Salaries

Meaning,
- Incomes treated as salary,
- Basis of charge of salary,
- Scope of income from salary,
- Profits in lieu of salary,
- Leave encashment,
- LTC,
- RPF,
- Super Annuation Fund
- Pension and gratuity
- Different type of allowances and their tax
treatment,
Planning as regard to allowances so as to
save tax.
- Different type of perquisites and their tax
treatment,
Planning as to perquisites so as to save tax.
-

Meaning

Income under the head salary comprises of

remuneration in any form (including
perquisites) received by an employee from
employer
Any salary due from an employer/ former
employer in P.Y. whether paid or not
Any salary paid or allowed to him in P.Y. by or
on behalf of an employee or a former employee
though not due or before it becomes due to him
Any arrears of salary paid or allowed to him in
P.Y. by or on behalf of an employee or a former
employee if not charged to income tax for any
earlier previous year

Characteristics of
Salaries

Relationship of Employee and employer

Salary from more than one employer
Salary from present, past or prospective employer
Tax free salary: upon which tax is deducted, paid by
employee from his own
(tax will be calculated gross salary: on amount of full salary
received by employee + tax paid by employer on behalf of
employee)
Salary received as a member of parliament (not salary will
come under other sources)
Receipts from persons other than employer (under other
sources)
Place of accrual of salary income
Deductions made by employer
Salary or pension received by UNO employees
Salary as partner (under B& P)

Characteristics of
Salaries

Payments received by legal heirs of deceased

employee (O/S)
Payment made after cessation of employment
(under head salaries even if it is capital receipts)
Voluntary foregoing of salary by an employee:
application of salary
Previous year for salary: April to March
Taxability of salary on due or receipt whichever is
earlier basis
Salary grade/ pay scale
Advance salary received
Arrears of salary received
Salary in lieu of notice

Computation of Salary
Salary + Allowances + Perquisites +
Profit in lieu of salary
Less: Entertainment allowances
[16(ii)] and Tax on employment/
Professional Tax [16(iii)]
= Income under the head Salaries

MEANING OF SALARY
Salary under the Act is defined U/s 17(1), which
includes the following:-
Wages;
Any Annuity or Pension;
Any Fees, Commission, Perquisites or Profits in Lieu
of salary;
Any Gratuity;
Any Advance of Salary;
Any payment received by an employee in respect of
any period of leave not availed by him, known as
leave encashment;
Transferred balance in a recognized provident fund
to the extent it is taxable;
Contribution made by central govt. to the account of
an employee under the pension scheme U/s 80 CCD;

Provident Funds (P.F.)

Statutory Provident Fund (S.P.F.): started in the year 1925,

this was started to promote the savings amongst
government employees, it is maintained by government as
well as non government departments e.g. railways, RBI,
Colleges, universities, local bodies, insurance companies
etc.
Recognized Provident Fund (R.P.F.): It is the fund which is
recognized by Commissioner of Income Tax. This is
maintained generally by Industries, business houses and
banks etc.
Unrecognized Provident Fund (U.R.P.F.): It is not
recognized but both employees as well as employers
contributes towards it
Public Provident Fund (P.P.F.): This fund was introduced
specially for Salaried persons but now it is sort of the fund
in which investment is done from savings point of view.

Particula
rs

Treatment of Provident
Funds
S.P.F.
(for
Govt. or
semi
govt.
employe
es)

R.P.F. (For Private

Sector)

U.R.P.F. (For Private Sector)

Employee
s own
contributi
on

Fully
Fully Qualifies for
Qualifies
deduction u/s 80C
for
deduction
u/s 80C

Does not Qualifies for deduction u/s

80C

Employer
s
contributi
on

Fully
exempted

Taxable= Amount
contributed by
employer less 12% of
salary

Ignore for the time being

Interest
Fully
credited
exempted
to
Accumulat
ed
Balance

Excess over 9.5%

interest is taxable

Ignore for the time being

Refund/

Exempted in all cases In case of refund taxable portion is

Fully

Allowances

Cash along with salaries paid by

employer to employee
Three Categories of Allowances:
Fully Exempted Allowances
Fully Taxable Allowances
Partially Taxable Allowances

