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"Salary" is the remuneration received by or accruing periodically to an individual for service rendered as a
result of expressed or implied contract.

Compensation or remuneration even in the following circumstances is chargeable to Income-tax under the
head 'Salaries': -

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

b) 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.

c) When arrears of salary are 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.

It is, therefore, clear that apart from current years salary, even advance salary and/or arrears of salary may
be taxed in the year of receipt. More specifically and elaborately, the Income-tax Act has stipulated that
salary includes :-

a) Salary, including advance/arrears of salary;

b) Wages;
c) Fees;
d) Commission;
e) Pension;
f) Annuity;
g) Perquisite;
i) Encashment of leave.

Receipts from Provident Fund chargeable to tax; Profit in lieu of or in addition to salary or wages; Gratuity;

Contribution of employer to Recognized Provident Fund in excess of prescribed limit; Interest on credit
balance of Recognized Provident Fund in excess of notified rates;

definition of 'salary' is inclusive and not exclusive.


No, payment can be taxed under this section unless the relationship of employer and employee exists
between the payer and payee. The employer and employee relationship is the relationship of a master and
servant, and it distinctly differs from that existing between a principal and agent. Primarily, the degree of
control of the employer over the employee would be a deciding factor, as the agent is generally not under
the complete Control and supervision of his principal.

That is why even the emoluments received by an Member if Parliament/ M.L.A. are not taxable under the
head "Salary" because of the absence of employer and employee relationship.


The golden rule is that it accrues where the service is rendered. Leave salary paid to a person employed in
India on leave to a foreign country is treated to be the arisen in India. However, if a citizen of India service
outside India and receives salary from the of India, it would be taxable as salary to have accrued in India.

Pensions are taxed under the head 'Salaries'.


The I.T. Act contemplates tax on salary which is due, whether paid or not, tax is attracted at the latest
possible point of time which is the date when the salary accrues or becomes due. However, where any
salary paid in advance is assessed in the year of payment, it cannot be taxed again when it becomes due.
Similarly, if arrears of salary have been assessed on the 'due' basis in the past, they are not liable to be
taxed again when they are paid.


When the salary is paid 'tax-free' the employee has to return in his total income the gross salary, i.e.
aggregate of the net-salary received plus the amount of tax paid on his behalf by the employer. It does not
make any difference whether the tax is borne by the employer voluntarily or under a contractual obligation.


Yes. The salary paid for services rendered in India is regarded as income earned in India, so as to
specifically provide that any salary payable for rest period or leave period which is both proceeded or
succeeded by service in India forms part of the service contract of employment will also be regarded as
income earned in India and so is to be taxed.


A 'perquisite' is defined in the Oxford as 'any casual emolument, or profit attached to an office or position
in addition to the salaries or wages'. In sunlit words, perquisites are the benefits in addition to normal salary
to which the employee has a right to by virtue his employment. In simple language, 'perquisites are benefits
or amenities provided in kind by the employer free of cost or at a concessional rate. Their value, to the
extent these go to reduce expenditure that the employee normally would have otherwise incurred in
obtaining these benefits and amenities, is regarded as part of taxable salary. As a golden rule, the taxable
value of perquisites in the hands of the employee, is its cost to the employer.

However, there are specific rules for valuation of certain perquisites

A) Perquisites Taxable in the hands of all employees:

i. Value of rent free provided to the employee by his employer whether furnished or
unfurnished. [S. 17(2)(i)]
ii. Value of concession in rent in respect of accommodation provided to the employee by
employer whether furnished or unfurnished. [S. 17(2)(ii)]
iii. Amount paid by employer in respect of any obligation which otherwise would have been
payable by the employee. [S. 17(2)(iv)]
iv. Amount payable by an employer, directly or indirectly, to effect an assurance on the life of
the assessee.

B) Perquisites taxable only in hands of specified employees:

The value of any benefits other than those mentioned above granted or provided free of cost or at
concession rate are taxable only in the hands of following specified employees:

a. Director employee (even for a single day anytime during the previous year.)
b. Employee having substantial interest in employer company ( preferably 20% or more
beneficial ownership even for a single day anytime during the previous year)
c. Employee drawing salary in excess of Rs. 50000/- ( Income under the head salary by
considering only monetary payments.)

