The Income-tax Act, 1961

The Income-tax Act, 1961 is the charging Statute of Income Tax in India. It provides for levy,
administration, collection and recovery of Income Tax. Recently the Government of India has brought
out a draft statute called the "Direct Taxes Code" intended to replace the Income Tax Act,1961 and
the Wealth Tax Act, 1956. Public Commentary has been called for the Draft Bill. [1] The redrafted bill is
supposed to be made public soon.

Scope of Total Income

1) Subject to the provisions of this Act, the total income of any previous year of a person who is a
resident includes all income from whatever source derived which(a) is received or is deemed to be
received in India in such year by or on behalf of such person ; or(b) accrues or arises or is deemed
to accrue or arise to him in India during such year ; or(c) accrues or arises to him outside India
during such year :Provided that, in the case of a person not ordinarily resident in India within the
meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India
shall not be so included unless it is derived from a business controlled in or a profession set up in
India.(2) Subject to a the provisions of this Act, the total income of any previous year of a person
who is a non-resident includes all income from whatever source derived which(a) is received or is
deemed to be received in India in such year by or on behalf of such person ; or(b) accrues or arises
or is deemed to accrue or arise to him in India during such year .Explanation 1.Income accruing or
arising outside India shall not be deemed to be received in India within the meaning of this section
by reason only of the fact that it is taken into account in a balance sheet prepared in India.
Explanation 2.For the removal of doubts, it is hereby declared that income which has been
included in the total income of a person on the basis that it has accrued or arisen or is deemed to
have accrued or arisen to him shall not again be so included on the basis that it is received or
deemed to be received by him in. The government of India imposes an income tax on taxable income of
all persons including individuals, Hindu Undivided Families (HUFs), companies, firms, association of
persons, body of individuals, local authority and any other artificial judicial person. Levy of tax is separate
on each of the persons. The levy is governed by the Indian Income Tax Act, 1961. The Indian Income Tax
Department is governed by CBDT and is part of the Department of Revenue under the Ministry of
Finance, Govt. of India. Income tax is a key source of funds that the government uses to fund its activities
and serve the public.
The Income Tax Department is the biggest revenue mobilize for the Government. The total tax revenues
of the Central Government increased from 1392.26 billion in 1997-98 to 5889.09 billion in 2007-08.

When due from the former employer or present employer in the previous
year, whether paid or not

When paid or allowed in the previous year, by or on behalf of a former

employer or present employer, though not due or before it becomes due.

When arrears of salary is paid in the previous year by or on behalf of a former

employer or present employer, if not charged to tax in the period to which it relates.

What is Salary:
Income under heads of salary is defined as remuneration received by an individual
for services rendered by him to undertake a contract whether it is expressed or
implied. According to Income Tax Act there are following conditions where all such
remuneration are chargeable to income tax:
The Central Government has been empowered by Entry 82 of the Union List of Schedule VII of
the Constitution of India to levy tax on all income other than agricultural income (subject to Section 10(1)).
[1]

The Income Tax Law comprises The Income Tax Act 1961, Income Tax Rules 1962, Notifications and

Circulars issued by Central Board of Direct Taxes(CBDT), Annual Finance Acts and Judicial
pronouncements by Supreme Court and High Courts.

What Income Comes Under Head of Salary:

Under section 17 of the Income Tax Act, 1961 there are following incomes which
comes under head of salary:

Salary (including advance salary)

Wages

Fees

Commissions

Pensions

Annuity

Perquisite

Gratuity

Annual Bonus

Income From Provident Fund

Leave Encashment

Allowance

Awards

What is Leave Encashment:

Leave encashment is the salary received by an individual for leave period. It is a
chargeable income whether he is a government employee or not. Under section
10(10AA) (i) there is also a provision of exemption in case of leave encashment
depending upon whether he is a government employee or other employees.
What is Annuity:
It is an annual income received by the employee from his employer. It may be paid
by the employer as voluntarily or on account of contractual agreement. It is not
taxable until the right to receive the same arises. Under section 56, Income Tax Act,
1961 other annuities come under a will or granted by a life insurance company or
accruing as a result of contract which comes as income under from other sources.
What is Gratuity:
It is salary received by an individual paid by the employee at the time of his
retirement or by his legal heir in the case of death of the employee.
What is Allowance:
It is the amount received by an individual paid by his/her employer in addition to
salary. Under section 15 of the Income Tax Act, 1961 these allowance are taxable
excluding few condition where they are entitled of deduction/ exemptions.
House Rent Allowance:
Under sections 10(13A) of Income Tax Act, 1961 allowance is defined as an amount received by an employee paid by
his/ her employer as a rent of his/her house. It is a taxable income. There is no exemption in tax if he is living in his
own house or house for which he is not paying rent. There are following amount which are exempt from tax:

Actual house rent paid by that individual

Rent paid for the accommodation over 10% of the salary
50% of the salary if house is placed at Delhi, Mumbai, Kolkata, Chennai or 40% of the salary
in it is placed in any other city
Entertainment Allowance:
It is the amount paid by employer for availing entertainment services. Under section
16(ii) of Income Tax Act, 1961 it is entitled to deduction in tax from is salary. But in
this case deduction is given to his gross salary which also includes entertainment
allowance. Deduction in tax against this allowance can be divided into two parts :
In case of Government employee entitled to minimum deduction of
Entertainment allowance received
20% of basic salary excluding any other allowance

Rs. 5000 In case of other employee entitled to minimum deduction of

(a) Entertainment allowance received
20% of basic salary excluding any other allowance
Rs . 7500
Entertainment allowance received during 1954-1955
Other Special Allowances
Children Education Allowance
Tribal Area Allowance
Hostel Expenditure Allowance
Remote Area Allowance
Compensatory Field Area Allowance
Counter Insurgency Allowance
Border Area Allowance
Hilly Area Allowance
Allowances for there is a provision of exempt in income tax are:
Allowance given to a citizen of India, who is a government employee, for rendering
services outside India
Allowances given to Judges of High Courts
Allowance given Judges of Supreme Court
Allowances received by an employee of UNO
What is Perquisite
Under section 17(2) of Income Tax Act, 1961 perquisite is defined as:
Amount paid for the rent-free accommodation provided to the assessee by his
employer
Any concession in the matter of rent respecting any accommodation provided to
the assessee by his employer
Any benefit or amenity granted or provided free of cost or at concessional rate in
any of the following cases:
1. By a company to an employee, who is a director thereof
2. By a company to an employee being a person who has a substantial interest in
the company
3. By any employer to an employee whose income under the head 'Salaries'
exceeds Rs.24000 excluding the value of non monetary benefits or amenities
4. Any sum paid by the employer in respect of any obligation which, but for such
payment, would have been payable by the assessee
5. Any sum payable by the employer whether directly or through a fund, other than
a recognised provident fund or EPF, to affect an assurance on the life of the
assessee or to effect a contract for an annuity
There are following perquisites which are tax free:
Medical facility
Medical reimbursement
Refreshments
Subsidized Lunch/ Dinner provided by employer

Facilities For Recreation

Telephone Bills
Products at concessional rate to employee sold by his/ her employer
Insurance premium paid by employer
Loans to employees by given by employer
Transportation
Training
House without rent
Residence Facility to member of Parliament, judges of High Court/ Supreme Court
Conveyance to member of Parliament, judges of High Court/ Supreme Court
Contribution of employers to employee's pension, annuity schemes and group
insurance

Deductions from Salary income

Certain deductions are available while determining the taxable salary income.
A) Standard Deduction

Income tax slabs 2009-2010 (for Men) in India:

Income Tax Slab (in Rs.)

Tax

0 to 1,60,000

No Tax

1,60,001 to 3,00,000

10%

3,00,001 to 5,00,000

20%

Above 5,00,000

30%

Income tax slabs 2009-2010 (for Women) in India:

Income Tax Slab (in Rs.)

Tax

0 to 1,90,000

No Tax

1,90,001 to 3,00,000

10%

3,00,001 to 5,00,000

20%

Above 5,00,000

30%

Income tax slabs 2009-2010 (for Senior Citizens) in India:

Income Tax Slab (in Rs.)

Tax

0 to 2,40,000

No Tax

2,40,001 to 3,00,000

10%

3,00,001 to 5,00,000

20%

Above 5,00,000

30%

B) Professional Tax
Professional tax, which is paid, is allowed as deduction.

