Laws of Taxation

SALARY

Submitted By- Submitted to-

Shivanika Singla Mrs. Shivani Gupta

156/13
Semester- 9
B.Com- LLB

Salary Page 1
 Laws of Taxation

CONTENTS
1. ACKNOWLEDGEMENT ............................................................................ 3

2. HEADS OF INCOME (Section 14) .............................................................. 4

3. MEANING OF SALARY............................................................................. 4

4. SALARY (Sections 15 to 17) ....................................................................... 5

5. SOME IMPORTANT POINTS REGARDING SALARY........................... 7

6. WHAT IS INCLUDED IN THE SALARY? .............................................. 10

7. PERQUISITES ........................................................................................... 13

8. PROFITS IN LIEU OF SALARY ............................................................. 25

9. ALLOWANCES ........................................................................................ 27

10. PROVIDENT FUND .................................................................................. 31

11. DEDUCTIONS FROM SALARY .............................................................. 35

12. BIBLIOGRAPHY ....................................................................................... 38

Salary Page 2
 Laws of Taxation

ACKNOWLEDGEMENT
I would like to express my heart felt gratitude towards Shivani ma’am for
giving me this project and helping and guiding me throughout to make it a success.

Her constant help and guidance by way of real life examples helped in the
better understanding of the subject.

I would also like to thank the library and staff of UILS department for
providing me with the necessary material which helped in the successful completion
of my project.

Shivanika Singla

Roll No- 156/13

Salary Page 3
 Laws of Taxation

HEADS OF INCOME (Section 14)

1
Section 14 provides that save as otherwise provided by this Act, all income shall, for the
purpose of charge of income-tax and computation of total income, be classified under the
following heads of income :

A) Salaries.

B) Income from house property.

C) Profits and gains of business or profession.

D) Capital Gains.

E) Income from other sources

MEANING OF SALARY

The term salary usually refers to a payment for services. It means remuneration for
services rendered to another person.

A salary is a form of payment from an employer to an employee, which may be

specified in an employment contract.2

An employee who is paid a salary is expected to complete a whole job in return for
the salary. This is different from a non-exempt employee who is paid an hourly rate
or by the piece produced. This employee is generally eligible to collect overtime.3

Basis of charge

 Salary is chargeable to tax on due or on receipt basis whichever is earlier;

 Salary received in advance is taxable in the year of receipt. Such salary not be
included again in the total income when it become due;
 Outstanding salary is taxable on due basis i.e. salary is taxable in the year in
which it falls due.
 Arrear salary is taxable on receipt basis.

1
Section 14,Income- tax Act,1961
2
https://en.wikipedia.org/wiki/Salary
3
http://humanresources.about.com/od/glossarys/g/salary.htm
Salary Page 4
 Laws of Taxation

SALARY (Sections 15 to 17)

1. Income Chargeable to Income-tax under the head “Salaries”

(Section 15)

According to Section 15, the following income shall be chargeable to income – tax
under the head “Salaries”:

(a) Any salary due from an employer or a former employer to an assesse in the
previous year, whether paid or not;

(b) Any salary paid or allowed to him in the previous year by or on behalf of the
employer or a former employer, though not due or 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 for any earlier
previous years.

For the removal of doubts, an explanation to Section 15 declares that where any
salary paid in advance 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.4

Salary will be chargeable to tax on the following basis

1. Due Basis:- Whenever salary becomes due from employer it will be

chargeable to tax even if it is not received by the employee, i.e. salary will be
included in the total income of the employee of the previous year when it
becomes due (when service is rendered)

Example - Mr. A Joined a company on 01.01.2017 and 'worked there till

31.03.2017 but due to some reason salary of said period was not given by the
company at the time of leaving that Job and was received on 15.04.2017.
Here, salary became due in the Previous Year 2016-17 though.it .was received

4
Taxation laws, ninth edition,2007, Kailash Rai , pg 47
Salary Page 5
 Laws of Taxation

in the Previous Year 2017-2018 and hence it would be taxable on due basis in
the Assessment Year 2017-2018.

2. Received basis

Whenever salaries received it would be chargeable to tax even if it has not

become due to the employee i.e. advance salary will be included in the total
income of an employee of the previous year when it is received even if it has
not become due.

Example- Mr A salary of two months (April and may 2017) of previous year
2017 to 2018 in advance in March 2017 (during previous year 2016 to 2017).
Hence, this salary of previous year 2017-18 received in advance in the
previous year 2016-17 will become income of the previous year 2016-17
though it was not due in that year.

ARREARS OF SALARY would be taxable on received basis if not fixable

earlier on due basis.

