1. INTRODUCTION

Income under the head salaries covers all possible remuneration due/paid to a person in respect

of services rendered by him in an express or implied contract of employment. However, arrears

of salary are taxable on payment basis and not on due basis. Payment received by an individual

other than an employer cannot be termed as salary and consequently cannot be taxed underthis

head. Salary is taxed on due basis or receipt basis whichever is earlier. If the employer pays the

salary tax-free the employee has to include in his taxable income not only the salary but also the

amount of tax paid by the employer.

Salary includes the following items:

v Wages: Conceptually there is not much difference between salary and wages as far as

taxability is concerned. They are treated same as any income under the head salary only.

v Any annuity or pension: Annuity is an annual grant made by the employer. It may be paid

voluntarily or on account of an contractual agreement by the employer. Annuity if payable

by the current employer is taxable as salary but if is paid by the previous employer; it is

taxed as profits in the lieu of salary.

v Any gratuity: Gratuity received by an employer on his retirement is taxable under the head

salary whereas gratuity received by the legal heir of the deceased employee shall be taxed

under the head ‘Income from other sources’. However in both the above cases, gratuity is

exempt up to a certain limit under section 10(10). In case gratuity is receivedby the

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employee, salary would include only that part of the gratuity which is not exempt under

section 10(10).

v Any fees or commission: Any fees, commission, perquisite or profits in lieu of or in

addition to any salary or wages would be included in grosssalary for the purpose of tax.

These may be a fixed amount or may be a percentage of their performance in terms of net

profit, turnover or revenue to the employer.

v Any payment received for any leave not availed by him: Leave salary, after a

minimum of specified criterion (will be discussed in detail in forthcoming issues) will be

taxable under the head salary of the employee.

v Transferred balance in a RPF to the extent it is taxable: Any contribution made by

the employer towards the recognized provident fund in excess of the specified limit of 12%

of the salary is taxable in the hands of the employee and hence included under the head

gross salary.

Under the head salary, the employers give a variety of allowances to their employees as welfare

gesture. This allowances are treated under the head salary unless aspecific exemption is been

provided in respect of any such allowance. These allowances are given to the employees to meet

specific/particular expenses, whether personal or for the performance of his duties in the

company. For example, specific exemptions in respect of allowances are provided under the

following sections:

i. House rent allowance (HRA) – Section 10(13A)

ii. Specific/Notified special allowance – Section 10(14)

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2 .OBJECTIVES

Among the five heads of income listed by S.14, “Salaries” is the first and most important head of

income. The concept of“Salaries” is very wide and includes not only the salary in common

parlance but also various other receipts, gifts, perquisites and benefits.

The lesson is divided into various sections dealing with theconcept of salary income and its

characteristics, which define as towhat constitutes “salaries” followed by the incomes falling

under this head the computation of basic salary, types of allowances and perquisites, valuation of

the perquisites, various income tax provisions for computing taxable value of allowances etc and

their detailed descriptions along with the applicable legal provisions of income tax.

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3. MEANING OF SALARY

Before one proceeds for Computation of Income under the head Salaries one must understand

the Meaning of Salary with reference to the Income Tax Act’ 1961. Salary under the Act is

defined U/s 17(1), which includes the following:-

        Wages;

        Any Annuity or Pension;

        Any Fees, Commission, Perquisites or Profits in Lieu of salary;

        Any Gratuity;

        Any Advance of Salary;

        Any payment received by an employee in respect of any period of leave not availed by him, known as leave encashment;

        Transferred balance in a recognized provident fund to the extent it is taxable;

        Contribution made by central govt. to the account of an employee under the pension scheme U/s 80 CCD

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4. DEFINITION OF SALARY [SEC. 17(1)]

Definition Of Salary Under Income Tax Act 1961

Definition of Salary u/s 17(1) of Income Tax Act is inclusive, which means apart from general

and popular meaning, also it includes those items which otherwise may not be considered as

salary.

1. Wages;

2. Any annuity or pension;

3. Any gratuity;

4. Any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;

5. Any advance of salary but not advance in the nature of a loan;

6. Any payment received by an employee in respect of any period of leave not     availed of by

him;

7. 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 under rule 6 of Part A of the Fourth

Schedule; and

8. 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

9. The contribution made by the Central Government or any other employer to the account of

an employee under a pension scheme referred to in section 80CCD. 

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5. TAXABLE & NON-TAXABLE PERQUISITES

Perquisites are benefits earned by employees of a company along with their normally received

wages or salaries. They are also called as perks. It is like a gratuity or incidental payment for

which the employee has the sole right. These are fringe benefits paid for a genuine reason. They

can be either given by the employer directly or indirectly. Before discussing about perquisites, let

us see what salary includes.

