Professional Documents
Culture Documents
The meaning of the term salary for purposes of income tax is much wider
than what is normally understood. Every payment made by an employer to his
employee for service rendered would be chargeable to tax as income from salaries.
The term salary for the purposes of Income-tax Act, 1961 will include both
monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as
well as non-monetary facilities (e.g. housing accommodation, medical facility,
interest free loans etc).
GENERAL POINTS:
(1)Employer-employee relationship: Before an income can become chargeable
under the head salaries, it is vital that there should exist between the payer and the
payee, the relationship of an employer and an employee.
4
Examples: (a) Sujatha, an actress, is employed in Chopra Films, where she is paid a
monthly remuneration of ` 2 lakh. She acts in various films produced by various
producers. The remuneration for acting in such films is directly paid to Chopra Films
by the different producers. In this case, ` 2 lakh will constitute salary in the hands of
Sujatha, since the relationship of employer and employee exists between Chopra
Films and Sujatha.
(b) In the above example, if Sujatha acts in various films and gets fees from
different producers, the same income will be chargeable as income from profession
since the relationship of employer and employee does not exist between Sujatha and
the film producers.
(c) Commission received by a Director from a company is salary if the Director
is an employee of the company. If, however, the Director is not an employee of the
company, the said commission cannot be charged as salary but has to be charged
either as income from business or as income from other sources depending upon the
facts.
(d) Salary paid to a partner by a firm is nothing but an appropriation of profits.
Any salary, bonus, commission or remuneration by whatever name called due to or
received by partner of a firm shall not be regarded as salary. The same is to be
charged as income from profits and gains of business or profession. This is primarily
because the relationship between the firm and its partners is not that of an employer
and employee.
(2) Full-time or part-time employment: It does not matter whether the employee is
a full- time employee or a part-time one. Once the relationship of employer and
employee exists, the income is to be charged under the head salaries. If, for
5
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.
(3) Foregoing of salary: Once salary accrues, the subsequent waiver by the employee
does not absolve him from liability to income-tax. Such waiver is only an application
and hence, chargeable to tax.
Ex: Mr. A, an employee instructs his employer that he is not interested in receiving
the salary for April 2013 and the same might be donated to a charitable institution. In
this case, Mr. A cannot claim that he cannot be charged in respect of the salary for
April 2013. It is only due to his instruction that the donation was made to a charitable
institution by his employer. It is only an application of income. Hence, the salary for
the month of April 2013 will be taxable in the hands of Mr. A. He is however, entitled
to claim a deduction under section 80G for the amount donated to the institution.
(4)Surrender of salary: However, if an employee surrenders his salary to the Central
Government under section 2 of the Voluntary Surrender of Salaries (Exemption from
Taxation) Act, 1961, the salary so surrendered would be exempt while computing his
taxable income.
(5) Salary paid tax-free: This, in other words, means that the employer bears the
burden of the tax on the salary of the employee. In such a case, the income from
salaries in the hands of the employee will consist of his salary income and also the tax
on this salary paid by the employer.
Definition of Salary
The term salary has been defined differently for different purposes in the Act. The
definition as to what constitutes salary is very wide. As already discussed earlier, it is
an inclusive definition and includes monetary as well as non-monetary items. There
are different definitions of salary say for calculating exemption in respect of gratuity,
house rent allowance etc.
Salary under section 17(1), includes the following:
(i) Wages,
(ii) Any annuity or pension,
(iii) Any gratuity,
(iv) Any fees, commission, perquisite or profits in lieu of or in addition to any salary or
wages,
(v) Any advance of salary,
7
(vi)Any payments received in respect of any period of leave not availed by him i.e.
leave salary or leave encashment,
(vii) The portion of the annual accretion in any previous year to the balance at the
credit of an employee participating in a recognised provident fund to the extent it is
taxable and
(viii) Transferred balance in recognized provident fund to the extent it is taxable,
(ix) 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.
CHAPTER-II
BASIS OF CHARGE
1. Section 15 deals with the basis of charge. Salary is chargeable to tax either on
due basis or on receipt basis, whichever is earlier.
2. However, where any salary, paid in advance, is assessed in the year of payment,
it cannot be subsequently brought to tax in the year in which it becomes due.
3. If the salary paid in arrears has already been assessed on due basis, the same
cannot be taxed again when it is paid.
Examples:
i. If A draws his salary in advance for the month of April 2014 in the month of March
2014 itself,
on
salary for the A.Y.2015-16 will not include that of April 2014.
ii. If the salary due for March 2014 is received by A later in the month of April 2014, it
is still chargeable as income of the P.Y.2013-14 i.e. A.Y.2014-15 on due basis.
