Income under the head

“SALARY”
Sec 14 Heads of • Salary
Income • Income from House Property
• Profit & Gains of Business or Profession
• Capital Gain
• Income from Other Sources
Employer- Before an income can become chargeable under the head
employee ‘salaries’, it is vital that there should exist between the payer
relationship and the payee, the relationship of an employer and an
employee.
Full-time or It does not matter whether the employee is a fulltime employee
Part time or a part-time one. Once the relationship of employer and
employment employee exists, the income is to be charged under the head
“Salaries”. If, for example, an employee works with more than
one employer, salaries received from all the employers should
be clubbed and
brought to charge for the relevant Previous Years.
Foregoing or Once salary accrues, the subsequent waiver by the employee
sacrificing of does not absolve him from liability to Income- tax. Such
salary waiver is only
an application and hence chargeable.
Surrender of However, if an employee surrenders his salary to the Central
salary Government u/s 2 of the Voluntary Surrender of Salaries
(Exemption from Taxation) Act, 1961, the salary so
surrendered
would be exempt while computing his taxable income.
Sec.15 Charging Due or receipt whichever falls earlier: Salary is taxable on
Section due basis or on receipt basis, whichever is earlier. Hence,
A - Salary due in a Previous Year is taxable, even if it
not received.
B - Salary received in a Previous Year is taxable, even if it is
not due.
 C - Arrears of salary received during the current Previous
Year shall be taxable in the current year if not charged to tax
in an earlier Previous Year.
No double taxation: once salary is taxed on due/receipt basis, it

will not be taxed again on receipt/ falling due, as the case may
be.
Deductions : Sec 16
Sec.16(i) Standard Deleted
Deduction
Sec.16(ii) Entertainment Least of the following will be allowed as a deduction:
Allowance
(only for • Actual amount of entertainment allowance received;
Government • 20% of basic salary of the individual
Employees) c- Rs 5,000
Sec.16(iii) Professional • Professional tax or tax on employment paid by an
Tax employee, levied under a State Act shall be allowed as
deduction ;
• such deduction is available only on actual payment;
• If an employer pays professional tax on behalf of his
employee, then it will first be included in the Salary
as a
perquisite and then, allowed as a deduction.
Definitions : Sec 17
Sec. 17(1) Definition of “Salary” includes :
SALARY
• Wages or Salary
• Annuity is annual grant made by the employer to
the employee.
• Pension is a periodical payment for past
services. d- Gratuity is a lump sum payment for
past services. e- Fees and Commission
• Perquisites.
• Profit in lieu of or in addition to salary or wages.
• Advance of Salary.
• Leave Encashment.
• RPF contribution and interest
• The contribution made by the Central Government in the
previous year, the account of any employee under a
pension scheme referred to in Section 80CCD.
Sec. 17(2) Definition of
Perquisite: are the benefits in addition to normal salary to
Perquisites
which the employee has a right by virtue of his employment.
Perquisite includes:
 • The value of Rent Free Accomodations (RFA)
provided to the assessee by his employer.
• The value of any concession accommodation
provided to the employee by his employer.
• The value of any benefit provided free of cost
/ at concessional rate in case of Specified
Employees.
• Any sum paid by the employer in respect of
any obligation on behalf of the employee.
• Any sum payable to affect an insurance policy on the
life of employee / to affect a contract for annuity.
Note1: Premium paid on Insurance policy is treated as
perquisite only if the beneficiary is the employee.

Note2: Life Insurance Premium (LIP) paid by the employer

qualify for deduction u/s 80C.

• The value of any specified security or sweat equity

shares is equal to the FMV as reduced by the amount
actually paid by or recovered from employee.
• Any amount of contribution to approved
superannuation fund to the extent it exceeds
Rs.1,50,000*.
• The value of any other fringe benefit as may
be prescribed, expect mobile / telephone.
Sec 17(3) Profit in Lieu • Compensation from employer/former employer in
of Salary connection with: Termination or Modification of the
Terms & conditions of employment.
• Any payment due to or received from any person
before joining or after cessation of the employment.
• Any sum received under a key man Insurance
policy including bonus on such policy.
Retirement Benefits / Exemptions under the head
Salary
Sec 10(10) Gratuity Gratuity is the payment made by the employer to an employee
in appreciation of past services rendered by the employee.
• Government employees and employees of local authority:
Exempted from tax.
• Employees covered under Payment of Gratuity Act, 1972

