Chapter 4: Income from Salary

and
Income from Other Sources
Definition of Salary Sec. 17(1) of Income Tax Act, 1961

Salary Includes :-
• Monetary payments (e.g. basic salary,
bonus, commission, allowances etc)
• Non monetary facilities (e.g. housing
accommodation, medical facility, interest
free loans).

it includes-
• Wages
• Any annuity or pension
• Any gratuity
• Any fees, commission perquisite or profits in lieu of or addition to any
salary or wages.
• Any advance of salary.
• Contributions under Sec80 CCD by employer or CG
• Contribution in excess of 12% of salary/ 9.5% as interest p.a to RPF a/c
 Interesting Points

• Employer - Employee Relationship

• Contract of Service Vs. Contract for Service

• Due or receipt basis whichever is earlier

• Advance of salary Vs. Advance against salary

• Arrears of Salary -?- Relief

• Partner’s salary
 Arrears of Salary

• As per provisions of the Income tax Act, 1961 , any arrears of salary, the same is
taxable in the year of payment of the arrears.

• Relief when salary, etc., is paid in arrears or in advance can be granted as per
Section 89 of Income Tax Act
 Partner’s salary

Any salary, bonus , commission or remuneration received by whatever name called

due to or received by a partner of a firm from a firm shall not be treated as salary
but shall be treated as income from business or profession
 Emoluments / “Perquisite” Section17 (2)

Perquisite

Reward or benefit linked to a position in addition to salary

• Rent-free/concessional rent accommodation

• Obligation paid by employer

• Amenity granted free / concessional rate to specified employee*(D/20% V.R/>50’)

• Specified security or sweat equity shares allotted by the employer, free of cost or
at concessional rate to the assessee

• Contribution to an approved superannuation fund by the employer >1 lacs

• Value of any other fringe benefit or amenity

 Profits in Lieu of Salary Sec. 17(3)

"Profits in Lieu of Salary” as per the provisions of the Income Tax Act includes:

i) The amount of any compensation due to or received by an assessee from his

employer or former employer at or in connection with...

a. the termination of his employment, or

b. the modification of the terms and conditions relating thereto;

ii) Any payment due to or received by an assessee :

a. from an employer or a former employer, or

b. from a provident or other fund to the extent to which it does not consist of
contributions by the assessee or Interest on such contribution, or

c. any sum of amount received under the Keyman Insurance Policy which
includes the sum allocated by way of bonus on such a policy;
 Gratuity Sec. 10(10)

• Gratuity is a voluntary payment made by an employer in appreciation of service

rendered by the employee .
Those covered
• Exemption is available under section 10(10) by the Payment
• Exemption is available to Government Employees of Gratuity Act
1972

For Non Government employees

.
Those not covered
by the Payment of
Gratuity Act 1972
 Gratuity Sec. 10(10)
Central /State Government Employees covered by
Employees Payment of Gratuity Act 1972
Fully Exempt from tax Exemption available is least of
following -
• Rs. 1000000.00
Gratuity actually received
15 days salary based on last
drawn salary for each
completed year of service or
part there of in excess of 6
months.
Salary means basic salary and
dearness allowance .
Number of days to be taken
for calculation in a month
would be 26.
Employees not covered by
payment of Gratuity Act 1972
Exemption available is least of
the following -
• Rs. 1000000.00
Gratuity actually received.
Half month’s salary (based on
last 10 months average salary
immediately preceding the
month of retirement or
death) for each completed
year of service.
Salary means basic salary ,
dearness allowance if
provided in terms of
employment and commission
as a percentage of turnover
achieved by the employee
 Pension 10(10A)

• A Pension is a fixed regular amount which is paid consistently to an individual,

commonly after retirement from administration.

• Pension is divided into

 Uncommuted Pension (periodic-chargeable to tax under section 15 in the hands of

all employees.)

 Commuted Pension. (lumpsum- Government Employees is fully exempt from tax.

Commuted Pension- For Non Government
employees

Those in receipt of gratuity

If not in receipt of gratuity
1 x commuted pension received x 100
1 x commuted pension received x 100
3 commutation %
2 commutation %
 Leave Salary 10(10AA)

i) Leave Encashment during service is fully taxable in all cases.

ii) Any payment by way of leave encashment received by Central and State Government.
Employees at the time of retirement in respect of the period of earned leave at credit are
fully exempted.

iii) In case of other employees, the exemption is to be limited to the least of following: (a)
Cash equivalent of unutilised earned leave (earned leave entitlement cannot exceed 30
days for every year of actual service) (b) 10 months average salary. (c) Leave encashment
actually received by the employee. This is further subject to a limit of Rs.3, 00,000

iv) Leave salary paid to legal heirs of a deceased employee, in respect to the privilege
leave standing to the credit of such an employee at the time of death is not taxable.
 Retrenchment Compensation (Sec.10 (10B)

Retrenchment compensation received by a workman under the Industrial Disputes

Act, 1947 or any other Act or Rules is exempted subject to following limits:-

i) Compensation calculated at fifteen days average pay for every completed year of
continuous service or part thereof in excess of 6 months.

ii) The above is further subject to an overall limit of Rs.5,00,000 .