Obviously, salary for the A.Y.2015-16 will not include that of March 2014.
Place of accrual of salary
Under section 9(1) (ii), salary earned in India is deemed to accrue or arise in India
even if it is paid outside India or it is paid or payable after the contract of employment
in India comes to an end.
9
assesse from his employer or former employer or from provident fund or from
other funds to extent to which it does not consist contribution by assesse or interest
on such contribution or any sum received under Keyman Insurance Policy
including the sum allocated by way of bonus or such policy.
(4) Any sum received in lumpsum or otherwise, by an assessee from any person before
joining any employment, or after cessation of such an employement.
Example: A would be employer or an ex-employer giving some money to an assessee so
that he does not join anywhere else.
Advance Salary
Advance salary is taxable when it is received by the employee irrespective of the fact
whether it is due or not. It may so happen that when advance salary is included and
charged in a particular previous year, the rate of tax at which the employee is assessed
may be higher than the normal rate of tax to which he would have been assessed. Section
89(1) provides for relief in these types of cases.
Annuity
1. As per the definition, annuity is treated as salary. Annuity is a sum payable in respect
of a particular year. It is a yearly grant. If a person invests some money entitling him to
series of equal annual sums, such annual sums are annuities in the hands of the investor.
2. Annuity received by a present employer is to be taxed as salary. It does not matter
whether it is paid in pursuance of a contractual obligation or voluntarily.
3. Annuity received from a past employer is taxable as profit in lieu of salary.
4. Annuity received from person other than an employer is taxable as income from other
sources.
12
Amount(Rs)
Basic
Amount(Rs)
XX
Dearness Allowance
DA(R)
XX
DA(O)
XX
XX
Commission
On Turnover (%)
XX
Normal
XX
XX
Wages
XX
Annuity
XX
Pension
XX
Bonus
XX
Advance salary
XX
Arrears of Salary
XX
80CCD
XX
XX
XX
XX
(X)
Gratuity
XX
(X)
XX
XX
Pension
A) Non Commuted (Periodic)
Fully
Taxable
commutation
in
before&
the
hands
after
of
XX
employees
13
B) Commuted (Lumpsum)
Received upon commutation
LESS:
Exempt
XX
u/s
10(10A) XX
XX
(X)
Leave Enchasment received upon
Retirement
XX
(X)
XX
(X)
Voluntary Compensation
XX
(X)
Allowance
XX
(X)
XX
XX
XX
XX
XX
Deduction u/s 16
(A) Entertainment
Allowance
Government
Employees
(XX)
XXX
CHAPTER-III
DEDUCTION U/S 16
The Income Chargeable under the head Salaries is computed after making the
following deductions:
16(ii) Entertainment Allowance:
In the case of a government employee, the least of:
(a) Maximum Rs5,000/(b) 20% of basic salary.
(c) Actual amount of entertainment allowance granted during the previous year.
Actual expenditure spent or not towards entertainment is absolutely irrelevant.
Entertainment allowance granted to non-government employees is fully taxable.
16(iii) Professional tax or tax on employment:
15
16
Children:
Children
Born on or after
01.10.1998
Maximum 2
children
In case of multiple
births i.e.
twins,triplet etc.
considered as one
child
Born before
01.10.1998
Any Number of
Children
Important point:
service period).
1) For Government Employees:
Government employee means State & Central Government Employees,
Employees from Local Authorities but not Employees of Statutory Corporation.
2) In the Case of Employees covered by the Payment of Gratuity Act 1972. Gratuity
received by an employee covered by the payment of Gratuity Act, is exempt from
tax to the extent of least of the following:
a) *15 days salary based on last salary drawn for every completed year of service
or part thereof in excess of 6 months.
b) Rs 10,00,000/c) Gratuity actually received.
Salary = Basic+ D.A only (whether in term or not in term)
15 days salary=salary last drawn x
15 days
26 days
3) In case of any other employee: Gratuity received by any other employee is exempt
from the tax to the extent of least of the following.
a) Rs 10,00,000/- maximum over a life of an assessee.
b) Half month average salary for each completed year of service (fraction of
service period at the end ignored).
c) Gratuity actually received.
19
Corporation employees).
20
21
CHAPTER-IV
Case Law: Commissioner of Income Tax Vs Dr P.L. Narula on 1st Dec 1983
22
taxation to salaries and emoluments paid by the United Nations to its officials.
