Income Under Head Salary Notes| Download PDF. In previous article we have given What is Taxable Income and PAN Card Changes w.e.f. 1st January, 2016. Today we are providing complete notes on income under head salary. You can download this notes at the end of this article. Read below
What is salary and what does salary include?
WHAT IS “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”.
WHAT DOES “SALARY” INCLUDE
Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of “Salaries” including therein (i) Wages (ii) Annuity or pension (iii) Gratuity (iv) Fees, Commission, perquisites or profits in lieu of salary (v) Advance of Salary (vi) Amount transferred from unrecognized provident fund to recognized provident fund (vii) Contribution of employer to a Recognised Provident Fund in excess of the prescribed limit (viii) Leave Encashment (ix) Compensation as a result of variation in Service contract etc. (x) Contribution made by the Central.
What are allowances and which allowances are exempt?
Allowance is defined as a fixed quantity of money or other substance given regularly in addition to salary for meeting specific requirements of the employees. As a general rule, all allowances are to be included in the total income unless specifically exempted. Exemption in respect of following allowances is allowable to the exent mentioned against each :-
House Rent Allowance:- Provided that expenditure on rent is actually incurred, exemption available shall be the least of the following :
(i) HRA received.
(ii) Rent paid less 10% of salary.
(iii) 40% of Salary (50% in case of Mumbai, Chennai, Kolkata, Delhi) Salary here means Basic + Dearness Allowance, if dearness allowance is provided by the terms of employment.
Leave Travel Allowance: The amount actually incurred on performance of travel on leave to any place in India by the shortest route to that place is exempt. This is subject to a maximum of the air economy fare or AC 1st Class fare (if journey is performed by mode other than air) by such route, provided that the exemption shall be available only in respect of two journeys performed in a block of 4 calendar years.
Certain allowances given by the employer to the employee are exempt u/s 10(14). All these exempt allowance are detailed in Rule 2BB of Income-tax Rules and are briefly given below:
For the purpose of Section 10(14)(i), following allowances are exempt, subject to actual expenses incurred:
(i) Allowance granted to meet cost of travel on tour or on transfer.
(ii) Allowance granted on tour or journey in connection with transfer to meet the daily charges incurred by the employee.
(iii) Allowance granted to meet conveyance expenses incurred in performance of duty, provided no free conveyance is provided.
(iv) Allowance granted to meet expenses incurred on a helper engaged for performance of official duty.
(v) Academic, research or training allowance granted in educational or research institutions.
(vi) Allowance granted to meet expenditure on purchase/ maintenance of uniform for performance of official duty.
Under Section 10(14)(ii), the following allowances have been prescribed as exempt.
|Type of Allowance||Amount exempt|
|(i) Special Compensatory Allowance for hilly areas or high altitude allowance or climateallowance.||Rs.800 common for various areas of North East, Hilly areas of UP, HP. & J&K and Rs. 7000 per month for Siachen area of J&K and Rs.300 common for all places at a height of 1000 mts or more other than the above places.|
|(ii) Border area allowance or remote area allowance or a difficult area allowance or disturbed area allowance.||Various amounts ranging from Rs.200 per month to Rs.1300 per month are exempt for various areas specified in Rule 2BB.|
|(iii) Tribal area/Schedule area/Agency area allowance available in MP, Assam, UP., Karnataka, West Bengal, Bihar, Orissa, Tamilnadu, Tripura||Rs.200 per month.|
|(iv) Any allowance granted to an employee working in any transport system to meet his personal expenditure during duty performed in the course of running of such transport from one place to another place.||70% of such allowance upto a maximum of Rs.6000 per month.|
|(v) Children education allowance.||Rs.100 per month per child upto a maximum 2 children.|
|(vi) Allowance granted to meet hostel expenditure on employee’s child.||Rs.300 per month per child upto a maximum two children.|
|(vii) Compensatory field area allowance available in various areas of Arunachal Pradesh, Manipur Sikkim, Nagaland, H.P., U.P. & J&K.||Rs.2600 per month.|
|(viii) Compensatory modified field area allowance available in specified areas of Punjab, Rajsthan, Haryana, U.P., J&K, HP., West Bengal & North East.||Rs.1000 per month|
|(ix) Counter insurgency allowance to members of Armed Forces.||Rs.3900 Per month|
|(x) Transport Allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of residence & duty.||Rs.800 per month.|
|(xi) Transport allowance granted to physically disabled employee for the purpose of commuting between place of duty and residence.||Rs.1600 per month.|
|(xii) Underground allowancegranted to an employeeworking in under groundmines.||Rs.800 per month.|
|(xiii) Special allowance in thenature of high altitudeallowance granted to members of the armed forces.||Rs. 1060 p.m. (for altitude of 9000-15000 ft.) Rs.1600 p.m. (for altitude above 15000 ft.)|
|(xiv) Any special allowancegranted to the members of the armed forces in the nature of special compensatory highly active field area allowance||Rs. 4,200/- p.m.|
|(xv) Special allowance granted to members of armed forces in the nature of island duty allowance. (in Andaman & Nicobar & Lakshadweep Group of Islands)||Rs. 3,250/- p.m.|
What are perquisites?
