INCOME UNDER

THE HEAD SALARY

 DEFINITION
1. Basic salary
2. Fees, Commission, perquisites and Bonus
3. Any annuity, pension or gratuity
3. Taxable value of cash allowances
4. Any advance of Salary
5. Any payment received by an employee in respect of
any period of leave not availed by him
6. Transferred balance in a recognized provident fund to
the extent it is taxable
The aggregate of the above incomes, after the
exemptions available, if any, is known as ‘Gross
Salary’.
 Contd….

From the ‘Gross Salary’, the following deductions are

allowed under Section 16 of the Act to arrive at the
figure of Net Salary:
1. Deduction for entertainment allowance – Section 16 (ii)
2. Deduction on account of any sum paid towards tax on
employment –Section 16(iii).
 SALARY
 Remuneration of a person, which he has
received from his employer for rendering
services to him. The relationship of payer
and payee must be of employer and
employee for an income to be categorized
as salary income.
 The Act makes no distinction between
salary and wages, though generally
salary is paid for non-manual work and
wages are paid for manual work
 SALARY
 Salary received from more than one
employer during the same previous year,
salary from each source is taxable under
the head “salaries”.
 Salary is taxable either on due basis or
receipt basis which ever matures earlier
 Salary, perquisite or allowance may be
given as a gift to an employee, yet it
would be taxable.
 SALARY
 Compulsory deduction from salary such as
employees’ contribution to provident fund,
deduction on account of medical scheme or
staff welfare scheme etc. are examples of
instances of application of income. In these
cases, for computing total income, these
deductions have to be added back.
 SALARY
 Surrender of salary
 Tax free salary
 Foregoing of salary
 Salary paid by foreign government or
enterprises
 Basis of charge
As per section 15, salary consists of:
a) Any salary due from an employer (or a former
employer) to an assessee in the Prev. year,
whether actually paid or not;
b) Any salary paid or allowed to him in the Prev. year
by or on behalf of an employer, though not due or
before it became due;
c) Any arrears of salary paid or allowed to him in the
Prev. year or on behalf of an employer, if not
charged to income-tax for any earlier previous
year.
 Place of accrual of salary
1. Salary in respect of service rendered in India
is deemed to accrue or arise in India even if
it is paid outside India or it is paid or payable
after the contract in India comes to an end.
2. Pension paid abroad is deemed to accrue or
arise in India, if it is paid in respect of
services rendered in India
3. Leave salary paid abroad in respect of leave
earned in India is deemed to accrue or arise
in India
 Different forms of salary
Advance Salary[sec17(1)(v)]- Advance Salary is
taxable on receipt basis in the assessment year.
However, a loan taken from employer is not taxable
as advance salary.

Arrear Salary- It is taxable on receipt basis, if the

same has not been subjected to tax earlier on due
basis.

Leave Salary- Encashment of leave by surrendering

leave standing to one’s credit is known as “Leave
Salary”
 Contd….
Fees, commission and Bonus: Any fees or commission
paid or payable to an employee is fully taxable and is included
in salary.

Bonus: Bonus is taxable ion the year of Receipt if it has not been
taxed earlier on due basis.

Gratuity: Gratuity is a retirement benefit. It is generally payable

at the time of cessation of employment of employment and on
the basis of duration of service.
 ALLOWANCES
 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.
 Fully taxable allowances

(i) Dearness Allowance and Dearness Pay

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 of
employment.
 Contd….
(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.
 Contd….
(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.
 Contd….
(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.
 PARTIALLY EXEMPT
ALLOWANCES
 This category includes allowances which are exempt up
to 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.
 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).
 Contd….
“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. But it does not include any other
allowance and perquisite.
 Illustration:
Mr. X is employed in A Ltd. getting basic pay of Rs.20, 000
per month and dearness allowance of Rs.7, 000 per month
(half of the dearness allowance forms part of salary for the
purpose of retirement benefits). The employer has paid
bonus @Rs.500 per month, Commission @1% on the sales
turnover of Rs.20 lakhs, and house rent allowance of Rs.6,
000 per month. X has paid rent of Rs.7, 000 per month and
was posted at Agra.
Compute his gross salary for the assessment year 2006-07
 Solution
Computation of Gross Salary Amount / Rs.
Basic Salary (Rs.20,000 x 12) 2,40,000
Dearness Allowance (Rs.7,000 x 12) 84,000
Bonus (Rs.500 x 12) 6,000
Commission (1% of Rs.20,00,000) 20,000
House Rent Allowance
(Rs.6,000 x 12 – Amount exempt Rs.53,800) 18,200