In case of employees who are covered under Payment of

Gratuity Act, the least of the following amounts are exempted
from tax:
 • Amount of gratuity actually received.
• Half month (i.e. 15/26 days) salary on the basis of
last drawn salary for each completed years of service
or part therof ( in excess of six months).
c- Max Rs.10,00,000
Salary means: Basic +
DA
• Other employees. Least of the following amounts
are exempted from tax:
A- Actual amount of gratuity received.
B- Half month (i.e. 15/30 days) salary on the basis of last
10 months average salary for each completed years of
service . C- Max Rs. 10, 00,000
Salary means: Basic + DA (if) +
%
Sec.10(10A) Pension Un commuted pension refers to pension periodically received
by
the employee. It is taxable in the hands of the both Govt. and
Non
Govt Employees.
Commuted pension Sec.10 (10A) means lumsum amount
taken by commuting the pension or part of the pension.
Government Employees: 100% exempt from tax.
Other Employees:
• If Gratuity is rect: 1/3 of 100% commuted pension
is exempt
• If Gratuity not rect: ½ of 100% commuted pension is
exempt.
Sec 10(10AA) Leave If an individual receives leave encashment on his retirement,
Encashment then the amount received will be eligible for exemption.
• Government employee: fully exempted from tax
• Non-Govt. employee: Least of the following is exempt:
• Actual Amount rect
b) Max Rs 300000/-
• 10 months salary On the basis of immediately
• Earned leave salary preceding 10 months average
Salary.
Salary means : Basic Salary + DA (if) +
%
Sec 10(10B) Retrenchment Retrenchment compensation received in accordance with any
Compensation scheme, which is approved by the Central Government, is fully
 exempt from tax.
Any other employee who receives retrenchment
compensation is entitled for exemption u/s 10(10B) as under:
1- Actual Amount
2- Max Rs 500000/-
3- Amount determined as per Industrial
Dispute Act,1947
Sec 10(10C) Voluntary Conditions for claiming exemption (Govt or Non Govt
Retirement Employees):
Compensati
• An individual, who has retired under the Voluntary
on
Retirement Scheme, should not be employed in
another company of the same management.
• He should not have received any other Voluntary
Retirement Compensation before from any other
employer and claimed exemption.
• Exemption u/s 10(10C) in respect of Compensation under
VRS can be availed by an Individual only once in his
lifetime.

Least of the following is exempt:

1- Actual Amount
2- Max Rs 500000/-
3- Completed yrs of service x 3 x last drawn salary Or
Remaining months of services x last drawn salary
Salary means = Basic Salary + DA (if)
Taxability of
Allowances
Allowances Fully Taxable
Allowances Fully
Exempt Allowances
Partly Exempt Allowances (upto exp incurred)
Partly Exempt Allowances
Fully Dearness Allowance and Dearness
Taxable Pay City Compensatory
Allowances Allowance
Tiffin / Lunch Allowance
Non practicing
Allowance Warden or
Proctor Allowance
Deputation Allowance
 Overtime Allowance
Fixed Medical
Allowance Servant
Allowance family
allowance,
Project allowance, Marriage allowance,
Holiday allowance etc
Fully • Foreign allowance: This allowance is usually paid by
Exempt the government to its employees being Indian citizen
Allowances posted out of India for rendering services abroad.

• Allowance to High Court and Supreme Court Judges.

• Allowances from UNO organization to its

employees are fully exempt from tax.
Partly exempt Travelling / Should be provided by the employer and spent by the
Allowances Transfer employee to meet the cost of official tour or transfer
(Depending allowance: expenses. Cost of travel or transfer includes payments
upon for transfer, packing and transportation of personal
Actual Exp) effects.
Daily Should be spent by the employee for meeting the daily
Allowance charges incurred on a tour or transfer.
Uniform Should be spent by the employee for
Allowance purchasing/maintaining office uniform for official duties.
Helper Should be used by an employee to meet the expenditure on
Allowance a helper who assists him in the performance of official
duties.
Academic / Should be used by the employee for his academic
Research research and training pursuits.
Allowance
Conveyance Should be used by the employee to meet the expenditure on
Allowance conveyance in performance of official duties.
Partly Special Amount exempt from tax varies from Rs 300 per month to Rs
Taxable
Compensator 7,000 per month
Allowances
(Not y (Hill Areas) .
Depending Allowance
upon
Actual Exp)
Border Area The amount of exemption varies from Rs 200 per month to
 Rs
Allowance 1,300 per month
Tribal Areas/ Rs 200 per month
Scheduled `
Areas
Allowance
Allowance It is an allowance granted to an employee working in any
for transport system to meet his personal expenditure during his
Transport duty performed in the course of running of such transport from
Employees one place to another place provided that such employee is not
in
receipt of daily allowance
The amount of exemption is :-
• 70 % of such allowance; or
• Rs 10,000 per month, Whichever is lower
Children Rs 100 pm per child for max 2 Childs
Education
Allowance
Hostel Rs 300 pm per child for max 2 Childs
Expenditure
Allowance
Transport Transport allowance is granted to an employee to meet his
Allowance expenditure for the purpose of commuting between the place
of
his residence and the place of his duty.

