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CHAPTER

III

INCOME FROM SALARY

Meaning of salary
Salary is the remuneration received by or accruing to an individual,
periodically, for service rendered as a result of an express or implied contract. The
actual receipt of salary in the previous year is not material as far as its taxability is
concerned. The existence of employer-employee relationship is the sine-qua-non for
taxing a particular receipt under the head salaries. For instance, the salary received
by a partner from his partnership firm carrying on a business is not chargeable as
Salaries but as Profits & Gains from Business or Profession. Similarly, salary
received by a person as MP or MLA is taxable as Income from other sources, but if a
person received salary as Minister of State/ Central Government, the same shall be
charged to tax under the head Salaries. Pension received by an assessee from his
former employer is taxable as Salaries whereas pension received on his death by
members of his family (Family Pension) is taxed as Income from other sources.

Basic elements of salary

Payer and payee must have employer and employee relationship.
Any payment received by an individual from a person other than his employer
cannot be termed as salary.

Basis of charge
Salary is chargeable to tax on due or on receipt basis whichever is earlier;
Salary received in advance is taxable in the year of receipt. Such salary not be
included again in the total income when it become due;

 Outstanding salary is taxable on due basis i.e. salary is taxable in the year in
which it falls due.
Arrear salary is taxable on receipt basis.

Definition of salary
As per section 17 (1) of the Income Tax, Salary includes:
i) wages.
(ii) Any annuity or pension
(iii) Any gratuity;
(iv) Any fees, commissions, perquisites or profits in lieu of or in addition

to any

salary or wages.
(v) Any advance of salary
(vi) Any payment received by an employee in respect of any period of leave

not

availed of by him
(vi) 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 under rule 6 of
Part A of the Fourth Schedule; and
(vii) The aggregate of all sums that are comprised in the transferred balance as referred
to in sub-rule (2) of rule 11 of Part A of the Fourth Schedule of an employee
participating in a recognized provident fund, to the extent to which it is chargeable to
tax under sub-rule (4) thereof;
(viii) The contribution made by the Central Government [or any other employer] in the
previous year, to the account of an employee under a pension scheme referred to in
section 80CCD;

The following deductions from salary income are admissible as per Section 16 of the
Income-tax Act.
(i) Professional/Employment tax levied by the State Govt.
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(ii) Entertainment Allowance- Deduction in respect of this is available to a

government employee to the extent of Rs. 5000/- or 20% of his salary or actual
amount received, whichever is less.
ESSENTIAL CHARACTERISTICS OF SALARIES
Followings are the essential characteristics of taxable salary,
Employer-Employee Relationship:
There must be relation of employer and employee between the payer of income
and receiver of income. Remuneration received in any other capacity will not be treated
as salary. Thus for instance, salary of a Member of Parliament cannot be specified as
salary, since it is received from Government of India which is not his employer.
Compensation for services rendered:
The payment must be made to an employee by the employer as compensation
for the services rendered by the employee. However, payment made in other forms like
gift, perquisites are also included in the definition of the term salary.

Name not important:

Salary may be called as such by whatever name. There is no difference between
salary and wages so long as the relationship between the payer and payee is that of
employer and employee and the payment is made as a compensation for the services
rendered by the employee.
More than One Sources:
Salary may be from more than one employer.
Type of Employment:
Salary may be in any capacity like part-time employment or full time
employment.
Past, Present and prospective employer
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Salary may be received from not just the present employer but also a
prospective employer and in some cases even from a former employer for example
pension received from a former employer.
Real intention to pay:
Salary income must be real and not fictitious. There must exist an intention/
obligation to pay and `receive salary.
Subsequent Surrender of Salary not tax-free:
Salary is taxed on due basis. A subsequent surrender of the salary will not be
tax-free except where an employee surrenders his salary to the central government, and
then the salary so surrendered will not be treated as taxable income of the employee.
Tax- Free salary:
Salary paid tax free is also taxable in the hands of the employee, though
contractually income tax on such is borne not by the employee but by the employer.
Time of taxability:
Salary is taxable in the year of receipt or in the year of earning or accrual of the
salary income, whichever is earlier. In other words advance salary will be taxed when
received and unpaid salary will be taxed on accrual i.e. if the salary has been received
first, then it will be taxable in the year of receipt. If it has been earned first but not yet
received then it will be taxable in the year of earning. However, salary once taxed shall
not be subjected to tax again .Accordingly accounting method employed by the
employee is not relevant to determine the taxability of salary.
Salary received by individuals only:
Salary is a compensation for personalized services, which can obviously be
rendered by a normal human being and not a body corporate. Salary income is taxable
in the hands of individuals only. No other type of person such as a firm or HUF,
companies can earn salary income.
Voluntary payments taxable as salary:

Voluntary payments like gift etc also form the part of taxable salary.
Salary in respect of services rendered in India:
Salary, leave salary and pension even if paid outside India are deemed u/s 9 to
accrue and arise in India and are taxable in India. Further, Salary paid to Indian
diplomats by the Government of India is deemed to accrue and arise in India although
the same is exempted e u/s 10.

