FACULTY OF LAW

BANARAS HINDU UNIVERSITY

LL.B (HONS.), SEMESTER-IV

Subject- INCOME TAX ACT 1961

Topic- ‘Salary’ under the ITA 1961

SUBMITTED TO- SUBMITTED BY-

Dr. K.S. Brijwal Rajeet Yadav

Assistant Professor Enrollment no.-19225LLB189
INCOME TAX ACT 1961 Roll No.189 Semester-V
Faculty of law LL.B (HONS.)
Banaras Hindu University 2019-2022
 ACKNOWLEDGEMENT

Firstly, I would like to thank Dr. K.S. Brijwal for having given me

the opportunity to make an assignment on the topic “ ‘Salary’

Under the ITA 1961”. I would like to thank him for providing
me with the inspiration and guidance for this project without his
help the project wouldn`t have been possible. I would also wish to
thank my Head of Department who constantly exhorts us to deliver
our best at every level.

I would also express my gratitude towards my seniors who were a

source of constant support and inspiration. Lastly, yet equally
importantly I am grateful to my family and my friends for supporting
me all the way through the making of this project.
 Introduction

Income tax as a concept has been present in India for many years,
but James Wilson who became India’s first finance (British) member
introduced the first modern Income Tax Act in 1860. “It was only for
the good of his subjects that he collected taxes from them, just as
the Sun draws moisture from the Earth to give it back a thousand-
fold,” wrote Kalidas in his epic poem Raghuvansh.
Income tax in India is a tax you pay to the government based on
your income (and profit, in the case of companies). The government
uses this tax money for various purposes including public services,
infrastructure development, defense spending and subsidies among
other options. If you earn income beyond a certain limit, it is
mandatory to pay income tax every year.
Income Tax Act 1961
The Income Tax Act is a comprehensive statute that focuses on the
different rules and regulations that govern taxation in the country.
It provides for levying, administering, collecting and recovering
income tax for the Indian government. It was enacted in 1961.
The Income Tax Act contains a total of 23 chapters and 298
sections according to the official website of the Income Tax
Department of India. These different sections deal with various
aspects of taxation in India. The various heads for which you have
to pay income tax include:
1. Salary
2. Income from house property
 3. Capital gains
4. Profit and gains from business or profession
5. Income from other sources
Every year, the Indian government presents a finance budget during
the month of February. The budget brings in various amendments
to the Income Tax Act. This includes changes in tax slabs wherever
applicable. For example, the Finance Minister announced that the
tax rate for individuals in the lowest tax bracket of Rs. 2.5 lakh to 5
lakh would be cut from 10% to 5% in FY2017. Similarly, tax on
Long Term Capital Gains (LTCG) was re-introduced during the
FY2018 budget. As a result, all gains greater than Rs. 1 lakh from
shares and equity mutual funds held longer than one year is now
eligible for LTCG tax at 10%.
The most recent budget presented by the current Finance Minister
Nirmala Sitharaman included the introduction of a new optional
system of taxation that comes with reduced income tax rates. These
new rates shall be available as an option from the financial year
2020-21.
Such amendments become a part of the Income Tax Act from the
following financial year (beginning from 1 st April) following the
approval from the President of India.

Charging Section of Salary:-

As per sec 15 of the Income Tax Act 1961 salary is taxable:-
a) On due or receipt basis whichever is earlier
b) Any arrears of salary received are fully taxable in the year of
receipt subject to relief u/s 89(1).
Salary in common parlance means any amount paid by an employer
to his employees in lieu of services rendered by them. However,
income tax act 1961 defines the term “salary” u/s 17(1) to include
the following monetary as well as non-monetary payments
a) Wages
b) Annuity or pension
c) Any Gratuity
d) Any fees, commission, perquisite or profits in lieu of or in
addition to any salary or wages
e) Any Advance of Salary
f) Leave Encashment
g) Employers’ contribution to provident fund in excess of 12% of
Salary
h) The contribution by the central government or any other
employer in the Previous year to the account of an employee under
a pension scheme u/s 80CCD
Taxability of wages
All wages received in consideration of services rendered are taxable
under the Income Tax Act, 1961.
Taxability of Annuity
 Annuity received from present employer is taxed as “ Salary”
 Annuity received from past employer is taxed as “ Profits in
Lieu of Salary”
  Annuity received from a person other than employer is taxed
under “Income from Other Sources”, such as “LIC ANNUITY”.
All annuities received are chargeable to tax and there is no
exemption whatsoever.
Taxability of Pension
Pension is any amount of periodic payment made by an employer to
the employee in consideration of past service payable after
retirement.
Pension is of two Kinds:-
Uncommuted Pension:-  
Uncommuted pension is pension received periodically. It is fully
taxable in the hands of both government and non government
employees.
Commuted Pension:–
Commuted pension means lump sum amount taken by commuting
the whole or part of the pension
 Commuted pension received by employees of the central
government/local authorities/ statutory corporation/members
of the defence services is fully exempt from tax.
 Commuted pension received by non government employees is
taxable subject to exemption u/s 10(10A) of the Income Tax
Act, 1961 as under:-
a) Where the employee has also received gratuity