Under section 17(1) of IT Act, it consists of

Annuity

Gratuity

Wages

Advance salary

Commission/fees/profits with respect to salary, etc

The following are the types of perquisites

Taxable Perquisites

Non-taxable Perquisites

Perquisites taxable but are taxable only in the hands of particular employees

Taxation of Perquisites

Perquisite is a gain or profit incidentally made from employment in addition to regular salary or

wages. Following perquisites shall be taxable.

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1) Value of rent free accommodation provided to the assesses by his employer,

2) Value of any accommodation provided to the assesses by his employer, at a concessional rent;

3) Value of any amenity or benefit granted free of cost or at a concessional rate to the following

categories of employees:

A director in the employer Company;

An employee being the beneficial owner of at least 20% of the ordinary shares in the employer

company; and

Any other employee whose income under the head ‘Salaries’ exclusive of all non-monetary

benefits or amenities exceeds Rs. 50, 000.

The perquisites taxable under this category are:

Provision of free or concessional educational facilities,

Reimbursement of medical expenditure,

Expenditure on foreign travel and stay during medical treatment,

Supply of gas, electricity and water,

Sale of an asset to the employee at concessional price (including sale o shares in the employer

company).

4) Any sum paid by the employer in shares in the respect of any obligation which but for such

payment, would have been payable by the assesses.

5) Any sum payable by the employer whether directly or through fund to effect an assurance on

the life of the assesses or to effect a contract on an annuity.

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6) Value of any sweat equity shares (ESOP) allotted (on the after 1.4.2009) by the employer on

former employer, free of cost or at concessional rate to the assesses.

7) Amount contributed to an approved superannuation fund by the employer in respect of the

assessee-employee, in excess of Rs. 1, 00, 000.

8) Value of any other benefit or amenity as may be prescribed, such as free meals, club facility,

credit card, gifts, interest free or concessional loans, etc.

Perquisite Not Taxable

The following shall, however, not constitute as perquisite:

1) Value of medical treatment provided to an employee or his family member in a hospital

maintained by his employer;

2) Reimbursement of expenditure incurred on medical treatment of and employee or his family

member in a Government approved hospital (like CHS or CGHS);

3) 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 the hospital specifying the disease or ailment for which medical treatment was

required, and

The receipt for the amount paid to the hospital.

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4) Premium paid by an employer to keep in effect an insurance on the health of a employee

under a scheme approved by  the Central Authority for the purpose of section 36(1) (ib);

5) Medical insurance premium paid by an employer for the health of an employee or his family

member under a scheme approved by the Central Authority u/s 80D (i.e. MEDICLAIM);

6) Reimbursement of expenditure incurred on medical treatment of an employee or his family

member [other than referred to in clause (i), (ii) and (iii) above], not exceeding Rs. 15, 000 in a

previous year;

7) Expenditure incurred by the employer or reimbursement of expenditure incurred, on medical

treatment of an employee or his family member outside India, including expenditure on travel

and stay aboard of the employee or family member, as the case may be, and one attended subject

to the conditions and limits prescribed by the Board.

9) The expenditure on medical treatment and stay abroad shall be excluded from perquisites only

to the extent permitted by the Reserve Bank of India.

10) The expenditure on foreign travel shall not constitute perquisite in case the gross total

income not including the said expenditure, of the employee does not exceed Rs. 2, 00, 000.

[Section 17(2) Proviso]

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6.PROFITS IN LIEU OF SALARY – S 17(3)

"profits in lieu of salary" 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 the termination of his employment or the modification of the terms and

conditions relating thereto;

(ii) any payment (other than any payment referred to in clause (10), 3 , clause (10A)] 4 , clause (10B)],

clause (11), 5 clause (12) 6 , clause (13)] or clause (13A)] of section 10), due to or received by an

assessee from an employer or a former employer or from a provident or other fund 7 (not being an

approved superannuation fund)], to the extent to which it does not consist of contributions by the assessee

or interest on such contributions.

1. Inserted by the Finance Act, 1992, w. e. f. 1- 4- 1993.

2. Omitted by the Finance Act, 1985, w. e. f. 1- 4- 1985. it was inserted by the Taxation Laws

(Amendment) Act, 1984, w. e. f. 1- 4- 1985, thus having never come into operation. The consequential

amendments in sub- clauses (iv) and (v) were also made and omitted simultaneously.

