INCOME UNDER HEAD SALARIES

“Salary is the recompense or consideration given to a person for the pains he has bestowed upon another’s
business” – Stroud’s Judicial Dictionary

The provisions pertaining to Income under the head “Salaries” are contained in section 15, 16 and 17 in the
following manner.

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BASIC ELEMENTS OF SALARY

1. Employer & Employee Relationship

- Relationship between employer and employee should be of Master and Servant

- Employer (Master) directs what & how the work is to be performed.

- Employee (Servant) is bound to follows the instructions i.e. he has no free will

- Any benefit (cash or kind) received by employee from employer, will always be chargeable under head
salaries

Examples:

(a) Sujatha, an actress, is employed in Chopra Films, where she is paid a monthly remuneration of ₹2 lakh.
She acts in various films produced by various producers. The remuneration for acting in such films is directly
paid to Chopra Films by the different producers.

In this case, ₹2 lakh will constitute salary in the hands of Sujatha, since the relationship of employer and
employee exists between Chopra Films and Sujatha.

(b) In the above example, if Sujatha acts in various films and gets fees from different producers, the same
income will be chargeable as income from profession since the relationship of employer and employee does
not exist between Sujatha and the film producers.

(c) Commission received by a Director from a company is salary if the Director is an employee of the
company. If, however, the Director is not an employee of the company, the said commission cannot be
charged as salary but has to be charged either as income from business or as income from other sources
depending upon the facts.

(d) Salary paid to a partner by a firm is nothing but an appropriation of profits. Any salary, bonus, commission
or remuneration by whatever name called due to or received by partner of a firm shall not be regarded as
salary. The same is to be charged as income from profits and gains of business or profession. This is primarily
because the relationship between the firm and its partners is not that of an employer and employee.

(e) Salary received by proprietor from his proprietorship firm is not an income. As proprietor and
proprietorship firm are the same person and no one can earn from himself.

(f) Agent and Principal: If a person is acting as an agent for his principal, any commission or remuneration
earned by the agent is not taxable under the head “Salaries”. This is because, an agent is not the employee
of his principal.

(g) Pension received by the widow or legal heir of deceased employee is not taxable as salary as no
employer- employee relationship exists between the payer and the payee. However such amount shall be
taxable under the head “Income from other sources”.

(h) Remuneration received by Judges is taxable under the head “Salaries” even though they are not having
any employer.

Note: A member of Parliament (M.P) or of State Legislature (M.L.A) is not treated as an employee of the
Government. Salary and allowances received by him are, therefore, not chargeable to tax under the head
salaries but under the head Income from other sources

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ILLUSTRATION 1

State whether the following receipts should be treated as salary or not?

● A teacher receives emoluments in kind from school in which he teaches.

Yes, it is immaterial whether salary has been received in cash or in kind.

● A teacher of a college receives fees from a University for checking answer sheets.

No, as employer – employee relationship does not exist between payer and payee. (College-teacher is not
the employee of the University). Such receipt shall be taxable under the head ‘Income from other sources’.

● A payment made to the Member of the Parliament or the State legislature.

No, as employer-employee relationship does not exist.

2. Full-time or part-time employment: Once the relationship of employer and employee exists, the income
is to be charged under the head “salaries”. It does not matter whether the employee is a full-time employee
or a part-time one.

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.

3. Foregoing of salary: Once 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.

Example:

Mr. A, an employee instructs his employer that he is not interested in receiving the salary for April 2020 and
the same might be donated to a charitable institution.

In this case, Mr. A cannot claim that he cannot be charged in respect of the salary for April 2020. It is only
due to his instruction that the donation was made to a charitable institution by his employer. It is only an
application of income.

Hence, the salary for the month of April 2020 will be taxable in the hands of Mr. A. He is, however, entitled
to claim a deduction under section 80G for the amount donated to the institution.

4. Surrender of salary: However, if an employee surrenders his salary to the Central Government under
section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so
surrendered would be exempt while computing his taxable income.

