Computation of Income under the

head Income from “Salaries”

• The first head of income is income from
“Salaries”.
Sections 15, 16 and 17 of the Income-tax
Act deal with the computation of income
under the head “Salaries”.
Section 15 – chargeabilty
Section 16 – deductions
Section 17 - definitions
 Basis of Charge sec 15
(a) Any salary due from an employer of a former
employer to an assessee in the previous year,
whether paid in that previous year or not;
(b) Any salary paid or allowed to him in the previous
year by or on behalf of an employer or a former
employer though not due in that previous year of
before it became due to him;
(c) Any arrears of salary paid or allowed to him in the
previous year by or on behalf of an employer or a
former employer, if not charged to income-tax in
any earlier previous year.
 Employer and employee
relationship:
• An income can be taxed under the head
“Salaries” only if there is a relationship of
an employer and employee between the
payer and the payee. If this relationship
does not exist, then the income would not
be deemed to be income from salary. The
relation of employer and employee should
be of master and servant.
 For example, in the case of a lecturer of a
college who is also appointed warden of the
college and gets wardenship allowance, the
allowance would be taxed under the head
“Salaries” because it is being received from the
employer by the employee although for non-
academic work. However, if this lecturer sets the
Question Paper of university, the remuneration
which he receives for setting the paper will not
be taxable under the head “Salaries” as the
university is not the employer of the lecturer.
Such remuneration would, however, be taxable
under the head “Income from other sources”.
 A Member of Parliament is not a
Government employee and therefore,
remuneration received by him is not taxable as
salary income, but as income from other
sources.
Any salary, bonus, commission or
remuneration due to/received by an assessee
from a firm, in which he is a partner, shall hot
be taxable under the head ‘Salaries’ as there is
no employer-employee relationship. It will,
however, be taxable under the head ‘profits and
gains of business or profession.
• Year of chargeability
• Salary is chargeable to tax either on due basis or on receipt
basis whichever is earlier
• Salary due in a previous year is taxable whether it is
received or not during that previous year
• Salary received in advance during the previous year is
taxable even if it is not due
• Arrears of salary received during the previous year is
taxable if it was not taxed in earlier years
• Loan taken from employer is not taxable even if it is
subsequently recovered from salary, therefore advance of
salary is taxable but advance against salary is not taxable
• Place of accrual
• The place of accrual of salary is the place
where the services are rendered
• Even if a NRI is paid salary outside india in
respect of services rendered in india ,it is
deemed to accrue or arise in india
 Foregoing of Salary:
• Once salary has been earned by an
employee, it becomes taxable in his hands
though he may subsequently waive the right
to receive the same from the employer. The
waiver of salary by the employee would be
treated as application of the income and
salary though waived would be taxable in
his hands.
 Meaning of Salary sec 17(1)
(i) Wages;
(ii) Any annuity or pension;
(iii) Any gratuity;
(iv) Any fees, commissions, perquisites or profits in
lieu of or in addition to any salary or wages;
(v) Any payment received by an employee in
respect of any period of leave not availed by
him;
(vi) Any advance of salary;
(vii) The annual accretion to recognised
provident fund, to the extent of the following:
a) employers contribution in excess of 12% of
salary
b) interest on the balance in the provident fund
account credited in excess of 8.5%
(viii) The aggregate of all sums that are
comprised in the transferred balance of an
employee participating in a recognised
provident fund to the extent to which it is
chargeable to tax.
• From the gross salary, the following two
deductions.
(i) Entertainment Allowance [Section 16(ii)];
(ii) Deduction on account of any sum paid to
wards tax on employment [Section 16(iii)].
• Entertainment allowance
• Entertainment allowance is not eligible for
exemption but it qualifies for deduction
• Entertainment allowance is first included in
the gross salary and then deduction is
allowed
 Treatment of Entertainment
Allowance
• W.e.f. assessment year 2002-03, this
deduction is allowed only to a Government
employee. Non-Government employees
shall not be eligible for any deduction on
account of any entertainment allowance
received by them.
• Such entertainment allowance to the extent of
minimum of the following three limits.
(i) Actual entertainment allowance received during
the previous year.
(ii) 20% of his salary exclusive of any allowance,
benefit or other perquisite.
(iii) Rs. 5,000.