3. Inserted by the Finance (No. 2) Act, 1965, w. r. e. f. 1- 4- 1962.

4. Inserted by the Finance Act, 1975, w. e. f 1- 4- 1976.

5. Substituted for" or clause (12)" by the Direct Taxes (Amendment) Act, 1964, w. e. f. 6- 10- 1964.

6. Being inserted by the Finance Act, 1995, w. e. f. 1- 4- 1996.

7. Being omitted, ibid.

gardeners, night watchman and sweepers provided by the employer should be calculated on an ad hoc

basis as given in Letter No. 40 25 69, dated 8- 6- 1971 (reproduced below) only when the services of

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sweeper are provided by the employer, i. e. the sweeper is recruited by the employer and remunerated by

him but his services are placed at the disposal of the employee. 2 Rent- free accommodation.- While

determining the fair rental value of an accommodation owned by the company, the cost of acquisition and

other capital expenses on renovation, etc. incurred by the company should be taken into account. In

respect of premises taken on lease or rent by the company the actual payment by the company should be

taken as fair rental value of the premises. 3 Reimbursement of medical expenses.- The value of the

perquisite arising by way of payment or reimbursement by an employer of expenditure on medical

treatment incurred by his employee on himself or on his spouse, children or parents including the

provision of free medical treatment or treatment at a concessional rate will not be included in the taxable

salary of the employee in the following cases:

(i) where the medical treatment is availed at hospitals, clinics, etc. maintained by the employer;

(ii) where the medical treatment is availed at hospitals maintained by the Government or local authorities

or hospitals approved for the purposes of CGHS or the Central Medical Scheme;

(iii) where the expenditure is on medical insurance premia;

(iv) where the medical treatment is availed of from any doctor outside the institutions schemes

mentioned above, an expenditure of upto Rs. 10, 000 in a year in the aggregate; and

(v) where the medical treatment is availed of in a hospital outside India and the expenditure is

incurred for treatment including on travel and stay abroad in connection with such treatment, as

also on travel and stay abroad of one attendant, to the extent permitted by RBI subject to the

condition that the amount qualifying for such tax exemption would not include expenditure

incurred on travel in the case of employees whose gross total income as computed without

considering the amount paid or reimbursed for expenditure in connection with medical treatment

exceeds Rs. 1 lakh.

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7 .EXEMPTION UNDER SECTION 10

Leave salary

Leave Encashment Salary [Sec. 10(10AA)] 

Tax Treatment of leave encashment is as under : Cases Treatment A. During service tenure

Fullytaxable [Sec. 17(1)(va)] B. At the time of retirement by employee of:   Government

Exempted [Sec.10(10AA)(i) ] Other Employer Minimum of the following shall be exempted

from tax u/s 10(10AA)(ii): Actual amount received; Rs.300000; 10 months average salary Cash

equivalent of 30 days average salary for every completed year of service as reduced by actual

leave availed or encashed during the tenure of service. Note: The period of 30 days is the

maximum ceiling. If employer allows leave for less than 30 days p.a. then such lesser days shall

be considered. Average salary means Basic + DA (forming part of retirement benefit) +

Commission (as a fixed percentage on turnover) being last 10 months average salary from the

date of retirement . While calculating completed year of service, ignore any fraction of the year.

While claiming the statutory amount (i.e. Rs.300000) any deduction claimed earlier as leave

encashment shall be reduced from Rs.300000 Assessee can claim Relief u/s 89(1).   Leave salary

paid to the legal heir: Leave salary paid to the legal heir of deceased employee is not taxable as

salary. The Act is silent on treatment of leave encashment received after death of employee.

However, on following grounds, it can be concluded that leave salary received by a legal heir

shall not be taxable in the hands of the recipient   a) A lump sum payment made gratuitously to

widow or legal heir of employee, who dies while in service, by way of  compensation or

otherwise is not taxable under thehead 'Salaries'. [Circular No.573, Dated 21.08.1990] b)

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Unutilised deposit under the capital gainsdeposit account scheme shall not be taxable in the

hands of legal heir.  [Circular No.743 dated 6/5/1996 ] c) Legal representative is not liable for

payment of tax on income that has not accrued to the deceased till his death.  d) Leave salary

paid to the legal heir of deceased employee is not taxable as salary. [Circulars Letter No.