C) Perquisites not Taxable in all cases:

a. Actual expenditure on medical treatment outside India, including travel and stay
abroad of the employee or his family and also on travel and stay abroad of one
attendant, to the extent permitted by RBI. Expenditure on travel abroad shall be
excluded from perquisite only in case of employees whose gross total Income before
including the said expenditure is Rs. 2.00 lacs or less.
b. Perquisites allowed outside India by the Government to a citizen of India for rendering
services outside India.
c. Sum payable by employer to pension or deferred annuity scheme.
d. Rent free official residence to a High Court or Supreme Court Judge.
e. Rent free furnished residence to official parliament.
f. Conveyance facility to High Court/Supreme Court Judge.
g. Allotment of share, debentures or warrants to its employees under ESOP or ESOS on
which FBT is payable.

Medical Treatment for employee and Family( Spouse, Children

and Dependent brothers, sisters and parents), Within India.

Treatment in a Hospital: a. Premium paid for Reimbursement of amounts

medical insurance only actually spent for medical
a. Maintained by employer
under a Central Govt. treatment other than
b. Maintained by Govt. or approved scheme. treatment referred to in
any Local authority or b. Reimbursement of table 1 not exceeding Rs.
any other hospital
Health Insurance 15,000/- in the financial
approved by Govt. for
premium paid by year.
medical treatment of employee himself and his
c. In respect of prescribed
diseases or ailments in a
hospital approved by
Chief Commissioner

A) Rent free unfurnished accommodation

For Employees other than Central or State Government Employees

Accommodation owned Accommodation taken on Accommodation in a

by employer : lease or rent: hotel:

i. Situated in cities Actual rent or 15% of Lower of 24% of Salary or

having population salary whichever is lower. actual hotel charges
exceeding 25 lakhs as
per 2001 census – Except in cases where
15% of salary. accommodation is
ii. Situated in cities provided in hotel for a
having population period not exceeding 15
exceeding 10 lakhs days on the transfer.
but not exceeding 25
lakhs as per 2001
In all above cases the rent recovered from
census – 10% of salary
employee will be reduced and the balance
iii. Situated in other will be charged as Value of perquisite for
places – 7.5% of
concession in rent.

B) Rent free furnished accommodation:

Step 1: Calculate the value of accommodation as if unfurnished

Step 2: Add: 10% per annum of original cost of furniture if furniture is owned by employer;
Actual hire charges, f the furniture is hired or rented by employer.

If the assessee pays any rent for the same to be reduced from total perquisites chargeable to tax.

C)Free domestic Servants:

Actual cost to employer in respect of free services of a sweeper, a gardener, a watchman or a

personal attendant as reduced by amount paid by employee.
D) Gas Electricity or Water
supply provided

Where the employer Where the employer has

supplied gas electricity or supplied Gas, Electricity
water for household or water for household
purposes from his own purpose by purchasing
sources without from outside agency
purchasing from any value is amount actually
outside agency, the value paid by employer.
of such benefits is
manufacturing cost
incurred per unit.

i.e. Perquisite for Gas,

Electricity or water supply
= No. of units consumed
by employee (x)
manufacturing cost per
unit to employer

E) Free or Concessional
Educational Facility

Where educational Where free education

institution itself is facilities are provided to
maintained and owned children of the
by employer and free employee in other
education facilities are institution by reason of
provided to children of his being in employment
the employee, of that employer,
perquisite value shall be perquisite value shall be
cost of such education cost of such education
in a similar institution in in a provided the cost
or near the locality exceeds Rs. 1000/- per
provided the cost month per child.
exceeds Rs. 1000/- per
month per child.

Education provided to any other family member of employee: Perquisite

shall be actual expenditure incurred by employer.

Scholarships: Scholarship paid by employer to employee gratuitously and

at his sole discretion without any reference to terms of employment for
meeting cost of education of his children is exempt u/s 10(16)
F)Interest free or concessional loan:

Value of loan to employee or any member of his household shall be at the rates charged by State
Bank of India (SBI) on 1st Day of relevant previous year (i.e. 01.04.2009 for the current previous
year which is 2009-10), in respect of loans for the same purpose advanced by employer, as
reduced by interest actually paid by employee or member of his household.

EXCEPTION: Perquisite value of loans given for medical treatment of specified disease or petty
loans up to Rs. 20000/- is not taxable.

G)Use of Movable assets

Value of benefit shall be 10% p.a. of actual cost of asset or the rent charges paid by the
employer as reduced by amount paid by the employee.