Gross Salary: 3,68,200

 Contd….
Amount of HRA exempt is least of 3 amounts:
1. 40% of Salary (Rs.2,40,000 + Rs.42,000 + Rs.20,000) = Rs.3,02,000
2. Actual HRA received (Rs.6, 000 x 12) = Rs. 72,000
3. Rent paid (Rs.7, 000 x 12 – 10% of salary Rs.30, 200) = Rs. 53,800
Amount of HRA exempt is = Rs. 53,800
 When exemption depends upon actual
expenditure by the employee- The foll.
Allowances are exempt under section 10(14) to
the extent the amount is utilised for the specified
purpose for which the allowance is received. The
amount of exemption under section 10(14) is-
a) The amount of the allowance; or

b) The amount utilised for the specific purpose for

which allowance is given,
Whichever is lower is considered
Name of Nature of allowance
allowance
Traveling Any allowance (by whatever name called)
allowance/tra granted to meet the cost of travel on tour
nsfer or on transfer
allowance
Conveyance Conveyance allowance granted to meet
allowance the expenditure on conveyance in
performance of duties of an office ( exp.
For covering the journey between office
and residence is not treated as
expenditure and is not exempt from tax.)
Daily Any allowance whether granted on tour
allowance or for period of journey in connection
with transfer, to meet the ordinary daily
charges incurred by an employee on
account of absence from his normal place
of duty
Name of Nature of allowance
allowance

Helper Any allowance (by whatever name called) to

allowance meet the expenditure on a helper where
such helper is engaged for the performance
of official duties.

Research Any allowance (by whatever name called)

allowance granted for encouraging the academic
research and other professional pursuits.

Uniform Any allowance (by whatever name called) to

allowance meet the expenditure on the purchase or
maintenance of uniform for wear during the
performance of duties of an office.
When exemption does not depend upon expenditure- In the
cases given, the amount of exemption does not depend upon
expenditure incurred by the employee. Regardless of the amount
of expenditure, the allowances given below are exempt to the
extent of-
a) The amount of allowance; or
b) The amount specified in rule 2BB
Whichever is lower

Name of Nature of allowance Exemption as specified in rule

allowance 2BB
Special It includes any special Amt. exempt from tax varies
compensatory compensatory from Rs. 300 per month to
(Hill Area) allowance in the Rs. 7,000 per month
Allowance nature of special
compensatory (hill
area) allowance or
high altitude
allowance or snow
bound area allowance
Name of Nature of allowance Exemption as
allowance specified in rule
2BB
Border area It includes any special Amt. of
allowance compensatory allowance in the exemption
nature of border area allowance varies from Rs.
or remote locality allowance or 200 per month
difficult area allowance or to Rs. 1300 per
disturbed area allowance. month

Tribal areas This allowance is given in a)

/scheduled area Madhya Pradesh ;b) Tamil Nadu
allowance Rs. 200 per
c) UP;(iii) Karnataka (iv) Tripura month
(v) Asam (iv) West Bengal (v)
Bihar (iv) Orissa