F.35/1/65-IT(B), dated 5/11/19 65 ]. Further, leave salary by a legal heir of the Government

employee who died in harness is not taxable in the hands of the recipient [Circulars No.309, dated

3/7/1981 ].  Taxpoint: If leave salary becomes due before the death of the assessee (no matter when and

by whom received), it shall be taxable in the hands of employee. Whereas if such salary becomes due

after the death of assessee, it shall not be taxable (even in thehands of legal heir of the assessee)

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8. COMMUTATION OF PENSION SECTION 10(10A)(I)

In the case of government servants who are allowed to retire prematurely and are permitted to be

absorved in a public undertaking on or after 24-7-1971, only the lump sum amount not exceeding

the commuted value of one third of pension admissible in accordance with the provisions of

Civil Pensions (Commutation) Rules, under clause (1)(a) of Rule 37A, would be excluding from

the total income under section 10(10A) of the Income-tax Act.

The remaining two-thirds amount received by the person by way of terminal benefit under rule

37A(1)(b) would be includible in the total income subject to relief under section 89(1) of the

Income-tax Act, 1961 read with Rule 21A of the Income-tax Rules, 1962. This cannot be

regarded as payment in commutation of pension as the same is in lieu of surrender of right to two

third of pension. The mere adoption of a formula for calculation of terminal benefit, would not

convert its character into that of computed pension, since other ingredients are absent. This

position has also been clarified by the Government of India vide its O.M. No. 44(1)-EV/71,

dated 13-4-1973.

In cases where entire amount of commuted pension has been exempted under section 10(10A)(i)

of the Income-tax Act, 1961 suitable remedial action to revise the assessment preferably u/s 263

may be taken.

In one of the cases the Delhi High Court has relied upon Rule 37A of the Pension Rules, 1972

which provides for payment of lump sum amount to persons absorbed in public sector

Corporation. As per this Rule payment of lump sum is made in lieu of pension. In the light of

this any payment under any similar scheme applicable to the members of the civil services of the

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Union the 'entire amount of commutation was held as exempt under section 10(10A)(i). This

decision has been accepted by the Board. The instruction No. 1191 has been withdrawn.

[Circular No. 286 dated 17-10-1980, File No. 174/79/80 IT(AI) Central Board of Direct Taxes

Bulletin, Vol. XXVI No. 3 page 172.]

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9. GRATUITY SECTION 10(10)

(i) any death- cum- retirement gratuity received under the revised Pension Rules of the Central

Government or, as the case may be, the Central Civil Services (Pension) Rules, 1972 , or under

any similar scheme applicable to the members of the civil services of the Union or holders of

posts connected with defence or of civil posts under the Union (such members or holders being

persons not governed by the said Rules) or to the members of the all India services or to the

members of the civil services of a State or holders of civil posts under a State or to the

employees of a local authority or any payment of retiring gratuity received under the Pension

Code or Regulations applicable to the members of the defence services;

(ii) any gratuity received under the Payment of Gratuity Act, 1972 (39 of 1972 ), to the extent it

does not exceed an amount calculated in accordance with the provisions of sub- sections (2) and

(3) of section 43 of that Act;

(iii) any other gratuity received by an employee on his retirement or on his becoming

incapacitated prior to such retirement or on termination of his employment, or any gratuity

received by his widow, children or dependents on his death, to the extent it does not, in either

case, exceed one- half month' s salary for each year of completed service,  5 calculated on the

basis of the average salary for the ten months immediately preceding the month in which any

such event occurs, subject to such limit as the Central Government may, by notification in the

Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the

employees of that Government]: Provided that where any gratuities referred to in this clause are

received by an employee from more than one employer in the same previous year, the aggregate

amount exempt from income- tax under this clause 6 shall not exceed the limit so specified]:

1. Inserted by the Finance (No. 2) Act, 1991, w. e. f 1- 4- 1991

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2. Substituted by the Finance Act, 1974, w. e. f. 1- 4- 1975. Earlier, it was amended by the

Finance Act, 1972, w. e. f. 1- 4- 1973 and the Finance Act, 1974 itself w. r. e. f. 1- 6- 1972 1- 4-

1962.

5. Substituted for' calculated on the basis of the average salary for the three years immediately

preceding the year in which the gratuity is paid, subject to a maximum of thirty- six thousand

rupees or twenty months' salary so calculated, whichever is less' by the Direct Tax Laws

(Amendment) Act, 1987, w. e. f. 1- 4- 1989. The italicised words were substituted for' thirty

thousand' by the Finance Act, 1983, w. r. e. f. 1- 4- 1982.

6. Substituted for' shall not exceed thirty- six thousand rupees" by the Direct Tax Laws

(Amendment) Act, 1987, w. e. f. 1- 4- 1989. The italicised words were substituted for" thirty

thousand' by the Finance Act, 1983, w. r. e. f. 1- 4- 1982.

