Income from the head

Salary

Meaning of Salary
Relationship between payer and payee Income under the head Salaries covers all
remuneration due/paid to a person in respect of
services rendered by him under an express or
implied contract of employment.
Charge under this head of income presumes the
relationship of an employer and an employee
between the payer and payee in contrast to that
of a principal and an agent.
The distinction between the two types of
relationship is vital because income earned by an
employee from his employer is chargeable under
the head Salaries, whereas income earned by an
agent is chargeable either under the head Profits
and gains of business or profession or under the
head Income from other sourcesCowan v.
Seymour [1920] 1 KB 500 (CA).

 EMPLOYER AND EMPLOYEE VIS-A-VIS PRINCIPAL

AND AGENT - An employee works under the direct
control and supervision of his employer. He not only
receives instructions from his employer but is subject to
right of the employer to control the manner in which he
should carry out the instructions. On the other hand, an
agent is generally free to carry out his principals
instructions according to his own discretion.

Section 17 (1)

Salary includes:
a. wages ;
b. any annuity or pension ;
c. any gratuity ;
d. any fees, commission, perquisite or profits in lieu of or in addition to any
salary or wages ;
e. any advance of salary ;
f. any payment received in respect of any period of leave not availed by him ;
g. the portion of the annual accretion in any previous year to the balance at the
credit of an employee participating in Recognised Provident Fund to the extent
it is taxable ;
h. transferred balance in a Recognised Provident Fund to the extent it is taxable;
and
i. the contribution made by the Central Government in the previous year, to the
account of an employee under a pension scheme referred to in section 80CCD

Treatment of forms of salary

Advance salary- taxed on receipt basis
Arrear salary- taxed on receipt basis
Leave encashment During service- taxable
After leaving job: least of the below is exempt:
Months of leave* x avg. monthly salary
10 x avg. monthly salary
Rs. 3,00,000
actual leave encashment
(avg. sal. based on last 10 months)

 Months of leave:
((Years of service x leaves credited per year upto 30)
leaves availed)/30

Gratuity
Governed by Payment of Gratuity Act, 1972
For employees covered by the Act, the least of the
following is exempt:
15 days salary X no. of years of service (1 yr./6 mths.)
Rs. 10,00,000
Gratuity actually received
(sal. is last basic+DA)
(15 days salary is calculated by basic+DA taken over 26 days)

Allowances
Allowance is generally defined as fixed quantity of money or
other substance given regularly in addition to salary for the
purpose of meeting some particular requirement connected with
the services rendered by the employee or as compensation for
unusual conditions of that serviceMutual Acceptance Co. v. FCT
[1944] 69 CLR 389.
It is fixed, pre-determined and given irrespective of actual
expenditure. Under the Act, it is taxable under section 15 on
due or receipt basis, whichever comes earlier, irrespective of
the fact that it is paid in addition to or in lieu of salary

Allowances exempt to the extent used

Travelling allowance/transfer allowance- Any allowance (by whatever
name called) granted to meet the cost of travel on tour or on transfer
(including any sum paid in connection with transfer, packing and
transportation of personal effects on such transfer).
Conveyance allowance -Conveyance allowance granted to meet the
expenditure on conveyance in performance of duties of an office (it
may be noted that an expenditure for covering the journey between
office and residence is not exempt from tax).
Daily allowance -Any allowance whether granted on tour or for the
period of journey in connection with transfer, to meet the ordinary daily
charges incurred by an employee on account of absence from his
normal place of duty.
Helper allowance -Any allowance (by whatever name called) to meet
the expenditure on a helper where such helper is engaged for the
performance of official duties.
Research allowance -Any allowance (by whatever name called) granted
for encouraging the academic research and other professional pursuits

Allowances where exemption not

dependant on expenditure
Transport allowance is granted to an employee to meet
his expenditure for the purpose of commuting between
the place of his residence and the place of his duty.
It is exempt up to Rs. 1600 per month (Rs. 3200 per month in
the case of an employee who is blind or orthopaedically
handicapped).
Transport facility between office and residence is exempt.

House rent Allowance

50 % of salary (BDCM) or 40 % of salary
House rent allowance received by the employee in
respect of the period during which rental
accommodation is occupied by the employee
The excess of rent paid over 10 per cent of salary
Amount exempt from tax - The least of the above three
is exempt from tax.