b) Where the employee has not received gratuity

Taxability of Gratuity
Gratuity is a voluntary payment made by an employer in
appreciation of services rendered by an employee.
 Any death cum retirement gratuity received by Central/State
government employees is fully exempt.
 Any gratuity received by an employee during the period of
service is fully taxable.
Gratuity received by Non government Employee
Gratuity received by non government employees is fully taxable
under the income tax act 1961 subject to exemption provided by
sec 10(10) which is described as under:-
Where the employee is covered by payment of gratuity act 1972:-
Least of the following is exempt:-
a) Rs 20,00,000
b) Gratuity received
c) 15/26 * Last drawn salary * no of completed year of service or
part thereof in excess of 6 Months (Where an employee has worked
for 8 years 7 months, the completed year of service shall be
considered 9)
Salary for this purpose means: Salary + Dearness Allowance
Where the employee is not covered by the Payment of Gratuity act
1972:-
Least of the following is exempt:-
a) Rs 20,00,000
b) Gratuity received
c) 1/2 * Average salary of last 10 months * completed year of service
(where an employee has worked for 8 Years 7 Months, the
completed years shall be considered as 8)
Note: Salary for this purpose means Salary + Dearness allowance
(If provided in terms of employment for retirement benefits) +
commission as a % of turnover.
Taxability of Advance salary
Salary is taxable on due or receipt basis whichever is earlier. As
such if any salary has been received by an assessee in advance, the
same is taxable in the year of receipt.
Taxability of Leave Encashment
Leave encashment means the amount received by an employee from
his employer on account of encashment of un availed leaves
standing to the credit of his account.
 Leave salary received by an employee during the period of
service is fully taxable.
 Leave salary received by a government employee at the time to
retirement is fully exempt from tax.
 Maximum entitlement for leaves under the income tax law is
30 per year.
 In case of government employees, leave encashment is taxable
subject to the exemption provided u/s 10(10AA).
As per the provisions of sec 10(10AA), least of the following is
exempt from leave encashment:-
a) Rs 3,00,000
b) Leave salary actually received
c) 10 months salary (on the basis of average salary of last 10
months preceding date of retirement)
d) Leave due  * Average salary p.m.
30 Days
(Average salary to be calculated on the basis of average salary of
last 10 months preceding date of retirement)
Note: Salary for this purpose means Salary + Dearness allowance
( If provided in terms of employment for retirement benefits) +
commission as a % of turnover.
Steps to determine period of leave in months:
1. No of actual completed years of service
2. Number of days leave entitlement for each completed year of
service as per rules of the employer (not exceeding 30 days for each
year)
3. Gross total leave in days (Step 1 * Step 2)
4. Less: Leave encashed & availed during continuation of service (in
days)
5. Period of earned leave (in days) Step 3 – Step 4)
6. Period of leave in months (Step 5 / 30Days)
Taxability of Employers contribution to provident fund in
excess of 12% of salary
Any amount contributed by an employer to a recognized provident
fund in excess of 12% of salary is taxable under the head salary.
Contribution by employer to pension fund established u/s
80CCD
Any contribution by employer to a pension fund established u/ 80
CCD of the
Income tax act is to be first included in the salary of the assessed
and then deductible under section 80CCD/92) up to 14% of
employee’s salary in case of Government employees and 10% in
case of all non-Government employees.
Taxability of Allowances:
Allowance means any amount received by employee from employer
in order to meet some specific expenses.
Allowances can be classified into three categories: -
 Allowances that are fully taxable
 Allowances which are exempted for a specific amount
 Allowances which are exempted on the basis of actual
expenditure
 Allowance which are fully exempt
Allowances that are fully taxable: -
Entertainment allowance/ Dearness allowance/ Overtime
allowance/Fixed medical allowance/City compensatory
allowance/Interim allowance/Servant allowance/Project
allowance/Tiffin/Lunch/Dinner allowance/Any other cash
allowance/Warden allowance/Non practicing allowance are all
taxable allowances.
Allowances which are exempted for a specific amount: -

Name of Allowance Extent to which

allowance is exempt
Hilly areas allowance or high altitude Rs 300 to Rs 7,000 p.m.
allowance or uncongenial climate depending upon the
allowance or snow bound area location.
allowance or avalanche allowance.