Provided further that where any such gratuity or gratuities was or were received in any one or

more earlier previous years also and the whole or any part of the amount of such gratuity or

gratuities was not included in the total income of the assessee of such previous year or years, the

amount exempt from income- tax under this clause  1 shall not exceed the limit so specified] as

reduced by the amount or, as the case may be, the aggregate amount not included in the total

income of any such previous year or years: 2 ] Explanation.- 3 In this clause and in clause

(IOAA)]," salary" shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the

Fourth Schedule;]

1. Substituted for' shall not exceed thirty- six thousand rupees' by the Direct Tax Laws

(Amendment) Act, 1987, w. e. f. 1- 4- 1989. The italicised words were substituted for' thirty

thousand" by the Finance Act, 1983, w. r. e. f. 1- 4- 1982.

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2. Omitted by the Direct Tax Laws (Amendment) Act, 1987, w. e. f. 1- 4- 1989. Prior to the

omission, the third and fourth provisos, as amended by the Finance Act, 1983, w. r. e. f. read as

under:" Provided also that the Central Government may, having regard to the maximum amount

which may for the time being be exempt under sub- clause (i) increase, by notification in the

Official Gazette, the limit of thirty- six thousand rupees, for all the three purposes for which it

has been mentioned in the foregoing provisions of this clause, up to such maximum amount:

Provided also that in relation to cases in which the event (that is to say retirement of the

employee or his becoming incapacitated or termination of his employment or his death, as the

case may be) on which gratuity is received had taken place before the 31st day of January, 1982,

the proviso immediately preceding this proviso shall not apply and the remaining provisions of

this clause shall have effect as if for the words" thirty six thousand rupees", at the three places

where they occur, the words" thirty thousand rupees" had been substituted."

3. Substituted for" In this clause' by the Direct Tax Laws (Amendment) Act, 1987, w. e. f. 1- 4-

1989.

3 All the three limits specified in the section will operate as cumulative conditions and the

exempt portion of the gratuity will be restricted to any of these three limits whichever is the least.

Retirement gratuity will be exempt to the extent mentioned in the latter half of the section and

the remaining amount will be entitled to relief under section 89 1. In the case of gratuity funds

approved for the purposes of Income- tax Act a provision authorising the payment of gratuity to

an employee while he continues to remain in service should not be allowed. The latter half of the

section should be regarded as covering the case of only a gratuity payment on the employee' s

retirement or on his becoming incapacitated or on termination of his employment or on his death.

The rules of a fund approved for the purposes of Income tax Act should not permit the payment

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of gratuity in the form of annuities payable over a specified number of years. In order to claim

the exemption under the section it is necessary that the amount of gratuity should be calculated

exactly on the basis laid down in the section.[ Letter No. 1 (1 79) 162, dated 13th December,

1962 ] 4 The expression' termination of employment used in the section as amended by Finance

Act, 1972 covers the case of an employee whose services come to an end due to his resignation.

5 Limit of exemption of death- cum- retirement gratuity under section 10 (10) (iii) has been

raised to Rs. 1 lakh in relation to employees who retire of become incapacitated or die on or after

1st April, 1988 or whose employment is terminated on or after that date.

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10.HOUSE RENT ALLOWANCE

(HRA) is received by the salaried class. A deduction is permissible under Section 10(13A) of the

Income Tax Act, in accordance with Rule 2A of the Income Tax Rules. You can claim

exemption on your HRA under the Income Tax Act if you stay in a rented house and get a HRA

from your employer.

The HRA deduction is based on salary, HRA received, the actual rent paid and place of

residence. The place of residence is important. For Mumbai, Kolkata, Delhi or Chennai, the tax

exemption on HRA is 50 percent of the basic salary, while for other cities it is 40 percent of the

basic salary.

The city of residence is to be considered for calculating HRA deduction.

The least value of these is allowed as tax exemption on HRA:

Actual rent allowance the employer provides as part of salary in the relevant period during which

the rental accommodation was occupied Actual rent paid for the house, less 10 per cent of basic

pay 50 percent of basic salary if you reside in Mumbai, Calcutta, Delhi or Chennai, or 40 per

cent if you reside in other cities.

In order to claim the exemption, the rent must actually be paid for the rented premises which you

occupy.

Also, the rented premises must not be owned by you. As long as the rented house is not owned

by you, the exemption of HRA will be available up to the limits specified.