5. Salary paid tax-free: This, in other words, means that the employer bears the burden of the tax on the
salary of the employee. In such a case, the income from salaries in the hands of the employee will consist of
his salary income and also the tax on this salary paid by the employer.

However, as per section 10(10CC), the income-tax paid by the employer on non-monetary perquisites on
behalf of the employee would be exempt in the hands of the employee.

6. Place of accrual of salary: Under section 9(1)(ii), salary earned in India is deemed to accrue or arise in India
even if it is paid outside India or it is paid or payable after the contract of employment in India comes to an
end.

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 Example:

Suppose, Mr. A, a citizen of India, is posted in the United States as our Ambassador. Obviously, he renders
his services outside India. He also receives his salary outside India. He is also a non-resident. The question,
therefore, arises whether he can claim exemption in respect of his salary paid by the Government of India to
him outside India. Section 9(1)(iii) provides that salaries payable by the Government to a citizen of India for
services outside India shall be deemed to accrue or arise in India. However, by virtue of section 10(7), any
allowance or perquisites paid or allowed outside India by the Government to a citizen of India for rendering
services outside India will be fully exempt.

Section 15: Basis of Charge

Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier. Hence,
taxable salary includes:
a) Advance salary (on ‘receipt’ basis): Salary paid in advance is taxable under the head ‘Salaries’
in the year of receipt.
Note: Such advance salary shall not be included again in the total income when the salary becomes
due.
b) Outstanding salary (on ‘due’ basis): Salary falling due is taxable under the head ‘Salaries’ in
the year in which it falls due.
Note: Such due salary shall not be included again in the total income when it is received.
c) Arrear salary: Any increment in salary with retrospective effect which have not been taxed
in the past, such arrears will be taxed in the year in which it is allowed. Arrear salary are
taxable on receipt basis
PROVISION ILLUSTRATED
Mr. X joined A Ltd. for a salary of ₹ 5,000 p.m. on 1/4/2017. In the year 2018-19 his increment
decision was pending. On 1/4/2019, his increment was finalized as for 2018-19: ₹ 1,000 p.m. and
for 2019-20 ₹ 1,500 p.m. Such arrear salary received on 5/4/2019. Find Gross taxable salary. Further,
salary of April 2020 has also been received in advance on 15/03/2020.
Solution
Gross taxable salary for the previous year 2019-20 shall be calculated as under:
Particulars Workings Amount
Salary for 2019-20 (5,000 + 1,000 + 1,500) × 12 90,000
Arrear salary for 2018-19 (1,000) × 12 12,000
Advance salary for April 2020 7,500
Gross total salary 1,09,500

Taxpoint : Method of accounting followed by the employee is irrelevant

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Salary due vs Salary accrued
Salary due is different from salary accrued.

Example: Mr. X joined an organisation for ₹ 10,000 p.m. on 1st Dec. 2019, in which salary falls due
on 1st day of every next month. In such case taxable salary for the previous year 2019-20 shall be ₹
30,000 calculated as under:
Month Amount of Salary Due date of salary Taxable in the P.Y.
December 2019 10,000 1/1/2019 2019-20
January 2020 10,000 1/2/12019 2019-20
February 2020 10,000 1/3/2019 2019-20
March 2020 10,000 1/4/2019 2020-21

Advance salary vs Advance against salary

‘Advance salary’ is taxable u/s 17(1)(e) whereas ‘Advance against salary’ is treated as loan hence,
not taxable under the head “Salaries”.
Place of accrual of salary

Salary which is received in India or earned in India shall be taxable in hands of all assessee whether
resident or non resident in India. Salary is deemed to be earned in India provided -
(a) The service is rendered in India;
(b) The rest period or leave period, which is preceded and succeeded by the service rendered in
India and forms part of the service contract of employment.
Exceptions:
■ Salary paid to a Government employee, being a citizen of India, is deemed to accrue in India,
irrespective of place of work [Sec. 9(1)(iii)].
■ Pensions payable outside India to certain categories of Government employees and Judges who
permanently reside outside India, shall not be deemed to arise or accrue in India. [Sec. 9(2)]
Taxpoint: Salary is earned at the place where service is rendered.

