1 INCOME FROM SALARY

JAMIA MILLIA ISLAMIA

Faculty of law

INCOME FROM SALARY

Tax Law

Submitted to: Ekramuddin

Submitted by: Nabil Iqbal

Roll no: 42

BA.LLB (Regular) 6th Semester

Batch: 2017 - 2022

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ACKNOWLEDGEMENT

Firstly, I would like to express my profound sense of gratitude towards the almighty “ALLAH”
for providing me with the authentic circumstances which were mandatory for the completion of
my project.
Secondly, I am highly indebted to Prof. Ekramuddin at Faculty of Law, Jamia Millia Islamia
University, New Delhi for providing me with constant encouragement and guidance throughout
the preparation of this project.
Thirdly, I thank the Law library staff who liaised with us in searching material relating to the
project.
My cardinal thanks are also for my parents, friends and all teachers of law department in our
college who have always been the source of my inspiration and motivation without which I
would have never been able to unabridged my project.
Without the contribution of the above said people I could have never completed this project.
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INDEX

TOPIC PAGE NO.

1.) INTRODUCTION 4
2.) SALARY 5-7
3.) FEATURES OF INCOME FROM SALARY 7-8
4.) EMPLOYER-EMPLOYEE RELATIONSHIP 8-9
5.) PLACE OF ACCRUAL OF SALARY 9
6.) ALLOWANCES 9-14
7.) PERQUISITES 14-16
8.) RETIREMENT BENEFITS 16
9.) CONCLUSION 17
10.) BIBLIOGRAPHY 18
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INTRODUCTION

Salary is the remuneration received by or accruing to an individual, periodically, for service

rendered as a result of an express or implied contract. The actual receipt of salary in the previous
year is not material as far as its taxability is concerned. The existence of employer-employee
relationship is the sine-qua-non for taxing a particular receipt under the head “salaries.” For
instance, the salary received by a partner from his partnership firm carrying on a business is not
chargeable as “Salaries” but as “Profits & Gains from Business or Profession”. Similarly, salary
received by a person as MP or MLA is taxable as “Income from other sources”, but if a person
received salary as Minister of State/ Central Government, the same shall be charged to tax under
the head “Salaries”. Pension received by an assessee from his former employer is taxable as
“Salaries” whereas pension received on his death by members of his family (Family Pension) is
taxed as “Income from other sources”.
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INCOME FROM SALARY

SALARY

Money which you earn from different sources is taxed differently. So if you are a salary earner,
your salary income to be taxed will be calculated in a different way from gains. The term
"Salaries" includes remuneration in any form for personal service, under an expressed or implied
contract of employment or service. Any remuneration paid by an employer to his employee in
consideration of his service is called Salary. It is paid in fixed intervals i.e. monthly one-twelfth
of the annual salary. It includes monetary value of those benefits and facilities provided by the
employer which are taxable. Section 15, 16 and 17 of the Income tax act, 1961 deals with the
computation of income under the head Salaries.1

Dictionary meaning of salary is that it is usually a form of earning or profit, provided by an

employer to his/her employee. This generally comes in the form of an incentive in addition to the
regular pay. This amount of money, defined as salary is the right of an employee for rendering
his/her services to the employer. It’s a fixed amount of money agreed every year as pay for
an employee, usually paid directly into his or her bank account every month.2

Meaning as per the guidelines of the Income Tax Department: Section 17 (2) of the Income Tax
Act, 1961, defines salary as the worth of an accommodation that is free of rent, from an
employer to an employee.3

 Section 17 of Income Tax Act defines salary to include:- 

a) Wages

b) Annuity

c) Pension

d) Gratuity

1
Income Tax Department, available at: https://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx, (last
visited on April 10th, 2020).
2
Salary, available at: https://dictionary.cambridge.org/dictionary/english/salary, (last visited on April 5th, 2020).
3
Supra note at 1.
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e) Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages

f) Advance of Salary

g) Leave Encashment

h) Annual accretion to the balance of Recognized Provident Fund

i) Transferred balance in Recognized Provident Fund

j) Contribution by Central Government or any other employer to Employees Pension Account

as referred in Sec. 80CCD4

Salary includes:
 Basic Salary or the fixed component of salary as per the terms of employment.
 Fees, Commission and Bonus that the employee gets from the employer
 Allowances that the employer pays the employee to meet his personal expenses.
Allowances are taxed either fully, partially or are exempt.