For the purpose of this deduction, salary means basic salary and includes dearness allowance, if

the terms of employment provide it, and commission based on a fixed percentage

of turnover achieved by the employee.

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The deduction is available only for the period during which the rented house is occupied by the

employee and not for any period after that. It is to be noted that the tax benefits for home loans

and HRA are two separate aspects.

In case you are paying rent for an accommodation, you can claim tax benefits on the HRA

component of your salary, while also availing tax benefits on a home loan.

You need to submit proof of rent paid through rent receipts, duly signed and stamped, along with

other details such as the rented residence address, name of the owner, period of rent etc.

How it applies :-For example, assume one earns a basic salary of Rs 20,000 per month and rents

a flat in Mumbai for Rs 5,000 per month. His actual HRA is Rs 8,000. He is eligible for 50

percent of the basic pay for HRA exemption.

Least of:

Actual HRA received – Rs 8,000

50 percent of basic salary – Rs 10,000

Excess of rent paid over 10 percent of salary, i.e., Rs 5,000 less Rs 2,000 – Rs 3,000.

As such, Rs 3,000 per month is the least and will be the exemption allowable for HRA

deduction.

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11.RETRENCHMENT COMPENSATION –S.10 (10B)

Any compensation received by a workman at the time of retrenchment or closure or transfer of

undertaking including change of management resulting in interruption of service is exempt fully

if it is paid under a scheme of closure approved by the central government and in other cases

least of the following amounts would be exempt:

Notified amount presently Rs. 5,00,000

15 days’ average pay for every completed year of service or any part thereof in excess of six

months

Actual amount.

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12. VOLUNTARY RETIREMENT SCHEME

Compensation is received/ receivable by an employee of the following undertakings:

 A Public Sector Company

Any other Company

An Authority established under the State, Central or Provincial Act.

A local authority

A Co-operative society

A University established under Central, State or Provincial Act and an institution declared to

be a university under Section 3 of the University Grants Commission Act’ 1956.

An Indian Institute of Technology

Such Institute of Management as the Central Govt. may specify.

State Govt.

Central Govt.

Institutes having importance throughout India/ State(s) as notified.

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13. PROVIDENT FUNDS

1) Recognised Provident Funds:

During the Employment:

Employer’s contribution into RPF = It is taxable as salary during the employment after giving

exemption @ 12% of salary.

Interest on the balance of RPF = It is taxable as salary during the employment after giving

exemption @ 9.5% p.a.

While computing Total Taxable Income, Employee’s contribution will be allowed as deduction

under section 80C from Gross Total Income of Employee.

Upon Retirement:

Full amount received from RPF account will be exempt from tax if the total year of service

rendered is 5 years or more and subject to other conditions.

2) Unrecognised Provident Funds:

During the Employment:

Employer’s contribution into URPF = It is NOT considered as income of employee.

Interest on the balance of URPF = It is NOT considered as income of employee

NO Deduction will be allowed u/s 80C from Gross Total Income. Upon Retirement

Amount received from URPF account will be taxable as under:

Employee’s contribution = It will not be treated as income since it has already been included in

his salary during the job.

Employer’s contribution = It will be fully taxable as salary income.

Interest on employer’s contribution = It will be fully taxable as salary income.

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Interest on employee’s contribution = It will be fully taxable as Income from other sources.

3) Statutory Provident Funds:

During the Employment:

Employer’s contribution into SPF = It is exempt from tax in the hand of employee.

Interest on the balance of SPF = It is exempt from tax in the hand of employee.

While computing Total Taxable Income, Employee’s contribution will be allowed as deduction

under section 80C from Gross Total Income of Employee.

Upon Retirement:

Full amount received from SPF account will be exempt from tax.

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14 .LIST OF TAXABLE AND NON TAXABLE-

ALLOWANCES

Taxable Allowances Partly Taxable

Allowances

Fully Exempt

Allowances

a)   Entertainment Allowance a)      House Rent Allowance a) Allowance granted to

Government Employees

outside India

b)   Dearness Allowance

b)      Special Allowance b) Sumptuary allowance granted

to High Court or Supreme

Court Judges

c)    Overtime Allowance c) Allowance paid by UNO

d)   Fixed Medical Allowance d) Compensatory allowance to

judge.

e)   City Compensatory Allowance

f)    Interim Allowance

g)   Servant Allowance

h)   Project Allowance

Warden Allowance

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PARTLY TAXABLE ALLOWANCES

a)   House Rent Allowance:  House Rent Allowance is provided to employee to meet the

accommodation expenses of the employee. It is taxable in the hands of employee after claiming

exemption under section 10 (13A). The deduction is allowed in the following manner:

Least of the three:

1.       House Rent Allowance actually received by the employee

2.       Actual rent paid less 10% of Basic Salary

3.       50% of the Basic Salary in case the accommodation is in Metro else 40% of the Basic Salary if

the accommodation is in a non metro

The Balance amount of House Rent Allowance received after claiming such deduction is taxable

in the hands of the employee along with Salary under the head “Income from Salaries”.