Border area allowance or remote Rs 200 to Rs 1,300 p.m.

locality allowance or difficult area depending upon the
allowance or disturbed area location.
allowance.

Tribal areas/schedule areas/Agency Rs 200 p.m.

areas allowance.

Any allowance granted to an 70% of such allowance

employee working in any transport upto a maximum of Rs
system to meet his personal 10,000 p.m.
expenditure during his duty (Exemption is not
performed in the course of running allowable if the employee
such transport from one place to is in receipt of a daily
another. allowance)

Children education allowance Rs 100 p.m. per child

upto a maximum of two
children

Hostel Allowance Rs 300 p.m. per child

upto a maximum of two
children

Compensatory Field area allowance Rs 2,600 p.m. in specified

 areas

Compensatory modified field area Rs 1,000 p.m. in specified

allowance areas

Counter insurgency allowance Rs 3,900 p.m.

Transport allowance granted to an Rs 3,200 p.m.

employee who is blind/deaf/dumb or
orthopedically handicapped with
disability to meet his expenditure for
the purpose of commuting between
the place of residence and the place
of his duty

Underground allowance Rs 800 p.m.

Allowances which are exempt on the basis of actual

expenditure:-
The following allowances are exempt upto the amount of
expenditure incurred by an employee:-
a) Traveling allowance
b) Daily allowance
c) Helper allowance
d) Uniform allowance
e) Scientific research allowance
Allowances which are fully exempt:-
Allowances received by judges of high court/supreme
court/employees of united nations organization.
Taxability of Perquisites
An employee may be provided with several perquisites by an
employer. The perquisites are any benefits provided by an employer
to employee. Some of the major perquisites offered by companies to
its employees and there taxability are as under:-
RENT FREE ACCOMMODATION
1. Rent free unfurnished Accommodation:-
(i) Government employees:-
value of perquisite chargeable to tax:-license fees fixed by
government.
(ii) Non-Government Employees:-
1. Where accommodation is not owned by employer:-
Rent paid or 15% of salary whichever is lower
2. Where accommodation is owned by employer:-
 Accommodation in a city having population upto 10 Lakhs :-
7.5% of salary
 Accommodation in a city having population more than 10
lakhs upto 25 lakhs :-  10% of salary
 Accommodation in a city having population more than 25
lakhs :-  15% of salary
2. Rent free furnished Accommodation:-
Value of furnishing to be calculated as under:-
1. Furnishing are taken on rent :- Rent Paid
2. Furnishing owned by employer :- 10% of actual cost
Value of rent furnished accommodation:-Value of rent free
unfurnished accommodation + Value of furnishings
OBLIGATION OF EMPLOYEE MET BY EMPLOYER
1. Electricity/Water/Heater/Gas:
Where employer provides the same from own sources:-
Value of perquisite:- Cost of production
Where employer provides from outside sources:-
Value of perquisite:- Amount Paid by the employer
2. Sweeper/Gardener/Watchman/Domestic Servant:
Value of perquisite: Amount paid by employer
3. Free Education:-
Where employer provides free education in own college:-
Value of perquisite : Fee charged by similar college in nearby area
Where employer provides free education in any other college:-
Value of perquisite : Actual amount paid by employer
4. Free Transport:-
 Free transport facility provided by employee engaged in the
business of transportation of passengers/ goods
Value of perquisite: Amount charged when similar services are
provided to general public.
 Free tickets to railway and airline employees are exempt
5. Medical Facilities:-
 Medical facilities are provided in a government hospital in
India/ Employer owned hospital in India/ a hospital approved
by the board are exempt from tax.
  Medical facilities in any other case upto a total value of Rs
15000 is exempt from tax.
 Medical Facilities provided by employer outside India:-
a) Treatment and stay expenditure are exempt upto the limits
permitted by RBI
b) Traveling expenditure is exempt where the Gross total
income of the assessee is upto 2 Lakhs. IN case of Gross total
income being in excess of Rs 2 Lakhs, the traveling expenditure is
chargeable to tax.
6. Telephone Facility:-
Telephone facility provided by employer is completely exempt from
tax.
ANY OTHER FRINGE BENEFITS
1. Free Meals:-
 Free meals provided by employer to employee during working
hours upto a total value of Rs 50 per meal is exempt from tax.