The amount
Children This allowance is given for exempt is
Education children’s education limited to Rs.
allowance 100 per month
per child up to a
max. of 2
children
Name of Nature of allowance
allowance
Hostel This allowance is granted to
expenditure an employee to meet the
allowance hostel expenditure of his
child
Compensatory If this exemption is taken,
field area the same employee cannot
allowance claim any exemption in
respect of border area
allowance mentioned above
If this exemption is taken,
Compensatory the same employee cannot
modified area claim any exemption in
allowance respect of border area
allowance mentioned above
Exemption as specified
in rule 2BB
It is exempt from tax
to the extent of Rs.
300 pm per child up to
a max. of 2 children
Exemption is limited to
Rs. 2600 pm in some
cases
Exemption is limited to
Rs. 1,000 pm in some
cases
Name of Nature of allowance
allowance
Transport It is granted to an employee
Allowance to meet his expenditure for
the purpose of commuting
between the place of his
residence and the place of his
duty
Exemption as specified
in rule 2BB
It is exempt up to Rs.
800 pm (Rs. 1600 pm
in the case of an
employee who is blind
or orthopaedically
handicapped)

It is granted to an employee Exemption is limited to

Underground who is working in Rs. 800 per month
allowance uncongenial, unnatural
climate in underground mines
High altitude It is granted to the members
allowance of armed forces operating in
high altitude areas
It is exempt from tax
up to Rs. 1,060 per
month (for altitude of
9,000 to 15,000 feet)
or Rs. 1,600 per
month ( for altitude
above 15,000 feet
 Entertainment Allowance [Sec. 16(ii)]:
Entertainment allowance is first included in
salary income under the head ”salaries” and
thereafter a deduction is given
• Govt. employee least of the following. is
deductible:
a) Rs. 5,000;
b) 20% of Salary exclusive of any allowance,
benefit or other perquisites.
c) Amount of entertainment allowance granted
during the Prev. year
• Non-Govt. employee (including employees
of statutory corporation and local authority)
entertainment allowance is not deductible.
 PERQUISITES
 Perquisites are defined as any casual emolument or benefit attached
to an office or position in addition to salary or wages. It denotes
some thing that benefits a man by going into his pocket; it does not
cover mere reimbursement of necessary disbursements. Such
benefits are normally given in kind but should be capable of being
measurable in money terms. Perquisites are taxable and included in
gross salary only if they are
(i) Allowed by an employer to an employee,
(ii) Allowed during the continuation of employment,
(iii) directly dependent on service,
(iv) resulting in the nature of personal advantage to the employee and
(v) derived by virtue of employers authority.
 DEFINITION
1. Value of rent free accommodation provided to the employee by the employer.
2. Value of concession in the matter of rent in respect of accommodation provided to
the employee by his employer.
3. Value of any benefit or amenity granted free of cost or at a concessional rate in
any of the following cases:
a) by a company to an employee who is a director thereof
b) by a company to an employee who has substantial interest in the company
c) by any employer to an employee who is neither a director, nor has substantial
interest in the company, but his monetary emoluments under the head ‘Salaries’
exceeds Rs.50, 000.
4. Any sum paid by the employer towards any obligation of the employee.
5. Any sum payable by employer to effect an assurance on the life of assessee.
6. The value of any other fringe benefit given to the employee as may be prescribed.
 Perquisites Taxable in case of All
Employees
1. Rent free house provided by employer
2. House provided at concessional rate
3. Any obligation of employee discharged by employer
e.g. payment of club or hotel bills of employee, salary
to domestic servants engaged by employee, payment of
school fees of employees’ children etc.
4. Any sum paid by employer whether directly or
through a fund to effect an assurance on the life of the
assessee or to effect a contract for an annuity.
5. The value of any other fringe benefit or amenity as
may be prescribed.
 Valuation of rent free accommodation for
Government employees
a) Unfurnished If accommodation is provided by the
State or Central Government to their employees,
the value of such accommodation is simply the
amount fixed by the government (called the license
fees) in this regard.
b) Furnished Value will be calculated as
unfurnished. Such value shall be increased by 10%
p.a. of the cost of furniture or if such furniture is
hired than by actual hire charges
 Other employees- Unfurnished
Population of city as Where the Where the
per 2001 census accommodation is owned accommodation
where accommodation by the employer is taken on lease
is provided or rent by the
employer
Exceeding 25 lakh 15% of salary in respect of Amount of lease
the period during which the rent paid or
accommodation is occupied payable or 15% of
by the employee salary, whichever
is lower
Exceeding 10 lakh but 10% of salary in respect of Same as above
not exceeding 25 lakh period during which the
accommodation is occupied
by the employee
Any other 7.5% of salary in respect of Same as above
period during which the
accommodation is occupied
by the employee
 Other employees- Furnished
 Value will be calculated as unfurnished. Such
value shall be increased by 10% p.a. of the
cost of furniture or if such furniture is hired
than by actual hire charges
 Furnished accommodation in a Hotel
The value of the perquisite is determined on the basis
of lower of the following two-
1. 24% salary paid or payable for the period during
which such accommodation is provided in the P.Y.
2. Actual charges paid or payable by the employer to
such hotel
Exception: If an accommodation is provided in a hotel
and following conditions are satisfied, nothing is
chargeable to tax-
 The hotel accommodation is provided for a total
period not exceeding in aggregate 15 days in a P.Y.
 Such accommodation is provided on an employee’s
transfer from one place to another place
Valuation of monetary obligation of the
employee discharged by employer
 Gas, electricity bill paid or reimbursed
 Children education expenses paid or
reimbursed
 Medical expenses reimbursed