Conditions for claiming exemption of HRA :

  HRA is available as an exemption to salaried employee only and not to the self employed people.

  Rent must be actually paid by the employee.

  If the employee resides at a rented accommodation for a part of financial year than the HRA is to

be claimed on proportionate basis.

  The basic Salary to be considered for the purpose of calculating HRA includes:

o    Basic pay

o   Dearness allowance, if provided in terms of employment and

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o   Commission as per fixed percentage of turnover.

  The place of accommodation is of most importance i.e. whether he resides in Metro or Non-

Metro.

b)     Special Allowance:  Special Allowance paid to employee under section 14(i) is partly taxable

in the following manner:

10(14)(i)any such special allowance or benefit, not being in the nature of a perquisite within the

meaning of clause (2) of Section 17, specifically granted to meet expenses wholly, necessarily

and exclusively incurred in the performance of the duties of an office or employment of profit,

[as may be prescribed], to the extent to which such expenses are actually incurred for that

purpose;

(ii) any such allowance granted to the assessee either to meet his personal expenses at the place

where the duties of his office or employment of profit are ordinarily performed by him or at the

place where he ordinarily resides, or to compensate him for the increased cost of living, [ as may

be prescribed and to the extent as may be prescribed];

Provided that nothing in sub-clause (ii) shall apply to any allowance in the nature of personal

allowance granted to the assessee to remunerate or compensate him for performing duties of a

special nature relating to his office or  employment unless such allowance is related to the place

of his posting or residence

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TAXABLE ALLOWANCES

Fully Exempt Allowances

a) Allowance granted to Government Employees outside India: Any Allowance granted by

the Government of India to its employee working outside India, being a citizen of India is fully

exempt from tax.

b) Sumptuary allowance granted to High Court or Supreme Court Judges:Sumptuary

allowance are paid to High Court and Supreme Court Judges are fully exempt i.e. they are not to

be taxed. The allowances are in the following manner:

-          Allowance to High court judge under section 22C:  Section 22C of the High Court Judges

(Conditions of Service) Act, 1954 states that “The Chief Justice and each of the other Judges of

every High Court shall be entitled to a sumptuary allowance of seven thousand five hundred

rupees per month and six thousand rupees per month, respectively.”

-            Allowance to Supreme court judge under section 23B:   Section 23B of the Supreme Court

Judges (Conditions of Service) Act, 1958 states that “In the calculation of the service for pension

of a continuing Judge for the purposes of this Act, his previous service for pension as a Chief

Justice or as a Judge of a former High Court in a Part B State, under the provisions of the High

Court Judges (Part-B States) Order, 1953, or any other order or rule then applicable to him, shall

be reckoned as service for pension as a Chief Justice or, as the case may be, as a Judge under this

Act.”

  c) Allowance paid by UNO: Allowance received by the employees of United Nations

Organization in the following manner is exempt from tax.

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“The United Nations, its property and assets wherever located and by whomsoever held, shall

enjoy immunity from every form of legal process except insofar as in any particular case it has

expressly waived its immunity. It is, however, understood that no waiver of immunity shall

extend to any measure of execution.”

  d) Compensatory allowance to judge: When a Judge receives Compensatory allowance under

Article 222(2) of the constitution, such allowance is not taxable. Article 222(2) states that:

“When a Judge has been or is so transferred, he shall, during the period he serves, after the

commencement of the Constitution (Fifteenth Amendment) Act, 1963, as a Judge of the other

High Court, be entitled to receive in addition to his salary such compensatory allowance as may

be determined by Parliament by law and, until so determined, such compensatory allowance as

the President may by order fix.”

Taxable Allowances

a) Entertainment Allowance: Entertainment Allowance is provided to employees to meet the

expenses of hospitality of customers. It is fully taxable in the hands of employees other than

government employees i.e. only Government employees can claim exemption in the manner

provided in section 16 (ii).  The exemption is allowed as follows:

Lower of:-

1)              1/5 of Basic Salary*

2)              Rs. 5000 or

3)              Actual Allowance received.

