Income under the Head "Salaries"

Section 15
 The following income would be chargeable to tax
 any salary due whether paid or not; Cash or accrual basis?
 any salary paid though not due;
 any arrears of salary paid, if not charged to tax in any earlier previous
year.
 If any salary paid in advance is included in income in any year, it shall not be
included again when the salary becomes due.
 Any salary, bonus, commission or remuneration, shall not be regarded as “salary” by
partner of a firm.

Deductions from salaries

Section 16
The income chargeable under the head "Salaries" shall be computed after making the
following deductions:

(i) [………..omitted by an earlier Finance Act…….]

(ia) a deduction of Rs. 50,000 or amount of salary, whichever is less;
(ii) In respect of entertainment allowance specifically granted to a government
employee, a deduction of 1/5th of salary or Rs. 5,000, whichever is less.
(iii) Tax on employment paid by the assessee.
 Salary, perquisite and profits in lieu of salary

Section 17
(1) “salary “ includes -
* wages; any advance of salary, any leave salary
* any annuity or pension;
* any gratuity
* any fees, commissions, perquisites or profits in lieu of or in addition
to any salary or wages;
* the annual accretion to and transferred balance in provident fund to the
extent taxable

Employer-employee relationship

What exactly is that?

Some usual components: taxable

 basic salary
 increment
 advance salary
 arrears of salary
 bonus
 salary in lieu of notice period

Partly exempted (Annual or terminal benefits)

 Leave travel concession (LTC or LTA)
 Gratuity
 Leave encashment
 Pension
 Voluntary retirement benefits
 Allowances (paid in cash)

 Fully taxable unless specifically exempted (full or

part) by a specific section of Income-tax Act
 Fully taxable – for example
 Dearness Allowance (DA)
 City Compensatory Allowance (CCA)
 Medical Allowance
 Lunch/ Tiffin Allowance
 Overtime Allowance
 Non-practising Allowance
 Entertainment received by non-government employees
[government employees get exemption u/s 16 (ii)]

 Partly exempted - House Rent Allowances s.10(13A)

 Exempted Allowances s.10(14)and Rule 2BB

S. 10(14)(i): a special allowance or benefit specifically granted to

meet expenses wholly, necessarily and exclusively incurred in the
performance of the duties of an office or employment of profit:
 expenses on travel, tour (daily allowances)
 transfer - cost of transfer, daily allowance on transfer
 conveyance in performance of duties of an office
 allowance granted for encouraging the academic, research and
training pursuits in educational and research institutions
 purchase or maintenance of uniform

S.10(14(ii) - Special allowance granted to meet employee's

personal expenses at a place where duties are ordinarily
performed or where the employee ordinarily resides or any
compensation for increased cost of living prescribed by Central
Government:
 Special Compensatory Allowance in the nature of Border Area
Allowance, Remote Locality Allowance or Difficult Area
Allowance or Disturbed Area Allowance
 Special Compensatory allowances like Tribal Areas,
Compensatory Modified Field Area Allowance etc.
 special allowance in the nature of high altitude (uncongenial
climate) allowance, counter insurgency allowance, granted to
members of armed forces etc.
*
**
 Children Education allowance - Rs. 100 per month per child for
2 children
 hostel expenditure allowance - Rs. 300 per month per child for
2 children
 Transport allowance no longer continues to be an exempted
allowance; TA granted to an employee to meet expenses for
commuting between place of his residence and the place of
his duty (Rs 1600 per month) has been merged with Standard
deduction (of Rs. 40,000) wef AY 2019-20
 Perquisites (benefits in kind)

S. 17(2)- "perquisites" include

 rent-free/ concessional rent accommodation provided to the employee
 the value of the value of any benefit provided free of cost or at concessional
rate to
Specified
employee  a director or an employee having substantial interest in the company
 to an employee whose salary income exceeds Rs. 50,000.

 for employee not falling under abovementioned categories, any sum paid by
Non- the employer in respect of any obligation which would have been payable by
specified the assessee

 any sum payable by the employer on life insurance policy of employee -

either directly or through a fund (except under recognised provident or
superannuation and some other specified funds),

 ESOP or sweat equity shares allotted or transferred to the assessee - directly

or indirectly, by the employer, or former employer, free of cost or at
concessional rate

 aggregate of amounts of any contribution made to the account of the assessee

by the employer—

(a) in a recognised provident fund;

(b) in the scheme referred to in sub-section (1) of section 80CCD;

and

(c) in an approved superannuation fund,

to the extent it exceeds Rs. 7,50,000 in a previous year;

 the annual accretion by way of interest, dividend or any other amount

of similar nature during the previous year to the balance at the credit of
these 3 funds/scheme referred above, to the extent it relates to the
contributions in excess of Rs. 7,50,000 mentioned above

 the value of any other fringe benefit or amenity as may be prescribed (like
Interest free or concessional loans, use or transfer of moveable assets, free
meals ….. any many more benefits and amenities)
 Taxation of various perquisites covered under rule 3:
Perquisite Valuation
rent-free/ concessional rent Taxability as per provisions of S. 17(2)
accommodation
motor car Taxation as per Rule 3
Education facility for dependents
gas, electricity etc.
use of assets /transfer of assets
Interest free/concessional loan
Cost to the employer - Rule 3
Free meals
Gift voucher/ club membership
Various other perquisites
Laptops, Computers Not taxable

Telephone, Mobile phones Not taxable

 Medical and Pool car – not perks

Items not treated as perquisites, hence not taxed

 Medical expenses/ reimbursements for medical
treatment in India
o Hospitalisation under conditions as specified in
proviso to S. 17(2)
o Mediclaim insurance premium paid/ reimbursed by
employer - any amount
 Medical expenses/ reimbursements for medical
treatment outside India on
o Expenditure on medical treatment/ travel and stay
abroad of employee/ family member, as also travel
and stay abroad of one attendant, subject to certain
conditions *
 Use of any vehicle provided by an employer for journey
from residence to office or other place of work and back –
pool car/ car lift

* conditions

(A) the expenditure on medical treatment and stay

abroad to be excluded from perquisite only to the
extent permitted by RBI; and

(B) the expenditure on travel to be excluded from

perquisite only for an employee whose gross total
income, computed before including this travel
expenditure, does not exceed Rs. 2,00,000
 S. 17(3) - “profits in lieu of salary” includes-
 compensation received by an employee from his employer for termination of
employment or the modification of the terms of employment;
 any payment received by an employee from an employer or from a provident
Capital or other fund, to the extent it does not consist of his own contributions.
Receipts  any amount due to or received, whether in lump sum or otherwise, by any
assessee from any person
 before his joining any employment with that person; or
 after cessation of his employment with that person.