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Chapter 3:

Income under the head “SALARY”

Sec 14 Heads of 1- Salary
Income 2- Income from House Property
3- Profit & Gains of Business or Profession
4- Capital Gain
5- Income from Other Sources
Employer- Before an income can become chargeable under the head
employee ‘salaries’, it is vital that there should exist between the payer and
relationship the payee, the relationship of an employer and an employee.
Full-time or It does not matter whether the employee is a fulltime employee or
Part time a part-time one. Once the relationship of employer and employee
employment exists, the income is to be charged under the head “Salaries”. If,
for example, an employee works with more than one employer,
salaries received from all the employers should be clubbed and
brought to charge for the relevant Previous Years.
Foregoing or Once salary accrues, the subsequent waiver by the employee does
sacrificing of not absolve him from liability to Income- tax. Such waiver is only
salary an application and hence chargeable.
Surrender of However, if an employee surrenders his salary to the Central
salary Government u/s 2 of the Voluntary Surrender of Salaries
(Exemption from Taxation) Act, 1961, the salary so surrendered
would be exempt while computing his taxable income.
Sec.15 Charging Due or receipt whichever falls earlier: Salary is taxable on due
Section basis or on receipt basis, whichever is earlier. Hence,
A - Salary due in a Previous Year is taxable, even if it not
received.
B - Salary received in a Previous Year is taxable, even if it is not
due.
C - Arrears of salary received during the current Previous Year
shall be taxable in the current year if not charged to tax in an
earlier Previous Year.
No double taxation: once salary is taxed on due/receipt basis, it
will not be taxed again on receipt/ falling due, as the case may be.
Deductions : Sec 16
Sec.16(i) Standard Deleted
Deduction
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Sec.16(ii) Entertainment Least of the following will be allowed as a deduction:

Allowance (only
for Government a- Actual amount of entertainment allowance received;
Employees) b- 20% of basic salary of the individual
c- Rs 5,000
Sec.16(iii) Professional a- Professional tax or tax on employment paid by an
Tax employee, levied under a State Act shall be allowed as
deduction ;
b- such deduction is available only on actual payment;
c-If an employer pays professional tax on behalf of his
employee, then it will first be included in the Salary as a
perquisite and then, allowed as a deduction.
Definitions : Sec 17
Sec. 17(1) Definition of “Salary” includes :
SALARY a- Wages or Salary
b- Annuity is annual grant made by the employer to the
employee.
c- Pension is a periodical payment for past services.
d- Gratuity is a lump sum payment for past services.
e- Fees and Commission
f- Perquisites.
g- Profit in lieu of or in addition to salary or wages.
h- Advance of Salary.
i- Leave Encashment.
j- RPF contribution and interest
k- The contribution made by the Central Government in the
previous year, the account of any employee under a pension
scheme referred to in Section 80CCD.
Sec. 17(2) Definition of
Perquisite: are the benefits in addition to normal salary to which
Perquisites
the employee has a right by virtue of his employment.
Perquisite includes:
a- The value of Rent Free Accomodations (RFA) provided to
the assessee by his employer.
b- The value of any concession accommodation provided to
the employee by his employer.
c- The value of any benefit provided free of cost / at
concessional rate in case of Specified Employees.
d- Any sum paid by the employer in respect of any
obligation on behalf of the employee.
e- Any sum payable to affect an insurance policy on the life
of employee / to affect a contract for annuity.
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Note1: Premium paid on Insurance policy is treated as perquisite

only if the beneficiary is the employee.

Note2: Life Insurance Premium (LIP) paid by the employer

qualify for deduction u/s 80C.

f- The value of any specified security or sweat equity shares

is equal to the FMV as reduced by the amount actually
paid by or recovered from employee.
g- Any amount of contribution to approved superannuation
fund to the extent it exceeds Rs.1,50,000*.
h- The value of any other fringe benefit as may be
prescribed, expect mobile / telephone.
Sec 17(3) Profit in Lieu of 1- Compensation from employer/former employer in connection
Salary with: Termination or Modification of the Terms & conditions
of employment.
2- Any payment due to or received from any person before
joining or after cessation of the employment.
3- Any sum received under a key man Insurance policy
including bonus on such policy.
Retirement Benefits / Exemptions under the head Salary
Sec 10(10) Gratuity Gratuity is the payment made by the employer to an employee in
appreciation of past services rendered by the employee.
1- Government employees and employees of local authority:
Exempted from tax.
2- Employees covered under Payment of Gratuity Act, 1972

