Income under the head

“SALARY”
⦁ Income from salary is the income or remuneration
received by an individual for services he is
rendering or a contract undertaken by him. This
clause essentially assimilates the remuneration
received by a person for the services provided by
him under the contract of employment.

⦁ This amount of remuneration will be considered as

income for the purposes of Income Tax Act only if
there is an Employer and employee relationship
between the person who is making the payment and
the person who is receiving the payment.

⦁ Employer and Employee Relationship – Any

payment that is received by a person will be treated
as Income under Income Tax Act if there exist an
Employer and employee relationship between the
payer and payee. For the purpose of qualifying
income as income from salary, their relationship
should be that of a master and servant.Where a
master is a person who directs his employee that
what is to be done and how it is to be done and
servant is the person who is liable to conduct that
work in the manner told by his employer.

⦁ Meaning of Salary
The salary for the purpose of calculation of income from
salary includes:

Wages;
Pension;
Annuity;
Gratuity;
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 Advance Salary paid;
Fees, Commission, Perquisites, Profits in lieu of or in
addition to Salary or Wages;
Annual accretion to the balance of Recognized Provident
Fund;
Leave Encashment;
Transferred balance in Recognized Provident Fund;
Contribution by Central Govt. or any other employer to
Employees Pension

Sec 14 Heads of ⦁ Salary

Income ⦁ Income from House Property
⦁ Profit & Gains of Business or Profession
⦁ Capital Gain
⦁ Income from Other Sources
Employer- Before an income can become chargeable under the head
employee ‘salaries’, it is vital that there should exist between the payer and
relationship the payee, the relationship of an employer and an employee.
Full-time or It does not matter whether the employee is a fulltime employee or
Part time a part-time one. Once the relationship of employer and employee
employment exists, the income is to be charged under the head “Salaries”. If,
for example, an employee works with more than one employer,
salaries received from all the employers should be clubbed and
brought to charge for the relevant Previous Years.
Foregoing or Once salary accrues, the subsequent waiver by the employee does
sacrificing of not absolve him from liability to Income- tax. Such waiver is only
salary an application and hence chargeable.
Surrender of However, if an employee surrenders his salary to the Central
salary Government u/s 2 of the Voluntary Surrender of Salaries
(Exemption from Taxation) Act, 1961, the salary so surrendered
would be exempt while computing his taxable income.

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Sec.15 Charging Due or receipt whichever falls earlier: Salary is taxable on due
Section basis or on receipt basis, whichever is earlier. Hence,
A - Salary due in a Previous Year is taxable, even if it not
received.
B - Salary received in a Previous Year is taxable, even if it is not
due.
C - Arrears of salary received during the current Previous Year
shall be taxable in the current year if not charged to tax in an
earlier Previous Year.

No double taxation: once salary is taxed on due/receipt basis, it

will not be taxed again on receipt/ falling due, as the case may be.
Deductions : Sec 16
Sec.16(i) Standard Deleted
Deduction
Sec.16(ii) Entertainment Least of the following will be allowed as a deduction:
Allowance
(only for ⦁ Actual amount of entertainment allowance received;
Government ⦁ 20% of basic salary of the individual
Employees) c- Rs 5,000
Sec.16(iii) Professional ⦁ Professional tax or tax on employment paid by an employee,
Tax levied under a State Act shall be allowed as deduction ;
⦁ such deduction is available only on actual payment;
⦁ If an employer pays professional tax on behalf of his
employee, then it will first be included in the Salary as a
perquisite and then, allowed as a deduction.
Definitions : Sec 17
Sec. 17(1) Definition of “Salary” includes :
SALARY
⦁ Wages or Salary
⦁ Annuity is annual grant made by the employer to the
employee.
⦁ Pension is a periodical payment for past services.
d- Gratuity is a lump sum payment for past services.
e- Fees and Commission
⦁ Perquisites.
⦁ Profit in lieu of or in addition to salary or wages.
⦁ Advance of Salary.
⦁ Leave Encashment.
⦁ RPF contribution and interest
⦁ The contribution made by the Central Government in the
previous year, the account of any employee under a pension
scheme referred to in Section 80CCD.