“Perquisite” may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages.
“Perquisite” is defined in the section 17(2) of the Income tax Act as including:
(i) Value of rent-free/concessional rent accommodation provided by the employer.
(ii) Any sum paid by employer in respect of an obligation which was actually payable by the assessee.
(iii) Value of any benefit/amenity granted free or at concessional rate to specified employees etc.
(iv) 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 assesssee.
(v) The amount of any contribution to an approved superannuation fund by the exployer in respect of the assessee, to the extent it exceeds one lakh rupees; and
(vi) the value of any other fringe benefit or amenity as may be prescribed.
Which are the perquisites exempted from Income Tax?
Some instances of perquisites exempt from tax are given below:
Provision of medical facilities (Provision to Sec. 17(2)): Value of medical treatment in any hospital maintained by the Government or any local authority or approved by the Chief Commissioner of Income-tax. Besides, any sum paid by the employer towards medical reimbursement other than as discussed above is exempt upto Rs.15,000/-.
Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India (Sec. 10(7)).
Rent free official residence provided to a Judge of High Court or Supreme Court or an Official of Parliament, Union Minister or Leader of Opposition in Parliament.
No perquisite shall arise if interest free/concessional loans are made available for medical treatment of specified diseases in Rule 3A or where the loan is petty not exceeding in the aggregate Rs.20,000/-No perquisite shall arise in relation to expenses on telephones including a mobile phone incurred on behalf of the employee by the employer.
What is included in Fringe Benefits and how are they taxed?
The Finance Act 2005 has introduced a new tax called ‘Income-tax on fringe benefits’ w.e.f. 01.04.2006. This shall be in the form of additional income tax levied on fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year.
Rate of Tax :-
The tax on fringe benefits shall be levied at the rate of 30% on the value of fringe benefits provided.
Liability to Pay: –
The liability to pay this tax is to be borne by the employer including
i) a company
ii) a firm
iii) an association of persons or body of individuals excluding any fund or trust or institution eligible for exemption u/s 10(23C) or 12AA.
iv) a local authority
v) an artificial juridical person
What is included in ‘Fringe Benifits’ :-
Fringe benefits have been defined as including any consideration for employment provided by way of
a) any privilege, service, facility or amenity provided by an employer directly or indirectly including reimbursements.
b) any free or concessional ticket provided by the employer for private journeys of his employees or their family members.
c) any contribution by the employer to an approved superannuation fund for employees.
d) any specified security or sweat equity shares allotted/ transferred, directly or indirectly by the employers free of cost or at concessional rate to his employees. The detailed provisions in respect of this are included in Chapter XII H of the I.T. Act.
Further, fringe benefits shall be deemed to have been provided if the employer has incurred any expenses or made any payments for various purposes namely, entertainment, provision of hospitality, conference, sales promotion including publicity, employees welfare, conveyance, tour & travel, use of hotel, boarding & lodging etc.
Various provisions relating to income tax on ‘fringe benefits’ have been modified by the Finance Act, 2006. Exceptions in respect of certain expenditures have been introduced including expenditure incurred on distribution of free/concessional samples and payments to any person of repute for promoting the sale of goods or services of the business of the employer. Similarly, it has been proposed that expenditure incurred on providing free or subsidized transport or any such allowance provided by the employer to his employees for journeys from residence to the place of work shall not be part of fringe benefits. Another significant amendment is regarding the contribution by an employer to an approved superannuation fund to the extent of Rs.1 lakh per employee which shall not be liable to fringe benefit tax. Further, in the case of some other expenses incurred such as expenses incurred on tour and travel, lower rates for valuation of fringe benefits @ 5% have been provided for. The Finance Act 2008 has introduced further exemption in respect of certain expenditures from the purview of Fringe Benefit Tax. These include payments through non-transferable electronic meal cards, provision of crèche facility, organizing sports events or sponsoring a sportsman being an employee. These provisions shall come into effect from A.Y. 2009-10 onwards.