Example: Any increment in the salary (according to Pay commission) is given

retrospectively with effect from 1-1-2006 and arrears are received by the
employee in July, 2015 i.e. The previous year 2015-16 then it would be
taxable on I received basis because these were not taxable earlier on due
basis.5

5
Dr.Jyoti Rattan, Taxation Laws, 6th Edition,Bharat Publisher (2015-16).
Salary Page 6
 Laws of Taxation

SOME IMPORTANT POINTS REGARDING

SALARY

1) Salaries – Every kind of remuneration of every kind of servant, public or private,

and however highly or lowly placed he may be , is covered under the scope of this
term used in the Income – tax Act , there is no difference between the wages of
labourer or high officials.6

2) Relationship of employer and employee – It is very essential for the

payment to fall under the heads of “salaries” that the relationship of the employer
and employee must exist between the payer and the payee. Every servant is an
employee; but an agent may or may not be an employee. It is very essential that an
distinction is drawn between income from employment which is taxable under this
section , and income from an office not amounting to employment which is taxable
under head “ Income from other sources” or as “ Profit and Gains from Business or
Profession”.

If an employee does any work for his employer which is not connected with its
service; then the remuneration for such work shall not be treated as salary. For
example, examiner’s remuneration received by a University teacher from his
University.

3) Salaries and Professional income - Every profession involves the making

of successive engagement and successive contracts. If the employment is merely
incidental to the profession the gains from such employment would be professional
earning under section 28 and not under section 15. For instance, a professional lawyer
may be engaged in a case. His earning from this engagement will be taxable as
professional earning under section 28; but if he is employed by a mill company as its
legal adviser and also to work as standing counsel for the company, the remuneration

6
Income-tax. law and accounts,1983 edition ,Dr. H.C . Mehotra, pg 54
Salary Page 7
 Laws of Taxation

received by him would be taxable under the head “Salaries”. In fact, whether, an
engagement is merely incidental to the profession amounts to employment depends
upon the duration of the employment and the other circumstances of the case. When a
person occupies a regular post or office amounting to the service, it is an employment
as distinct from mere engagement in the course of the profession.

(4) Receipts from persons other than the employer – Perquisites or

profits or any remuneration received from person other than the employer would be
taxable under the head “Income from other Sources “ even if they accrue to the
employee by reason of his employment . For example, remuneration received by a
professor of a college for acting as a examiner in a University or Board.

(5) Payment made after cessation of employment – Payment made by an

employer to his employee after the cessation of his employment is also taxable
under the head “Salaries”. It is taxable under this head because it represents
remuneration for services rendered in the past.

(6) Payment in commutation of pension – A lump- sum received in

commutation of pension by a government is excluded from his salary income. If it is
received by a non- government employee besides receiving a gratuity it is excluded
from his salary income to the extent of the commuted value of one – third of the
pension which he is normally entitled to receive. If a non- government employee
doesn’t get a gratuity then the commuted value of one half of such pension is
excluded from his salary income.

(7) Application of salary – Voluntary foregoing. The voluntary foregoing

by an employee of the salary due to him is normally mere application of the income
and the salary is none the less taxable. It would be taxable on the further ground that
salary is taxable if it is due, whether paid or not. But in reality there is no agreement
to pay any salary, the apparent foregoing of a fictional salary would not attract tax.

Salary Page 8
 Laws of Taxation

(8) Tax free salary – When a salary is paid tax free , the employee has to include
the total income , the gross salary i.e. the aggregate of the net salary received plus the
amount of tax paid on his behalf by employer , except under provisions of sub
clauses (vii) and (ix) of Section 10(6)

(9) Deductions by employer - Compulsory deduction from salary are also

instances of mere application of income. The fact that a portion of salary has to be
devoted compulsorily to some purpose under contractual obligation does not prevent
it from being assessable as income under the head “salary” , for it is a case of
application of income . For example, an assesse was engaged on a fixed salary upon
the obligatory condition that the employer should provide him with board, lodging
etc. for which he should pay an amount which is deducted from his gross salary
before payment. Held, the tax was chargeable on the gross salary without any
allowance for compulsory deduction made by the employer.

(10) Salary of a Member of Parliament – This is not chargeable under the

head “salaries” as a Member of Parliament is not a government employee. The
relation between him and the government is not of a servant and master. It is taxable
under the head “Income from other Sources “.7

7
file://chapter-4-income-from-salaries.pdf
Salary Page 9
 Laws of Taxation

WHAT IS INCLUDED IN THE SALARY?

The term “salary” has been defined under section 17(1). According to this section,
“Salary” includes the following:

1. Wages – The term “salary” includes wages. “Wages” means “pay given for
labour, usually manual or mechanical, at short stated intervals, as distinguished from
salaries or fees. “

2. Annuity or pension – The term “salary” includes any annuity or pension.

Thus, annuity and pension paid by the employer are taxable under he head “salary”
whether they are paid voluntarily or under a contractual obligation. If annuity or
pension is paid by the employer , it is taxable under the head “salary”, but if it is paid
by a person other than the employer , e.g., annuities paid under an insurance policy
or under a deed or will, it is taxable as under “ income from other sources “ and not a
“ salary “. In a simple language an “annuity “ is a sum of money payable yearly or at
any rate periodically , from a source which is exclusively or at any rate primarily
personal estate .Thus, in a legal parlance ,”annuity “ means a fixed sum payable
yearly or periodically. Pension is a periodical allowance or a stipend granted on
account of past services. Pension is taxable under the head salary but payment in
communication of pension falling under section 10 (10-A) is exempted from income-
tax.