 Income tax or professional tax paid by

employer
Value of such monetary obligation shall be
the actual amount spent by the employer
and is taxable whether the employee is
specified or not
 VALUATION OF LIFE INSURANCE
PREMIUM
 Amount. payable by an employer, directly or
indirectly, to effect an assurance on the life of
the employee is taxable in the hands of all
employees. The rule is however, not applicable
if the employer makes contribution/payment
towards the following:-
a) Recognized Provident Fund ( up to 12% of the
salary of the employee)
b) Approved Superannuation Fund
c) Group Insurance schemes
d) Employee’s State Insurance schemes, and
e) Fidelity guarantee scheme
 Valuation of interest-free loan or
loan at concessional rate of interest
Step
- 1 Find out the “max. outstanding monthly balance” (i.e.
the aggregate outstanding balance for each loan as on
the last day of each month)

Step 2 Find out rate of interest charged by SBI as on the 1st

day of relevant P.Y. in respect of loan for the same
purpose advanced by it

Step 3 Calculate interest for each month of the Prev. year on

the outstanding amount mentioned in step 1 at the rate
of interest given in step 2
Step 4 From the total interest calculated for the entire P.Y.
under step 3, deduct interest actually recovered, if any,
from the employee during the P.Y.
Step 5 The balancing amount [step3 minus Step 4] is taxable
value of the perquisite
 EXCEPTIONS
-

Exemption If a loan is made available for medical

1 treatment in respect of diseases specified
in Rule 3A (the exemption is however, not
applicable to so much of the loan a has
been reimbursed to the employee under
any medical insurance scheme)
Exemption Where the amount of original loan ( or
2 loans) does not exceed in the aggregate
Rs. 20,000
 The value of traveling, touring,
accommodation and any other
expenditure paid for or borne or
reimbursed by the employer for any
holiday availed of by the employee or
any member of his household is the
actual cost of the facility.
 VALUE OF FREE FOOD ETC.
CIRCUMSTANCES TAXABLE VALUE
Tea- or snacks provided nil
during working hours
Free food or non-alcoholic nil
beverages during working
in a remote area or an
offshore installation.
Free food or non-alcoholic Amount in excess
beverages during working of Rs. 50 per
meal is taxable
In any other case Actual cost
Value of any gift, voucher or token
 Actual value of such gift if the value
is more than Rs.5000
 It will be taken as nil if the value is
less than Rs. 5000
 CREDIT CARD & CLUB
MEMBERSHIP
CIRCUMSTANCES TAXABLE VALUE

Where payment is made or The amount paid

reimbursed by the employer for or reimbursed
for the purpose other than by the employer
the official.
Where payment is made or Nil , provided
reimbursed by the employer certain conditions
for the official purpose are fulfilled.
 CONDITIONS
 Complete details in respect of such
expenditure is maintained by the
employer which may, inter alia, include
the date of expenditure and the nature of
expenditure.
 The employer gives a certificate for such
expenditure to that effect the same was
incurred wholly and exclusively for the
performance of official duty
 USE OF MOVABLE ASSETS
CIRCUMSTANCES TAXABLE
VALUE
Use of laptop and computers nil