In case of employees who are covered under Payment of Gratuity

Act, the least of the following amounts are exempted from tax:
a- Amount of gratuity actually received.
b- Half month (i.e. 15/26 days) salary on the basis of last
drawn salary for each completed years of service or part
therof ( in excess of six months).
c- Max Rs.10,00,000
Salary means: Basic + DA
3- Other employees. Least of the following amounts are
exempted from tax:
A- Actual amount of gratuity received.
B- Half month (i.e. 15/30 days) salary on the basis of last 10
months average salary for each completed years of service .
C- Max Rs. 10, 00,000
Salary means: Basic + DA (if) + %
Sec.10(10A) Pension Un commuted pension refers to pension periodically received by
the employee. It is taxable in the hands of the both Govt. and Non
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Govt Employees.
Commuted pension Sec.10 (10A) means lumsum amount taken
by commuting the pension or part of the pension.
Government Employees: 100% exempt from tax.
Other Employees:
1) If Gratuity is rect: 1/3 of 100% commuted pension is
exempt
2) If Gratuity not rect: ½ of 100% commuted pension is
exempt.
Sec 10(10AA) Leave If an individual receives leave encashment on his retirement, then
Encashment the amount received will be eligible for exemption.
(i) Government employee: fully exempted from tax
(ii) Non-Govt. employee: Least of the following is exempt:
a) Actual Amount rect
b) Max Rs 300000/-
c) 10 months salary On the basis of immediately
d) Earned leave salary preceding 10 months average
Salary.
Salary means : Basic Salary + DA (if) + %
Sec 10(10B) Retrenchment Retrenchment compensation received in accordance with any
Compensation scheme, which is approved by the Central Government, is fully
exempt from tax.
Any other employee who receives retrenchment compensation is
entitled for exemption u/s 10(10B) as under:
1- Actual Amount
2- Max Rs 500000/-
3- Amount determined as per Industrial Dispute
Act,1947
Sec 10(10C) Voluntary Conditions for claiming exemption (Govt or Non Govt
Retirement Employees):
Compensati
1- An individual, who has retired under the Voluntary
on
Retirement Scheme, should not be employed in another
company of the same management.
2- He should not have received any other Voluntary Retirement
Compensation before from any other employer and claimed
exemption.
3- Exemption u/s 10(10C) in respect of Compensation under
VRS can be availed by an Individual only once in his lifetime.

Least of the following is exempt:

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1- Actual Amount
2- Max Rs 500000/-
3- Completed yrs of service x 3 x last drawn salary
Or
Remaining months of services x last drawn salary
Salary means = Basic Salary + DA (if)
Taxability of Allowances
Allowances Fully Taxable Allowances
Fully Exempt Allowances
Partly Exempt Allowances (upto exp incurred)
Partly Exempt Allowances
Fully Dearness Allowance and Dearness Pay
Taxable City Compensatory Allowance
Allowances Tiffin / Lunch Allowance Non
practicing Allowance Warden
or Proctor Allowance
Deputation Allowance
Overtime Allowance
Fixed Medical Allowance
Servant Allowance family
allowance,
Project allowance, Marriage allowance,
Holiday allowance etc
Fully (i) Foreign allowance: This allowance is usually paid by the
Exempt government to its employees being Indian citizen posted out of
Allowances India for rendering services abroad.

(ii) Allowance to High Court and Supreme Court Judges.

(iii) Allowances from UNO organization to its employees are

fully exempt from tax.
Partly exempt Travelling / Should be provided by the employer and spent by the
Allowances Transfer employee to meet the cost of official tour or transfer
(Depending allowance: expenses. Cost of travel or transfer includes payments for
upon Actual transfer, packing and transportation of personal effects.
Exp)

Daily Should be spent by the employee for meeting the daily

Allowance charges incurred on a tour or transfer.
Uniform Should be spent by the employee for
Allowance purchasing/maintaining office uniform for official duties.
Helper Should be used by an employee to meet the expenditure on
Allowance a helper who assists him in the performance of official
duties.
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Academic / Should be used by the employee for his academic research

Research and training pursuits.
Allowance
Conveyance Should be used by the employee to meet the expenditure on
Allowance conveyance in performance of official duties.
Partly Special Amount exempt from tax varies from Rs 300 per month to Rs
Taxable
Compensator 7,000 per month
Allowances
y (Hill Areas) .
(Not
Depending Allowance
upon
Actual Exp)
Border Area The amount of exemption varies from Rs 200 per month to Rs
Allowance 1,300 per month
Tribal Areas/ Rs 200 per month
Scheduled `
Areas
Allowance