The question whether pension received by the erstwhile officials of the United
Nations form it would be exempt from Income tax was considered by Karnataka
High Court in the case of Commissioner of Income Tax v. K Ramaiah (1980) 126
ITR 638. The High Court held that since under s.17 of the Income Tax Act 1961,
salary has been defined from tax, so shall be pension. The board have accepted the
decision of the Karnataka High Court.
In view of the foregoing, apart from salary received by employees of United
Nations Organisation or any person covered under the U.N. (Privileges and
Immunities) Act,1947, pension received by them from U.N will also be exempted
from income tax. Pending appeals on this point may be conceded and reference
application withdrawn.
Not only the Department accepted the decision of the Karnataka High Court, but
issued a circular for the guidance of the authorities under the Act. It is unfortunate
authorities under the Act. It is unfortunate that the Department has withdrawn the
reference application in the case of assessed.
The view taken by the Tribunal in these references is correct. We accordingly
answer these references against department and in the favor of the assessed with
no order as to costs.
23
CHAPTER-V
Pension from Employer
(Lumpsum)
Government Employee
(Fully exempt u/s 10(10A)
Computed pension
XX
LESS: Exempted
1/3rd x Amount Received
% of Commutation
b) Gratuity not received.
Commuted Pension XX
LESS: Exempted
1/2th x Amount Received
% of Commutation
24
Government Employee
Fully Exempt
Others
Least of the Followings
a) Balance of leave as per income tax*
Average Salary.
b) 10 months Average Salary.
c) Actual Leave Salary Received.
d) Maximum over lifetime of employee
Rs 3,00,000/-
26
Guidelines- The Guidelines for the purpose of Section 10(10C) have been laid down in
Rule 2BA of the income tax rules. The guidelines provide that the scheme of voluntary
retirement should be in accordance with the following requirements, namelya) It applies to an employee who has completed 10 years of service or completed
40 years of age, whichever matures early.
b) It applies to all employees (by whatever name called), including worker and
executives of a company or authority or co-operative society.
c) The scheme of Voluntary retirement has been drawn to result in overall
reduction in the existing strength of the employees & not in reducing the
salary bill.
d) The vacancy caused by voluntary retirement is not to be filled up, nor the
retiring employees is to be employed in another company or concern
belonging to the same management; and
e) The amount receivable on account of voluntary retirement of the employees
does not exceed the amount equivalent to 3 months of salary for each
completed year of service of salary at the time of retirement multiplied by the
balance months of service left before the date of his retirement on
superannuation.
The following point should also be kept in view.
a) Employers can frame different schemes of voluntary retirement for different
classes of their employees. However, these schemes have to conform to the
aforesaid guidelines prescribed in rule 2BA of the Income-tax Rules.
b) If the exemption is allowed to an employee u/s 10(10C) in a particular
assessment year of the first time, then exemption u/s 10(10C) shall not be
28
Sec 10(11) and 10(12): Taxability of Provident Fund- Recognised, Unrecognised &
Statutory.
Sec 10(11) & 10(12) of the Act deal with exemption on payment from provident funds,
while section 80c of the act deals with allowance of deductions on contributions to
provident funds. The following are types of Provident Funds.
1) Recognised Provident Fund (RPF): This scheme is applicable to an organisation
which employees 20 or more employees. An organisation can also voluntary opt
for this scheme. All RPF scheme must be approved by The Commissioner of
Income Tax. Here by company can either opt for government approved scheme or
the employer and the employee can together start a PF scheme by forming a trust.
The Trust so created shall be invests fund in a specific manner. The income of the
trust shall also be exempt from income taxes.
2) Unrecognised Provident Funds (UPF): Such Schemes are those that are started by
29
Provident
Fund:
The
Fund
is
mainly
meant
for
Employees
SPF
Deduction
Contributio
u/s
n
Employers
available
Exempt
available
u/s 80C
Exempt up Exempt
Contributio
from Tax
to 12% of From
RPF
Deduction
80C u/s
salary
UPF
NO
PPF
Deduction
80C deduction
Initially
u/s
80C
available
Employer
Tax Does
not
Contribute
Excess
30
Interest
be
added
to
*Salary
Exempt up Exempt
Employee
to 9.5% p.a.
Contributio
be added to
Interest
*Salary.
-
on Exempt
from
Exempt
Tax from tax
Exempt
Employers
from
Contributio
initially
n
Lumpsum
on Exempt
Shall
tax
Exempt u/s
10(11)
10(11).
10(12)
Commissioner in accordance with the rules contained in Part B of the VIth Schedule to
the Income-tax Act, 1961.