 Breakfast/snacks & tea/ brunch at work place
are exempt from tax.
2. Use of Movable Property:-
 Taxable @ 10% of actual cost or rent paid by employer in
respect of that asset as the case may be.
 Use of Laptop and Computer are exempt from tax.
3. Transfer of Movable assets:-
 Transfer of Computer and Computer peripherals:
Taxable value of perquisite = W.D.V. of the asset as calculated
after providing depreciation @ 50% p.a. on written down value of
the asset for each completed year of use.
 Transfer of Car:
Taxable value of perquisite = W.D.V. of the asset as calculated
after providing depreciation @ 20% p.a. on written down value of
the asset for each completed year of use.
 Transfer of any other asset:
Taxable value of perquisite = W.D.V. of the asset as calculated
after providing depreciation @ 10% p.a. on straight line method for
each completed year of use
4. Credit card Expenses:-
Taxable Value of Perquisite = Actual amount of expenses incurred
by the employer.
5. Club expenses:-
Taxable Value of Perquisite = Amount of expenses incurred by the
employer.
 Corporate membership and club membership provided
uniformly across all employees is exempt from tax.
6. Interest free concessional Loan:-
Taxable value of perquisite = interest rate charged by SBI on
similar loan as on 1st April of the P.Y. (-) interest rate recovered from
employee.
However, no notional interest is charged to tax in case of the
following loans:
a) A loan given for the purpose of medical treatment of certain
prescribed diseases as mentioned in Rule 3A of the Income Tax
rules (and is not reimbursed to the employee under a medical
insurance scheme)
b) A loan not exceeding in the aggregate Rs 20,000/-
LEAVE TRAVEL CONCESSION:
 Exemption in respect of leave travel concession is provided in
respect of 2 journeys undertaken in a block of 4 calendar
years.
 Exemption is available in respect of employee and his family
members. Family means Self, two children and dependant
parents/brother/sister.
a) Taxable value of perquisite is calculated depending upon the
mode in which journey is undertaken:
Air: Economy class fare undertaken by the shortest route
Train : First class A.C. fare by shortest route
Any other mode: Where public transport exists : Deluxe class fare
by shortest route
Where no public transport exists :   First class A.C. fare by train by
shortest route.
CAR FACILITY:
 Where the car is owned by the employee, used completely
for personal purposes and expenses are incurred by
employer:-
Value of perquisite : Actual amount of expense incurred
  Where the car is owned by the employee, used partially for
personal and partially for official purposes and expenses
are incurred by employer:-
Value of perquisite : Actual amount of expense incurred
Less
1800 p.m. (where the car engine is upto 1.6L C.C.)
2400p.m.(where the car engine is above 1.6L C.C.)
Add
900 p.m. for driver facility
 Where the car is owned/hired by the employer, used
completely for personal purposes and expenses are
incurred by employer:-
Value of perquisite: Actual amount of expense incurred
(+) Salary paid to driver (If any)
(+) Dep 10% of Cost
Where the car is owned/hired by the employer, used partially
for personal and partially for official purposes and all expenses
are borne by employer:-
Value of perquisite:
Rs 1800 p.m. (where the car engine is upto 1.6L C.C.)
Rs 2400p.m.(where the car engine is above 1.6L C.C.)
Add
900 p.m. for driver facility
 Where the car is owned/hired by the employer, used
partially for personal and partially for official purposes
and only official expenses are borne by employer:-
Value of perquisite:
Rs 600 p.m. (where the car engine is upto 1.6L C.C.)
Rs 900p.m.(where the car engine is above 1.6L C.C.)
Add
900 p.m. for driver facility
Note: In case of all perquisites, if any amount is recovered from
the employee, then the same has to be deducted from  the value
of perquisite to arrive at the taxable value of perquisite.

Conclusion
The Indian government reduced the tax rate for people earning
between Rs. 2.5 lakhs to Rs. 5 lakhs, from 10% to 5%, during the
FY2017 Union budget. Furthermore, budget 2020 also reduced the
tax rates for other income slabs. This was aimed at reducing the tax
liability for a large percentage of the Indian population as well as at
encouraging a greater number of income earners to pay tax. So, if
you are eligible to pay tax, ensure you pay your taxes and file
returns in time to avoid any penalties.