INCOME UNDER THE HEAD

‘SALARIES’
Sections 15-17
 OVERVIEW
• Section 15 – Charging section
• Section 16 – Deductions –
• Minimum Standard Deduction
• Entertainment allowance and
• Profession Tax - these 3 are chapter head deductions under this
head of income
• Section 17 – Definition – Definition of salary is split into
3 parts
• Salary,
• Perquisites
• Profits in lieu of salary
 CHARGING SECTION - SECTION15

• Any amount due or received by an employee including arrears of salary from an

employer or former employer, falling within the purview of ‘salary’ is chargeable
to tax under the head ‘salaries’.
• Conditions for an income to be qualified as salary:
• The sine qua non (essential condition) for charging under the head
“ Salary” is that there must be Employer – Employee relationship between the
payer and payee .
• The Income Tax Act doesn’t prescribe any test to determine the existence of
employer – employee relationship . So the court has laid down certain tests to
determine it . The prima facie test is “ Direct control test” As per this test ,
“ Contract of service” results in employer- employee relationship.
• Another point to be kept in mind is Not all income received by the
employee from his employer would be taxable under the head salary.
This is because of the fact that the income in question must be
received for services rendered in the ‘ordinary course of
employment’ .
• Payment received under Employer – employee relationship must fall
under the def. of “ salary” under sec 17.
Exception :
• If any salary paid in advance and if it is included in the
total income of any person for any previous year, it shall
not be included again in the total income of the person when the
salary becomes due.
• Eg salary an individual is supposed to receive in the financial year
2024-2025, he has received it in the Py 2022-2023 and it is
assessed for tax in the AY 2023-2024, then that amount will not he
assessed for tax in 2025-2026.
• ii. Any salary, bonus, commission or renumeration due to or received
by a partner of a firm from the firm shall not be regarded as salary for
the purpose of this section.
• Other components :
• Foregoing of salary - Taxable
• Surrender of salary – If an employee surrenders his salary to the
central government under 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.
• Tax free salary - If the employer has paid tax free salary to the
employee, that will also be included for the computation of income
under the head salary for the employee. Tax free salary - the burden
of paying tax on that salary will be on the employer, he will pay the
tax for the salary of the employee.
• Place of accrual of salary – Under Sec 9(1)(ii), salary earned in India is
deemed to accrue or arise in India even if it is paid outside India.
How to compute salary income/net taxable
salary

Add -
Income from salary ******
Income by way of allowances *****
taxable value of perquisites ****
Gross salary ******
Less - Deductions u/s 16 ******
Income from salaries ******
DEFINITION OF SALARY-SECTION 17
• The term Salary is not exhaustively defined, but is inclusively defined under
Section 17(1).
• Section 17(1) defines salary to include-
• Wages
• Any annuity or pension
• Any gratuity
• Any fees, commissions, perquisites or profits in lieu of or in addition to any
salary or wages
• Any advance of salary
• Leave encashment
• The annual accretion to recognised provident fund to the extent of
• Employer’s contribution in excess of 12% of salary
• Eg employer contributes 15,000 Rs to RPF and the salary of the employee is
100000. 15,000 - 12,000 = 3000. 3000 will be considered to be a part of the
salary of the employee.
• Interest credited to the RPF in excess of 9.5% p.a.
• The accumulated transferred balance from unrecognised provident
fund account to a recognised provident fund account to the extent it
is chargeable
• 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.
 Perquisites - 17(2)
Meaning and Features:

• Perquisites can be defined as any casual emoluments or benefits

attached to an office or position, in addition to salary.

• Perquisite is a non-cash benefit provided by the employer to the

employee.

• When an employee obtains a perquisite during the course of his

employment it is taken into consideration for assessment of tax. Value
of the perquisite is included in income under the head salary.