HRA
MEANING OF SALARY - Salary for the
purpose of HRA exemption means basic
salary and includes dearness allowance if
terms of employment so provide.
It also includes commission based on a
fixed percentage of turnover achieved by
an employee as per terms of contract of
employment
Exemption is denied where an employee
lives in his own house, or in a house for
which he does not pay any rent or pays
rent which does not exceed 10 per cent of
salary.

HRA
The amount of exemption in respect of house rent allowance
received by an employee depends upon the following :
a. salary of the employee ;
b. house rent allowance ;
c. rent paid ; and
d. the place where house is taken on rent.
When these four are the same throughout the previous year, the
exemption should be calculated on annual basis. When,
however, there is a change in respect of any of the aforesaid
factors, then the exemption shall be worked out on monthly
basis.

Perquisites
a gain or profit incidentally made from employment in addition
to regular salary or wages, especially one of a kind expected or
promised.-Webster
any casual emolument or benefit attached to an office or
position in addition to salary or wages.- Murrays
property acquired otherwise than by inheritance : a casual profit
: anything left over that a servant or other has by custom a right
to keep : a tip expected upon some occasion : emoluments :
something regarded as falling to one by right.- The Chambers
signifies some benefit in addition to the amount that may
be legally due by way of contract for services rendered

Section 17(2)

Perquisite includes :
a. the value of rent-free accommodation provided to the assessee
by his employer
b. the value of any concession in the matter of rent respecting any
accommodation provided to the assessee by his employer
c. 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, who has substantial interest in
the company ;
iii. by any employer to an employee other than (i) and (ii) above
and whose income under the head Salaries, exceeds Rs.
50,000

d. any sum paid by the employer in respect of any

obligation which but for such payment would have been
payable by the assessee;
e. 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; and
f. the value of any other fringe benefit or amenity as may
be prescribed

Types of perquisites
Furnished/unfurnished house without rent or at
concessional rent Where accomodation owned by employer: 15/10/7.5% of
salary
Where accomodation leased by employer: rent or 15% of
salary whichever is lower.
Salary for this purpose: basic salary, dearness allowance/pay,
if terms of employment so provide, bonus, commission, fees,
all other taxable allowances and any monetary payment which
is chargeable to tax (by whatever name called).

 Add: Cost of furniture

10% of original value or hire charges, whichever applicable

If concessional rent, then find out total cost and deduct

amount paid as rent. Balance would be the perquisite.

 Leave travel concession - twice in a block

of four years
Current block 2014-17
For family including dependent parents,
brothers and sisters
Actual expenditure (restricted to shortest route)

Amount paid by an employer in respect of

any obligation which otherwise would have
been payable by the employee

Amount payable by employer to effect an

assurance/annuity on the life of employee
Amount payable by an employer, directly or indirectly,
to effect an assurance on the life of the assessee or to
effect a contract for an annuity, is taxable in the hands
of all employees.
This rule is, however, not applicable if the employer
makes contribution/payment towards the following

recognised provident fund (up to 12 per cent of salary of

the employee);

approved superannuation fund (upto 1.5 lakhs);

group insurance schemes;
employees state insurance schemes;

Interest free loan/loan at concessional

interest

Step 1 Find out the outstanding balance as on the last day of each month.
Step 2 Find out rate of interest charged by the State Bank of India (SBI) as on
the first day of the relevant previous year for similar loans
Step 3 Calculate interest for each month of the previous year on the
outstanding amount
mentioned in Step 1 at the rate of interest given in
Step 2.
Step 4 From the total interest calculated for the entire previous year under
Step 3, deduct interest actually recovered, if any, from the employee
during the previous year.
Step 5 The balancing amount [i.e. Step 3 minus Step 4] is taxable value of the
perquisite.

Exemption 1 If a loan is made available for medical treatment in respect of

diseases specified (the exemption is, however, not applicable to the amount
reimbursed to the employee under any medical insurance scheme).
Exemption 2 Where the amount of original loan (or loans) does not exceed Rs.