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Sec. 17(2) Definition of
Perquisite: are the benefits in addition to normal salary to which
Perquisites
the employee has a right by virtue of his employment.
Perquisite includes:
⦁ The value of Rent Free Accomodations (RFA) provided to
the assessee by his employer.
⦁ The value of any concession accommodation provided to
the employee by his employer.
⦁ The value of any benefit provided free of cost / at
concessional rate in case of Specified Employees.
⦁ Any sum paid by the employer in respect of any
obligation on behalf of the employee.
⦁ Any sum payable to affect an insurance policy on the life
of employee / to affect a contract for annuity.
Note1: Premium paid on Insurance policy is treated as perquisite
only if the beneficiary is the employee.

Note2: Life Insurance Premium (LIP) paid by the employer

qualify for deduction u/s 80C.

⦁ The value of any specified security or sweat equity shares

is equal to the FMV as reduced by the amount actually
paid by or recovered from employee.
⦁ Any amount of contribution to approved superannuation
fund to the extent it exceeds Rs.1,50,000*.
⦁ The value of any other fringe benefit as may be
prescribed, expect mobile / telephone.
Sec 17(3) Profit in Lieu of ⦁
Compensation from employer/former employer in connection
Salary with: Termination or Modification of the Terms & conditions
of employment.
⦁ Any payment due to or received from any person before
joining or after cessation of the employment.
⦁ Any sum received under a key man Insurance policy
including bonus on such policy.
Retirement Benefits / Exemptions under the head Salary

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Sec 10(10) Gratuity Gratuity is the payment made by the employer to an employee in
appreciation of past services rendered by the employee.
⦁ Government employees and employees of local authority:
Exempted from tax.
⦁ Employees covered under Payment of Gratuity Act, 1972

In case of employees who are covered under Payment of Gratuity

Act, the least of the following amounts are exempted from tax:
⦁ Amount of gratuity actually received.
⦁ Half month (i.e. 15/26 days) salary on the basis of last
drawn salary for each completed years of service or part
therof ( in excess of six months).
c- Max Rs.10,00,000
Salary means: Basic + DA
⦁ Other employees. Least of the following amounts are
exempted from tax:
A- Actual amount of gratuity received.
B- Half month (i.e. 15/30 days) salary on the basis of last 10
months average salary for each completed years of service .
C- Max Rs. 10, 00,000
Salary means: Basic + DA (if) + %
Sec.10(10A) Pension Un commuted pension refers to pension periodically received by
the employee. It is taxable in the hands of the both Govt. and Non
Govt Employees.
Commuted pension Sec.10 (10A) means lumsum amount taken
by commuting the pension or part of the pension.
Government Employees: 100% exempt from tax.
Other Employees:
⦁ If Gratuity is rect: 1/3 of 100% commuted pension is
exempt
⦁ If Gratuity not rect: ½ of 100% commuted pension is
exempt.
Sec 10(10AA) Leave If an individual receives leave encashment on his retirement, then
Encashment the amount received will be eligible for exemption.
⦁ Government employee: fully exempted from tax
⦁ Non-Govt. employee: Least of the following is exempt:
⦁ Actual Amount rect
b) Max Rs 300000/-
⦁ 10 months salary On the basis of immediately
⦁ Earned leave salary preceding 10 months average
Salary.
Salary means : Basic Salary + DA (if) + %

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 Sec 10(10B) Retrenchment Retrenchment compensation received in accordance with any
Compensation scheme, which is approved by the Central Government, is fully
exempt from tax.
Any other employee who receives retrenchment compensation is
entitled for exemption u/s 10(10B) as under:
1- Actual Amount
2- Max Rs 500000/-
3- Amount determined as per Industrial Dispute
Act,1947
Sec 10(10C) Voluntary Conditions for claiming exemption (Govt or Non Govt
Retirement Employees):
Compensati
⦁ An individual, who has retired under the Voluntary
on Retirement Scheme, should not be employed in another
company of the same management.
⦁ He should not have received any other Voluntary
Retirement Compensation before from any other employer
and claimed exemption.
⦁ Exemption u/s 10(10C) in respect of Compensation under
VRS can be availed by an Individual only once in his lifetime.