• perquisites are both taxable and exempted from tax depending upon
limits and conditions provided under the IT Act.
Definiton - sec 17(2)
1. the value of rent-free accommodation provided to the assessee by his employer [sec.
17(2)(i)];
2. the value of any concession in the matter of rent respecting any accommodation provided to
the assessee by his employer [sec. 17(2)(ii)];
3. the value of any benefit or amenity granted or provided free of cost or at concessional rate
in any of the following cases:
i) by a company to an employee who is a director thereof;
ii) by a company to an employee, being a person who has substantial interest
(20% voting) in the company ,
iii)by any employer (including a company) to an employee to whom provisions of
(i) and (ii) above do not apply and whose income under the head “Salaries”
exclusive of the value of all benefits or amenities not provided for by way of
monetary benefits, exceeds Rs. 50,000 [sec. 17(2)(iii)];
4. any sum paid by the employer in respect of any obligation which but for such
payment would have been payable by the assessee [sec. 17(2)(iv)];
5. any sum payable by the employer, whether directly or through a fund other
than a recognised provident fund or approved superannuation fund or a
deposit-linked insurance fund, to effect an assurance on the life of the
assessee or to effect a contract for an annuity [sec. 17(2)(v)];
6. 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 [sec. 17(2)(vi)];
7. the amount of any contribution to an approved superannuation fund by the employer in

respect of the assessee, to the extent it exceeds Rs. 1,50,000 [sec. 17(2)(vii)]; and

8. the value of any other fringe benefit or amenity as may be prescribed [sec. 17(2)(viii)].
Profits in lieu of salary – Section 17(3)
This includes:
• Terminal Compensation – The amount of any compensation due to or
received by an assessee from his employer or former employer at or in
connection with
• Termination of employment or
• Modification of the terms and conditions of employment
• Payment from an unrecognised provident fund or superannuation
fund – any payment due to or received by the assessee from his employer or
former employer or from PF or any other fund to the extent to which it does not
consist of contributions by the assessee.
• Payment under a Keyman Insurance Policy – Any sum received under a
KIP including the sum allocated by way of bonus on such policy shall be
considered profits in lieu of salary
• Any amount due or received, whether in lump sum or otherwise by
an assessee from any person
• Before his joining any employment with that person or
• After the cessation of his employment with that person
• Any other sum received by the employee from the employer
Deductions – S. 16
The following need to be deducted from gross salary to compute
income chargeable under the head ‘Salaries’:
• Minimum Standard Deduction – S.16(ia)
• Deduction for Entertainment Allowance – S. 16(ii)
• Deduction for Profession Tax – S. 16(iii)
Minimum Standard Deduction – S.16(ia)
• Inserted by the Finance Act, 2018.
• Initially it was 40,000
• Now a deduction of 50,000 rupees or the amount of the salary,
whichever is less is available to salaried employees as per the old
regime.
• Under the new regime from FY 2024-2025. MSD for salaried
employees is Rs 50,000 and for pensioners it is 75,5000
• If a tax payer has received pension from the former employer, he can
claim a standard deduction of 75,000 or the amount of salary which
ever is lesser.
 Entertainment allowance-S.16(ii)
• Entertainment allowance is not eligible for exemption, only deduction. This deduction
is available only in the case of Government employees, not others. The extent
is to the least of the following:
• Rs 5,000 or
• 1/5th of salary or
• Actual entertainment allowance received for the previous year.
• Salary = only basic salary. It excludes all allowances, benefits and perquisites.
Even dearness allowance should not be included.
• Actual expenditure on entertainment is irrelevant.
• In the final computation of salary income entertainment allowance will be included in the
“salary Income” and then it will be shown as deduction and deducted from the gross
salary income.
Sum :
Basic salary of A is Rs 1,20,000 per annum. Entertainment
allowance is paid to A is RS 1000 per month in the PY. Find
his entertainment allowance.

Ans -
Entertainment allowance is the least of the following :
5000 Rs, or
1/5 of basic salary - 1/5 (1,20,000) = 24,000, or
the actual amount received = 12,000

Entertainment allowance of A is Rs 5000.

Profession tax-S.16(iii)
• Deduction is allowed in respect of any sum paid by the assessee on
account of a tax on employment leviable by or under any law.
• In case the profession tax is paid by the employer on behalf of the
employee, the amount so paid should be included in gross salary as a
perquisite and then deducted.
• The amount of profession tax levied by a local authority shall not
exceed Rs 2,500 p.a. – Art 276(2) of the Constitution.
Sums :
X is employed in Company A and gets a basic salary of Rs
38,750 per month. He gets Rs 3,000 as entertainment
allowance per month. An amount of Rs 1000 for the year
was paid as professional tax by X’s employer on behalf of
X.
Find out Entertainment allowance that can be claimed as
deduction.
Find out Income from salary chargeable to tax.
Make the calculations on two categories
1. Considering X as a government employee
2. Considering X as a non government employee.