DEPARTMENT OF

MANAGEMENT
STUDIES (BBA)

Subject Name : INCOME TAX

Module No. and Name : UNIT-2

Title of the Sub-topic : INCOME FROM SALARY

Class & Section (Optional) : VI SEM A & B SEC

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 DEPARTMENT OF
MANAGEMENT

INCOME FROM SALARY

STUDIES (BBA)

 Basic Pay: It is amount paid to employee as salary by the employer .

Basic pay is fully taxable. A salary is the remuneration which is
received by an employee from their employer for rendering the
services. It is like a compensation which is paid by the employer to the
employee in consideration for their services. Salary can be in cash or
kind. Section 15 which is also known as charging section provides that
the following
 DEPARTMENT OF
MANAGEMENT
STUDIES (BBA)

Incomes fall under the head salaries:

 Salary due from an employer or former employer to an assessee in

the previous year

 Salary paid or allowed in the previous years by or on behalf of an

employer or former employer

 Arrear salary not charged in earlier year, paid or allowed in the

previous year by or on behalf of an employer or former employer

 DEPARTMENT OF
MANAGEMENT

Meaning of Salary
STUDIES (BBA)

Section 17(1) gives an inclusive definition of Salary. Salary Includes:

1. Wages
2. Any annuity or pension
3. Any gratuity
4. Any fees, commissions, perquisites or profits in lieu of or in addition to any salary
or wages
5. Any advance of salary
6. Any payment received by an employee in respect of any period of leave not
availed by him
 DEPARTMENT OF
MANAGEMENT
STUDIES (BBA)

7. The annual accretion to the balance at the credit of an employee

participating in a recognized provident fund, to the extent to which it
is chargeable to tax
8. The aggregate of all sums that are comprised in the transferred
balance of an employee participating in a recognized provident fund,
to the extent to which it is Chargeable to tax
9. The contribution made by the Central Government or any other
employer in the
previous year, to the account of an employee under a notified
pension scheme
referred to in Section 80CCD.
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 DEPARTMENT OF
MANAGEMENT
STUDIES (BBA)

Different forms of Salary

An employee gets their salary in different forms. Some important forms of salary
are as follows:
 Bonus
 Fees and Commission
 Advance Salary
 Arrear Salary
 Annuity
 Profit in lieu of Salary
 Encashment of Earned Leave
 Compensation for retrenchment
 Death-cum-Retirement Gratuity
 Pension
 Voluntary Retirement Amount
 Tax paid by the employer for the perquisites
 DEPARTMENT OF
MANAGEMENT
STUDIES (BBA)

SAVITHA.B.H ASSISTANT PROFESSOR

 DEPARTMENT OF
MANAGEMENT

Encashment of Earned Leave:

STUDIES (BBA)

 Encashment of leave by surrendering earned leave standing to the

employee’s credit is known as “encashment of leave salary”
 DEPARTMENT OF
MANAGEMENT
STUDIES (BBA)

Retirement Benefits
It is also a part of income from salary. When an employee retires or
leaves or retrenched from the job, he is entitled to receive some
amount from the employer. These payments consist following:
1) Pension [Section 10(10A))]: Pension means periodical payment
received by the employee from his past employer. Pension is fully
taxable as salaries in the hands of all employees (Government /non-
government)
 DEPARTMENT OF
MANAGEMENT
STUDIES (BBA)

 Pension May be two types

 1. Uncommuted pension: It is a periodic payment generally on monthly
basis until such employee dies. It is fully taxable for all employees
whether government or non-government.
 2. Commuted pension: Sometimes the employee wants to have a
lumpsum amount in lieu of periodical pension. The lumpsum amount
which he receives on foregoing the pension, either full or part of it, is
known as commuted value of pension.

SAVITHA.B.H ASSISTANT PROFESSOR

 DEPARTMENT OF
MANAGEMENT
STUDIES (BBA)

SAVITHA.B.H ASSISTANT PROFESSOR

 DEPARTMENT OF
MANAGEMENT

Gratuity
STUDIES (BBA)

2) Gratuity [Section 10(10)]: Gratuity is a payment made by the

employer to an employee in appreciation of the past services
rendered by the employee. It is a retirement benefit.
 DEPARTMENT OF
MANAGEMENT
STUDIES (BBA)

SAVITHA.B.H ASSISTANT PROFESSOR

 DEPARTMENT OF
MANAGEMENT

Provident Fund:
STUDIES (BBA)

Provident fund is the fund for future. It provides a support to the

employee for their future requirement. Under this, a certain sum is
deducted by the employer from the employee’s salary as his
contribution every month. The employer also contributes a certain
percentage to the provident fund. These contributions are invested. The
interest earned on these investments is also credited to the provident
fund account of the employees. The balance thus keeps accumulating
year after year. At the time of retirement or resignation, the
accumulated amount is given to the employee.
 DEPARTMENT OF
MANAGEMENT

Kinds of Provident Fund

STUDIES (BBA)

There are basically four types of Provident Fund:

1) Statutory Provident Fund (SPF): This fund is set up under the Provident Fund Act, 1925.
It is mainly meant for Government employees or semi-Government employees, university
or educational institutions affiliated to a university established by statute or other
specified institutions.