The Finance act, 2009 has withdrawn the Fringe Benefit Tax. Thus, the FBT stands abolished w.e.f. A.Y. 2010-11 and now such perquisites are taxable in hands of employees.
Which investments are eligible for deductions u/s 80C?
The following investments/payments are inter alia eligible for deduction u/s 80C:-
|Nature Of Investment||Remarks|
|Life Insurance Premium||For individual, policy must be in the name of self or spouse or any child’s name. For HUF, it may be on life of any member of HUF.|
|Sum paid under contract for deferred annuity||For individual, on life of self, spouse or any child of such individual.|
|Sum deducted from salary payable to Govt. Servant for securing deferred annuity for self, spouse or child||Payment limited to 20% of salary.|
|Contribution made under Employee’s Provident Fund Scheme||–|
|Contribution to PPF||For individual, can be in the name of self/spouse, any child & for HUF, it can be in the name of any member of the family.|
|Contribution by employee to a Recognised Provident Fund.||–|
|Subscription to any notified securities/notified deposits scheme.||–|
|Subscription to any notified savings certificates.||e.g. NSC VIII issue.|
|Contribution to Unit Linked Insurance Plan of LIC Mutual Fund||e.g. Dhanrakhsa 1989|
|Contribution to notified deposit scheme/Pension fund set up by the National Housing Bank.||–|
|Certain payment made by way of instalment or part payment of loan taken for purchase/ construction of residential house property.||Condition has been laid that in case the property is transferred before the expiry of 5 years from the end of the financial year in which possession of such property is obtained by him, the aggregate amount ofdeduction of income so allowed for various years shall be liable to tax in that year.|
|Subscription to units of a Mutual Fund notified u/s 10(23D)||–|
|Subscription to deposit scheme of a public sector company engaged in providing housing finance.||–|
|Subscription to equity shares/ debentures forming part of any approved eligible issue of capital madeby a public company or public financial institutions.||–|
|Tuition fees paid at the time of admission or otherwise to any school, college, university or other educational institution situated within India for thepurpose of full time education.||Available in respect of any two children.|
|Any term deposit for a fixed period of not less than five years with the scheduled bank.||This has been included in Section 80C by the Finance Act 2006.|
|Subscription to notified bonds issued by NABARD||This has been included in Section 80C by the Finance Act 2007 and has come into effect from 1.4.2008.|
|Payment made into an account under the Senior Citizens Savings Scheme Rules, 2004||This has been introduced by Finance Act, 2008 and shall come into effect from 1.4.2009.|
|Payment made as five year time deposit in an account under the Post Office Time Deposit Rules, 1981||This has been introduced by Finance Act, 2008 and shall come into effect from 1.4.2009.|
It may be noted that the aggregate amount of deductions under sections 80C, 80CCC and 80CCD are subject to an overall ceiling of Rs.1 lakh.
How much of Gratuity is exempt?
GRATUITY – SECTION 10(10)
a) Any Death-cum-Retirement gratuity to Govt. Employees : Wholly exempt.
b) Any gratuity received by the employees covered under Payment of Gratuity Act, 1972. Least of the following is exempt:-
– 15 days salary (7 days in case of seasonal employment) for each completed year of service or part in excess of 6 months.
– Rs. 3,50,000.
– Amount of gratuity actually received
c) Any other gratuity, (not covered under (a) or (b)): Least of the followings is exempt:-
– Rs 3,50,000
– Half month’s salary for each completed year of service
– Amount of gratuity actually received.
How much of Commuted Pension is exempt?
A) Government Employees : Wholly exempt.
B) Non-Govt. Employees :
i) Where the employee receives gratuity, amount not exceeding the commuted value to the extent of 1/3rd of the pension is exempt.
ii) In other cases : the commuted value of ½ of pension is exempt.