CTC
CTC is one of the generic term when a person talks about salary. CTC stands for Cost To
Company. It is the amount that the company in spending on hiring and sustaining an employee.
CTC includes the salary as well as the other benefits provided to an employee which can be meal
coupons, office space rent, Provident Fund, Medical Insurance, House Rent Allowance
(HRA) and any other element that cost to the company. It may be noted that CTC varies from
the actual income from salary that a person receives as CTC also includes variables over and
above the actual salary that a person is receiving.

CTC contains all monetary and non-monetary amounts spent on an employee. All the below
mentioned are a part of the in-hand salary, and therefore, are a part of the CTC pay as well.

They are:

 Basic

 Dearness Allowance (DA)

4
Income Tax Act, 1961 (Act 2 of 1961).
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 Incentives or bonuses

 Conveyance allowance

 House Rent Allowance (HRA)

 Medical allowance

 Leave Travel Allowance or Concession (LTA / LTC)

 Vehicle Allowance

 Telephone / Mobile Phone Allowance

 Special Allowance

A major part of CTC comprises of compulsory deductibles. These include deductions for

provident fund, medical insurance, etc. They form a part of the compensation structure but
doesn’t get them as a part of an in-hand salary. But it definitely increases the CTC.

CTC = Direct Benefits + Indirect Benefits + Savings Contributions

 Direct Benefits refer to the amount paid to the employee monthly by the employer which
forms part of his/her take-home or net salary and is subject to government taxes.

 Indirect Benefits refer to the benefits that employees enjoy without paying for them. The
company pays them on behalf of the employee but adds these expenses to the employee’s
CTC as it is an expense from the company’s point of view.
 Savings contribution refers to the monetary value added to the employee’s CTC example
EPF.5

FEATURES OF INCOME FROM SALARY:

5
CTC salary, available at: https://www.sumopayroll.com/blog/ctc-salary-basic-calculated/, (last visited on April
11th, 2020).
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 It is most important that an employer-employee relationship exists between the people

involved to charge any payment under the head salary.
 The employment can be full-time or part-time. Salary earned from multiple employers
can be clubbed together.
 Once the employee accrues the salary, the liability to pay tax can’t be exempted by any
means.
 The surrendered salary of the employees is exempt from the tax.
 In the case of tax-free salary, the pay income along with the tax will be a part of the
revenue from the pay of the employee.6

EMPLOYER AND EMPLOYEE RELATIONSHIP:

According to Section 2 (13) of the Income Tax Act, 1961 an "employee" means any person
(other than an apprentice) employed on a salary or wage not exceeding 12[twenty-one thousand
rupees] per mensem in any industry to do any skilled or unskilled, manual, supervisory,
managerial, administrative, technical or clerical work for hire or reward, whether the terms of
employment be express or implied, And
 
(14) "Employer" includes—
 (i)  in relation to an establishment which is a factory, the owner or occupier of the factory,
including the agent of such owner or occupier, the legal representative of a deceased owner or
occupier and where a person has been named as a manager of the factory under clause (f) of sub-
section (1) of section 7 of the Factories Act, 1948, the person so named; and
 (ii )  in relation to any other establishment, the person who, or the authority which, has the
ultimate control over the affairs of the establishment and where the said affairs are entrusted to a
manager, managing director or managing agent, such manager, managing director or managing
agent;7

6
Salary, available at: https://www.slideshare.net/vaishali_bansal/salary-30373029, (last visited on, April 12th,
2020).
7
Factories Act, 1948 (Act 63 of 1948).
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Any Income can be taxed under the head “salaries” only if there is a relationship of an employer
and employee between payer and payee. Any income would be deemed to be income from salary
only if relation of employer and employee exist. Their relationship should be of master and
servant. A master is a person who directs what is to be done and how it is to be done, and the
servant is one who is required to conduct the work in manner prescribed by master.

POINTS TO CONSIDER:
a) Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is earlier.

b) Existence of relationship of employer and employee is must between the payer and payee to
tax the income under this head.

c) Income from salary taxable during the year shall consist of following:

i. Salary due from employer (including former employer) to tax

Payer during the previous year, whether paid or not;

ii. Salary paid by employer (including former employer) to taxpayer during the previous
year before it became due;

iii. Arrear of salary paid by the employer (including former employer) to taxpayer during
the previous year, if not charged to tax in any earlier year;

Exceptions - Remuneration, bonus or commission received by a partner from the firm is not
taxable under the head Salaries rather it would be taxable under the head business or profession.