Allowances

Fully Exempted Allowances:

Foreign allowance given by Government
to its employees posted abroad
House Rent Allowance given to judges
of High Court and Supreme Court
Sumptuary allowance given to Judges of
High court and supreme court

Allowances
Fully Taxable Allowances:
- Dearness allowance/ Additional Dearness Allowance/
High Cost of living Allowance= amount paid to
employees to bear rise in prices and to compensate the
loss. The amount of D.A. which enters into pay for
services benefits and retirement benefits is known as
Dearness Pay
- City/ Capital Compensatory Allowance: given to
compensate for the high cost of living in a particular big
city in India
- Lunch Allowances
- Tiffin Allowances
- Marriage Allowance
- Family Allowance
- Deputation Allowance

Allowances

Fully Taxable Allowances:

Wardenship Allowances
Non Practicing Allowances
Project Allowances
Overtime Allowances
Fixed Medical Allowance
Entertainment Allowance for non
government employees
Water and electricity allowances
Servant allowance

Allowances
Partially Taxable Allowances:
House Rent Allowances:

Taxable= Actual- Exempted

Whichever is less from the following is exempted:
- 50% of Salary (in case of metropolitan cities) or 40% of Salary
(in case of other cities)
or
- Actual Rent paid- 10% of salary
- Actual HRA received
Salary= Basic Salary + Dearness Pay + Commission on Turnover
When HRA will be fully taxable:
If employee is living in his own house
If he is living in a house for which he is not paying rent
If rent paid does not exceed 10% of salary

Allowances

Partially Taxable Allowances:

Entertainment Allowances:
- It is fully taxable in case of non-government employees
- It will be firstly added in the total income of
government employee then whichever is less from the
following is allowed as deduction u/s 16 (ii):
20% of Salary
Or
Actual amount received as entertainment
allowances
Or
Rs. 5,000
Salary= only basic salary

Allowances

Partially Taxable Allowances:

The exemption of allowances depends upon actual

expenditure:
Actual allowances received- actual expenditure (amount
spent)= Taxable
Traveling Allowances
Conveyance allowances
Daily allowances
Helper allowances
Academic Research allowances
Uniform allowances

Allowances
Partially Taxable Allowances:
When the exemption does not depends upon the expenditure:
Special compensatory allowances/ Hill Area Allowances/ Snow
bound area/ High Altitude allowances/ Uncongenial Climate
allowance = Amount exempted varies from Rs. 300 p.m. to Rs.
7,000 p.m.
Boarder Area/ Remote area/ Difficult Area/ Disturbed Area
Allowances = Amount exempted varies from Rs. 200 p.m. to
Rs. 1,300 p.m.
Compensatory Field area allowances= Exempted upto Rs.
2,600 p.m.
Compensatory Modified Field area allowances= Exempted
upto Rs. 1,000 p.m.
Counter Insurgency Allowances= Exempted upto Rs. 3,900
p.m.
Highly active field area allowance= Exempted upto Rs. 4,200
p.m.

Allowances
Partially Taxable Allowances:
When the exemption does not depends upon the
expenditure:
Underground Allowance given to coal mine workers=
Exempted upto Rs. 800 p.m.
Island Duty Allowance given to armed force posted in
Andaman & Nicobar and Lakshdweep group of Islands=
Exempted upto Rs. 3,250 p.m.
Transport Allowance= exempted upto Rs. 800 p.m. but in
case of handicapped Rs. 1,600 p.m. (in case of both
government and private concern)
Tribal Area Allowances = Amount exempted Rs. 200 p.m.
Running Flight Allowance= person is moving from one
place to another but not in respect of daily allowance=
exempted upto 70% of such allowance or Rs. 6,000 p.m.
whichever is less

Allowance
Partially Taxable Allowances:
When the exemption does not depends
upon the expenditure:

Children Education Allowance: exempted upto

Rs. 100 p.m. per child for maximum two
children only
Hostel expenditure Allowance: exempted upto
Rs. 300 p.m. per child for maximum two
children only
Domestic servant Allowance: Fully taxable

Perquisites

Exempted for all employees

Taxable for all employees
Taxable only for specified employees

Perquisites: Exempted for

all employees
Free medical facilities or reimbursement of medical
expenditure:
Allowed for treatment of self, wife, dependent children,
dependent parents and dependent brother and sisters
If treatment has been taken from hospital maintained
by employer, central govt., state govt., local authority,
approved by chief commissioner= Fully exempted
If treatment is taken from private or unrecognised
hospital= upto Rs. 15,000 exempted
Medical treatment is taken from outside India: if
treatment of employee or any member then expenses
paid or reimursement= fully exempted
Expenses of stay of patient and one attendant= fully
exempted= if the total income of employee does not
exceeds Rs. 2,00,000

Perquisites: Exempted for

all employees

Free refreshment supplied by employer to its employees

during office hours
Free meals given to remote area
Free recreational facilities
Telephone including mobiles given by employer to
facilitate the business of employer
Free education (does not exceeds Rs. 1,000 p.m. per
child)
Cost of refresher course
Rent free accommodation to high court or supreme court
judges
Goods sold by employer to his employee at concessional
rate
Free ration to armed forces
Perquisites provided to employees posted abroad

Perquisites: Exempted for

all employees

Rent free house to an officer of parliament, union

minister, leader of opposition in Parliament
Conveyance facilities to high court or supreme court
judges
Free conveyance provided by employer to employee for
going to or coming from place of employment
Amount contributed by employer towards pension or
deferred annuity scheme
Employers contribution to staff group insurance scheme
Computers, laptops given to an employee for official or
personal use
Transfer of moveable asset which is used by employer
for 10 years

Perquisites: Exempted for

all employees

Accident Insurance premium

Interest free loan (if loan does not exceeds
Rs. 20,000= Fully exempted, in case more
than Rs. 20,000= for treatment of notified
illness, if the rate charged by employer is
equal or higher than rate charged by SBI=
fully exempted)
Income tax on perquisites paid by employer
Any unauthorised use of a benefit

Perquisites: taxable for all

employees
Rent Free Accommodation:

Valuation of Unfurnished Accommodation:

For Government employees:
Taxable= License fees fixed by Government
For Non- Government employees:
If House is owned by the employer= Taxable=
If Population is less than 10 lakhs= 7.5% of Salary
If Population is more than 10 lakhs but less than 25 lakhs= 10%
of Salary
If Population is more than 25 lakhs= 15 of Salary
If House is hired by the employer= Taxable=
Actual rent paid by employer or 15% of salary= WEL= Taxable

Perquisites: taxable for all

employees
Rent Free Accommodation:

Valuation of Furnished Accommodation:

Value of unfurnished accommodation
+
10% of actual cost of furniture (if owned by employer) or hire
charges (if hired by employer)
(in case of govt. as well as non govt. employees
Salary in case of Rent free accommodation:
Basic salary, wages, dearness pay, commission, bonus, fees,
commission, value of all taxable allowances, all monetary
payments, leave encashment of salary
Salary does not includes:
D.A., any allowance exempted, employers contribution to PF,
Value of perquisites, income tax of employees if paid by
employer

Perquisites: taxable for all

employees
Concessional Rent Accommodation
Value of Rent free accommodation
Less: Rent paid by Employee
If the employee is living in more than one accommodation
then for first 3 months the value of lower accommodation
is taxable but after three months value of both such houses
will be taxable.
Hotel Accommodation:
If for less than 15 days= Fully Exempted
If more than 15 days=
24% of salary x no of days more than 15 days/ 365 days
or
Actual bill
WEL = Taxable

Perquisites: taxable for all

employees

Obligation of employee met by employer

Any amount of LIC premium paid by employer during
life of employee
Value of specified security or Sweat equity shares
transferred
Contribution to approved Superannuation fund of
employee in excess of Rs. 1,00,000
Interest free loan or concessional loan
Traveling, touring, accommodation
Gift or voucher or token facility
Credit card facility
Club facility
Use of moveable assets and transfer of moveable
assets

Perquisites: taxable for

specified employees only
Specified employee:
He is director of the company or
He has substantial interest of the
company (hold atleast 20% voting
shares of the co.) or
His monetary salary is more than Rs.
50,000 p.a.