 Keyman Insurance Policy

• It is a life insurance policy

• Policy taken by a person on the life of another person

• Key Person could be an employee/Director of a Company with technical

background, experience entrepreneurial vision and/or market image whose death,
will have a bearing on the profitability of the Company.

• There can be more than one Key Person within a Company of the requisite
background, knowledge, experience etc. It is not necessary for a Key Person to
hold the highest position.

• the assessee is entitled for deduction u/s 10(10D) on the sum received under such
policy
 Provident Fund

• Any amount of payment, (i.e. to which the Provident Fund Act, 1925 applies)
being received from a Provident Fund is exempt. Any payment from any other
provident fund notified by the Central Govt. is also exempt.

• Under the PPF Scheme 1968, the Public Provident Fund(PPF) is established and
has been notified for this purpose.
 Sec. 10(5) Value of Leave Travel Concession

• Many employers provide Leave Travel Allowance (LTA) to their employees, the
amount of which can be claimed by an employee if he/she goes on any vacation.

• This Leave Travel Allowance (LTA) amount can be claimed when an employee
goes on any vacation and then submits the actual bills to the employer.

• Exemption of Fare Only

• Travel within India only allowed

• Exemption only in respect of two journeys performed in a block of four calendar

year

• You can carry forward your Leave Travel Allowance in the situation that it has
not been used.
 Sec. 17(2) (i): Valuation in Respect of Unfurnished Rent
Free Accommodation Rule 3(1)

• Provision of accommodation must be based on an employer-employee relationship,

and must have arisen as a result of deputing the employee on duty at a particular
place.

• Perquisite is taxable even an employee has neither used the accommodation as his
residence nor has forgone or waived the right to enjoy the services of the
accommodation.

• Rent-free accommodation is a taxable perquisite provided by a foreign employer to a

State Government officer sent on deputation.
 Provisions of Household’s Material of an Employee

1. Gas, electricity or water supply provided:

a. Where employer has supplied gas, electricity or water for household purposes from
its own sources ,the value of such benefits is the manufacturing cost incurred per unit
by the employer,

b. Where the employer has supplied gas, electricity or water for household purpose, by
purchasing from outside agency, such value will be treated as an amount actually paid
by employer,

c. Where any amount is paid by employee such an amount paid shall be deducted from
value so arrived.

2. Free Domestic Servants: Actual cost to employer in respect of free services of a

sweeper, a gardener, a watchman or a personal attendant as reduced by the amount
paid by an employee.
 Provisions of Educational Facilities for Employee’s
Family

• Such provisions can be free or concessional educational facility for the employee’s
family members.

• In cases where employer maintains or owns the educational institution or allows

education in other educational institution due to his employment the value will
be such education cost in a similar institution or in vicinity .

• If such cost does not exceeds Rs. 1,000 per month per child nothing shall be taxed
as perquisite
 Interest Free Loan & Loan at Concessional Rate of
Interest

• value of benefit provided by the employer to employee or to any member of his

household during the relevant previous year shall be determined as the sum
equal to the interest computed at the rate charged p.a. by the SBI as on the 1st
day of the relevant previous year in respect of the loans for the same purpose
advanced by it on the maximum outstanding monthly balance as reduced by the
interest, if any, actually paid by the employee or any such member of his
household.
• Maximum outstanding monthly balance” means aggregate outstanding balance
for each loan as on the last day of each month.

• However if such loans are made available for medical treatment for prescribed
diseases or where the loan amount is petty not exceeding in aggregate Rs. 20000/-
no value would be charged.

•
 Medical Facilities not Treated as Perquisite

1)Value of any medical treatment provided to the employee or his family in a hospital
maintained by the employer.

2) Value of medical treatment in any hospital maintained by the Government or any

local authority or approved by the Government.

3) Value of medical treatment for prescribed diseases or ailments in any hospital

approved by the Chief Commissioner of Incometax.

4) Besides, any sum paid by the employer towards medical reimbursement other
than as discussed above is exempt up to Rs.15,000/-.

5) Any sum paid by the employer in respect of premium paid by the employee, under
schemes approved by the Government or the Insurance Regulatory and Development
Authority that qualifies for deduction under section 80D of the Income-tax Act
 Perquisite for Motor Car

• The Motor Car perquisite is taxable under section 10(14)(i) in the manner as
prescribed in Rule 3 (2) of the Income Tax Act.

• When the car is provided by the employer or is owned by the employee and is
used wholly and exclusively for official purpose then there is no taxability.