Gross salary Taxable:

Compulsory deductions from salary such as employees contribution to
provident fund, deduction on account of medical scheme or staff welfare scheme etc.
are examples of instances of application of income. In these cases, for computing total
income, these deductions have to be added back.

Perquisites- Section 17 (2)

Perquisite is additional benefit received by an employee over & above his basic
salary but it is different from allowance. Perquisite may be paid voluntarily or by virtue
of service contract.
Perquisites taxable in case of all employees.
Perquisites taxable only in case of specified employees like directors etc.
Perquisites not taxable at all
Perquisites Taxable in case of All Employees:
Under Section 17 (2) Perquisites includes:The following perquisites are taxable in case of every employee, whether
specified or not:
1. Rent free house provided by employer
2. House provided at concessional rate
3. Any obligation of employee discharged by employer e.g. payment of club or
hotel bills of employee, salary to domestic servants engaged by employee,
payment of school fees of employees children etc.

4. Any sum paid by employer in respect of insurance premia on the life of

employee
5. Notified fringe benefits (on which fringe benefit tax is not applicable) it
includes interest free or concessional loans to employees, use of movable
assets, transfer of moveable assets.
Perquisites taxable only for specified employees:
1. Services of a sweeper, a gardener, a watchman or a personal attendant provided
by an employer to an employee without charge or with nominal charge if
domestic servant is engaged by employer and salary is paid by employer.
2. Supply of gas, electric energy or water for household consumption of employee
without any charge or with nominal charge if connection is in the name of
employer and bills are paid by employer
3. Education facility to any household members of the employee without any
charge or with nominal charge if bills are issued in the name of & paid by
employer.
4. Any medical facility in India provided to an employee or any member of his
family if bills are in the name of employer and paid or reimbursed by employer
in excess of ` 15,000 per assessment year.
5. Car or any other automotive conveyance.
6. Transport facility by a transport undertaking (not being provided by railways or
by an airline).

1.
a)
b)
c)
d)

Perquisites not taxable in all cases:

Rentfree furnished or unfurnished accommodation in cases mentioned below:
Rent freeaccommodation given in a remote area.
A temporary accommodation of 800 sq. ft given at mining site, etc.
Hotel accommodation given after transfer for not exceeding 15 days
Rentfree official accommodation provided to a Judge of High Court or
Supreme Court or an official of Parliament or a Union Minister and a Leader of

opposition in Parliament.
2. Leave travel concession to employees subject to provision of section 10(5)
3. Providing use of computer & laptop to an employee or any member of his
household.
4. Providing medical facilities to an employee or any member of his family:
a) in a hospital maintained by the Government or any local authority or approved
by the Government for the medical treatment of Government employees.
b) in a hospital maintained by the employer.
c) in respect of prescribed diseases or ailments, in any hospital approved by the
Chief Commissioner having regard to the prescribed guidelines.
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5. Health insurance premium of the employee or any member of his household

paid by the employer
6. Any other medical facility in India provided to an employee or any member of
his family
7. Bills are in the name of employer and paid or reimbursed by employer up to `
15,000 per assessment year
8. Bills are in the name of employee and paid or reimbursed by employer up to `
15,000 per assessment year
9. Medical facility outside India if a few conditions are satisfied
10. Any perquisite other than taxable perquisites already mentioned (few examples
are car, holiday home, club, free tea / refreshment / lunch, gift, etc.)
Valuation of Perquisites:
The rules relating to valuation of such benefits & amenities have been mentioned in
rule 3. They are as under.

Accommodation:
For the purpose of valuation of house, employees are divided into 2 categories:
a) Central and State Government employees: If accommodation is provided by the
State or Central Government to their employees, the value of such
accommodation is simply the amount fixed by the government (called the
license fees) in this regard.
b) Other Employees: The valuation of accommodation for this category of non
government employees depends upon whether the accommodation given to the
employee is owned by the employer or taken on lease.
Accommodation owned by employer
The value of accommodation is:
i.
20% of salary in cities having population exceeding four lakhs as
ii.

per 1991 census.

15% of salary in other cities in respect of the period for which the
accommodation was occupied by the employee during the

previous year.
Accommodation is taken on lease / rent by the employer:
i.
The value of such accommodation is actual amount of lease
rental paid or payable by the employer or 20% of salary,
whichever is lower.

Salary: For the purpose of valuation of perquisites in respect of rent free

accommodation, salary includes

Basic Salary
DA
Bonus
Commission
Fees

Leave Travel Concession [S.10(5)]

It is exempted to the following extent:

In case of an individual,
The value of any travel concession or assistance received by or due to him,
From his employer for himself & his family, in connection with his proceeding

on leave to any place in India.

Or, from his employer or former employer for himself and his family, for
proceeding to any place in India after retirement from service or after the

termination of his service,

Subject to the conditions prescribed as to the number of journeys and the
amount exempt per head.