Amendment Finance Act, 2015:

It is exempt up to Rs 1600 (earlier Rs 800) per month.
For
handicapped / blind person, exemption upto Rs 3200
(earlier Rs
1600) per month
Underground Employees who are working in unnatural climate in
Allowances underground mines. Rs 800/- pm
Sec.10(13A) Conditions HRA Assessee is in receipt of HRA & he Pays Rent.
Exemption u/s 10(13A) Rule 2A:
Least of the followings:
• Actual amount received
• 50% ( for metro cities) / 40 % ( for non-
metro cities) of Salary
• Rent paid less 10 % of Salary
 Salary means = Basic +
DA (if) + %
It is important to note that salary must be for relevant
period.
Taxability of
Perquisites
Types of perquisites Perquisites may be divided into three broad categories:
• Perquisites taxable in the case of all employees
• Perquisites exempt from tax in the case of all employees
• Perquisites taxable only in the hands of specified
employees.
Rent Free Central /
Accommod State Govt License Fees (-) Amount recovered from employee
ation Employee
Other than
central / Owned by Employer
state govt
employee
In cities having In cities having In other places:
population exceeding 25 population exceeding 7.5% of Salary
lakhs as per 2001 10 lakhs but not Less Rent actually
census: exceeding 25 lakhs as paid by employee
per
2001 census:
15% of Salary Less 10% of Salary
Rent actually paid by Less Rent actually
employee paid by employee
Other than Not Owned by Employer
central / Rent paid by the employer or 15% of Salary whichever is lower
state govt Less Rent recovered from employee
employee
Accommodat 24% of salary paid/payable or actual charges paid/payable
ion in a whichever is lower
hotel Less: Amount paid or payable by the employee
Important Hotel Accommodation: Accommodation provided in a hotel will not be a
Note: taxable perquisite if the following two conditions are fulfilled:
• The period of such accommodation does not exceed 15 days
• Such accommodation has been provided on the transfer of the employees
 from one place to another
Value of Value of unfurnished accommodation as above
Furnished Add : Value of Furniture provided:
Accommodat • If owned by employer, 10%p.a. of original cost of such
ion furniture
• If hired from third party, then Actual hire charges
Less: Any charges paid or payable by the employee
Note 1: Furniture includes Television sets, radio, refrigerator,
other household appliance, air-conditioning plant or
equipment.

Note 2:
• For the first 90 days of transfer: Where accommodation is
provided both at existing place of work and in new place,
the accommodation, which has lower value, shall be
taxable.
• After 90 days: Both accommodations shall be taxable.

Note 3:
Salary includes all monetary benefits but does not
include if: DA is not in terms in employment & PF.
Sweeper, Actual cost to the employer
gardener or Less: Amount paid by employee
watchman
provided by the
employer
Free Supply of • Procured from outside agency
Gas, Electricity or Amount paid to outside agency
Water • Resources owned by employer himself
Manufacturing cost per unit
Less: amount paid by the employee
Free Education a) Free education to any member of employees’ family provided in
an
educational institution owned and maintained by the employer shall
be
determined with reference to reasonable cost of such education in a
similar institution in a nearby locality.
The value shall be nil, if the cost of such education per child
does not exceed Rs.1, 000 per month.

• In any other case: The value of benefit of providing free or

 concessional educational facilities for any member of the house hold
(including children) of the employee shall be the amount of
expenditure incurred by the employer.

• Any amount paid or recovered from the employee shall be deducted.

Free Benefit provided by any undertaking engaged in the carriage of
Transport passengers or goods to any employee or to any member of his
household for private journey free of cost or at concessional rate in
any conveyance owned or leased by it shall be taken to be the value at
which such benefit is offered by such undertaking to the public as
reduced by the amount, if any, paid by or recovered from the employee
for such benefit.