The tax treatment of contribution and exemption of payment from tax are as follows:
(i)
(ii)
(iii)
CHAPTER-VI
Taxable Value of Allowance:
Allowance is a fixed monetary amount paid by the employer to the employee (over and
above basic salary) for meeting certain expenses, whether personal or for the performance
32
of his duties. These allowances are generally taxable and are to be included in gross
salary unless specific exemption is provided in respect of such allowance. For the purpose
of tax treatment, we divide these allowances into 3 categories:
I.
II.
III.
35
If an employee is living in his own house and receiving HRA, it will be fully taxable.
Example:
Mr. X is employed in A Ltd. getting basic pay of Rs.20, 000 per month and dearness
allowance of Rs.7, 000 per month (half of the dearness allowance forms part of salary for
the purpose of retirement benefits). The employer has paid bonus @Rs.500 per month,
Commission @1% on the sales turnover of Rs.20 lakhs, and house rent allowance of
Rs.6, 000 per month. X has paid rent of Rs.7, 000 per month and was posted at Agra.
Solution:
Computation of Gross Salary
Amount(rs)
2,40,000
84,000
6,000
20,000
18,200
3,68,200
36
Certain allowances are given to the employees to meet expenses incurred exclusively in
performance of official duties and hence are exempt to the extent actually incurred for the
purpose for which it is given. These include travelling allowance, daily allowance,
conveyance allowance, helper allowance, research allowance and uniform allowance.
(iv)Special Allowances to meet personal expenses:
There are certain allowances given to the employees for specific personal purposes and
the amount of exemption is fixed i.e. not dependent on actual expenditure incurred in this
regard. These allowances include:
a) Children Education Allowance
This allowance is exempt to the extent of Rs.100 per month per child for maximum of
2 children (grand children are not considered).
b) Children Hostel Allowance
Any allowance granted to an employee to meet the hostel expenditure on his child is
exempt to the extent of Rs.300 per month per child for maximum of 2 children.
c) Transport Allowance
This allowance is generally given to government employees to compensate the cost
incurred in commuting between place of residence and place of work. An amount
uptoRs.800 per month paid is exempt. However, in case of blind and orthopaedically
handicapped persons, it is exempt up to Rs. 1600p.m.
d) Out of station allowance:
An allowance granted to an employee working in a transport system to meet his personal
expenses in performance of his duty in the course of running of such transport from one
place to another is exempt up to 70% of such allowance or Rs.6000 per month,
37
whichever is less.
III. FULLY EXEMPT ALLOWANCES
(i) Foreign allowance
This allowance is usually paid by the government to its employees being Indian citizen
posted out of India for rendering services abroad. It is fully exempt from tax.
(ii) Allowance to High Court and Supreme Court Judges of whatever nature are exempt
from tax.
(iii) Allowances from UNO organisation to its employees are fully exempt from tax.
F
ul
ly
T
a
x
a
bl
e
Entertainent
allowance
Dearness
Allowance
Overtime
Allowance
City
Compensatory
Allowance
Interin
Allowance
Servant
Allowance
Project
Allowance
Lunch/Tiffin/Dinn
er Allowance
Warden
Allowance
Nin-Practice
Allowance
Fix Medical
Allowance
Any other Cash
Allowance
P House
Rent
ar
allowanc
tl
e
y Special
T
Allowanc
e Sec
a
10(14).
x
a
bl
e
F Allowanc
e
ul
granted
ly
by govt
E
to
employe
x
es
e
outside
m
India u/s
p
10(7).
t Allowanc
e by
UNO to
its
employe
e.
Any
Allowanc
e
received
by High
court
&suprem
e Court
judge
38
CHAPTER- VII
ALLOWANCE
Sec-17(2) Perquisite
Perquisite may be defined as any casual emolument or benefit attached to an office or
position in addition to salary or wages. In essence, these are usually non-cash benefits
given by an employer to employees in addition to cash salary or wages. However, they
may include cases where the employer reimburses expenses or pays for obligations
incurred by the employee. Perquisites are also referred to as fringe benefits. Broadly,
perquisite is defined in the section 17(2) of the Income-tax Act as including:
1) Value of rent-free or concessional rent accommodation provided by the employer.
2) Value of any benefit/amenity granted free or at concessional rate to specified
employees etc.
3) Any sum paid by employer in respect of an obligation, which was actually payable
by the assessee.
4) Any sum paid by the employer for assurance on life of the employee or to effects
a contract for an annuity.
5) Value of any other fringe benefit as may be prescribed.