Employee Employer Place of service Salary received Taxable

Any Any India Any where Yes
Any Any Any where In India Yes
Ordinarily resident in India Any Any where Any where Yes
Indian citizen Government Outside India Any where Yes
Not ordinarily resident/Non resident Any Outside India Outside India No

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 COMPUTATION OF INCOME UNDER HEAD SALARY
Step 1: Calculate GROSS SALARY
(Gross salary includes various elements of salary u/s 17 after allowing exemptions available against
them)
Step 2 : Allow deductions u/s 16 (ii) & (iii)
Step 3 : Step 1 – Step 2 is Income taxable under head Salary.

Meaning of Salary
Section 17(1), defined the term “Salary”. It is an inclusive definition and includes monetary as well
as non-monetary items.

Wages

 Wages generally relate to manual work, whereas Salary relate to non-manual work.
 Wages can be hourly wages, daily wages, monthly wages, piece rate wages etc.
 From point of view of tax, wages are treated just like salary and, therefore wages is also
taxable under head salary.
BASIC SALARY / PAY
Basic salary/pay is minimum remuneration payable on monthly basis in money terms. It is the base
on which all the other benefits like allowances and perquisites are decided by the employer. It is
Fully taxable.

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BONUS

 Bonus can be of different types. It can be based on performance, fixed or can also be paid
on certain occasions eg Diwali etc.
 All types of Bonus are fully taxable.
 Bonus is taxable on receipt basis. Therefore, it will be included in the gross salary only in the
previous year in which the bonus is received.
COMMISSION

 Any commission payable by employer to the employee is fully taxable as salary.

 Commission payable can be a fixed sum e.g. ₹600 p.m., ₹5000 p.a. & like that. It can also be
on percentage basis like 3% of turnover achieved or say 2% of net profits of the company
etc.
 All types of commissions including purchase commissions are fully taxable.

Allowances
Payments in cash made by the employer to his employees monthly, other than basic salary, are
called an allowance. It is a fixed sum of money paid regularly in addition to salary for the purpose of
meeting some particular expenditure (whether personal or official) of an employee. Various types
of allowances normally in vogue are discussed below:

Pay-Scale (Grade system): It is a system of payment where increment scale is pre-known to

employee. E.g. Basic salary is given as 5,000 – 1,000 – 8,000 – 2,000 – 12,000. The above data

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indicates the increment schedule. As per this schedule initial payment is ₹ 5,000 p.m. which will
increased by ₹ 1,000 every year until salary reaches to ₹ 8,000 p.m. Once salary reaches to ₹ 8,000
then increment will be ₹ 2,000 every year till salary reaches the scale of ₹ 12,000. Accordingly, basic
salary is calculated.
Dearness Allowance (DA) or Dearness Pay (DP): It is an extra amount given to an employee to meet
the burden of inflation or increased cost of living. This is fully taxable.

Note: Sometimes, it is given that DA/DP is not forming a part of retirement benefit (Leave
encashment, Pension, Provident Fund, etc.). In such case, DA/DP itself shall be fully taxable.
However, for calculating taxable Leave encashment, Pension, HRA, etc., DA/DP will be included in
‘salary’ only if it forms a part of retirement benefit.

DEDUCTIONS FROM GROSS SALARY

Standard Deduction Section 16(ia)
A standard deduction of ₹50,000 or the amount of salary, whichever is lower, is to be provided to
the employees.
Section 16(ii) TREATMENT OF ENTERTAINMENT ALLOWANCE
It is first included in the gross salary (ignoring the amount of deduction available) & then a
deduction is available u/s 16(ii)
The deduction available is calculated as under:
In case of Government employees i.e. employees of Central & State Govt.
The deduction from gross salary shall be the minimum of the following three amounts:
I. Actual entertainment allowance
II. ₹ 5,000
III. 20% of basic salary.