Least of the following is exempt:

1- Actual Amount
2- Max Rs 500000/-
3- Completed yrs of service x 3 x last drawn salary Or
Remaining months of services x last drawn salary
Salary means = Basic Salary + D

Profit in lieu of salary:

⦁ Any compensation due to or received by an employee

from his employer or former employer at or in connection
with the termination of his employment or modification
of the terms and conditions relating thereto.
⦁ Any Payment (Other than Receipts exempt from tax)
under section 10, due to or received by employee from his
employer or former employer or from a provident fund or
other fund to the extent it does not consist of
contributions by the assessee or interest on such
contributions or any sum/bonus received under a Keyman
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 Insurance Policy.
⦁ Any amount whether in lump-sum or otherwise, due to or
received by an assessee from his employer, either before
his joining or after leaving the employment.
Tax on Salary borne by employer:

When the salary is paid ‘tax free’, that is, the tax due on the
salary is paid in to government account by the employer, the
employee has to return in his total income the gross salary i.e.
the aggregate of the net salary received plus the amount of tax
paid on his behalf by the employer. It does not make any
difference whether the tax is borne by the employer voluntarily
or under a contractual obligation.

RECEIPT IN THE NATURE OF EXEMPT FROM INCOME TAX

There are few receipts under head of salary income which are
exempt subject to certain conditions. Those terms and
conditions are not explained here in details because the
purpose of writing this term is only to give brief and basic idea
of income tax act for learners. Following are few receipts which
are exempt from income tax:-

⦁ Leave Travel Concession

⦁ Gratuity
⦁ Commuted pension
⦁ Leave encashment
⦁ Retrenchment compensation
⦁ Payment on Voluntary retirement
⦁ Traveling allowance on tour or on transfer, including any
sum paid for packing and transportation of personal
effects on transfer.
⦁ Daily allowance or tour or for the period of journey on
transfer.
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 ⦁ Conveyance Allowance – Rs.1600/= per month.
⦁ Transport allowance @ Rs.3200/= per month granted to
an employee, who is blind or orthopaedically
handicapped with disability of lower extremities to meet
his expenditure for the purpose of commuting between
the place of his residence and the place of duty.
⦁ Any allowance granted to meet the expenditure incurred
on a helper where such helper is engaged for the
performance of official duties.
⦁ Any allowance granted for encouraging the academic
research and training pursuits, in educational and
research institution.
⦁ Uniform allowance.
⦁ Children education allowance Rs.100/= per month
maximum for 2 children.
⦁ Any allowance to meet the expenditure on hostel on his
child Rs. 300/= per month, maximum for 2 children.
⦁ Gratuitous payment to widow/legal heirs if the employee
who dies while in service.
⦁ Any income by way of pension received by Government
employees or family pension received by any member of
family, who has been awarded Param Vir Chakra/Maha
Vir Chakra/Vir Chakra/other notified gallantry award.
⦁ Any allowance in lieu of rent free accommodation paid to
High Court Judges or Supreme Court Judges.
⦁ House Rent Allowance (HRA) exemption (u/s10) is entitled
least of the following :-
Actual HRA received, or
Rent paid in excess of one-tenth of salary or
50% of salary if the accommodation is situated at Delhi,
Mumbai, Kolkata, or Chennai or
40% of salary if the accommodation is situated at any other
place.

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Note: HRA will not be exempt if the residential accommodation
is occupied by the assessee, is owned by him or the assessee
has not actually spent any expenses on account of rent.

The employee who is receiving the HRA up to a certain limit, is

not required to produce the rent receipts. However, at the time
of regular assessment, the employee has to produce the rent
receipt.

For this purpose of calculation of exemption of HRA, Salary

includes Dearness Allowance if the terms & conditions of
employment so provide i.e. where Dearness Allowance is taken
into account while calculating Provident Fund & Allowance etc.

Note: Conveyance allowance is not exempted from tax for

financial year 2018-19 (assessment year 2019-20)

PERQUISITES: Perquisites are a gain or profit incidentally made

from employment in addition to regular salary.

TAXABLE PERQUISTES: Following are few perquisites which are

taxable under head ‘salary income’:-

Value of rent free accommodation.

