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Income from Salary

Salary It means any remuneration paid by the employer to the employee in consideration of his services. It could be monetary or non-monetary.

Salary includes the following


1. Basic salary/ Wages 2. Various Allowances such as Dearness Allowances, House Rent Allowances, Medical Allowances etc. 3. Bonus, fees, commission etc. 4. Annuity/ Pension 5. Gratuity 6. Monetary Value of Perquisites 7. Leave Salary 8. Pension and Commuted value of pension 9. Transfer from Unrecognized Provident Fund 10. Profits in lieu of Salary 11. Advance salary received by employees 12. Arrears of Salary received

Employer and Employee Relationship


There should be employer and employee relationship between the giver and the receiver of that income. This is the basic condition to be fulfilled for income to be called Salary Income. Any receipts from a person other than employer cannot be taxable under Salaries. If an employee does any work for his employer which is not connected with his services, then remuneration for such work will not be treated as salary. Eg. Examiner's remuneration, remuneration for setting the question papers, valuation, etc.

Place of Accrual:
It is the place where the employee is working or rendering services. In case of Govt. employee if he get transferred to outside India and earn a salary there for the services rendered there, it is considered as Indian Income. Whereas if a non-govt. employee is transferred to a branch outside India, his salary which is received there, is considered as foreign income.

Salary Grade
Every person has a salary grade/pay scale which represents exclusively the initial basic salary, future increments in the same, during the entire service period and the maximum salary after which there is no increment.

Tax-free Salary
When the employer pays the tax on behalf of the employee, it is called tax-free salary. In such a case, the aggregate of the net salary received plus the amount of tax paid on his behalf by the employer, should be taken into account for income tax purpose. ( gross salary)

Allowances
Allowances refers to a fixed sum of money paid regularly, in addition to salary for the purpose of meeting some particular requirement connected with the services rendered by an employee. From Income Tax view, There are three types of such allowances: 1. Fully taxable allowances 2. Partly taxable and partly exempt allowances 3. Tax-free allowances (Fully exempt allowances)

Fully Taxable Allowances


A. Dearness Allowance or Dearness Pay: It is an allowance paid by an employer to the employee to enable him to meet the high cost of living
B. City Compensatory Allowance: It is given to the employees to meet the high cost of living in big cities.

C. Medical Allowance D. Servant Allowance E. Tiffin/ Dinner/ Refreshment Allowance F. Overtime Allowance G. Non-practicing Allowance H. Hill Allowance I. Deputation Allowance

J. Warden & Proctor Allowance K. Family Allowance L. Marriage Allowance M. Project Allowance N. Rural Allowance O. Telephone Allowance P. Education Allowance Q. Holiday Allowance R. Health Allowance S. Special Qualification Allowance T. High Cost of Living Allowance

Fully Exempt Allowances:


A. Foreign Allowance: This is paid by the Govt. to an Indian Citizen outside India for rendering services in abroad. E.g.. Overseas Allowance B. Sumptuary Allowance: This is given to High Courts/ Supreme Court Judges C. Allowances from UNO: This is paid by a United Nations Organization to its employees

Partly Taxable and Partly exempt Allowances:


A. House Rent Allowance : It is an allowance given to an employee to meet expenditure incurred on payment of rent in respect of residential accommodation occupied by him. Least of the following is exempt from tax and the balance is taxable: i. Actual HRA ii. Excess rent paid over and above 10% of the salary iii. 50% of the salary if the accommodation is situated in Mumbai, Kolkatta, Delhi and Chennai or 40% if it is situated in other cities.
Note: Incase an employee is living in his own house and is getting HRA or is living in a house for which he is not paying any rent, full amount of HRA is taxable.

B. Entertainment Allowance:

This allowance is paid by the employer to the employee to enable the employee to meet certain expenses incurred by him for entertaining the customers of the employer's business. The entertainment allowance fully included in the gross salary income of the employee. Thereafter a deduction is allowed in respect of this allowance u/s 16 (ii) to a govt. employee, from the gross salary income (subject to certain conditions).

C. Special Allowance:
Special Allowances for performing of the office duties:
1. Travelling/Transfer/ Packing Allowance 2. Daily Allowance 3. Conveyance Allowance 4. Helper Allowance 5. Academic Allowance 6. Uniform Allowance All the above allowances are exempt from tax to the extent to which they are actually spent by the employee for his official duty purposes. The unspent amount is taxable.

Special allowances for meeting the personal purpose: 1. Children Education Allowance- is exempt at Rs. 100 p.m. per child upto two children. 2. Children Hostel Allowance- is exempt at Rs. 300 p.m. per child upto two chidren. 3. Transport Allowance- is exempt at Rs. 800 p.m. incase of employee who is blind or orthopedically handicapped is exempt at Rs. 1600 p.m. 4. Underground Allowance- is exempt at Rs. 800 p.m. 5. Tribal Allowance- is exempt upto a maximum of Rs. 200 p.m.