In case of employees of the Railways and airlines, the value of

transport facility shall be exempt.
Use of any 10% of Actual Cost if owned by the employer; or Actual rental
movable asset charge paid/payable by the employer less Amount recovered from
other than employee.
computer or
laptops or other
assets already
mentioned
Free meals during Actual cost to the employer in excess of Rs 50 per meal less: amount
office hours recovered from the employee.
Tea or non-alcoholic beverages and snacks during working hours is not
taxable.
Gifts Value of any gift or voucher or token other than gifts made in cash or
convertible into money (e.g. gift cheques) on ceremonial occasion.
In this case if the aggregate value of gift during the previous year is less
than Rs 5,000, then it is not a taxable perquisite.
Interest-free or • To the employee or any member of his household during the
concessional loan relevant previous year
• Value of perquisites shall be the interest computed at the rate
charged
per annum by the State Bank of India, as on the 1st day of the relevant
previous year on the maximum outstanding monthly balance .

“Maximum outstanding monthly balance” means the aggregate

outstanding balance for each loan as on the last day of each
 month.

However, no perquisites if such loans are made available

• For medical treatment in respect of prescribed diseases (like cancer,
tuberculosis, etc.) or
• Amount of loans are petty not exceeding in the aggregatè 20,000.
Use of any The value of benefit shall be determined @ 10% p.a. of the actual cost
movable of such asset or the amount of rent or charge paid or payable by the
asset employer as reduced by the amount, if any, paid or recovered from the
employee for such use.
Transfer of The value of benefit shall be determined to the amount representing the
any movable actual cost of such asset to the employer as reduced by the cost of
asset normal wear and tear calculated at the rate of
• 50% in case of computers and electronic items (WDV method)
• 20% in case of motor cars (WDV method)
• 10% in case of motor cars (SLM method)
reduced by the amount, if any, paid or recovered from
the employee being the consideration for such transfer.
Credit card Membership fees and annual fees incurred by the employee or any
expenses member of his household, which is charged to a credit card (including
any add-on- card) paid for or reimbursed by such employer reduced by
the amount, if any paid or recovered from the employee

Such expenses incurred wholly and exclusively for official purposes

would not be treated as a perquisite if complete details in respect of
such expenditure are maintained by the employer.
Club expenditure • The value of benefit is any expenditure incurred (including the
amount of annual or periodical fee) in a club (for employee or his
household member) as reduced by the amount recovered from the
employee.

• If corporate membership then the value shall be zero.

(c) There would be no perquisite for use of health club, sports and
similar facilities provided uniformly to all employees by the employer.
Tax-free Medical IN INDIA :
perquisites Facilities Owned Hospital, :
(in all NIL Government hospital,
cases) : NIL Approved Hospital :
NIL
 Any other hospital: Payment/Reimbursement by employer
of actual expenditure upto Rs 15,000.

OUTSIDE INDIA :
Treatment or Lodging : To the extent permitted by RBI.
Travelling Exp : exempt only in the case of an employee
whose GTI before including therein the said expenditure
doesn’t exceed Rs 2,00,000.

Note 1: Family means:

*The Spouse & Children &
*The Parents, brothers & sisters wholly or mainly dependent
on the employee.
Note 2: Mediclaim: Insurance premium paid/ reimbursement
by the employer on the Mediclaim policy taken by the
employer/ employee.
Telephone 100% not taxable.
facility
The value of provided by the employer to the employees as a group (and
transport not to any individual or a few employees alone) from their
place of residence to the place of work and back in the case of
an employer engaged in the business of carriage of goods or
passengers, to his employees either free of charge or at a
concessional rate.
Also conveyance facility provided for the journey between
office
and residence and back at free of charge or at concessional rate.
Personal Payment of annual premium by employer on personal accident
accident policy effected by him to his employee is not taxable.
insurance
Refresher Where the employee attends any refresher course in
Course management
and the fees are paid by the employer, the amount spent
by
employer for the purpose is not taxable.
Leave Travel Leave Travel Concession is a non-taxable perquisite
Concession (LTC) available for salaried class. An Employee with his
dependent family members can avail of this facility to
travel anywhere in India.
Exemption is limited to the amount actually spent. The
amount exempt is the value of any travel concession or
 assistance received or due to the assessee.

• Journey by Air: Economy Class Airfare of India

Airlines by the shortest route or the actual amount spent,
whichever is lower.