Perquisites: taxable for

specified employees only
Perquisites of Motor car:
(i) Motor car is owned or hired by employer and its
running and maintenance expenses are met or
reimbursed by employer:
(a) Car is fully used in the performance of official
duties of the employee= Value of perk= Nil
(b) Car is used for the private, personal or family
purposes of the employee= Value of perk= actual
expenses incurred by the employer on running
and maintenance of car + salary of driver +
normal wear and tear of car (10% of cost of car)any amount charged by employer from employee
(any amount paid or re-imbursed by employee)

Perquisites: taxable for

specified employees only
Motor car is owned or hired by employer and its
running and maintenance expenses are met or
reimbursed by employer:
(c) Car is used partly in the performance of duties and
partly for private or personal purposes:
The expenses on maintenance and running are met
or re-imbursed by employer: if engine does not
exceeds 1.6 lts= Rs. 1800 p.m.; if engine exceeds
1.6 lts= Rs. 2400 p.m.
The expenses on running and maintenance for
private or personal use are fully met by employee
himself= if engine does not exceeds 1.6 lts= Rs.
600 p.m.; if engine exceeds 1.6 lts= Rs. 900 p.m.
If driver is also provided by employer to run motor
car= Rs. 900 p.m. will be added in both the cases
(i)

Perquisites: taxable for

specified employees only
(ii)

Motor car is owned but its running and

maintenance expenses are met or reimbursed by
employer:
Car is being used wholly or solely for official
purposes= Value of perk= Nil
Car is being used partly for official purposes and
partly for personal or private purposes: taxable
value of perk=
Actual amount of expenditure incurred by
employer
less: 1800 p.m. in case of small car/ 2400 p.m. in
case
of big car
less: 900 p.m. for driver

Perquisites: taxable for

specified employees only
(iii) Where the employee owns any other automotive
conveyance but the actual running and
maintenance expenses are met or reimbursed by
employer:

Employees conveyance is being used only for

official purposes= Value of perk= Nil but the
proper log book is to be maintained.

Employers Conveyance is being used partly for

official purposes and partly for personal or private
purposes of the employees: taxable value of perk=
Actual amount of expenditure incurred by employer
less: 900 p.m. for driver
Proper log book is to be maintained.

Perquisites: taxable for

specified employees only

Perquisites of free domestic servants= Value of perks= (Amount

spent by employer- amount charged/ recovered by employer from
employee)
Perquisites in respect of free supply of Gas, Electricity or water
supply = Value of perks= (Amount spent by employer- amount
charged/ recovered by employer from employee)
Free educational facilities to children of employees household:
If payment of reimbursement of fees of school, college etc. =
taxable
Providing free educational facilities in a school or college
maintained by employer: more than Rs. 1,000 p.m. taxable
Facilities of free or concessional private journey to an employee by
the employer engaged in the carriage of passengers or goods
value of perks= Normal frieght charges chargeable from publicamount chargeable from employee
Medical facilities= fully taxable

Profits in lieu of salary

Leave Travel Concession
The amount actually used= Exempted;
In case journey is by Air= air economy fair of the national
carrier by shortest route to the place of Journey
In case journey is by other than Air= Air conditioned first class
rail fare by the shortest route to the place of destination
In case place is not connected by rail:
If recognised transportation system exists = fare of first class
fare by the shortest route to the place of destination
If recognised transportation system does not exists = fare of
first class air conditioned fare by the shortest route to the
place of destination, if the journey is supposed to be
covered by rail
Assessee + spouse + two children