Allowance It is an allowance granted to an employee working in any

for transport system to meet his personal expenditure during his
Transport duty performed in the course of running of such transport from
Employees one place to another place provided that such employee is not in
receipt of daily allowance
The amount of exemption is :-
(i) 70 % of such allowance; or
(ii) Rs 10,000 per month, Whichever is lower
Children Rs 100 pm per child for max 2 Childs
Education
Allowance
Hostel Rs 300 pm per child for max 2 Childs
Expenditure
Allowance
Transport Transport allowance is granted to an employee to meet his
Allowance expenditure for the purpose of commuting between the place of
his residence and the place of his duty.

Amendment Finance Act, 2015:

It is exempt up to Rs 1600 (earlier Rs 800) per month. For
handicapped / blind person, exemption upto Rs 3200 (earlier Rs
1600) per month
Underground Employees who are working in unnatural climate in
Allowances underground mines. Rs 800/- pm
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Sec.10(13A) Conditions Assessee is in receipt of HRA & he Pays Rent.

HRA Exemption u/s 10(13A) Rule 2A:
Least of the followings:
(a) Actual amount received
(b) 50% ( for metro cities) / 40 % ( for non-metro cities) of
Salary
(c) Rent paid less 10 % of Salary
Salary means = Basic + DA (if) + %
It is important to note that salary must be for relevant period.
Taxability of Perquisites
Types of perquisites Perquisites may be divided into three broad categories:
(1) Perquisites taxable in the case of all employees
(2) Perquisites exempt from tax in the case of all employees
(3) Perquisites taxable only in the hands of specified employees.
Rent Free Central /
Accommod State Govt License Fees (-) Amount recovered from employee
ation Employee
Other than
central / Owned by Employer
state govt
employee
In cities having In cities having population In other places:
population exceeding 10 lakhs but not 7.5% of Salary
exceeding 25 lakhs exceeding 25 lakhs as per Less Rent actually paid
as per 2001 census: 2001 census: by employee
15% of Salary 10% of Salary
Less Rent actually Less Rent actually paid by
paid by employee employee
Other than Not Owned by Employer
central / Rent paid by the employer or 15% of Salary whichever is lower
state govt Less Rent recovered from employee
employee
Accommodat 24% of salary paid/payable or actual charges paid/payable
ion in a hotel whichever is lower
Less: Amount paid or payable by the employee

Important Hotel Accommodation: Accommodation provided in a hotel will not be a taxable

Note: perquisite if the following two conditions are fulfilled:
(a) The period of such accommodation does not exceed 15 days
(b) Such accommodation has been provided on the transfer of the employees from
one place to another
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Value of Value of unfurnished accommodation as above

Furnished Add : Value of Furniture provided:
Accommodat • If owned by employer, 10%p.a. of original cost of such furniture
ion • If hired from third party, then Actual hire charges
Less: Any charges paid or payable by the employee

Note 1: Furniture includes Television sets, radio, refrigerator,

other household appliance, air-conditioning plant or equipment.

Note 2:
(a) For the first 90 days of transfer: Where accommodation is
provided both at existing place of work and in new place, the
accommodation, which has lower value, shall be taxable.
(b) After 90 days: Both accommodations shall be taxable.

Note 3:
Salary includes all monetary benefits but does not include if:
DA is not in terms in employment & PF.
Sweeper, Actual cost to the employer
gardener or Less: Amount paid by employee

watchman
provided by the
employer
Free Supply of (i) Procured from outside agency
Gas, Electricity or Amount paid to outside agency
Water (ii) Resources owned by employer himself
Manufacturing cost per unit
Less: amount paid by the employee

Free Education a) Free education to any member of employees’ family provided in an

educational institution owned and maintained by the employer shall be
determined with reference to reasonable cost of such education in a similar
institution in a nearby locality.
The value shall be nil, if the cost of such education per child does not
exceed Rs.1, 000 per month.

b) In any other case: The value of benefit of providing free or concessional

educational facilities for any member of the house hold (including
children) of the employee shall be the amount of expenditure incurred
by the employer.

c) Any amount paid or recovered from the employee shall be deducted.

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Free Benefit provided by any undertaking engaged in the carriage of

Transport passengers or goods to any employee or to any member of his household
for private journey free of cost or at concessional rate in any conveyance
owned or leased by it shall be taken to be the value at which such benefit
is offered by such undertaking to the public as reduced by the amount, if
any, paid by or recovered from the employee for such benefit.

