INCOME

FROM
SALARY
 What is Salary?
Income under heads of salary is defined as remuneration received
by an individual for services rendered by him to undertake a
contract whether it is expressed or implied.

According to Income Tax Act, there are following conditions

where all such remuneration are chargeable to Income Tax:
• When due from the former employer or present employer in the
previous year, whether paid or not.
• When paid or allowed in the previous year, by or on behalf of a
former employer or present employer, though not due or before
it becomes due.
• When arrears of salary is paid in the previous year by or on
behalf of a former employer or present employer, if not charged
to tax in the period to which it relates.
Income under the Head of Salary
Under section 17 of the Income Tax Act, 1961 there are
following incomes which comes under head of
salary:
• Basic Salary (including advance salary)
• Wages
• Fees
• Commissions
• Pensions
• Annuity
• Perquisite
• Gratuity
• Annual Bonus
• Income From Provident Fund
• Leave Encashment
• Allowance
• Awards
 PERFORMA OF SALARY
NAME OF ASSESSEE:- ASSESSMENT YEAR:-
PREVIOUS YEAR:- LEGAL STATUS: - INDIVIDUAL
/COMPANY
RESIDENTIAL STATUS:-
SR NO. PARTICULARS (RS) (RS)
I. SALARY
Basic salary xxx
Advance salary xxx
Arrears of salary xxx
Bonus xxx
Leave salary xxx
Commission xxx
Pension xxx
Gratuity xxx XXX

II. ALLOWANCES
Dearness allowances xxx
House allowances xxx
Conveyance allowances xxx
 Special allowances xxx
Lunch allowances xxx
Fixed medical allowances xxx
Entertainment allowances xxx XXX

III. PERQUISITE TAXABLE XXX

IV. PROFIT IN LIEU OF SALARY

Compensation received from the employer xxx
Employers contribution to provident fund xxx XXX

GROSS TOTAL INCOME (I. +II. +III. +IV.) XXX

LESS:DEDUCTIONS
Entertainment allowance xxx
Professional tax xxx XXX
NET TAXABLE SALARY XXX
 Tax implications of
salary components
Component Taxable Income
Basic Fully taxable
House Rent Allowance Fully taxable
Supplementary allowance Fully taxable
Conveyance Partially exempt
Lunch coupons Fully Exempt
Medical reimbursement Partially exempt
Leave travel allowance Partially exempt
Company’s contribution
Partially exempt
towards PF
Telephone reimbursement Fully Exempt
Car reimbursement Fully Exempt
Annual bonus Fully taxable
Mediclaim contribution Fully Exempt
Gratuity Partially exempt
 Tax Treatment of different forms of
‘SALARY’
• Salary to Partners {Section 15}:
Any salary, bonus, commission or remuneration received by a
partner from his firm is taxed as business income and not as salary
income.
• Overtime Payment:
Overtime payment is a taxable salary income.
• Annuity {Section 17(1) (ii)}:
Annuity received from present employer will be taxed as salary.
COMPONENTS OF SALARY
• Bonus:
Bonus is taxed in the year of receipt, it is not taxed on due basis.

• Advance Salary {Section 17(1) V}:

when any salary paid in advance is taxed on receipt basis (in the yr. of
receipt) it can’t be taxed again on the due basis (in the yr. in which it
becomes due).

• Arrear of Salary:
Arrear of Salary received by an assessee is charged to tax on receipt
basis (if it was not taxed earlier on due basis).
• Retrenchment Compensation
{Sec. 25F (b)}:
Compensation received at the time
of retrenchment, is exempt from
tax to the extent of lower of the
following:
– 15 day’s average pay for each
completed yr. of services or any
part in excess of six months.
– Maximum amt. 5, 00,000.
– Actual amount received.
• Fees & Commission:
Fees & Commission paid to an
employee are taxed as salary
income.
Leave Salary (Encashment) (section 10(10A)):

Particulars Exemptions
Encashment of leave during the continuation of It is charged to tax.
service
Encashment of leave at the time of retirement
1. If there is Central or State Govt. Employees Fully exempt from tax u/s
10(10AA)(i)
2. For any other employees Whichever is less of following
1. Period of earned leave in
months X Avg. monthly salary

2. Avg. monthly salary X 10

3. Maximum amt. 3,00,000
4. Actual received.
Note: Period of leave in month
Gratuity {Section 10(10)}:
Particulars Exemption
Gratuity recd. By Govt. & Local Fully exempt u/s 10(10) (i)
Authority Employees
Gratuity in case of employees Lower of following amount.
covered by Payment of Gratuity Act, 1. 15 days salary X yrs of
1972 service
2. Max. amt. 3, 50,000.
3. Actually received.
Gratuity in respect of any other Lower of following amount.
employee. 1. 1/2 months salary for each
completed yr of service.