Movable assets, other than- (i) 10% p.a. of

(i) Laptop and computers and the actual
(ii) Assets already specified cost.
(ii) The rent or
hire charges
(As the case
may be)
 Transfer of any movable assets.
Asset transferred Value of benefit
Computers and Actual cost of asset less 50%
electronic items each completed year during
which such asset was used by
the employer on WDV method
Motor cars Actual cost of asset less 20%
each completed year during
which such asset was used by
the employer on WDV method
Any other assets Actual cost of asset less 10%
each completed year during
which such asset was used by
the employer on SL method
 Perquisites taxable in case of
Specified Employees only
1. Free supply of gas, electricity or water supply for
household consumption
2. Free or concessional educational facilities to the members
of employees household
3. Free or concessional transport facilities
4. Sweeper, watchman, gardener and personal attendant
5. Any other benefit or amenity
Specified employee- Specified employee is an employee
who is either a director or has substantial interest in the
company where he is employed or is drawing monetary
salary of more than Rs.50, 000 during the previous year.
 Free supply of gas, electricity or water
Circumstances Value of benefit

Where such supply is It shall be the manu

made from resources -facturing cost per
owned by the employer unit
Any other case Amount paid on this
account by employer
Free or concessional educational facilities
Circumstances Value of benefit
Where institution is Actual Cost of education in
maintained by the a similar institution. But
employer nil if not more than Rs.
1000 per child
Where such facilities Actual Cost of education in
is given in any other a similar institution. But
institution nil if not more than Rs.
1000 per child
Any other case Actual cost
 Free or concessional transport facilities
Circumstances Value of benefit

Provision of transport to
employee or any other
member of household who nil
himself is in the business
of carriage and transport
Any other case Actual cost
 Value of any specified security or
sweat equity
 Fairmarket value of the specified
security on the date on which the
option is exercised by the assessee
as reduced by the amount actually
paid by him.
 Valuation in respect of Motor car
Different situations
I. When Car is owned or hired by
employer & maintenance and
running expenses are met or
reimbursed by employer
a) If the car is wholly used for
official purposes
b) If the car is wholly used for
private purposes of the employee
or any member of his household
Value of the perquisite
a) No value provided a few
conditions are satisfied
b) Step1: Find out actual
expenditure incurred by the
employer [ i.e. exp. On running &
maintenance including
remuneration of the chauffer plus
normal wear & tear of the car) @
10% pa of actual cost to the
employer) or hire charges if car is
taken on hire]
Step2- Less: Amt. recovered
from employee Balancing amtis
taxable value of the perquisite
Different situations
c) If the car is used partly for
official and partly for private
purposes of the employee
maintenance and running
expenses are met by
employer.
d) If the car is used partly for
official and partly for private
purposes of the employee
maintenance and running
expenses are met by
employee.
Value of the perquisite
A sum calculated at the rate of Rs.
1,800 pm where the cubic capacity
of the engine does not exceed 1.6
liters or Rs. 2,400 pm if such
capacity exceeds 1.6 liters and Rs.
900 pm if chauffer is provided.
A sum calculated at the rate of Rs.
600 pm where the cubic capacity
of the engine does not exceed 1.6
liters or Rs. 900 pm if such
capacity exceeds 1.6 liters and Rs.
900 pm if chauffer is provided.
Different situations Value of the perquisite
When Car is owned
or hired by
employee &
maintenance and
running expenses
are met or
reimbursed by
employer
a) If the car is a) No value provided a few conditions are
wholly used for satisfied
official purposes

b) If the car is used Actual cost as reduced by the Rs. 1,800 pm

partly for official and where the cubic capacity of the engine does
partly for private not exceed 1.6 liters or Rs. 2,400 pm if such
purposes of the capacity exceeds 1.6 liters and Rs. 900 pm if
employee chauffer is provided.
However if actual expenses are more than
1800/2700/2400/3300 p.m. as the case may
be such amount may be claimed as deduction
by maintaining specified records