H) Transfer of Movable assets:

Value of benefit on transfer of movable assets shall be the actual cost of asset to the employer as
reduced by depreciation expense as per following table:

Movable Asset Taxable Value

Computers and *Electronic items Actual Cost to employer
Less: Depreciation @ 50% as per WDV
Cars Actual Cost to employer
Less: Depreciation @ 20% as per WDV
Any other movable Asset Actual Cost to employer
Less: Depreciation @ 10% on Straight Line
*Electronic items does not include Amount, if any, paid by or recovered from
household appliances ( i.e. white employee being the consideration for such
goods) like Washing machines, transfer will be reduced for charging to tax.
microwave ovens, mixers, hot plates
ovens etc.


A. Entertainment Allowance: [S. 16(ii)]

Only for Government Employees (Least of following is exempt)

1. Rs. 5000/-
2. 20% of Basic Salary,
3. Actual amount received.

B. Tax on Employment/ Professional Tax [S. 16(iii)]

a. Any sum paid by employee.
b. If employer pays such tax on behalf of employee, it is treated as perquisite
and then deduction is allowed from gross salary income.
This category includes all the allowances, which are fully taxable. So, if an allowance is not partially exempt
or fully exempt, it gets included in this category.

The main allowances under this category are enumerated below:

i. Dearness Allowance and Dearness Pay

As is clear by its name, 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.

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 / dinner/ refreshment Allowance

It is fully taxable. It is given for lunch to the employees.

iv. Deputation/ project 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.

v. 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.

vi. Fixed Medical Allowance

Medical allowance is fully taxable even if some expenditure has actually been incurred for medical
treatment of employee or family.

vii. Servant Allowance

It is fully taxable whether or not servants have been employed by the employee.

viii. Other allowances

There may be several other allowances like family allowance, marriage allowance, education
allowance, and holiday allowance etc. which are not covered under specifically exempt category, so
are fully taxable.


i. Foreign allowance: This allowance is usually paid by the government to its employees being Indian
citizen posted out of India for rendering services abroad. It is fully exempt from tax.
ii. Allowance to High Court and Supreme Court Judges of whatever nature are exempt from tax.
iii. Allowances from UNO organisation to its employees are fully exempt from tax.


This category includes allowances which are exempt upto 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.

(i) 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 (HRA) 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).

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.

The exemption of HRA depends upon the following factors:

(1) Basic Salary (3) Rent paid
(2) Place of residence (4) HRA received

If an employee is living in his own house and receiving HRA, it will be fully taxable.

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 2010-11
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

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

(ii) Special Allowances for meeting official expenditure

Certain allowances are given to the employees to meet expenses incurred exclusively in performance of
official duties and hence are exempt to the extent actually incurred for the purpose for which it is given.
These include travelling allowance, daily allowance, conveyance allowance, helper allowance, research
allowance and uniform allowance.

(iii) Special Allowances to meet personal expenses

There are certain allowances given to the employees for specific personal purposes and the amount of
exemption is fixed i.e. not dependent on actual expenditure incurred in this regard. These allowances
a. Children Education Allowance
This allowance is exempt to the extent of Rs.100 per month per child for maximum of 2 children
(grand children are not considered).
b. Children Hostel Allowance
Any allowance granted to an employee to meet the hostel expenditure on his child is exempt to the
extent of Rs.300 per month per child for maximum of 2 children.
c. Transport Allowance
This allowance is generally given to government employees to compensate the cost incurred in
commuting between place of residence and place of work. An amount uptoRs.800 per month paid is
exempt. However, in case of blind and orthopaedically handicapped persons, it is exempt up to Rs.

Exemptions for Retirement Benefits

These benefits are provided by the employer to the employee for his future, either while in service
or on his retirement. These have different tax treatment. They include:

Government employees and employees of local authority:

In case of such employees, the entire amount of gratuity received by then is

Gratuity exempted from tax. Nothing will be added to gross salary

Gratuity is the payment Employees covered under Payment of Gratuity Act, 1972.
made by the employer to
an employee in In case of employees who are covered under Payment of Gratuity Act, the
appreciation of past minimum of the following amounts are exempted from tax:
services rendered by the • Amount of gratuity actually received
employee. It is received • 15 days of salary for every completed years of service or part thereof in
by the employee on his excess of six months.
retirement. Gratuity is (15 / 26 x [basic salary + Dearness Allowance] x No. of years of service+1
exempted upto certain [if fraction > 6 months]).
limit depending upon the • Rs.3, 50,000 (amount specified by government).
category of employee.
For the purpose of Other employees.
exemption, employees In case of employees not falling in the above two categories, gratuity
are divided into 3 received
categories: from the employers is exempt to the extent of minimum of following
• Actual amount of gratuity received.
• Half month average salary for every completed year of service
(1/2 x average salary of last 10 months x completed years of service).
• Rs.3, 50,000 (amount specified by government)

Periodical pension (or uncommuted pension).