In case of employees of the Railways and airlines, the value of transport

facility shall be exempt.

Use of any 10% of Actual Cost if owned by the employer; or Actual rental charge
movable asset paid/payable by the employer less Amount recovered from employee.
other than
computer or
laptops or other
assets already
mentioned
Free meals during Actual cost to the employer in excess of Rs 50 per meal less: amount
office hours recovered from the employee.
Tea or non-alcoholic beverages and snacks during working hours is not
taxable.
Gifts Value of any gift or voucher or token other than gifts made in cash or
convertible into money (e.g. gift cheques) on ceremonial occasion.
In this case if the aggregate value of gift during the previous year is less
than Rs 5,000, then it is not a taxable perquisite.
Interest-free or 1- To the employee or any member of his household during the relevant
concessional loan previous year
2- Value of perquisites shall be the interest computed at the rate charged
per annum by the State Bank of India, as on the 1st day of the relevant
previous year on the maximum outstanding monthly balance .

“Maximum outstanding monthly balance” means the aggregate

outstanding balance for each loan as on the last day of each
month.

However, no perquisites if such loans are made available

a- For medical treatment in respect of prescribed diseases (like cancer,
tuberculosis, etc.) or
b- Amount of loans are petty not exceeding in the aggregatè 20,000.
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Use of any The value of benefit shall be determined @ 10% p.a. of the actual cost of
movable asset such asset or the amount of rent or charge paid or payable by the employer
as reduced by the amount, if any, paid or recovered from the employee for
such use.

Transfer of any The value of benefit shall be determined to the amount representing the
movable asset actual cost of such asset to the employer as reduced by the cost of normal
wear and tear calculated at the rate of
a) 50% in case of computers and electronic items (WDV method)
b) 20% in case of motor cars (WDV method)
c) 10% in case of motor cars (SLM method)
reduced by the amount, if any, paid or recovered from the
employee being the consideration for such transfer.

Credit card Membership fees and annual fees incurred by the employee or any member
expenses of his household, which is charged to a credit card (including any add-on-
card) paid for or reimbursed by such employer reduced by the amount, if
any paid or recovered from the employee

Such expenses incurred wholly and exclusively for official purposes would
not be treated as a perquisite if complete details in respect of such
expenditure are maintained by the employer.

Club expenditure (a) The value of benefit is any expenditure incurred (including the amount
of annual or periodical fee) in a club (for employee or his household
member) as reduced by the amount recovered from the employee.

(b) If corporate membership then the value shall be zero.

(c) There would be no perquisite for use of health club, sports and similar
facilities provided uniformly to all employees by the employer.

Tax-free Medical IN INDIA :

perquisites Facilities Owned Hospital, : NIL
(in all Government hospital, : NIL
cases) Approved Hospital : NIL
Any other hospital: Payment/Reimbursement by employer of
actual expenditure upto Rs 15,000.

OUTSIDE INDIA :
Treatment or Lodging : To the extent permitted by RBI.
Travelling Exp : exempt only in the case of an employee whose
GTI before including therein the said expenditure doesn’t exceed
Rs 2,00,000.
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Note 1: Family means:

*The Spouse & Children &
*The Parents, brothers & sisters wholly or mainly dependent on
the employee.

Note 2: Mediclaim: Insurance premium paid/ reimbursement by

the employer on the Mediclaim policy taken by the employer/
employee.
Telephone 100% not taxable.
facility
The value of provided by the employer to the employees as a group (and not to
transport any individual or a few employees alone) from their place of
residence to the place of work and back in the case of an
employer engaged in the business of carriage of goods or
passengers, to his employees either free of charge or at a
concessional rate.
Also conveyance facility provided for the journey between office
and residence and back at free of charge or at concessional rate.
Personal Payment of annual premium by employer on personal accident
accident policy effected by him to his employee is not taxable.
insurance
Refresher Where the employee attends any refresher course in management
Course and the fees are paid by the employer, the amount spent by
employer for the purpose is not taxable.
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Leave Travel Leave Travel Concession is a non-taxable perquisite available for

Concession salaried class. An Employee with his dependent family members
(LTC) can avail of this facility to travel anywhere in India.
Exemption is limited to the amount actually spent. The amount
exempt is the value of any travel concession or assistance
received or due to the assessee.

