Every payment made by an employer to his employee for service rendered would be chargeable to tax as ‘Income from Salary”. For the purpose of Income-Tax Act, 1961 the term salary includes both monetary payments like basic salary, bonus, commission, allowances, etc. and non-monetary facilities like housing accommodation, medical facility, interest-free loans, etc. It must be noted that any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as “salary”. Thus, income would be taxable under the head Income from Salary only when an employer-employee relationship exists, regardless whether the employee is a full-time employee or a part-time one.
Income from Salary
At the time of payment of salary, the employer is required to mandatorily deduct TDS on salary U/S 192 and the balance amount after deduction of TDS is payable to the employee. Once the salary accrues, the subsequent waiver by the employee does not absolve him from liability to income-tax. Such waiver is only an application and hence, chargeable to tax. However, if he surrenders his salary to the Central Government U/S 2 of the voluntary surrender of salaries act, 1961, the salary rendered will be exempt while computing his taxable Income from Salary.
U/S 17(1), the term salary includes the following:
- Any annuity or pension
- Any gratuity
- Any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages
- Any advance of salary
- Any payment received in respect of any period of leave not availed by him i.e. leave salary or leave encashment
- Portion of the annual accretion to the balance at the credit of an employee participating in recognized PF to the extent taxable
- Transferred balance in a recognized PF to the extent it is taxable
- Any contribution made by the Central Government or any employer to the account covered under a pension scheme referred in section 80 CCD.
The basis of Charge:
- Salary is chargeable to tax either on the due basis or on receipt basis, whichever is earlier.
- Any salary paid in advance is assessed in the year of payment. It cannot be subsequently brought to tax in the year in which it becomes due.
- If any arrears of salary paid has already been assessed on a due basis, the same cannot be taxed again when it is paid.
Place of Accrual of salary:
- Salary is accrued where services are rendered even if it paid outside India.
- Salary paid by the Foreign Government to his employee serving in India is taxable.
- Leave salary paid abroad in respect of leave earned in India shall be deemed to accrue or arise in India.
- If a citizen of India render services outside India, and receives salary from Government of India, it would be taxable as salary deemed to have accrued in India.
Allowances are fixed quantity of money or other substance in addition to basic salary, given regularly to an employee for the purpose of meeting some particular requirement connected with the service rendered by him. Allowances are taxable on due or receipt basis, whichever is earlier. Allowances can be fully taxable, partly taxable or fully exempt from tax.
Fully taxable allowances:
- Dearness allowances and dearness pay: Dearness allowances are granted to the employees to compensate them for the cost of inflation.
- Fixed medical allowance: Paid by an employer when the employee or any of his family members fall sick for the cost incurred on their treatment.
- Tiffin/lunch/dinner allowance: Received by an employee to meet the food expenses.
- Hill allowance:
- Warden/proctor allowance: This allowance is paid to the employee for working as a warden or keeper in the educational institute.
- Overtime allowance: This compensation is paid to workers who work over and above the office/working hours.
- Project allowance: To meet the project expenses
- Deputation allowance: This allowance is given to an employee when is sent from his permanent place of service to some other place or institution or organization on deputation for a temporary period.
- Servant allowance: Amount received for meeting servant charges
- Non-practicing allowance: It is given to the doctors in government service, who are banned from doing private practice.
- Any other cash allowance: Like marriage allowance, bereavement allowance or holiday allowance.
- Interim allowance: It is paid to meet the increased cost of living in cities and is paid as a part of final allowance.
- Other allowances like city compensation allowance (given to those employees who are posted in big cities), telephone allowance, holiday allowance, holiday allowance, special qualification allowance, etc.
Partly taxable allowances:
- House Rent Allowance (HRA): HRA is given to meet the cost of a rented house taken by an employee for his stay. The city of residence, HRA received, the actual rent paid and salary is considered for calculating HRA deduction. For cities of Mumbai, Kolkata, Delhi or Chennai, there is 50% exemption on HRA of the basic salary, while for other cities it is 40% of the basic salary. U/S 10(13A), HRA allowance can be claimed for deduction up to the amount, whichever is lower from the following:
- Actual rent paid minus 10% of basic salary
- Amount equal to 50% of salary in case of house situated in metros and 40% in case of house situated at any other place
- Actual HRA received.