It is fully taxable in the hands of all employee, whereas government or non
Pension is a payment
made by the employer
after the retirement or Commuted pension
death of employee as a
reward for past service. For employees of government organisations, local authorities and statutory
corporations, it is fully exempted from tax, hence not included in gross
It is normally paid as a salary.
periodical payment on
monthly basis but certain For other employees If the employee is also receiving gratuity along with
employers may allow an pension, then one third of the total value of pension is exempted from tax.
employee to forgo a Amount received in excess of this is taxable, so included in gross salary.
portion of pension in lieu
of lumpsum amount. If the other employee is not in receipt of gratuity, commuted value of half of
This is known as the total value of pension is exempted from tax. Any amount received over
commutation of pension. and above this amount is taxable,
The treatment of these so included in gross salary
two kinds of pension is as
Pension received by employee is taxable under the head “Salaries”.
However, family pension received by legal heirs after death of employee is
taxable under ‘Income from other sources’.
Leave Salary Encashment of leave while in service. This is fully taxable and so is added
to gross salary.
Employees are entitled to
various types of leave.
The leave generally can Encashment of leave on retirement. For the purpose of exemption of
be taken (casual accumulated leave encashment, the employees are divided into two
leave/medical leave) or it categories:
lapses. Earned leave is a
kind of leave which an • State or Central Government employees.
employee is said to have Leave encashment received by government employees is fully
earned every year after exempted from tax. Nothing is to be included in gross salary.
working for some time.
• Other employees
This leave can either be Leave encashment of accumulated leave at the time of retirement
availed every year, or get received by other employees is exempted to the extent of minimum of
encashment for it. four amounts.
If leave is not availed or • Amount specified by Central Government (3, 00,000).
encashed, it is allowed to • Leave encashment actually received.
be carried forward. • 10 months average salary (10 x average salary of 10 months
preceeding retirement).
This leave keeps getting • Cash equivalent of unavailed leave.
accumulated and is
encashed by employee
on his retirement. The tax
Leave entitlement is calculated on the basis of maximum 30 days leave
treatment of leave
every year, cash equivalent is based on average salary of last 10 months
encashment is as under:

Retrenchment Compensation:

1. In cases where the scheme is approved by the Central Government, the entire amount is exempt.
2. In other cases, minimum of the following is exempt:
a. Amount calculated in accordance with S. 25F(b) of the Industrial Disputes Act.
b. Such amount as notified by Government ( Currently it is Rs. 5,00,000/-)
c. Actual amount received

Voluntary Retirement Compensation:

Any amount received or receivable by an employee of a person not being an Individual, H U F or a Firm,
AOP or BOI. At the time of his voluntary retirement or termination or separation under a scheme framed in
accordance with guidelines prescribed by Act:

Exemption is least of following:

1. Actual amount received
2. Rs. 5 Lakhs in total from one or more employers.
3. Last Drawn Salary x 3 months x No. of completed years of service.
4. Last Drawn Salary x Balance no. of months of service left.

Provident Fund

Provident Fund Scheme is a welfare scheme for the benefit of employees. Under this scheme, certain
amount is deducted by the employer from the employee’s salary as his contribution to Provident Fund every
month. The employer also contributes certain percentage of the salary of the employee to the Fund. The
contributions are invested outside in securities. The interest earned on it is also credited to the Provident
Fund Account. At the time of retirement, the
accumulated balance is given to the employee.

Tax treatment of provident fund depends upon the type of provident fund being maintained by the employer.
Sr. Particulars Statutory PF Recognized PF Unrecognized PF Public PF
1. Employees Contribution Exempted from tax Exempted upto Exempted from tax Employer does
to PF 12% of salary not contribute
excess of
contribution in
included in gross
2. Deduction under Available Available Not Available Available
Section 80C on
employee’s contribution
3. Interest credited to PF Exempted from tax Exemption upto Exempted from tax Exempted from
notified rate tax
(9.50%) per
annum) Excess of
interest included
in gross salary
4. Lump sum payment Exempted from tax Exempted from Lumpsum includes : Exempted from
given to employee on tax (if rendered a) Own Contribution- Tax
retirement Continuous Exempt
service of more b) Interest on own
than 5 years contribution - taxable
as income from other
contribution and
interest thereon
taxable so included in
gross salary

Income tax slabs Previous Year 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 Previous Year 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 Previous Year 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%