PAPER I : TAX LAWS AND

PRACTICE
UNIT III
Income from Salary (A.Y. 2023-2024)
By Adv.Dr. Chitra K. Deshpande
M.P. Law College Aurangabad.
 Basic Concept:
 Every Payment made by an employer to his employees for
service rendered by him would be chargeable to tax as income
from salaries. Provisions regarding income under head of
salaries given under section15,16and17.
 U/S 15- deals with chargeability U/S 15- deals with
chargeability Salaries Due or paid or advance
 U/S 16-Standard deduction , Entertainment allowance &
profession tax
 U/S 17 –Salary includes perquisites and profits in lieu of salary
Adv. Dr. Chitra K. Deshpande
 SALARY INCOME
CHARGEABILITY.
Existence of ‘master-servant’ or ‘employer-employee’
relationship is absolutely essential for taxing income under
the head “Salaries”. Where such relationship does not exist
income is taxable under some other head as in the case of
partner of a firm, advocates, chartered accounts, LIC agents,
small saving agents, commission agents etc. Besides, only
those payments which have a nexus with the employment
are taxable under the head “salaries”.
‘Salary’ is chargeable to income tax on due or paid basis,
whichever is earlier.
 Any arrears of salary paid in the previous year, if not
taxed in any earlier previous year, shall be taxable in the
year of payment. (Sec.15).
 “Salary” includes
 (i) wages,
 (ii) annuity or pension,
 (iii) any gratuity over and above the exemption limit,
 (iv) any fee, commission,
 (v) any advance of salary
 (vi) amount contributed by the employer towards the
recognized provident fund in excess of 12% of salary
and interest on balance in R.P.F. in excess of 9.5%,
 (vii) the value of any perquisites and benefits to
the employee provided by the employer,
 (viii) any amount of profit in lieu of salary,
 (ix) payment received by an employee in
respect of any period of leave not availed of by
him,
 (x) transferred balance in a R.P.F. to the extent
it is taxable under Rule 11 (4) of Part A of
Fourth Schedule of the Income Tax Act, 1961,
and
 (xi) Central Government’s Contribution in a
previous year to an employee’s account under
notified pension scheme u/s.80CCD
 Salary paid by a foreign Government to its employees serving
in India is taxable under the head ‘salary’.
 Salary is considered for the months of April to March or March
to February, depending upon when it becomes due or payable.
In case of Government employees, salary for the months of
March to February is considered.
 DIFFERENT FORMS OF SALARY
 Basic Salary
 Dearness Allowance/Pay
 Advance Salary
 Arrears of Salary
 Leave Salary
 Salary in lieu of notice
 Salary to partner
 Fees and Commission
Adv. Dr. Chitra K. Deshpande
 Different Forms of Salary……
 Bonus
 Gratuity :-
 Pension :- Uncommuted/ Commuted
 Annuity
 Retrenchment Compensation
 Remuneartion for Extra Duties
 Compensation under VRS
 Profit in lieu of Salary
 Salary from UNO
Adv. Dr. Chitra K. Deshpande
 Leave Salary
The accumulated leaves standing to the credit off an employee
may be availed by the employee during his service time.
Nature of Leave Status of Employee Whether it is Taxable
Encashment
Leave Enclashment during Government / Non- It is Chargeable to Tax.
continuity of employment Government Employee However relief can be taken
under section 89
Leave Encashment at the Government Employee It is fully exempt from tax
time of retirement/leaving job under section 10(10AA) (i)