Profits in lieu of salary

Death cum retirement gratuity: it can be given
At the time of leaving the job
At the time of death
Govt. Employees: Fully exempted
Non- Govt. Employees: Received- exempted= taxable
If it is covered under Payment of Gratuity Act, 1972
Rs. 10,00,000
Or
Actual Received
Or
Monthly Salary last drawn x 15 days/ 26 days x no of years of service (Rounded off
years)
WEL= Exempted
If it is covered under Payment of Gratuity Act, 1972
Rs. 10,00,000
Or
Actual Received
Or
Monthly Salary last drawn x 15 days/ 30 days x no of years of service (Completed years)
WEL= Exempted
Salary= BP + DP + C

Profits in lieu of salary

Pension
(i) Un commuted Pension:
Fully Taxable in case of Govt. and Non- Govt.
Employees
(ii) Commuted Pension:
Govt. Employees= Fully exempted
Non Govt. Employees:
(a) Receiving Gratuity also:
= 1/3 x Amount of commuted pension x reverse of
portion commuted= exempted
(b) Not receiving Gratuity:
= 1/2 x Amount of commuted pension x reverse
of portion commuted= exempted

Profits in lieu of salary

Leave encashment:
Govt. employees: fully exempted
Non- govt. employees:
Actual
Or
Rs. 3,00,000
Or
10 months average salary
Or
Salary x (Months for which Leave is due months for which
leave has been taken)
WEL= Exempted, rest taxable
Salary: Basic salary + DP + C

Profits in lieu of salary

Compensation on termination of
employment
Actual amount received
Or
Rs. 5,00,000
Or
1/ 2 x salary x no of years (rounded off)
WEL= Exempted, Rest taxable
Salary= BP + DP+ C

Profits in lieu of salary

Voluntary Retirement
Exemption allowed to any employee whether government or
non government
Rs. 5,00,000
or
Actual
or
3 x salary x completed no of years
or
No of months remaining in the service if retirement not taken
x average salary
WEL= Exempted, rest taxable
Salary= BP+ DP+ C

Hints for Tax Planning

It should be ensured that, under the term

of employment the DA should be part of
employment purposes; that will reduce the
tax liability e.g. Contribution of employer
to RPF, Gratuity and HRA etc.
The commission should be paid on Fixed
percentage of Turnover (as per the case
held in Supreme Court) that will reduce
the tax liability in case of HRA,
Entertainment Allowances, Gratuity etc.

Hints for Tax Planning

As uncommuted pension is taxable to all

(Government as non- Government Employees) so it
should be preferred that pension should be
commuted, For Government Employees it is fully
exempted and in case of non- Government
Employees it is partly exempted
If a person who is working under a firm in which
he is member of RPF, if he wants to leave the firm
before the expiry of 5 years then he should join
the firm in which he can become the member of
RPF, only then the accumulated balance from the
former employer will be exempted

Hints for Tax Planning

Since the contribution of employer

towards the RPF is exempted upto 12%,
the employer can raise the benefit
towards employee upto 12% in this way
his tax liability will not increase
While medical allowances payable in cash
are taxable, but the ordinary free medical
facilities are not taxable, so the medical
facilities should be provided instead of
fixed medical allowances

Hints for Tax Planning

The incidence of tax on retirement, gratuity,

commuted pension are less if these are paid in the
beginning of the year. So there should be mutual
arrangements among both employees and employer
that it should be paid in the beginning of the year.
An employee can claim for the benefit of relief if
payment made towards URPF
Pension received in India by a non-resident assessee
from abroad is taxable in India. If he wants to get
the exemption it should be firstly received there
then remitted to India, it will be exempted then

Hints for Tax Planning

Leave travel concession is exempted if it is taken as
per provisions so try to follow that to get exemption
Computers, laptops given to an employee for
official or personal use, Transfer of moveable asset
which is used by employer for 10 years= exempted,
so take after appropriate time to get benefit
Since Salary in case of Rent free accommodation:
Basic salary, wages, dearness pay, commission, bonus,
fees, commission, value of all taxable allowances, all
monetary payments, leave encashment of salary
So it would be advantageous if an employee will go for
perquisites instead of allowances, that will reduce
the value of RFA.