PLACE OF ACCRUAL OF SALARY:

a) Salary accrues where the services are rendered even if it is paid outside India;

b) Salary paid by the Foreign Government to his employee serving in India is taxable under the
head Salaries;

c) Leave salary paid abroad in respect of leave earned in India shall be deemed to accrue or
arise in India.

Exceptions -  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.8

8
Deduction from salary, available at: https://enterslice.com/learning/deduction-salary/, (last visited on 13th April,
2020).
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ALLOWANCES
Payments in cash made by the employer to his employees usually at regular intervals, other than
salary are known as allowances. An allowance is the financial benefit given to the employee by
the employer over and above the regular salary. Some of these allowances are taxable under the
head Salaries. A few of them again could be partly taxable and few others are non-taxable or
fully exempt from taxes.
From Income Tax point of view, there are 3 types of allowances which are as under
a. TAXABLE ALLOWANCES
b. ALLOWANCES EXEMPT UPTO SPECIFIED LIMITS
c. FULLY EXEMPT ALLOWANCES

TAXABLE ALLOWANCES
Taxable allowances are those allowances which are fully taxable under Income tax act,
1961.While computing taxable salary whole amount is added into the salary. Following are the
allowances which are fully taxable:

- Dearness Allowance and dearness pay

- Fixed medical allowance

- Tiffin allowance

- Servant allowance

- Non practicing allowance

- Hill allowance

- Warden/ Proctor allowance

- Deputation allowance

- Overtime allowance

- Other allowances like City Compensatory allowance, Telephone allowance, Holiday allowance,
Special qualification allowance, etc. All the above allowances can be understood by their names
but yet there are some allowances, which I think needs explanation. So there explanation is given
below:
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1. Dearness Allowance:  (DA) is an allowance paid to employees as a cost of living

adjustment allowance paid to the employees to cope with inflation. DA paid to employees
is fully taxable with salary. The Income Tax Act mandates that tax liability for DA along
with salary must be declared in the filed return.

2. Entertainment Allowance: Employees are allowed the lowest of the declared amount one-
fifth of basic salary, actual amount received as allowance or Rs. 5,000. This is an
allowance provided to employees to reimburse the expenses incurred on the hospitality of
customers. However, Government employees can claim exemption in the manner
provided in section 16 (ii). All other employees have to pay tax on it.

3. Overtime Allowance: Employers may provide an overtime allowance to employees

working over and above the regular work hours. This is called overtime and any
allowance received for this is fully taxable.

4. City Compensatory Allowance: City Compensatory Allowance is paid to employees in an

urban centre which may be highly expensive and to cope with the inflated living costs in
the cities. This allowance is fully taxable.

5. Interim Allowance: When an employer gives any Interim Allowance in lieu of final

allowance, this becomes fully taxable.

6. Project Allowance: When an employer provides an allowance to employees to meet

project expenses, this is also fully taxable.

7. Tiffin/Meals Allowance: Sometimes employers may provide Tiffin/Meals Allowance to

the employees. This is fully taxable.

8. Cash Allowance: When the employer provides a cash allowance like marriage allowance,
bereavement allowance or holiday allowance, it becomes fully taxable.

9. Non-Practicing Allowance: When physicians are attached to Clinical Centers of the

various Laboratories/Institutes, any non-practicing allowance paid to them become fully
taxable.
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10. Warden Allowance: When an employer pays an allowance to an employee working as a

Warden i.e. Keeper in an educational Institute, the allowance received is fully taxable.

11. Servant Allowance: When an employer pays an employee to engage services of a servant,

such an allowance is taxable.

ALLOWANCES EXEMPT UPTO SPECIFIED LIMITS

i. HOUSE RENT ALLOWANCE

ii. ENTERTAINMENT ALLOWANCE
iii. SPECIAL ALLOWANCES FOR MEETING CERTAIN EXPENDITURES

 HOUSE RENT ALLOWANCE: HRA is given to meet the cost of a rented house taken
by the employee for his stay. The Income Tax Act allows for deduction in respect of the
HRA paid to employees. The exemption on HRA is covered under Section 10(13A) of
the Income Tax Act and Rule 2A of Income Tax Rules. HRA is exempt to the extent of
the minimum of following 3 amounts:
- Actual Amount Received,

- Excess of Rent paid by the assessee over 10 % of salary due to him for the relevant period,

- 50% of the salary if residential house is situated at Mumbai, Kolkata, Delhi, Chennai.
- 40% of the salary if residential house is situated at city other than above metropolitan cities.