Car belonging to Expenses Wholly personal Partly Personal use

incurred by use
Employee Employer Actual expenses Actual amount of expenditure
incurred incurred by the employer as
reduced by –
1. Upto 1.6 lts CC engine Rs.
1800.00
2. Above 1.6 lts CC Rs.
2400.00 p.m.
3. Driver Salary Rs.
900.00 p.m
Perquisite for Motor Car
 Review Question

a) Explain the provisions related gratuity payments in the light of

the provisions of Income tax Act.
b) Discuss about keyman insurance policy and the relevant tax
treatment for key person insurance policies.
c) Briefly talk about the treatment of provident fund for income tax
purposes.
d) Discuss the difference between interest free loan and loan at
concessional rate of interest. Are these taxable perquisites ,
elaborate on the same.
 Amendments Applicable for A.Y 2018-19

a) House Rent Allowance

If Rent paid > INR 1,00,000 per year (>INR 8333 per month) - Landlord Name
and PAN is
mandatory in submission to employer.

b) Interest paid on house property loan

If interest paid on house property loan is to be claimed by an employee, he/she
must submit Lender Name and PAN of Lender to the employer– includes
Banks, NBFCs, Housing Finance Cos.

c) TDS on Rent Paid

If Rent paid is greater than Rs.50,000/- per month – TDS to be deducted by

tenant @ 5% and paid to the Government. TAN not required.
Income from Other Sources
 Income from Other Sources

• Section 56 of Income Tax Act talks about the provisions of “Income from other
sources". Under the Income Tax act, income of every kind which is not to be
excluded from the total income shall be chargeable to income tax under the head
'Income from other sources', if provided it is not chargeable to income tax under
any of the other heads of income.

• Thus, income from other sources is a residuary head of income i.e. income which
is not chargeable under any other head will be chargeable to tax under this
particular head.

• All income other than income from salary, house property, business and
profession or capital gains will be covered under 'Income from other sources'.
 There are certain incomes which are always taxed under
this head. These incomes are as follows:

• Dividends are always taxed under this head. However, dividends from domestic
company other than those covered by section 2(22)(e) are exempt from tax under
section 10(34).

• Winnings from lotteries, crossword puzzles, races including horse races, card game
and other game of any sort, gambling or betting of any form whatsoever, are always
taxed under this head.

• Income by way of interest received on compensation or on enhanced compensation

such income shall be deemed to be the income of the year in which it is received,

• Gifts received by an individual or HUF (which are chargeable to tax) are also taxed
under this head.
 DEDUCTIONS FROM INCOME FROM OTHER SOURCES

1. in case of Dividends and interest on Securities

2. In case of Income from letting of machinery , plant or furniture with or without building

3. Deduction of amount deposited : to provident fund or superannuation fund is deemed as

income u/s 59(ic) if not taxable under the head “Profit and Gains of Business or Professions.
4. Standard Deduction in the case of family pension [ Sec.57(iia)] : In the case of income in
the nature of family pension, the amount deductible is Rs. 15,000 or 33 ½% of such income,
whichever is less.
5. Any other expenses for earning income [ Sec. 57(iii)] : if the following 4 basic conditions
are satisfied :
i. The expenditure should be incurred solely for earning such income
ii. it should not be in the nature of capital expenditure
iii. is should not be in the nature of personal expense.
iv. is should be incurred in the relevant accounting year.
 Amounts not deductible , Section 58 in The Income- Tax Act

In the case of any assessee,-

(i) any personal expenses of the assessee;(ia) any expenditure of the nature referred to in sub-
section (12) of section 40A;]
(ii) any interest chargeable under this Act which is payable outside India on which tax has not been
paid or deducted
(iii) any payment which is chargeable under the head" Salaries", if it is payable outside India, unless
tax has been paid thereon or deducted therefrom
 MCQ’s

Income from other sources is…. Head of income.

a) Major
b) Main
c) Residual
d) Irrelevant
Any sum of money or property received by individual ………without
consideration is taxable.
a) Equal to Rs25000
b) Exceeding Rs25000
c) Exceeding Rs35000
d) Exceeding Rs50000
Winning from lottery, races wwill be taxed at the rate of….
a) 30%
b) 31%
c) 32%
d) 33%
 Amendments applicable A.Y 2018-19

Income from Other Sources Dividend income Taxation

Under the existing provisions of section 115BBDA, income by way of dividend in excess of Rs. 10
lakh is chargeable to tax at the rate of 10% on gross basis in case of a resident individual, Hindu
undivided family or firm.
With a view to ensure horizontal equity among all categories of tax payers deriving income from
dividend, it is proposed to amend section 115BBDA so as to provide that the provisions of said
section shall be applicable to all resident assessees except domestic company and certain funds,
trusts, institutions, etc. Now expanded to all persons except companies, certain funds and trusts.

Scope of income from other sources widened

Receipt of cash or property by any person from any other person without consideration or
inadequate consideration in excess of INR 50,000 to be taxed. Existing exceptions continue
 MCQ’s

The maximum limit of exemption for gratuity received by an

employee is Rs…
a) 5 lacs
b) 15 lacs
c) 10 lacs
d) None of the given option.
Medical reimbursement up to Rs….., is an exempt perquisite.
a) 1000
b) 10000
c) 15000
d) 20000
Commission and bonus received by a partner shall not be regarded as
……….
a) Business profession income
b) Salary income
c) income
d) None of the given option