How much of Leave Encashment on Retirement is exempt?
a) Govt. Employees : wholly exempt.
b) Non-government Employees : Exemption is available in respect of the least of the following :
– Cash equivalent of the leave salary in respect of the period of earned leave to the credit of the employee at the time of retirement but not exceeding 30 days for each year of actual service and also not exceeding for a period of ten months;
– The Amount calculated on the basis of 10 months average salary immediately preceding his retirement;
– Rs. 3,00,000 if date of retirement is on or after 1.4.98;
– Leave encashment actually received.
How much of Retrenchment Compensation is exempt?
RETRENCHMENT COMPENSATION – SECTION 10 (10B) :
The retrenchment compensation received by a workman is exempt provided that in general it does not exceed the sum calculated on the basis provided in Section 25F(b) of Industrial Disputes Act, 1947 or any such amount as is specified by the Central Govt. by a Notification, whichever is less. The maximum exemption is Rs. 5 lakhs where retrenchment is on or after 1-1-1997.
How much payment received on Voluntary Retirement is exempt
PAYMENT RECEIVED ON VOLUNTARY RETIREMENT SECTION 10 (10C):
Any amount received by an employee of a Public Sector Company or of any other company at the time of voluntary retirement is exempt to the extent such amount does not exceed Rs. 5 lacs, provided the scheme of such voluntary retirement is in accordance with the guidelines prescribed under rule 2BA of Income Tax Rules 1962. If an exemption has been allowed under this section for any assessment year, no exemption there under is allowable in relation to any other assessment year. Further, the benefit of the exemption has been extended to employees of an authority established under a Central, State or Provincial Act, or a local authority or to employees of a Co-operative society, university, Indian institute of Technology and notified Institute of Management.
How much Special Allowance Benefit is exempt?
Any special allowance or benefit specifically granted to the employee to meet the expenses in the performance of duties of an office or employment of profit (as is prescribed in the I.T. Rules, 1962) is exempt to the extent of actual expenditure incurred.
How much of Annual Accretion fo PF Account is exempt?
Provident Fund Account (PF Account)
a) Employer’s contribution to the extent of 12% of the salary
b) Interest on the credit balances at the notified rate of 12%.
How much House Rent allowance is exempt?
HOUSE RENT ALLOWANCE – SEC 10 (13A) READ WITH RULE 2A :
When the employee is occupying a rented residential accommodation, the amount of house rent allowance received by him is exempt to the extent of least of the following amounts:
a) 50% of the salary where residential house is situated at Bombay, Calcutta, Madras or Delhi and 40% of the salary where residential house is situated at any other place.
b) House Rent Allowance actually received by the Employee in respect of the period during which the residential accommodation is occupied by him during the year.
c) Amount of rent paid in excess of 10% of the salary. Besides the above, there are certain other incomes also, which are totally exempt or exempt subject to fulfillment of certain conditions.
Are arrears of salary taxable?
Yes. However certain benefit of spread over of income to the years to which it relates can be availed for lower incidence of tax.
This is called relief u/s 89(1) of Income-tax Act.
What is Gratuity?
(i) Any death cum retirement gratuity received by Central and State Govt. employees, Defence employees and employees in Local authority shall be exempt.
(ii) Any gratuity received by persons covered under the Payment of Gratuity Act, 1972 shall be exempt subject to following limits:-
(a) For every completed year of service or part thereof, gratuity shall be exempt to the extent of fifteen days Salary based on the rate of Salary last drawn by the concerned employee.
(b) The amount of gratuity as calculated above shall not exceed Rs.3,50,000(w.e.f. 24.9.97).
(iii) In case of any other employee, gratuity received shall be exempt subject to the following limits:-
(a) Exemption shall be limited to half month salary (based on last 10 months average) for each completed year of Service
(b) Rs.3.5 Lakhs whichever is less.
Where the gratuity was received in any one or more earlier previous years also and any exemption was allowed for the same, then the exemption to be allowed during the year gets reduced to the extent of exemption already allowed, the overall limit being Rs 3.5 Lakhs.
As per Board’s letter F.No. 194/6/73-IT(A-1) dated 19.6.73, exemption in respect of gratuity is permissible even in cases of termination of employment due to resignation. The taxable portion of gratuity will quality for relief u/s 89(1).
Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax (Circular No. 573 dated 21.8.90). Payment of Gratuity (Amendment) Bill, 2010 has proposed to increase the limit to Rs. 10,00,000.
Is leave encashment fully taxable?