 ENTERTAINMENT ALLOWANCE: It is an allowance given by an employer to his

employee. It is first included in income from salary under section 15 and then deduction
is allowed to a govt. employee under sec 16(ii). Least of the following amounts shall be
deducted:- Amount Actual received, 1/5 of salary , where salary = Basic Salary Rs. 5000

 SPECIAL ALLOWANCES FOR MEETING CERTAIN EXPENDITURES:

A special allowance paid to employees is covered under section 14(i) and does not fall
within the purview of a perquisite. It is essentially for performance of a duty is partly
taxable.
There are two types of special allowances under this category:-
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1. SPECIAL ALLOWANCES FOR PERFORMANCE OF OFFICIAL DUTIES: These

allowances are exempt to the extent of actual amount received or the amount spent for the
purpose of official duties, whichever is less. E.g. travelling allowance, Daily allowance,
Helper allowance, etc.
2. ALLOWANCES TO MEET PERSONAL EXPENSES: There are many allowances
covered under this category, but here I am explaining the provisions of few allowances
which are as follows: - Children Education Allowance - Exempt up to actual amount
received per child or Rs.100 p.m. per child up to a maximum of 2 children, whichever is
less.
 HOSTEL EXPENDITURE ALLOWANCE: Exempt up to actual amount received per
child or Rs.300 p.m. per child up to a maximum of 2 children, whichever is less.
 TRIBAL AREA ALLOWANCE: Exempt up to actual amount received or Rs. 200 per
month, whichever is less.
 TRANSPORT ALLOWANCE: It is exempt up to Rs.800 p.m. but in case of blind or
orthopedically handicapped, it is exempt up to Rs. 1600 p.m.
 ALLOWANCE ALLOWED TO TRANSPORT EMPLOYEES WORKING IN ANY
TRANSPORT SYSTEM: It covers Fixed Allowance given by employer to his employee
working in any transport system, to meet his personal expenditure during his performance
of duty and amount of exemption shall be 70% of such allowance or rs.10,000 p.m.
whichever is less.

FULLY EXEMPTED ALLOWANCES:

There are certain allowances which are fully exempt under Income Tax Act, 1961:- 9
 FOREIGN ALLOWANCE: This allowance is usually paid by the government to an
Indian citizen outside India for rendering services in abroad. It is not taxable at all. There
may be several types of foreign allowances e.g. overseas allowance, Children Education
allowance, etc. Important point: This Exemption is available only to government
employees and they must be citizen of India.
 SUMPTUARY ALLOWANCES: These allowances are given to High Court/ supreme
Court Judges and are fully exempt from tax.

9
Supra note at 4.
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 ALLOWANCE FROM UNO: Allowances paid by UN organizations to its employees

are fully exempt.
 PER DIEM ALLOWANCE: It means Per Day Allowance. If per Diem Allowance is
paid for the use of hotel, boarding and lodging facilities to an employee, any surplus
accruing to him from such allowance are exempt from tax. 10

PERQUISITES:
Perquisites are payments received by employees over their salaries. They are not reimbursement
of expenses. So, it is a non-cash benefit granted by an employer to the employee. Under the
Income Tax Act, a perquisite is defined as a benefit which an employee avails of or is entitled to
on account of the employee’s job or position in the enterprise. 11 Obtaining perquisites has
important tax consequences for the employee. When an employee obtains a perquisite during the
course of employment, the perquisite is taxable as a part of the assessment of the employee. The
value of the perquisites received by an employee is included under the salary income of the
employee. 
Classification-
For income tax purposes, Perquisites are classified into the following categories:
 Perquisites that is taxable only when the employee belongs to a specified group.
 Perquisites which are taxable in the hands of all categories of employees.
 Specified security or sweat equity shares transferred or allotted by the employer to the
assessee.
 Employer’s contribution to the approved superannuation fund to the extent it exceeds
Rs.1, 50,000.
 Tax-free Perquisites

Some perquisites are taxable for all employees, they are:

1. Value of rent-free accommodation provided to the assessee by his employer.
2. Value of any concession in the matter of rent in respect of any accommodation provided
to the assessee by his employer.
10
Allowances, available at: https://www.bankbazaar.com/tax/taxable-non-taxable-allowances-for-salaried-
individuals.html, (last visited on 20th April, 2020).
11
Sec. 17(2), Income Tax Act, 1961 (Act 2 of 1961).
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3. Value of any benefit or amenity granted or provided free of cost or at concessional rate in
any of the following cases:
 By a company to an employee who is a director
 By a company to an employee is a person having a substantial interest in the
company
 By any employer, including a company, to any employee whose income under the
head ‘salaries’, after excluding the value of all benefits or amenities not provided
for by way of monetary payments, exceeds fifty thousand rupees
 Usage of a vehicle provided for the journey by the assessee from his residence to
his office or other places of work and back to his residence shall not be regarded
as a benefit or amenity granted or provided to him free of cost or at a concessional
rate.
4. Amount paid by the employer in respect of any obligation which, but for such payment,
would have been payable by the assessee.
5. Amount paid to affect an assurance on the life of the assessee or to affect a contract for an
annuity otherwise through a specified or approved fund.
6. Value of employee stock options or sweat equity shares allotted or transferred free of cost
or at concessional rate to the employee.
7. Employer’s contribution to the superannuation fund, not exceeding rupees one lakh fifty
thousand.12
Some are taxable only to specific employees like directors or those who have substantial interest
in the organization, they are taxed for:
1. Free gas, electricity etc. for domestic purpose
2. Concessional educational expenses
3. Concessional transport facility
4. Payment made to gardener, sweeper and attendant.
Some perquisites are exempt from tax. The fringe benefits that are exempt from tax are:
1. Medical benefits
2. Leave travel concession
3. Health Insurance Premium

12
Ibid.
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4. Car, laptop etc. for personal use.

5. Staff Welfare Scheme13

RETIREMENT BENEFITS
Retirement benefits are given to employees during their period of service or during retirement.

 PENSION: Pension is given either on a monthly basis or in a lump sum. The tax is
treated depending on the category of the employee.
 GRATUITY: Gratuity is given as appreciation of past performance which is received at
the time of retirement and is exempt to a certain limit.
 LEAVE SALARIES: Leave salaries tax depends on the category of the employee. The
employee may make use of the leave or encash it.
 PROVIDENT FUND: Provident fund is contributed by both employee and employer on
a monthly basis. At the retirement, employee gets the amount along with interest. Tax
treatment is based on the type of provident fund maintained by the employer.14

13
Employee benefits, available at: https://www.indiafilings.com/learn/perquisites-income-tax-act/, (last visited on
17th April, 2020).
14
Supra note at 9.
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CONCLUSION

The Taxation of income received from salaries is not just a concept to learn only but practically
it puts a lot of challenges in front of tax return preparers so as to ensure that correct provisions
are applied while computing the net salary income. Salary is the remuneration that a person
receives periodically for rendering services based on an implied or express contract and it may
include gratuity, wages, pensions, etc. Income from salary seems to be a very small portion but it
contains lot of provisions, the study of which is must before practically applying it.

However, not all income is termed as salary. If a professional is being paid for his/her expertise
in a professional capacity, it is termed as ‘Professional/Technical Fees’. Similarly, a partner
earning salary from his/her company is charged taxes under ‘Profits & Gains from Profession or
Business’.

Salary is charged to tax on due or receipt basis whichever is earlier, hence, salary foregone by
the employee is charged to tax on due basis, even though it is not received by him. In other
words, salary foregone after its accrual is charged to tax, even though it is not received by the
employee.
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BIBLIOGRAPHY

BOOKS
 Income Tax, Dr. Girish Ahuja & Dr. Ravi Gupta, 7th edition, 2018, Universal Publication
 Income Tax Act 2013, Taxmann, 62th edition, 2018
 Income Tax Act With Master Guide To Income Tax Act, Pradeep S. Shah, Rajesh S.
Kadakia & George Koshi, for TAXMANN, 2018

WEBSITES
 https://www.caclubindia.com/articles/income-from-salary-23975.asp
 http://incometaxmanagement.com/Pages/Tax-Ready-Reckoner/GTI/Salary/CONTENT-
Income-Under-the-Head-Salary.html
 http://yourfinancebook.com/how-salary-is-defined-under-income-tax-act-1961/
 http://www.legalserviceindia.com/income%20Tax/Tax5.htm
 https://www.incometaxindia.gov.in/Documents/Left%20Menu/Income-from-salary.htm