1. Journey by Air: Economy Class Airfare of India Airlines by

the shortest route or the actual amount spent, whichever is lower.

2. Journey by Rail: A/C 1st Class rail fare by the shortest route
or actual amount spent, whichever is lower.

3. Where the place of destination is connected by Rail: Air-

conditioned first class Rail fare by the shortest route or the actual
amount spent for the journey performed by road whichever is
lower.

4. Where the place of destination is NOT connected by Rail :

1. If Recognized public transport exists: First Class or
Deluxe Class fare by the shortest route or the actual amount spent
whichever is lower.
2. If No recognized public transport exists: Air-
conditioned first Class Rail fare by the shortest route or the actual
amount spent whichever is lower. These exemptions is available
only for 2 journeys performed in a block of 4 calendar years.
Family of an Individual means:
• Spouse and children of the individual, and
• Parents, brothers and sisters of the individual or any of them,
wholly or mainly dependent on the Individual
Car Facility
Owned by Exp By 100% Personal Use Partly Personal Partly Official
Employee Employee Nil Nil
Employee Employer Exp incurred by Exp incurred by employer xxx
employer Less: Upto 1.6 ltr engine (1800 pm)
Or, More than 1.6 ltr (2400 pm)
Add: Driver 900 pm
Employer Employee Wear & tear i.e. 10% Upto 1.6 ltr engine 600 pm
of actual cost of car Or, if More than 1.6 ltr 900 pm
Add: Driver 900 pm
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Employer Employer Exp incurred by Upto 1.6 ltr engine 1800 pm

employer Or, if More than 1.6 ltr 2400 pm
Add: Wear & tear i.e. Add: Driver 900 pm
10% of actual cost of
car
Other Automotive Conveyance – Rule 3(2)
Where any other automotive conveyance (i.e., other than car) is owned by the employee and actual
running and maintenance charges are met or reimbursed by the employer:
Use of Vehicle Value of Perquisite
Wholly and exclusively for Official Purpose NIL
Partly Official and Partly for Private Purposes Expenses incurred by the employer
Less: 900 p.m. / higher amount if specified
documents are maintained
Less: Amount recovered from employee

Specified documents (same documents as in the case of car) need to be maintained.

Important Notes : ESOP or Sweat Equity Shares : Value of the perquisite u/s. 17(2)(vi) & Rule
3(8) and 3(9):
(a) *Specified Security or SWEAT equity shares, allotted to an employee by the employer or
former employer, either directly or indirectly for free of cost or at concessional rate is
considered as perquisite.
(b) Such perquisite was exempt in the hands of the employee upto AY 2009-10 as the value
of such perquisite was taxable as Fringe Benefit in the hands of the employer u/s.
115WB.
(c) As a result of abolition of FBT and amendments in sec. 17(2)(vi) from AY 2010-11 (i.e.,
in case of allotment or transfer of specified security or sweat equity shares on or after
1.4.2009), such perquisites are chargeable to tax in the hands of the employee.
(d) The value of such perquisite shall be arrived as under:

FMV (Fair Market Value) of the specified Less: Amount actually paid by
security or sweat equity shares as on the date or recovered from
on which option is exercised employee
(e) FMV shall be determined as per Rule(3)(8) under:

On the date of exercise of the option FMV

Equity Shares are If TRADED on the Average of the *Opening Price and *Closing
LISTED on a date of exercising Price of the share on the date of exercise of the
recognised stock of the option option
exchange  If such shares are traded on such date in
more than 1 stock exchange, the above
prices shall be taken of that recognised
stock exchange which records the
highest trading in such share
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If NOT traded on *Closing Price on a closest date preceding the

the date of date of exercise of the option
exercising of the  If shares are traded on such closest date
option in more than 1 stock exchange, the
above price shall be taken of that
recognised stock exchange which
records the highest trading in such
shares
Equity Shares are NOT listed on a Value determined by the Merchant Banker on the
recognised stock exchange or in case of date of exercise of option or any earlier date (not
securities other than Equity shares earlier than 180 days from the date of the
exercising)
Sec.2(h) of the Securities Contracts (Regulation) Act, defines “securities” to include (i) shares,
scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature
in or of any incorporated company or other body corporate; (ia) derivative; (ib) units or any other
instrument issued by any collective investment scheme to the investors in such schemes; (ic)
security receipt as defined in clause (zg) of sec. 2 of the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such
instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia)
such other instruments as may be declared by the Central Government to be securities; and
(iii) rights or interest in securities;