C) Arrears salary
If salary is received in arrears or in advance, it can be spread over the years to which it relates and be taxed
accordingly as per section 89(1) of the Income tax Act.
Disclaimer : This is an information based website, meant for providing assistance to it's readers. The information has
been gathered from a number of secondary sources, we do not hold any responsibility for mis-information or miscommunication.

Income from salaries

All income received as salary under employer-employee relationship is taxed under this head,
on due or receipt basis, whichever arises earlier. Employers must withhold tax compulsorily (subject to
Section 192), if income exceeds minimum exemption limit, as Tax Deducted at Source (TDS), and provide
their employees with a Form 16 which shows the tax deductions and net paid income. The Act contains
exemptions including (the list isn't exhaustive):-

Relevant
Particulars

section for
computing
exemption

Leave travel concession

10(5)

Death-cum-Retirement Gratuity

10(10)

Commuted value of Pension (not taxable for specified Government employees)

10(10A)

Leave encashment

10(10AA)

RATES OF INCOME-TAX AS PER

FINANCE ACT. 2013:

10(10B)

Retrenchment Compensation

As per the Finance Act, 2013, income-tax is required to be

deducted under Section 192 of the Act from income chargeable
under the head Salaries for the financial year 2013-14 (i.e.
Assessment Year 2014-15) at the following rates:
2.1 Rates of tax

Relevant
section for

Particulars

computing
exemption

A. Normal Rates of tax:

SlNo
Total Income
Rate of tax
1
Where the total
Nil
income does not exceed Rs.
2,00,000/-.
2
Where the total income
10 per cent of the amount by
exceeds Rs. 2,00,000 but which the total income
does not exceed Rs.
exceeds Rs. 2,00,000/5,00,000/3
Where the total income
Rs. 30,000/- plus 20 per cent
exceeds Rs. 5,00,000/- but of the amount by which the
does not exceed Rs.
total income exceeds Rs.
10,00,000/-.
5,00,000/-.
4
Where the total income
Rs. 1,30,000/- plus 30 Per
exceeds Rs. 10,00,000/-.
cent of the amount by which
the total income exceeds Rs.
10,00,000/B. Rates of tax for every Individual, resident in India, who
is of the age of sixty years or more but less than eighty
years at any time during the financial year:

Sl
No
1

Total Income

Rate of tax

Where the total income

does not exceed Rs.
2,50,000/Where the total income
exceeds Rs. 2,50,000
but does not exceed Rs.
5,00,000/Where the total income
exceeds Rs.
5,00,000/- but does not
exceed Rs.

Nil

10 per cent of the amount by

which the
total income exceeds Rs.
2,50,000/Rs. 25,000/- plus 20 per cent of
the
amount by which the total
income exceeds Rs. 5,00,000/-.

Relevant
Particulars

section for
computing
exemption

10,00,000/Where the total income

exceeds Rs.
10,00,000/-

Rs. 1,25,000/- plus 30 per cent

of the
amount by which the total
income exceeds Rs. 10,00,000/C. In case of every individual being a resident in India,
who is of the age of eighty years or more at any time
during the financial year:
Sl
Total Income
Rate of tax
No
1 Where the total income
Nil
does not exceed Rs.
5,00,000/2 Where the total income
20 per cent of the amount by
exceeds Rs.
which the
5,00,000 but does not
total income exceeds Rs.
exceed Rs.
5,00,000/10,00,000/4 Where the total income Rs. 1,00,000/- plus 30 per cent of
exceeds Rs.
the
10,00,000/amount by which the total
income exceeds Rs. 10,00,000/-

Illustration:
The income chargeable under the head salaries of an employee below sixty
years of age for the year inclusive of all perquisites is Rs.4,50,000/-, out of
which, Rs.50,000/- is on account of non-monetary perquisites and the
employer opts to pay the tax on such perquisites as per the provisions
discussed above.
STEPS:
Income Chargeable under the head
Rs. 4,50,000/Salaries
inclusive of all perquisites
Tax on Total Salary (including Cess)
Rs. 25,750/-

Average Rate of Tax

5.72%
[(25,750/4,50,000) X 100]
Tax payable on Rs.50,000/= (5.72% Rs. 2,861/of 50,000)
Amount required to be deposited each Rs. 240 (Rs. 238.4)
month
=2881/12)
The tax so paid by the employer shall be deemed to be TDS made from
the salary of the employee.