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b) Dearness Allowance: Dearness Allowance is a Cost of living Adjustment allowance paid to

the employee. It is taxable along with salary. For tax planning it must be provided as a part of

salary so that assessee can get more benefit on calculation of Gratuity, Pension, etc.

c) Overtime Allowance: Many a times workers work over and above the office/working hours.

Compensation received for such work is known as Overtime allowance. Thus, being a part of

Salary it is fully taxable.

d) Fixed Medical Allowance: The fix amount paid by the employer for meeting the Medical

Expenses of the employee or any of his Family members is fully taxable. For tax planning

purpose, the employer should reimburse the actual expense incurred for medical treatment of the

employee or any of his Family members. Such reimbursement if exceeds Rs. 15,000; than the

same is also taxable.

e) City Compensatory Allowance: City Compensatory Allowance is paid to employee to meet

the increased cost of living in the cities arising due to inflation effect. Such allowance is fully

taxable. Actual expenditure by the employee is not taken into consideration.

f)  Interim Allowance: Interim Allowance is paid to employee as a part of Final allowance. It is

fully taxable.

g) Servant Allowance: Allowance received for meeting servant charges is also fully taxable.

h) Project Allowance: Project Allowance paid to employee to meet the project expenses is also

fully taxable.

i) Tiffin/Lunch/Dinner Allowance: Tiffin/Lunch/Dinner Allowance received by employee to

meet the food expense incurred by him is fully taxable.

j) Any other Cash Allowance: Any other Cash Allowances received by the employee such as

marriage allowance, Holiday Allowance, etc are fully taxable in the hands of the employee.

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k) Warden Allowance: Such allowance is paid to the employee working as a Warden i.e.

Keeper in the educational Institute. He may be working as a Rector in hostel or Proctor in the

Institute. Allowance so received is fully taxable

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15. DEDUCTIONS FROM SALARIES: - S. 16

Aggregate of taxable amount in respect of salary, various allowances and perquisites is called the

Gross Salary. From the Gross Salary so arrived, Deductions are allowed u/s 16. Other than that,

no further deductions are allowed under this head. The following are the deduction available to

the employee U/s 16:-

11.1. Entertainment Allowance: -S.16 (2)

Deduction in respect of entertainment allowance is allowed only to the Government Servants.

Employees working in private institutions are not entitled to this deduction. Amount of deduction

shall not exceed the actual amount or 20% of basic salary or Rs. 5000 , whichever is less.

Amount actually spent on entertainment is not relevant.

11.2. Profession Tax:

The Profession Tax, paid by an employee in a given previous year, will be deducted from the

gross salary in order to get the taxable amount of salary. Profession Tax is levied by state

government on employment

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16. ILLUSTRATION

Q 1) Mr. Penpushar retired from government service in 30-09-2013 from 1-11-2013 he

joined as superintendent of a nursing Home. He furnishes the following particulars for the

previous year ending 31-03-2014. Compute his taxable salary for the assessment year 2013-

14.

Basic pay & D.A. upto 30-09-2013 60,000

Entertainment Allowance from government upto 30-09-2013 5,000

Pension p.m. from 1-10-2013 @ 1,500 9,000

Leave salary in respect of earned leave to his credit 13,500

Gratuity 1,10,000

Provident fund 1,50,000

Commuted Pension 32,000

Salary from Nursing Home 30,000

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Solution:-

Computation of income from salaries of Mr. Penpushar

P.Y.13-14 A.Y.14-15

Particular Amt Amt

Basic pay & D.A. upto 30-09-2013

Entertainment allowance

Pension(1500*6)

Leave salary

(-) Exampt u/s 10(10AA)

Gratuity

(-) Exampt u/s 10(10)

Provident fund

(-) Exampt u/s 10(10)

Commute pension

(-) Exampt u/s 10(10A)

Salary from Nursing Home

Gross Income from salary

(-) Deduction u/s 16

1) Profession tax

2) Entertainment tax

Net taxable salary

13,500

(13,500)

1,10,000

(1,10,000)

1,50,000

(1,50,000)

32,000

(32,000)

60,000

5,000

9,000

-

-

-

-

30,000

1,04,000

-

5,000

99,000

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17. BIBLIOGRAPHY

en.wikipedia.org/wiki/Salary

https://iiserb.ac.in/.../Income%20Tax%20on%20salaries%20FY%202013...

www.surfindia.com › Finance › Income Tax › Heads of Income

en.wikipedia.org/wiki/Income_tax_in_India

www.simpletaxindia.net/p/income-from-salary-income-calculation.html

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