• Journey by Rail: A/C 1st Class rail fare by the shortest

route or actual amount spent, whichever is lower.

• Where the place of destination is connected by Rail:

Air- conditioned first class Rail fare by the shortest route
or the actual amount spent for the journey performed by
road whichever is lower.

• Where the place of destination is NOT connected by Rail

:
• If Recognized public transport exists: First
Class or Deluxe Class fare by the shortest route or the
actual amount spent whichever is lower.
• If No recognized public transport exists:
Air- conditioned first Class Rail fare by the shortest route
or the actual amount spent whichever is lower. These
exemptions is available only for 2 journeys performed in a
block of 4 calendar years. Family of an Individual means:
• Spouse and children of the individual, and
• Parents, brothers and sisters of the individual or any of
them, wholly or mainly dependent on the Individual
Car
Facility
Owned by Exp By 100% Personal Use Partly Personal Partly Official
Employee Employee Nil Nil
Employee Employer Exp incurred Exp incurred by employer
by employer xxx
Less: Upto 1.6 ltr engine
(180
0 pm) Or, More than 1.6 ltr
(240
0 pm)
Add: Driver 900
pm
 Employer Employee Wear & tear i.e. 10% Upto 1.6 ltr engine 600
of actual cost of car pm
Or, if More than 1.6 ltr 900
pm
Add: Driver 900 pm
Employer Employer Exp incurred Upto 1.6 ltr engine 1800 pm
by employer Or, if More than 1.6 ltr 2400 pm Add:
Add: Wear & tear i.e. Driver 900 pm
10% of actual cost of
car
Other Automotive Conveyance – Rule 3(2)
Where any other automotive conveyance (i.e., other than car) is owned by the employee and
actual running and maintenance charges are met or reimbursed by the employer:
Use of Value of Perquisite
Vehicle
Wholly and exclusively for Official Purpose NIL
Partly Official and Partly for Private Expenses incurred by the employer
Purposes Less: 900 p.m. / higher amount if specified
documents are maintained
Less: Amount recovered from employee

Specified documents (same documents as in the case of car) need to be maintained.

Important Notes : ESOP or Sweat Equity Shares : Value of the perquisite u/s. 17(2)(vi) &
Rule 3(8) and 3(9):
• *Specified Security or SWEAT equity shares, allotted to an employee by the
employer or former employer, either directly or indirectly for free of cost or at
concessional rate is considered as perquisite.
• Such perquisite was exempt in the hands of the employee upto AY 2009-10 as the
value of such perquisite was taxable as Fringe Benefit in the hands of the employer
u/s. 115WB.
• As a result of abolition of FBT and amendments in sec. 17(2)(vi) from AY 2010-11
(i.e., in case of allotment or transfer of specified security or sweat equity shares on or
after 1.4.2009), such perquisites are chargeable to tax in the hands of the employee.
• The value of such perquisite shall be arrived as under:

FMV (Fair Market Value) of the specified Less: Amount actually

paid by security or sweat equity shares as on the date or recovered from
on which option is exercised employee
• FMV shall be determined as per Rule(3)(8) under:
On the date of exercise of the FM
 option V
Equity Shares If TRADED on Average of the *Opening Price and *Closing
are LISTED on the date of Price of the share on the date of exercise of
a recognised exercising of the the option
stock option • If such shares are traded on such date in
exchange
more than 1 stock exchange,
the above prices shall be taken
of that recognised stock
exchange which records the
highest trading in such share
If NOT traded *Closing Price on a closest date
on the date of preceding the date of exercise of the
exercising of option
the option • If shares are traded on such
closest date in more than 1
stock exchange, the above price
shall be taken of that
recognised stock exchange
which records the highest
trading in such
shares
Equity Shares are NOT listed on a Value determined by the Merchant
recognised stock exchange or in Banker on the date of exercise of option
case of securities other than or any earlier date (not earlier than 180
Equity shares days from the date of the
exercising)
Sec.2(h) of the Securities Contracts (Regulation) Act, defines “securities” to include (i)
shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a
like nature in or of any incorporated company or other body corporate; (ia) derivative; (ib)
units or any other instrument issued by any collective investment scheme to the investors in
such schemes; (ic) security receipt as defined in clause (zg) of sec. 2 of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units
or any other such instrument issued to the investors under any mutual fund scheme; (ii)
Government securities; (iia) such other instruments as may be declared by the Central
Government to be securities; and
(iii) rights or interest in securities;