(i) Leave Encashment during service is fully taxable in all cases, relief u/s 89(1) if applicable may be claimed for the same.
(ii) Any payment by way of leave encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt.
(iii) In case of other employees, the exemption is to be limited to the least of following:
(a) Cash equivalent of unutilized earned leave (earned leave entitlement can not exceed 30 days for every year of actual service)
(b) 10 months average salary
(c) Leave encashment actually received. This is further subject to a limit of Rs 3,00,000 for retirements after 02.04.1998.
(iv) Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit of such employee at the time of death is not taxable.
Is payment received from a PF eligible for exemption?
Any payment received from a Provident Fund, (i.e. to which the Provident Fund Act, 1925 applies) is exempt. Any payment from any other provident fund notified by the Central Govt. is also exempt. The Public Provident Fund (PPF) established under the PPF Scheme, 1968 has been notified for this purpose. Besides the above, the accumulated balance due and becoming payable to an employee participating in a Recognised Provident Fund is also exempt to the extent provided in Rule 8 of Part A of the Fourth Schedule of the Income Tax Act.
Will payment be exempt from approved superannuation fund?
Payment from an Approved Superannuation Fund will be exempt provided the payment is made in the circumstances specified in the section viz. death, retirement and incapacitation.
What is Pension?
Pension is described in section 60 of the CPC and section 11 of the Pension Act as a periodical allowance or stipend granted on account of past service, particular merits etc. Thus monthly allowance to the younger brother of a ruler was treated as a maintenance allowance and not pension (Raj Kumar Bikram Bahadur Singh Vs. CIT 75 ITR 227(MP)). There are three important features of ‘pension’. Firstly, pension is a compensation for past service. Secondly, it owes its origin to a past employer-employee or master-servant relationship. Thirdly, it is paid on the basis of earlier relationship of an agreement of service as opposed to an agreement for service. This relationship terminates only on the death of the concerned employee.
Pension received from a former employer is taxable as ‘Salary’. Hence, the various deductions available on salary income, including relief u/s 89(1) for the arrears of pension received would be granted to pensioners who received their pension from, a nationalised bank and in other cases their present Drawing & Disbursing Officers. Similarly, deductions from the amount of pension of standard deduction and adjustment of tax rebate u/s 88 and 88B shall be done by the concerned bank, at the time of deduction of tax at source from the pension, on furnishing of relevant details by the pensioner. Instructions in above regard were issued by R.B.I.’s Pension Circular (Central Service No. 7/C D.R./ 1992(Ref. No. DGBA:GA(NBS) No. 60/GA64-(II CVL-91-92 dated 27.4.92).
Pension to officials of UNO is exempt from taxation. Section 2 of the UN (Privilege & Immunities) Act, 1947 grants tax exemption to salaries/emoluments paid by U.N. The Karnataka High Court had held that u/s 17 of the Income Tax Act, salary has been defined as including pension, therefore, if salary received from U.N. is exempt, so shall be the pension. This decision was accepted by the CBDT vide circular No. 293 dated 10.02.1981.
What is Family Pension?
Family pension is defined in Section 57 as a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of death. Pension and family pension are qualitatively different. The former is paid during the lifetime of the employee while the latter is paid on his death to surviving family members. However, in case of family pension, since there is no employer-employee relationship between the payer and the payee, therefore, it is taxed as ‘Income from Other Sources’ in the hands of the nominee(s). In respect of family pension, deduction u/s 57(iia) of Rs.15000 or 1/3rd of the amount received, whichever is less, is available.
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Content in this Article
- What is salary and what does salary include?
- What are allowances and which allowances are exempt?
- What are perquisites?
- Which are the perquisites exempted from Income Tax?
- What is included in Fringe Benefits and how are they taxed?
- Which investments are eligible for deductions u/s 80C?
- How much of Gratuity is exempt?
- How much of Commuted Pension is exempt?
- How much of Retrenchment Compensation is exempt?
- How much payment received on Voluntary Retirement is exempt
- How much Special Allowance Benefit is exempt?
- How much of Annual Accretion fo PF Account is exempt?
- How much House Rent allowance is exempt?
- Are arrears of salary taxable?
- What is Gratuity?
- Is leave encashment fully taxable?
- Is payment received from a PF eligible for exemption?
- Will payment be exempt from approved superannuation fund?
- What is Pension?
- What is Family Pension?
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