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Income from Salary : Section 15 to 17.

INTRODUCTION
Income under the Head “Salaries” is dealt in Sec 15, 16 and 17 of the Income Tax
Act 1961. Salary consists of remuneration paid in any form for the services rendered
under a relationship of “Master and Servant” or “Employer and Employee”.

For a Government servant who is a citizen of India posted abroad, the salary paid to
him for service rendered outside India is deemed to accrue in India; but foreign
allowance and perquisites granted to him are exempted from tax under sec 10(7).
This concession is not available for employees in private services.

DEFINITION

Sec 17(1) of the Income tax Act 1961 defines “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 of by him.
vii. 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
under Rule 6 of Part A of the Fourth Schedule.
viii. The aggregate of all sums that are comprised in the transferred balance as
referred to in sub-rule (2) of Rule 11 of Part A of the Fourth Schedule of an
employee participating in a recognised provident fund, to the extent to which it
is chargeable to tax under sub-rule (4) thereof, and
ix. The contribution made by the Central Government or any other employer in the
previous year for the account of an employee under a pension scheme referred
to in Sec 80-CCD

a) Income assessable under the Head “Salaries”

U/s 15 of the I.T. Act, following are the income chargeable under “salaries”

(i) Any salary due from an employer or former employer in the previous year
whether paid or not.
(ii) Any salary paid or allowed to an assessee in the previous year, by or on
behalf of an employer or former employer though not due or before it
became due to him.

(iii) Any arrears of salary paid or allowed to him for the previous year, by or
on behalf of an employer or former employer, if not charged to tax for any
earlier years.

b) Permissible deductions from Salaries

(i) Standard Deduction

Upto the Assessment year 2005-06, standard deductions were applicable to the
salaried people under Clause (i) of sec. 16. Since different deductions from the
salary income are provided in other sections, the Parliament has omitted Clause
(i) of sec 16 by The Finance Act 2005. Hence, from 1.4.2006, there is no
standard deduction from the salary.

(ii) Entertainment Allowance

Clause (ii) of Sec 16 provides this allowance. The deduction of entertainment


allowance should not exceed a sum equal to 1/5th of his salary (exclusive of any
other allowance, perquisites or benefit) or Rs.5000/-, whichever is less.

(iii) Professional Tax

Clause (2) of Article 276 of the Constitution of India empowers the State
Government to impose taxes on professions, trades, callings and employments
shall not exceed Rs.2500/- pa. The tax goes to the Municipality, District Board,
local board or other local authority in the State.

According to Clause (iii) of sec 16 of IT Act, the professional tax paid by any
employee shall be deducted from the total income.

(iv) Medical Treatment

Sec 17(2) of IT Act provides exemption for medical treatment, subject to certain
restrictions for the medical treatment to the employee and his family members.
Proviso (ii) to Clause (2) of sec 17 provides exemption, subject to certain
limitations for the reimbursement of expenditure on medical treatment in an
affliated hospital.

(v) Medical Insurance Premium

Provisos (iii) & (iv) of Clause (2) of sec 17 provides exemption, subject to certain
limitations for the medical insurance premium.

(vi) Reimbursement of expenditure on Medical treatment in abroad

Proviso (vi & vii) to Clause (2) of sec 17 provides exemption to a maximum of
Rs.15000/- towards reimbursement of medical expenses in abroad.

(vii) LIC Premium

According to sec 80-C, the premium paid towards LIC are deductable from
the total income of the salaried employee. This differs from the assessment
year to assessment year according to the Finance Act.

(viii) NSS Bonds

Sec 80-CCA provides that any individual or a HUF has in the previous year deposited
any amount in accordance with such scheme as the Central Government may by
notification in the Official gazette, specify in this behalf or paid any amount to effect
or to keep in force, a contract for such annuity plan of the LIC is exempted from
Income tax computation.

(ix) Equity linked savings scheme

Sec 80-CCB lays down that where an assessee being an individual or a HUF, has
acquired in the previous year, out of his income chargeable to taxes, units of any
Mutual Fund specified under Unit Trust of India Act, under any plan formulated in
accordance with such scheme as the Central Government may by notification in the
Official Gazette specify, he shall, in accordance with and subject to the provisions of
this section, be allowed a deduction in the computation of total income, which
should not exceed Rs.10000/- in the previous year.

(x) Certain Pension funds (Sec-80CCC)


According to Sec 80-CCC, certain annuity plans of LIC or any other insurer for
receiving pension from the fund, be allowed a deduction in the computation of his
total income, which should not exceed to Rs.1,00,000/- in the previous year.
(xi) Contribution to Pension Scheme (Sec-80CCD)

According to Sec 80-CCD, where as assessee being an individual employed by


Central Government or any other employer on or after 1st day of Jan, 2004 has in the
previous year paid or deposited any amount in his account under a pension scheme
notified, be allowed for a deduction in the total income, which should not exceed 10%
of his salary in the previous year.

(xii) Interest on Loan taken for higher education (sec 80-E)

(xiii) Donations to charitable institutions (Sec 80-G)


50% of donations are allowed to some charitable institutions, viz., Prime
Ministers’ Drought Relief Fund, National Children’s fund etc. And 100% of
donations are allowed to certain funds and charitable institutions, such as
Flood funds etc.

(xiv) RENTS (Sec-80GG)


Towards payment of rent for the accommodation for his own purpose, the payment
of rent is allowed for deductions, which should not exceed Rs.10000/- per month
or 25% of his total income for the year, whichever is less, subject to such other
terms and conditions.

(xv) Donations for scientific or rural development

Sec 80GGA

(xvi) Donations to Political parties (sec. 80 GGC)


Any person or assessee is allowed to donate. However, civil servant / government
employees are not allowed to have any connection with any political party.

Other exemptions, which are wholly exempted from I.T.


i) Death cum retirement Gratuity (Sec 10 (10)
ii) Value of commuted pension (sec 10(10AA)
iii) Leave encashment
iv) Retrenchment and compensation (sec 10 (10B)
v) Payment from GPF (sec 10 (11))
vi) Payment from Recognized Provident Fund (RPF) (sec 10 (12))
vii) Payment of superannuation Fund (sec 10(13))
viii) HRA (sec 10(13A))
ix) Special Allowance (Sec 10(14 (i)))
x) Allowances to meet personal expenses (sec 10(14)(ii))
xi) Interest on deposit of retirement benefits in notified schemes (sec 10(15)(iv)