Movable assets sold at nominal price

Cost to employer
Less normal wear and tear (WDV)
50% for electronic gadgets
20% for cars
10% for others

Less selling price

Balance: perquisite

Medical facilities
If facility owned/maintained by employer
Hospital of CG/SG/LA
Approved hospitals
spent/reimbursed by employer- entire amount exempt
If in other clinics- upto Rs. 15,000 pa.
Medical allowance is always taxable

Other perquisites
Lunch/ refreshment provision

Food and non-alcoholic beverages in office premises or

through non-transferable paid vouchers usable only at eating
joints are tax free
Taxable only if value per meal exceeds Rs. 50

Gifts, vouchers or token: upto Rs. 5000

Credit cards
Club membership
Telephone/mobile
Others

Sweat equity shares

Sweat equity shares means equity shares issued by a
company to its employees or directors at a discount or
for consideration other than cash for providing knowhow or making available rights in the nature of
intellectual property rights or value additions, by
whatever name called.
Eg. Equity shares, other shares, debentures, derivatives,
units

If sweat equity shares qualify as

perquisite
If the conditions are satisfied then the perquisite will be taxable
in the hands of employee in the previous year in which shares or
securities are allotted or transferred to the employee.
For this purpose, one has to find out fair market value of shares
or securities according to the prescribed method (it will be
prescribed by the Central Board of Direct Taxes).
Fair market value of shares or securities will be calculated on the
date on which the employee exercises the option.
Amount actually paid or recovered from the employee in respect
of such shares or securities shall be deducted.

Section 80 C
The following are the main provisions of section 80C
Under section 80C, deduction is available from gross total
income.
Deduction under section 80C is available only to an individual or an HUF.
Deduction is available on the basis of specified qualifying
investments/contributions/deposits/payments made by the taxpayer
during the previous year.
The investment, deposit, etc. can be made out of taxable income or
otherwise.
The gross qualifying amount is allowed as deduction subject to a maximum
of Rs. 1,50,000.
The maximum amount deductible under sections 80C, 80CCC and 8CCD
cannot exceed Rs. 1.5 lakhs.

80C
1. Life insurance premium
subject to a maximum of 10 per cent of sum assured
Self, spouse, children
Minimum 2 years

2. Employee provident fund (5 years)

3. 15 year public provident fund
4. National Savings Certificates,
5. Unit-linked insurance plan (ULIP) of Unit Trust of India
or LIC Mutual Fund (min 5 years)

80C
6. Notified annuity plan of LIC or any other insurer; notified
units of Mutual Fund or UTI
7. Tuition fees
not including any payment towards development
fees/donation/payment of similar nature
to any university/college/educational institution in India for full
time education of any two children

8. Payment towards the cost of purchase/construction of a

residential
property

including repayment of loan taken from Government, bank,

cooperative bank, LIC, National Housing Bank, assessees employer
where such employer is public company/public sector
company/university/ co-operative society) (min 5 years)

80C
9. Approved debentures and equity shares of
infrastructure public company; units of a
mutual fund proceeds of which are utilised for
the developing, maintaining, etc., of a new
infrastructure facility
10. Amount deposited under Senior Citizens
Saving Scheme.
11. Amount deposited in five year time deposit
scheme in post office or bank.

Section 80 CCD- Contribution to NPS

1. For individual contributions

Deduction upto 10% of salary by employee/ 10% of GTI

Deduction upto Rs. 1,50,000 (combined limit) plus Rs. 50,000

2. For joint contributions:

Contribution of employer and employee deductible upto 10% each of
salary
Contribution of employee upto Rs. 1,50,000 (combined limit) plus Rs.
50,000
Contribution of employer over and above Rs. 1.5 lakhs combined limit
(no upper limit)

Sec 80D-medical insurance premium

For self/spouse /children- upto Rs. 25000
For parents- upto Rs.25,000
If senior citizens also included, another 5,000

Sec 80E- Interest paid while repaying education loan

Loan for higher education (any study after SSE)

For self/spouse/children/ward
Out of taxable income
Starting year+ 7 years or completion of interest

Sec 80 GG- Rent paid but no HRA received

Individual not receiving HRA (need not be an employee)

Pays rent for residential accommodation
No house owned at place of residence by self, spouse, minor child
If house owned at other place, no benefit of self occupied property
claimed
Least of following is exempt:
Rs. 5000 per month
25% of total income (GTI less LTCG less general deductions)
Excess of rent paid over total income

Sec 80 TTA- Savings Bank account interest

Deduction of up to Rs. 10,000 from savings account with bank/ PO