39
Taxable Perquisite:
a) u/s 17(2)(i) : The value of Rent Free Accommodation provided to the assessee,
taxable in the hands of all employees, i.e. specified as well as non-specified
employees u/s 17(2)(i).
b) u/s 17(2)(ii) : The value of any concession in the matter of rent in respect of any
accommodation provided to the assessee by his employer , taxable in hands of all
employees i.e. specified employer, taxable in the hands of all employees i.e.
specified as well as non-specified u/s 17(2)(ii).
c) u/s 17(2)(iii) : The value of any benefit or amenity granted or provided free of cost
or at concessional rate by the employer to the employee, these are in the nature of
mere facilities such as servants, gas-water-electricity, education & medical, which
are taxable in the hands of only specified employees u/s 17(2)(iii)
The word provided signifies that once such facility is made available by the
employer to the employee, it will be taxable whether the employee actually uses
this facility or not, provided the employee has not foregone or waived his right
there to.
d) u/s 17(2)(iv) : Any amount paid an employer in respect of any obligation which
otherwise would have been payable by the employee, i.e. Employees liability met
by the employer. For Example, if the servant is appointed by employee or Gas,
water electricity bills are in the name of employee; and subsequently such
payments by employee is reimbursed by employer or directly paid by employer it
is taxable perquisite in the hands of all employees, i.e. specified as well as nonspecified employees u/s 17(2)(iv).
The word paid signifies that the perquisite will be taxable in the year of actual
40
payment / reimbursement.
e) u/s 17(2)(v) : Any sum payable by the employer to the effect an assurance on
the life of the assessee or to effect a contract for an annuity, taxable in the hand of
all employees, i.e. specified as well as non-specified u/s 17(2)(v).
The word payable signifies that such a perquisite will be taxable in the year in
which it was due, even if the same is actually paid in the next year.
f) u/s 17(2)(vi) : The value of any specified security or sweat equity shares allotted
or transferred, directly or indirectly, by the employer, or former employer, free of
cost or at concessional rate to the assessee, which is taxable in the hands of all
employees i.e. specified as well as non-specified u/s 17(2)(vi)
g) u/s 17(2)(vii) : The amount of any contribution to an approved superannuation
fund by the employer in respect of the assessee, to the extent it exceeds one lakh
rupees, which is taxable in the hands of all employees i.e. specified as well as nonspecified u/s 17(2)(vii).
h) u/s17(2)(viii): The value of any other fringe benefit or amenity as may be
prescribed, which is taxable in the hands of all employees i.e.specified as well as
non-specified u/s 17(2)(viii).
41
the total monetary salary of Rs 50,000/- , we have to deduct the following nonmonetary items and deduction from gross salary:
Gross Salary
Less: a) Value of any Perquisite
b) Employers Contribution to RPF taxable portion (i.e. n excess of 12%
of
SALARY)
d. Holiday Facility
g. Free Voucher Facility (Market Value is exceeds ` 5,000)
h. Use of Movable Assets (10% P.A. of Original Cost or Rent except computer or
mobile)
i. Movable Asset sold at Concessional rate.
VALUATION OF PERQUISITES
Rent Free Accommodation
For Employee of Central Government or State Government:
Value will be equal to the License fees, which would have been determined by the CG/SG
in accordance With the Govt. Rules.
7.5% of Salary
10% of Salary
15% of salary
(i)
(ii)
XXX
44
XXX
XXX
(ii)
46
xxx
Less: Depreciation
xxx
WDV
xxx
Rate of Depreciation:Computer
: 50% on WDV
Motor Car
: 20% on WDV
Other assets
: 10% on SLM
47
CHAPTER-VIII
CONCLUSION
Before an income can become chargeable under the head salaries, it is vital that there
should exist between the payer and the payee, the relationship of an employer and an
employee.
It does not matter whether the employee is a full- time employee or a part-time one. Once
the relationship of employer and 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.
Conceptually there is no difference between salary and wages. Both are compensation for
work done or services rendered, though ordinary salary is paid in connection with service
48
of non-manual type of work, while wages are paid in connection to manual service,
therefore, remuneration received by an individual is taxable under the head Salaries
whether the remuneration is termed as salary or wages.
BIBLIOGRAPHY
Books:
ICAI- IPCC Study Material AY 14-15
J.K Shah Taxation Text Book
J.K Shah Class Notes
Internet:
http://taxgururanjeetkunwar.com/
http://libvolume8.xyz/taxation/bcom/2ndyear/taxation/incomefromsalary/incomefr
omsalarynotes1.pdf
49