Salary for this purpose means only basic salary and
excludes all allowances and perquisites
• Profession tax
• Deduction is allowed in respect of any sum paid
by the assessee on account of a tax on
employment
• In case the profession tax is paid by the employer
on behalf of the employee ,the amount so paid
shall be included in the gross salary as a perquisite
and then deduction is allowed
• Exemptions sec 10(5) to sec 10(14)
• Sec 10 (5) value of travel concession or assistance
• value of travel concession or assistance received
by an individual from his employer or former
employer for himself and his family members in
connection of his proceeding
• On leave to any place in India while in service or
after retirement shall be exempt from tax
• Family means spouse and children ,parents
brothers & sisters dependent on the individual
• The exemption is available in respect of 2
journeys performed in a block of 4 calender years
• The present block is 2006 to 2009
• Where an individual does not avail such
exemption during any such block ,the value of
travel concession first availed during the first
calendar year of the immediately succeeding block
shall be eligible for exemption in lieu of the
exemption not availed in the earlier block
• Therefore only one trip can be carried forward to
be availed in the succeeding block
• Quantum of exemption
• The exemption for each trip shall computed on the
following basis restricted to actual expenditure
incurred for such travel
• Air – amount not exceeding air economy class
• Rail – amount not exceeding the air conditioned
first class
• Any other mode - amount not exceeding the air
conditioned first class
• Sec 10(7) indian citizen employed abroad
by govt of india
• Any allowance or perquisite paid or allowed
outside india by the govt to a citizen of
india for rendering service outside india is
exempt
• Eg person employed in embassy
• Sec 10(10) gratuity
• Govt employee:any death cum retirement
gratuity received by a govt employee is
wholly exempt from tax
• Employees covered by the payment of gratuity act
• Any gratuity received by an employee covered by the said
act is exempt from tax to the extent of least of the
following
• 1. rs 3,50,000
• 2. 15 days salary (out of 26 days) based on last drawn
salary for each completed year of service or part of the
year in excess of 6 months
• 3.gratuity actually received
• Salary for this purpose means basic salary and dearness
allowance
• In the case of any other employee
• Any gratuity received by any other employee is
exempt from tax to the extent of least of the
following
• 1. 3,50,000
• 2. ½ months salary (on the basis of last 10 months
average immediately preceding the month in
which any such event occurs) for each completed
year of service (fraction to be ignored)
• 3. gratuity actually received
• Salary for this purpose means basic
salary,dearness allowance if provided in
terms of employment and commission as a
percentage of turnover achieved by the
employee
• Basic salary shall be the average of last 10
months salary
Sec 10(10A)- Commuted Pension
• Uncommuted Pension refers to pension
periodically received by the employee.
Commuted pension means lumpsum
amount taken by commuting the pension or
part of the pension. Where an employee
commutes only a part of the pension under
the pension rules ,the remaining will be
periodically received by him.
• Uncommuted pension is taxable as salary
u/s 15 in the hands of both govt and non-
govt employees.
• Any commuted pension received by a govt
employee is wholly exempt from tax.
CBDT has clarified that the Judges of High
Courts & Supreme Courts are also entitled
to the exemption.
• A non- govt employee can avail exemption to the
following extent:
• (i) If the employee is in receipt of Gratuity, 1/3rd
of the amount of commuted pension which he
would have received had he commuted the
whole(100%) of the pension.
• (ii) If the employee is not in receipt of gratuity , ½
of the amount of commuted pension which he
would have received had he commuted the
whole(100%) of the pension.
• Uncommuted pension
• (1800x8) 14400
• Uncommuted pension
• After date of commutation
• (1800x4x50%) 3600
• Commuted pension 36000
• Less:exempt u/s10(10A)36000
• (36000/50%=72000x1/2) nil
• Taxable pension 18000
 Sec 10(10AA)- Leave Salary
• Government Employee: Any amount received as
cash equivalent of leave in respect of period of
earned leave to his credit at the time of retirement
whether on superannuation or otherwise , is
exempt from tax .
• Non-Government Employee: Leave Salary is
exempt from tax to the extent of least of the
following:
• A) cash equivalent of the leave ( on the
basis of average of last 10 months salary) to
the credit of the employee at the time of
retirement ( calculated at 30 days credit for
each completed year of service ) or
• B) 10 months salary ( on the basis of
average of last 10 months salary)
• C) The amount specified by the govt –Rs.300000
• D) leave encashment actually received
• Even in the case of voluntary retirement by way of
resignation , leave salary received qualifies for
exemption.
• Salary for this purpose means basic salary
,dearness allowance if provided in terms of
employment and commission as a percentage of
turnover achieved by the employee.
• Actual leave salary 36000
• Less:exempt u/s10(10AA)
• (3000x1) 3000
• (3000x10) 30000
• 300000
• 36000 3000
• Taxable leave salary 33000
• Leave eligible 22 months
• Leave taken
• (22x1.5=33 months
• less 12) 21
• Leave to his credit 1 month
• Average 3000
 Sec.10(10B)- Retrenchment
Compensation
• Compensation received by a workman at
the time retrenchment is exempt to the
extent of the lower of the following:
• A) amount calculated under the Industrial
Disputes Act 1947.