- Entertainment allowances: These allowances are paid to reimburse the expenses incurred on the hospitality of customers, by the employees. They are allowed as exemption only to the government employees. The exemption is allowed as of these, whichever is lower;
- 1/5 of basic salary
- Rs. 5000/-
- Actual allowance received
- Special allowances:
- Transport allowances: Granted to meet the expenditure for the purpose of commuting between the place of residence and place of duty. It is exempted up to Rs. 800/- per month but in case of blind or orthopedically handicapped, it is exempted up to Rs. 1600/- per month.
- Education allowance: Granted for employee’s children education. It is exempted up to Rs. 100/- per month up to a maximum of 2 children.
- Tribal area allowance: It is exempted up to Rs. 200/- per month or actually received; whichever is less.
- Hostel expenditure allowance: Granted to an employee for his children’s hostel expenditure and is exempted up to Rs. 300/- per month up to a maximum of 2 children.
- Outstation allowance: It is exempted up to the amount, whichever is lower;
– 70% of allowance
– Rs. 6000/- per month
- Compensatory field area allowance: Exempted up to Rs. 2600/- per month.
- Fully exempt allowances:
- Allowances granted to Government employees outside India:
- Sumptuary allowance granted to High Court or Supreme Court judges:
- Allowance paid by the United Nations Organizations:
- Compensatory allowance received by a judge:
- Foreign allowances: Paid by the government to an Indian citizen outside India, for rendering services in abroad and is only applicable to government employees.
Perquisites are an extra benefit in addition to the amount that may be legally due by way of contract for services rendered.
- Any sum paid by the employer in respect of any obligation, which would have been payable by the assessee.
- Value of any accommodation provided by the employer at concessional rent.
- Value of any accommodation which is rent free.
- Value of any other benefits or amenity as may be prescribed, such as free meals, credit card, gift, club facility, interest free loans, etc.
- The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds Rs. 1 lakhs.
- The value of any specified security or sweat equity shares allotted or transferred, by the employer, free of cost or at concessional rate to the assessee.
- Value of any other fringe benefits or amenity.
- Telephone provided by an employee at the employee’s residence.
- Employer’s contribution to a staff group insurance scheme.
- Perquisites allowed outside India by the Government to an Indian citizen for rendering services outside India.
- Leave travel concession.
- The sum payable by an employer to a recognized PF or an approved superannuation fund or deposit-linked insurance fund.
- Goods sold by an employer to his employees at concessional rates.
- Privilege passes and privilege ticket orders granted by Indian Railways.
- Refreshment provided to all employees during working hours.
- Amount spent by the employer on the training of employees or amount paid for refresher management course including expenses on boarding and lodging.
- Rent-free official residence provided to a judge of a High Court or the Supreme Court.
- Payment of annual premium by an employer on personal accident policy effected by him on the life of his employee.
- Rent-free furnished residence including maintenance provided to an officer of parliament, Union Minister and a Leader of Opposition in Parliament.
Perquisites taxable only in the hands of specified employees:
The value of any benefits or amenity mentioned above in 1 & 2 will be taxable in the hands of these employees:
- An employee of a company who is also a director of a company and it doesn’t matter whether he is a full-time director or part-time director.
- An employee who has a substantial interest in the company.
- An employee who salary exceeds Rs. 50000/- excluding all monetary benefits exempt U/S 10, all non-monetary benefits, entertainment allowance, etc.
Deduction from Salary
- Entertainment allowance: (only if received by government employees)
Least of the following is exempt from tax:
- 1/5 of basic salary
- Rs. 5000/-
- Actual allowance received
Employment tax/Professional tax:
If a professional tax is paid by the employer on behalf of its employees than it is first included in the salary of an employee as a prerequisite and then is allowed to be deducted. Professional tax in Gujarat is as follows:
|Monthly Salary||Professional Tax Per Month|
|Up to Rs. 15000/-||Nil|
|Rs. 15001 – Rs. 25000||Rs. 150|
|Rs. 25001 – or Above||Rs. 200|
- Pension: Given on a monthly basis or in a lump sum.
- Gratuity: Given an appreciation of past performance which is received at the time of retirement and is exempt to a certain limit.
- Provident Fund: It is contributed by employer and employee every month and employee gets PF amount with interest.
- Leave Salaries:
How to compute Income from Salary ?
Bonus, commission and fees
Retirement benefits such as gratuity & PF
Less: deductions from salary
|Income from Salary||
Income from Salary