Value of any accommodation provided by employer at
concessional rent.
Any sum paid by the employer in respect any obligation which
but for such payment, would have been payable by the
assessee.
Value of any other benefits or amenity as may be prescribed,
such as free meals, club facility, credit card, gift, interest free or
concessional loans, etc.
PERQUISITES NOT TAXABLE: There are certain perquisites which
are not taxable and not added in ‘salary income’. Following are

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such perquisites which are exempt from income tax:-

Value of medical treatment provided to an employee or his

family member in a hospital maintained by his employer.
Reimbursement of expenditure incurred on medical treatment
of an employee or his family member in a Government
approved hospital (like CHS or CGHS)
Reimbursement of expenditure incurred by the employee in a
hospital approved by the Chief Commissioner in connection
with the medical treatment of the employee or any member of
his family. This concession will be admissible for treatment of
prescribed diseases or ailments. The employee is required to
attach with his return of income:-
A certificate from hospital of disease.
A receipt of amount paid to hospital
Medical insurance premium paid by the employer for the
health of the employee or his family member under a scheme
approved by the Central Government.
Reimbursement of expenditure incurred on medical treatment
of an employee or his family member up to Rs.15000/=.
Note: Family for this purposes means: The spouse, children of
employee and the parents, brother & sisters, wholly or mainly
dependent on individual.

Free meal of value up to Rs.50/= per meal provided by the

employer during office hours at business premises
Gift or Gift Voucher up to a certain specified limit in a year. If
the value of Gift Voucher is more than that specified limit then
whole amount shall be taxable. The specified limit for this
purpose for financial year 2016-17 is Rs.5000/=.
Tea or snacks provided during office hours.
Free meals during working hours provided in a remote area or a
offshore installation.
Note: Reimbursement of medical expenses is not exempted

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from tax for financial year 2018-19 (assessment year 2019-20)

Difference Between Allowances and Perquisites::- From the

point of view of employer, both are the expenses, incurred by
employer for employees. But in case of allowances, these are
received by the employee in cash to meet some specific
expenses on regular basis whether these expenses are incurred
or no by the employee.In case of perquisites, the expenses are
incurred by the employer on behalf of employee.

PERMISSIBLE DEDUCTIONS FROM SALARY INCOME

⦁ With effect from financial year 2018-19 (assessment year

2019-20), a standard deduction of Rs.40000/= or the
aamount of salary, whichever is less, shall be allowed
under section 16(ia).
⦁ Professional Tax
⦁ Interest on home loan taken.
⦁ Deduction under chapter VI-A of Indian Income Tax Act.
Certain payments made by employees are permitted as
deduction from salary income subject to certain terms
and conditions. For example:-
⦁ Life Insurance Premium
⦁ LIC Pension Plan (Jeevan Suraksha).
⦁ Contribution of Notified Pension Scheme.
⦁ Deposit in Public Provident Fund Account.
⦁ Repayment of housing loan. (Principal amount only)
⦁ Donation for charitable purposes subject to certain terms
and conditions.
⦁ Medical Insurance Premium for self up to Rs.25000/=
(Rupees 30000/= in case he/she is senior citizen. With
effect from financial year 2018-19 the Medical insurance
premium for senior citizen is increased to Rs.50000/=.

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⦁ Additional deduction for medical insurance premium will
be allowed for parent(s) for Rs.25000/= (Rs.30000/= if the
insured person is senior citizen).With effect from financial
year 2018-19 the Medical insurance premium for senior
citizen is increased to Rs.50000/=.
⦁ Expenses incurred on Preventive Health check up is
allowed up to Rs.5000/=. This amount can be paid in cash
also. Same rules for preventive health check up applies for
parents also. Please note that the amount spent on
preventive health check up will be included in amount on
medical insurance premium. Total of preventive health
check up expenses and medical insurance premium must
not exceed the permissible limit under section 80D.
⦁ With effect from 01.04.15, any expenses incurred for
medical treatment of any parent or parents, who is very
senior citizen and not covered under medical insurance, is
allowed up to Rs.30000/=. Very senior citizen means the
person who has completed 80 years in the relevant
financial year.
⦁ Interest on loan taken for higher education from any
financial institution.
⦁ Tution fees of the children
⦁ Donation for charitable purpose subject to certain terms
and conditions.
⦁ Expenditure on rent if the employee is not in receipt of
house rent allowance.
⦁ Installment paid for home loan taken.
⦁ Contribution to Public Provident Fund.
⦁ Investment in Infrastructure bonds.
⦁ Fix deposit with banks for five years under tax saving
scheme.
⦁ Investment in National Saving Certificate etc.

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