• B) Rs.500000
 Sec 10 (10C)- Voluntary
Retirement/separation scheme
• Least of the following:
• Last drawn salary x 3 x completed years of service
or Last drawn salary x remaining months of
service whichever is lower
• Rs. 500000
• Actual compensation received
• Salary for this purpose means basic salary
,dearness allowance if provided in terms of
employment and commission as a percentage of
turnover achieved by the employee.
• Actual comp 1200000
• Less:exempt u/s 10(10C)
• i)20000x3x20=1200000
• Or20000x86 mon=1720000
• W.e.l 1200000
• Ii) 500000
• Iii) 1200000 500000
• Taxable comp 700000
• Eligible employees
• A public sector company
• Any other company
• An authority established under central, state or
provincial act
• A local authority
• Co-operative society
• University
• Indian institute of information
• Any state govt
• the central govt
• Any institution notified by the central govt
in this regard
• This exemption may be availed only once
• Following requirements need to be fulfilled
to qulify for exemption
• Employee should complete 10 years of
service or 40 years of age
• Applies to all employees including workers
and executives but excludes directors of the
company
• The scheme should be drawn to reduce the
overall strength of the employees
• The vacancies so created not to be filled up
• Retiring employees not to be employed in
companies under the same management
 Sec 10(11)-Statutory/Public
Provident Fund
• Any payment from a Statutory P.F or P.F set
up by the govt and notified is exempt from
tax.
 Sec 10(12)-Recognised Provident
Fund
• The accumulated balance due payable to an
employee participating in RPF shall be exempt in
the following cases:
• In the case of an employee who has rendered
continuous service with his employer for a period
of 5 years
• Employee whose service is terminated due to ill
health, contraction or discontinuance of employers
business or cause beyond his control
• RPF balance is transferred to another employer
 Sec 10(13)- Approved
Superannuation Fund
• Payment from ASF is exempt if it is made
• On the death of the beneficiary
• to an employee in lieu of or in commutation of an
annuity on his retirement at or after a specified age
or on his becoming incapacitated prior to such
retirement
• By way of refund of contributions on death of
beneficiary
Sec 10(13A)-House Rent Allowance

• HRA granted to an assessee by his employer

is exempt to the extent of least of the
following:
• i) excess of rent paid over 10% of salary
due for the relevant period
 Sec 10(14)- Special Allowances
• The follow allowances are prescribed by CBDT under Rule 2BB of
the I.T Act as exempt to the extent spent or specified here below:
• Any allowance granted and spent to meet the cost of-
• Travel on tour or on transfer
• ordinary daily charges on absence from normal place of duty
• Conveyance allow to meet exp on conv in performance of duties –no
free conv is provided by the employer
• Exp on a helper in performance of duties
• Academic, research and training pursuits in edu & research
institutions
• Purchase or maintenance of uniform for wear during performance of
duties
• 2.composite hill compensatory allowance:
• Rs 300 p.m is exempt if place is located 1000 mtrs or
above sea level
• Rs. 800 p.m – specified notified area
• Rs. 7000 p.m siachen area of jammu & kashmir
• 3. tribal area allowance Rs. 200 p.m is exempt if the
place of employment is in assam ,bihar, karnataka
,M.P, orissa, tripura, T.N, U.P, W.B.
• 4. border area allowance are exempt to the extent of
rs 200 or rs 300 or rs 750 or rs 1,050 or rs 1,100 or
rs 1,300pm depending upon the notified place
• Any allowance granted to an employee working in a
transport system to meet his personal expenses during
his performance of duty in the course of running of
such transport from one place to another place is
exempt to the extent of 70 % of such allowance or rs
6,000 pm whichever is less
• Children education allowance is exempt up to rs 100
per month per child up to a maximum of 2 children
• Any allowance granted to an employee to meet the
hostel expenditure of his child is exempt upto rs 300
per month per child up to a maximum of 2 children
• Transport allowance granted to employee who is
blind or orthopaedically handicapped to meet his
expenditure for the purpose of commuting
between the place of his residence to the place of
his duty to the extent of rs 1600 pm
• Transport allowance granted to any other
employee to meet his expenditure for the purpose
of commuting between the place of his residence
to the place of his duty to the extent of rs 800 pm
• Any special allowance in the nature of counter
insurgency allowance to armed forces rs 3,900 pm
• Underground allowance to an employee working in a
coal mines rs 800 pm
• High altitude allowance granted to member of armed
forces :
• For altitude of 9000 to 15000 ft rs 1060pm
• Above 15000 ft 1600 pm
• Special allowance to members of armed forces
• Special compensatory highly active field area
allowance rs 4,200 pm
• Island duty allowance – Andaman & Nichobar and
lakshadweep islands rs 3,250 pm