Leave Encashment at the Non-Government Employee It is fully or Partly exempt

time of retirement/leaving from tax under section
Job 10(10AA) (ii)
Adv. Dr. Chitra K. Deshpande
 Government Employee Getting Leave Encashment at the time
of Retirement Sec 10(10AA)(i) : It is always Exempt from Tax.
 Non-Government Employee Getting Leave Encashment at the
time of Retirement Sec 10(10AA)(ii):- Leave Salary is exempt
from Tax on the basis of least of the following :
 1] Period of earned leave to the credit of the employee at the
time of his retirement or leaving the job x Average Monthly
Salary (Leave at credit in months x average monthly salary)
 2] 10 x Average Monthly Salary
 3] Government Limit Rs. 25,00,000/-
 4] Leave Salary received at the time of retirement
Adv. Dr. Chitra K. Deshpande
 Practical Question on Leave Salary
 X was employed by PQR Ltd. Upto March 15, 1989. at the
time of leaving PQR Ltd he was paid Rs. 3,50,000/- as leave
salary out of which Rs.57,000/- was exempt from tax under
section 10(10AA)(ii). Thereafter he joined ABC(P) ltd and
received Rs.4,12,200 as leave salary at the time of his
retirement on December 31, 2022. Determine the amount of
taxable leave salary from the following information.

Adv. Dr. Chitra K. Deshpande

 Salary at the time of Retirement (per month) Rs.22,900/-
 Average Salary received during 10 months ending on Dec 31,
2022 a] From March 1st 2022 to 31st July 2022 Rs. 22,600/-
b] From 1st August 2022 to Dec 31st 2022 Rs. 22,900/-.
 Duration of Service 14 3/4th year
 Leave entitlement for every year of Service 45 days
 Leave availed while in service 90 days
 Leave at the credit of the employee at the time of retirement
[(14x45)-90/ 30] = 18 months
 Leave salary paid at the time of retirement (22,900pm x 18
months) = 4,12,200/-
Adv. Dr. Chitra K. Deshpande

 SOLUTION
 NAME OF THE EMPLOYEE : Mr. X
 Previous Year : 1/4/2022 to 31/3/2023
 Assessment Year : 2023-2024
 Computation of Leave Salary Taxable to Mr. X for AY 2023-24

Adv. Dr. Chitra K. Deshpande

PARTICULARS AMOUNT

Leave Salary Received 4,12,200

Less : Least of the following is exempt from tax U/s 2,27,500

10(10AA)(ii)
1] Period of earned Leave to the credit of employee 2,50,250
at the time of retirement (Working Note 1)
2] 10 Months X Average Monthly Salary 2,27,500
(Working Note 2)
3] Government Exemption (Working Note 3) 24,43,000
4] Actual leave Salary received 4,12,200
Taxable leave Salary in the hands of Mr. X 1,84,700
Adv. Dr. Chitra K. Deshpande
 Working Note 1
 Calculation of Period of Earned leave at the credit of the
Employee.
 Step 1 : Length of Service (14 3/4years) only completed years
to be considered so 14 years.
 Step 2: Rate of Leave Entitlement (X is entitled for 45 days
leave for each year of service, but as per governemt only 30
days leave for each year is available) so 14 years service means
14 months leave.

Adv. Dr. Chitra K. Deshpande

 Working Note 1
 Step 3: Leave availed in Service : it is given as 90 days means
90days /30 days = 3 months (Converting days into month)
 Step 4 Leave to the credit of Employee at the time of
retirement = 14 Months – 3 months = 11 Months.
 Step 5 : leave at the credit X Average monthly Salary (WN2)
 = 11months X 22,750/- = 2,50,250/-

Adv. Dr. Chitra K. Deshpande

 Working Note 2
 10 Months X Average Monthly Salary
 Step 1 : Average Monthly Salary
 Salary for this purpose means basic Salary + DA+ Commission
(if terms of employment so provide).
 Average Salary means Salary drawn during the period of 10
months immediately preceding the retirement.
 a] From March 1st 2022 to 31st July 2022 Rs. 22,600/-
 (22,600 X 5 months = 1,13,000)
 b] From 1st August 2022 to Dec 31st 2022 Rs. 22,900/-.
(22,900 X 5 months= 1,14,500)
Adv. Dr. Chitra K. Deshpande
 Average Monthly Salary
 So average salary for 10 months= 1,13,000 + 1,14,500=
2,27,500/10 = 22,750/- Average Monthly salary.

Adv. Dr. Chitra K. Deshpande

 Working Note 3
 Government is Rs.25,00,000/-
 But as X has already availed 57,000/- exemption after
retirement from PQR Ltd. Amount available for claiming
exemption is Rs.25,00,000 – Rs.57,000 = Rs. 24,43,000/-.

Adv. Dr. Chitra K. Deshpande