In case of other employees

Deduction on account of Entertainment Allowance is NOT ALLOWED
Special Points:

 Salary for this purpose is basic salary only. That means all allowances; commissions &
perquisites will have to be ignored.
 Actual expenditure incurred by an employee for entertainment purpose is not relevant.
Deduction is to be calculated only as per above-mentioned provisions.

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Section 16(iii) : TAX ON EMPLOYMENT

Employment/professional tax paid in allowed as deduction in the Previous Year of Actual

Payment
Special point:
1. The constitution has given powers to state govts to levy tax on profession, trade, employment.
Such tax payable by a person cannot exceed ₹2500 pa.
2. If professional tax is paid by the employer, then first it will be included in employee Gross salary
as a perquisite, being a monetary obligation of the employee fulfilled by the employer. And then
deduction will be allowed to employee u/s 16(iii)

HOUSE RENT ALLOWANCE [SECTION 10(13A)]

House rent allowance is given by employer to the employee to meet the expenditure in respect of
residential accommodation occupied by the employee
H.R.A to be included under head Salary = HRA received less exemption u/s 10(13A)
Exemption u/s. 10(13A):
Minimum of following is exempt
1. Actual HRA
2. Rent paid less 10% of Salary
3. 50% of Salary: If rented accommodation in Delhi, Mumbai, Kolkata, Chennai;
40% of Salary: In other cities

SPECIAL POINTS:

1. Exemption is not available to an assessee who lives in his own house, or in a house for which he
has not incurred the expenditure of rent.
2. Salary for this purpose means basic salary, dearness allowance, if provided in terms of
employment and commission as a fixed percentage of turnover.
3. For criteria of 50% or 40% of salary as deduction, place of employment is not significant but place
where the house is situated is important.
4. Salary shall be determined on due basis for the period for which the employee occupies rented
accommodation in the previous year and gets HRA.
ILLUSTRATION 1

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X, a resident of Ajmer, receives ₹ 48,000 as basic salary during the previous year 2019-20. In
addition, he gets ₹ 4,800 as dearness allowance forming part of basic salary, 7% commission on sales
made by him (sale made by X during the relevant previous year is ₹ 86,000) and ₹ 6,000 as house
rent allowance. He, however, pays ₹ 5,800 as house rent. Determine the quantum of exempted
house rent allowance.
Solution
Computation of taxable house rent allowance of X for the A.Y. 2020-21
Particulars Details (₹) Amount (₹)
House Rent Allowance Received 6,000
Less: Minimum of the following being exempted u/s 10(13A)
a) Actual Amount Received 6,000
b) 40% of Salary (Note) 23,528
c) Rent paid – 10% of salary [₹ 5,800 – ₹ 5,882] Nil Nil
Taxable House Rent Allowance 6,000

Note: Salary for the purpose of HRA

Basic salary ₹ 48,000
Dearness Allowance ₹ 4,800 Commission (7% of ₹ 86,000) ₹ 6,020
Total ₹ 58,820
Hence, exemption u/s 10(13A) is Nil.

ILLUSTRATION 2
Compute the taxable house rent allowance of Mr. Abhijeet from the following data:

 Basic Salary ₹ 5,000 p.m., D.A. ₹ 2,000 p.m., HRA ₹ 4,000 p.m., Rent paid ₹ 4,000 p.m. in Pune.
 On 1/07/2019, there is an increment in Basic salary by ₹ 1,000.
 On 1/10/2019, employee hired a new flat in Kolkata at the same rent as he was posted to Kolkata.
 On 1/01/2020, employee purchased his own flat and resides there.

ILLUSTRATION 3
Mr. Raj Kumar has the following receipts from his employer:

(1) Basic pay ₹ 3,000 p.m.

(2) Dearness allowance (D.A.) ₹ 600 p.m.
(3) Commission ₹ 6,000 p.a.
(4) Motor car for personal use (expenditure met by the ₹ 500 p.m.
employer)
(5) House rent allowance ₹ 900 p.m.
Find out the amount of HRA eligible for exemption to Mr. Raj Kumar assuming that he paid a rent of ₹ 1,000
p.m. for his accommodation at Kanpur. DA forms part of salary for retirement benefits.

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