2) Recognized Provident Fund (RPF): Recognized Provident Fund Scheme is a scheme to

which the Employees Provident Funds Act, 1952 applies. According to this Act, any
person who employs 20 or more employees, is under an obligation to register himself
under the act, and start a provident fund scheme for the employees in his organization
after three years’ of its establishment. A fund which is recognized by the chief
commissioner or commissioner of income tax also known as recognized provident fund.
Basically, it is maintained by schedule bank, factories, business houses, private
organization etc.
 DEPARTMENT OF
MANAGEMENT
STUDIES (BBA)

3) Un-Recognized Provident Fund (URPF): A scheme started by the employer and the
employees in an establishment. It is approved by Commissioner of Provident Fund but not
approved by the Commissioner of Income-tax. It is maintained by any institution or private
organization.

4) Public Provident Fund (PPF): This scheme was started from July 1 1968. It is recovered
under Public Provident Fund Act, 1968. Any member of the public, whether in employment or
not, may contribute to this fund. In other words, it is a scheme where there is an employee’s
own contribution only. In this scheme there is no employer’s contribution. The minimum
contribution to this Fund is Rs. 500 and maximum Rs. 70,000 per year. The contributions
made to the scheme along with interests are repayable after 15 years, unless extended. The
rate of interest, under the scheme is 8% per annum.
 DEPARTMENT OF
MANAGEMENT
STUDIES (BBA)

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 DEPARTMENT OF
MANAGEMENT

Allowances
STUDIES (BBA)

 It is a fixed sum of money received by the employees from the

employer to meet their official or personal expenses.
Tax treatment:
1. Allowances, which are fully taxable
2. Allowance, which are partly taxable
3. Allowances, which are fully exempted

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 DEPARTMENT OF

Allowances MANAGEMENT
STUDIES (BBA)

Allowance is any fixed amount paid by the employer to the employee in cash
other than salary is called allowance. It is paid for meeting the specific requirement related to the job. It
can be categories into three types:

1) Fully Taxable Allowance: It consist those allowance which are fully (total
amount) included under the head salary for determining the tax liabilities

2) Partly Taxable Allowance: It consist those allowance which are partly included
under the head salary. Certain portions of these allowances are exempted from tax. The taxable portion
of these allowances can be determined as follows:
Taxable Portion = Actual Allowance – Exempt Portion

3) Fully Exempt Allowance: It consist those allowance which are fully exempt. It
is not included under the head salary for determining the tax liabilities.
 DEPARTMENT OF
MANAGEMENT
STUDIES (BBA)

Some Important Allowances

 Dearness Allowance or Pay: This allowance is given to an employee to
Compensate him for the loss in the purchasing power of money due to increase in prices. It
may be paid under the terms of employment or otherwise.

 House Rent Allowance [Sectionc 10(13A) and Rule 2A]: It is given by the
employer to the employee to meet the residential accommodation expenditure. It is exempt
to the extent of the least of the following amounts:
i) Actual House Rent Allowance received
ii) Excess of rent paid over 10% of the salary for the relevant period
iii) 50% of the salary where the residential house is situated at Mumbai, Calcutta, Delhi or
Chennai and 40% of the salary in other cases, for the relevant period. Salary includes basic
salary, DA (terms of employment) and commission on turnover
 DEPARTMENT OF
MANAGEMENT
STUDIES (BBA)

Entertainment Allowance
This allowance is given by an employer to his employee for
entertaining the client. It is fully taxable but for the government
employee it is deducted from the income from salary under section
16(ii). The least of the following will be exempt:
i) Actual Entertainment Allowance Received
ii) 20% of salary
iii) Maximum Rs. 5,000
Salary includes basic salary, DA (term of employment) and fixed
commission on turnover
 DEPARTMENT OF
MANAGEMENT
STUDIES (BBA)

 Children Education Allowance: It is one of the partly taxable

allowances which are exempt upto @ Rs. 100 per month per child
upto a maximum two child.
 Hostel Allowance: It is another partly taxable allowance which is
exempt upto @Rs.300 per month per child upto a maximum two
child.
 DEPARTMENT OF
MANAGEMENT

Entertainment Allowances (EA)

STUDIES (BBA)

 Entertainment Allowance (EA) is included in salary income and

thereafter a deduction is given U/S 16(1)

SAVITHA.B.H ASSISTANT PROFESSOR

 DEPARTMENT OF
MANAGEMENT
STUDIES (BBA)

SAVITHA.B.H ASSISTANT PROFESSOR