2. Max. amt. 3, 50,000.

3. Actually received.
Note: In A.Y. 2011 - 12 i.e. Max. Amt. is 10, 00,000.
• Gratuitous Payment:
Any lump sum & any ex – gratia payments made
gratuitously or by way of compensation or otherwise to a
widow/legal heirs of an employee, who dies while still in
service will not be taxable as per Circular No. 776, dated
June 8, 1999.
 Pension
Particulars Exemption
A) Uncommuted pension recd. by any Fully taxable as salary.
employee. (Govt. or Non Govt.)

B) Commuted pension recd. by Govt. Fully exempt from tax u/s 10(10A)
employee. (i)
C) Commuted pension recd. by Non Govt. employee.

1) If such employee receives gratuity. 1/3 of full value of commuted

pension will be exempt from tax
u/s 10(10A) (ii)

2) If such employee does not receive 1/2 of full value of commuted

gratuity. pension will be exempt from tax
u/s 10(10A) (ii)
COMPONENTS OF ALLOWANCES
 Exempted
Name of Allowances Sec. Rule Provisions Amt.
HRA 10(13A) 2A 1. 1/2 of Salary at Mumbai , Whichever is
Bangalore , Delhi , Chennai. & 2/5 less
of Salary when other side resident.
2. Actual received
3. Rent paid in excess of 10% of
Salary.
Conveyance 10(14)   1. The amount of allowance Whichever is
received less

2. The amt. spent for that purpose

Helper 10(14)   1. The amount of allowance Whichever is
received less

2. The amt. spent for that purpose

Children Education 10(14) 2BB Rs. 100 per month per child up to
max. of two children.  
Hostel Expenditure 10(14) 2BB Rs. 300 per month per child up to
max. of two children.  
Transport 10(14) 2BB Rs. 800 per month & 1600 per
month in case of an employee,
who is blind, orthopedically
handicapped.
 
Exemption varies from 300 p/m to
Special Compensatory 10(14) 2BB 7000 p/m.  
Name of Exempted
Allowances Sec. Rule Provisions Amt.
Border Area 10(14) 2BB Exemption varies from
200 p/m to 1300 p/m.  
Rs. 200 p/m in case of
Tribal/Scheduled Area 10(14) 2BB prescribed tribal area.  
Exemption is limited to
Under Ground 10(14) 2BB Rs. 800 p/m.  
High Altitude Area 10(14) 2BB Exemption is up to Rs.
1060 p/m or 1600 p/m
depending upon height
of altitude.
 
Highly Active Field Area 10(14) 2BB Exemption is up to Rs.
4200 p/m.  
Exemption is up to Rs.
Island Duty 10(14) 2BB 3250 p/m.  
COMPONENTS OF PERQUISITES
RENT FREE ACCOMMODATION
1. In case of Central Govt. employee then License Fee will be exempt.
2. In case of any other employee
Population of the city Nature of Accom.
Owned by the Employer Rented by the Employer
Exceeding 25 Lakh 15 % of Salary Lower of a) 15% of Salary or b)
rent paid/payable by the
employer

Between 10 - 25 Lakh 10 % of Salary Same as above

Less than 10 Lakh 7.5 % of Salary Same as above

Note: Salary for this purpose

1. Basic Salary
2. D. A. (not in terms)
PERQUISITE VALUE OF MOTOR CAR PROVIDED
FOR OFFICE USE AND PERSONAL USE
Circumstances Engine Cubic capacity does not
exceed 1.6 litres.
If motor-car is used No value if specified documents
wholly and exclusively are maintained by the
in the performance of employer.
his official duties.
Circumstances Engine Cubic capacity does not Engine Cubic capacity exceeds 1.6 litres.
exceed 1.6 litres
If car is used Actual amount of expenditure
exclusively for private incurred by the employer on the
or personal purposes of running and maintenance of
the employee or any motorcar
member of his (+)
household & the remuneration, if any, paid by
running and the employer to the chauffeur
maintenance are met (+)
or reimbursed by the depreciation of the car and
employer (-)
any amount charged by the
employer for such use by the
employee
Engine Cubic capacity exceeds 1.6
litres.
No value if specified documents are
maintained by the employer.
Actual amount of expenditure incurred
by the employer on the running and
maintenance of motorcar
(+)
remuneration, if any, paid by the
employer to the chauffeur
(+)
depreciation of the car and
(-)
any amount charged by the employer
for such use by the employee
 Provident Fund
Particulars Statutory Recognized PF Unrecognized PF Public PF
PF
Employer Exempt Exempt upto 12% of salary, Exempt Not applicable
contribution excess of 12% is taxable.
(as there is only
assessee’s own
contribution.)

Deduction u/s 80C on Available Available Not available Available

employee's
contribution
Interest credited to PF Exempt Exempt upto 9.5%, excess of Exempt Fully
that rate is taxable. exempted
Lump sum payment. Exempt Exempt in some cases (Note Payment Recd. in respect of Fully
At the time of 1), otherwise PF will be employee's own contribution is
retirement or treated as an Unrecognized exempt from tax, interest on
exempted.
termination of service fund from the beginning . employee's contribution is
taxable under the head "IFOS".
Balance is taxable under
"Salaries".

