prescribed. Thus, only those benefits not falling within the meaning
of ‘fringe benefit’ as defined under section 115WB would be treated
as ‘perquisites’ under section 17. Those benefits falling within the
meaning of ‘fringe benefit’ as defined under section 115WB will be
taxed in the hands of the employer in addition to income-tax.

(2) Perquisites exempt from tax in all cases:

(i) Telephone provided by an employer to an employee at his residence;
(ii) Goods sold by an employer to his employees at concessional rates;
(iii)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;
(iv) Privilege passes and privilege ticket orders granted by Indian
Railways to its employees;
(v) Perquisites allowed outside India by the Government to a citizen of
India for rendering services outside India;
(vi) Sum payable by an employer to a RPF or an approved
superannuation fund or deposit linked insurance fund established
under the Coal Mines Provident Fund or the Employees’ Provident
Fund Act;
(vii) Employer’s contribution to staff group insurance scheme;
(viii) Leave travel concession;
(ix) Payment of annual premium by employer on personal accident
policy effected by him on the life of the employee;
(x) Refreshment provided to all employees during working hours in office
premises;
(xi) Subsidized lunch or dinner provided to an employee;
(xii) Recreational facilities, including club facilities, extended to
employees in general i.e., not
restricted to a few select employees;
(xiii) Amount spent by the employer on training of employees or amount
paid for refresher management course including expenses on
boarding and lodging;
(xiv) Medical facilities subject to certain prescribed limits;
(xv) Rent-free official residence provided to a Judge of a High Court or
the Supreme Court;
(xvi) Rent-free furnished residence including maintenance provided to an
Officer of Parliament,
Union Minister and a Leader of Opposition in Parliament;
(xvii) Conveyance facility provided to High Court Judges under section
22B of the High Court Judges (Conditions of Service) Act, 1954
and Supreme Court Judges under section 23A of the Supreme Court
Judges (Conditions of Service) Act, 1958.
 (xviii) Motor car facility.

However, some of the perquisites mentioned above are taxable as fringe

benefits in the hands
of the employer (Refer to definition of fringe benefits as per section 2(23B)

(3) Perquisites taxable only in the hands of specified employees

[Section 17(2)(iii)]:
The value of any benefit or amenity granted or provided free of cost or at
concessional rate
which have not been included in 1 & 2 above will be taxable in the hands of
specified
employees:
Specified employees are:
(i) Director employee: An employee of a company who is also a director is
a specified employee. It is immaterial whether he is a full-time
director or part-time director. It also does not matter whether he is
a nominee of the management, workers, financial institutions or the
Government. It is also not material whether or not he is a director
throughout the previous year.

(ii) An employee who has substantial interest in the company: An

employee of a company who has substantial interest in that
company is a specified employee. A person has a substantial
interest in a company if he is a beneficial owner of equity shares
carrying 20% or more of the voting power in the company.
Beneficial and legal ownership: In order to determine whether a
person has a substantial interest in a company, it is rather the
beneficial ownership of equity shares carrying 20% or more of the
voting power that is relevant rather than the legal ownership.
 (iii) Employee drawing in excess of Rs.50,000: An employee other than an
employee described in (i) & (ii) above, whose income chargeable
under the head ‘salaries’ exceeds Rs.50,000 is a specified
employee. The above salary is to be considered exclusive of the
value of all benefits or amenities not provided by way of monetary
payments. In other words, for computing the limit of Rs.50,000, the
following items have to be excluded or deducted:
(a) all non-monetary benefits;
(b) monetary benefits which are exempt u/s 10. This is because the
exemptions provided u/s 10 are excluded completely from
salaries.
(c) Deduction for entertainment allowance [u/s 16(ii)] and deduction
toward professional tax [u/s 16(iii)] are also to be excluded.
If an employee is employed with more than one employer, the aggregate of
the salary
received from all employers is to be taken into account in determining the
above ceiling limit of
Rs.50,000, i.e. Salary for this purpose
= Basic Salary + D.A. + Commission, whether payable monthly or turnover
based + Bonus +
Fees + Any other taxable payment + Any taxable allowances + Any other
monetary
benefits – Deductions under section 16]
 BIBLIOGRAPHY

Every presentation needs the help of many sources, which helps to give us an idea to do the work
perfectly, efficiently and clearly. To overcome the presentation of our project we have taken the
help of many books, magazines and few websites. They are mentioned below:

Books like:

• Taxation, Professional Competence Course

• Bharat’s Publications; Systematic Approach To Income Tax Service Tax
And VAT, Dr. Girish Ahuja and Ravi Gupta