Note: 1 Salary for this purpose

1. Basic salary
2. D.A. (if terms of employment)
3. Commission is determined at a fixed percentage of turnovers achieved by an
employee.
 Medical Facilities
Medical facility Exemption
Medical Situation- I Fully exempted
treatment in 1. Treatment in hospital maintained by
India the employer.(For any diseases.) Fully exempted
2. Treatment in my hospital –
 Maintained by Government (Central or
state)/ local authority; or
 In a hospital approved by Government
for medical treatment of its employees.
(For any diseases)
3. Treatment in any hospital approved by Fully exempted
the Chief Commissioner of income tax
for prescribed disease.

Situation – II a. Actual expenses incurred

Treatment in any other hospital (i.e. private or reimbursed by
hospital) employer ; or
b. Rs. 15,000 in aggregate
per annum (which ever is
less)
Medical 1. Expenses on medial Expenses to the extent permitted by RBI.
treatment treatment of the
outside India employee/ and member of
his family.
2. Expenses on stay abroad of Expenses to extent permitted by RBI.
the patient (i.e. employee
or any member of his
family) (+) one attendant.
3. Traveling expenses of the Fully exempted
patient (i.e. employee or Conditions
any member of his family) GTI before including the taxable perquisite
(+) one attendant. on account of travel expenses does not
exceed Rs. 2,00,000..
Note – taxable value of medical treatment &
stay abroad shall be included in computing
the limit of. 2,00,000.
Note – it should be noted that if GTI exceeds
Rs. 2, 00,000 entire amount of traveling
expenses reimbursed by the employer is
taxable.

The employee has to attach along with his return of income, a certificate from the
hospital specifying the disease for which the medical treatment was required and
the receipt for the amount paid to the hospital.
Leave Travel
Allowances (LTA):
Different situations Amount of exemption
1. Journey is performed by Air Amt. of ecenomy class air fare of the national carrier
by the shortest route or the amt.spent, whichever is
less.

2. Journey is performed by Rail Amt. of air conditioned first class rail fare by the
shortest route or amount spent, whichever less.

3. Places of origin of journey & Amt. of air conditioned first class rail fare by the
destination are connected by rail & shortest route or the amount spent, whichever is less.
journey is performed by any other mode
of transport.

4. Places of origin of journey & destination are not connected by rail

A. Where a recognised public transport First class or deluxe class fare by the shortest route or
system exists the amount spent, whichever is less.

B. Where no recognised public transport Air conditioned first class rail fare by the shortest
systems exist. route (as if the journey had been performed by rail)
or the amount actually spent, whichever is less.
Profits in lieu of SALARY {Section 17(3) (ii)}:
 Received or due to be received to the extent which is not exempt,
and which it does not consist of contribution made by the
employee, or interest thereon, is taxable as profits in lieu of salary.
• Annuity received from Ex-Employer will be taxed as “Profits in lieu
of salary”.

• Keyman Insurance Policy:

Surrender value of the policy endorsed in favor of the employee, or
the sum received by him at the time of retirement, will be taxable as
profit in lieu of salary.

• Lump-sum Incentives:
Any amount due or received:
      Before joining employment or
After leaving employment, it is Taxable as profit in lieu of salary.
 
Deductions from salary
(Section 16)
• Standard Deductions {Section 16(i)}:
This deduction is not available from the A. Y. 2006 – 07.

• Entertainment Allowance {Section 16(ii)}:

This allowance is first included in salary income under the
head “Salary” & thereafter deduction is given on the basis
enumerated in the following:
In the case of Govt. employee:
– Rs. 5000.
– 1/5 of basic salary.
– Actual amount received.
Whichever is less is eligible for deduction.
In the case of other employee, no deduction is available from
A.Y. 2002 – 03.
Professional Tax or Tax on Employment
{Section 16(iii)}:
• Deduction is available in
the year in which
professional tax is actually
paid.
• If Professional Tax is
reimbursed by the
employer, then
Professional Tax
reimbursed by the
employer will first be
included in salary as
perquisite & then the
same amount is allowed
as deduction under
section 16(iii) from gross
 Tax Slabs
Income tax slabs 2011-2012 (for Men) in India:
Income Tax Slab (in Rs.) Tax
0 to 1,80,000 No Tax
1,80,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%
Income tax slabs 2011-2012 (for Women) in India:
Income Tax Slab (in Rs.) Tax
0 to 1,90,000 No Tax
1,90,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%
Income tax slabs 2011-2012 (for Senior Citizens) in India:
Income Tax Slab (in Rs.) Tax
0 to 2,50,000 No Tax
2,50,001 to 5,00,000 10%
5,00,001 to 8,00,000 20%
Above 8,00,000 30%
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