3. Gratuity – “Salary” also include gratuity. A gratuity may be understood as a

payment made by the employer to the employee for the services rendered by him to
the employer. Certain gratuities are exempted under section 10 (10). It is to be noted
that gratuity paid by the employer is taxed under the head “salary” but if paid by a
person other than the employer, it will be table as “Income from other sources “and
not as “salary”.

Salary Page 10
 Laws of Taxation

4. Fees, commission, Perquisites or Profits in lieu of or in addition to salary or

wages:

(A) Fee.- Fees may be understood to mean “reward or compensation for services
rendered or to be rendered : especially payment for professional services , optional
amount, or fixed by custom or laws , charge ; pay . “

(B) Commission – Commission means “ the percentage or allowance made to a

factor or agent for transacting business for another .For this purpose , there is no
difference between the commission which is wholly dependent upon the work done
and fixed salary on a monthly basis. Thus, fees, commissions, perquisites or profits
may be in lieu of or addition to regular remuneration and include honorarium or
purely voluntary payments. They are all as much taxable as regular salary or wages.

(C) Perquisites -Perquisites mean any casual emoluments, fees or profit attached to
an office in addition to salary and wages. In simple words, it’s a personal advantage.
It does not cover a mere reimbursement of any expenditure incidental to the
employment. Like if an employee is provided with a watchman for official use there
is no personal advantage to the employee, hence there is no perquisites. If the
watchman is provided for personal as well as official use, the value of the perquisites
only relating to personal use is taxable. Similarly if the traveling bills for official
duties are reimbursed to the employee, there is no advantage to the assesse, so it is not
a perquisite. The perquisites may be in cash or in kind or in the money or money’s
worth and also in amenities which are not convertible to the money

5. Any advance of salary – The term “salary “ includes any advance of salary
received.

Salary Page 11
 Laws of Taxation

6. Annual accretion to provident fund.- That portion of the annual accretion

in any previous years to the balance at the credit of an employee participating in a
recoganised provident fund as consist of :-

(a) Contributions made by the employer in excess of 10% of the employee’s salary
and

(b) Interest thereon which is in excess of one-third of the employee’s salary or in

excess of the amount calculated at the rate of 7.5% per annum, shall be deemed to
have been received by the employee in that previous year and shall be included in
his total income for the purpose of income- tax.

7. Sums in transferred balance - The amount transferred from an

unrecoganised provident fund to a recoganised provident fund account of the
employee is included in the employee’s total income under the head “salary”.
Clause (vii) of sub-section (1) of Section 17 provides that “salary” includes the
aggregate of all sums that are comprised in the transferred balance as referred to
in sub- rule (2) of rule 11 of Part A of the Fourth Schedule.

8. Contribution by the Central Government or any other employer to

the account of employee under pension scheme [Section 17 (1) (viii)].
– It provides that “salary” shall include 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 referred to in section 80CCD.

9. Leave salary on leave encashment Any amount of leave salary on leave

encashment which is received:

1) doing service period; or

Salary Page 12
 Laws of Taxation

2) at the time of retirement or termination of service beyond exempted limit would be

taxable under head salary8

PERQUISITES

The term ‘perquisite’ indicates some extra benefit in addition to the amount that may
be legally due by way of contract for services rendered. In modern times, the salary
package of an employee normally includes monetary salary and perquisite like
housing, car etc.

• Perquisite may be provided in cash or in kind.

• Reimbursement of expenses incurred in the official discharge of duties is not a

perquisite.

• Perquisite may arise in the course of employment or in the course of profession.

If it arises from a relationship of employer-employee, then the value of the
perquisite is taxable as salary. However, if it arises during the course of
profession, the value of such perquisite is chargeable as profits and gains of
business or profession.

• Perquisite will become taxable only if it has a legal origin. An unauthorised

advantage taken by an employee without his employer’s sanction cannot be
considered as a perquisite under the Act.

The term “perquisite” is defined under section 17(2). The definition of perquisite is an
inclusive one. Based on the definition, perquisites can be classified in following three
ways:

8
Dr.Jyoti Rattan, Taxation Laws, 6th Edition,Bharat Publisher (2015-16).
Salary Page 13
 Laws of Taxation

Perquisites taxable in the case of all employees: The following perquisites

are chargeable to tax in all cases.

1. Value of rent-free accommodation provided to the assessee by his employer

[Section 17(2)(i)].

Exception: Rent-free official residence provided to a Judge of a High Court or to a

Judge of the Supreme Court is not taxable. Similarly, rent-free furnished house
provided to an Officer of Parliament, is not taxable. Value of concession in rent in
respect of accommodation provided to the assessee by his employer [Section
17(2)(ii)].

2. Amount paid by an employer in respect of any obligation which otherwise

would have been payable by the employee [Section 17(2)(iv)].

For example, if a domestic servant is engaged by an employee and the employer

reimburses the salary paid to the servant, it becomes an obligation which the
employee would have discharged even if the employer did not reimburse the
same. This perquisite will be covered by section 17(2)(iv) and will be taxable in
the hands of all employees.

3. 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,
other than payment made to RPF or approved superannuation fund or
deposit-linked insurance fund established under the Coal Mines Provident
Fund or Employees’ Provident Fund Act.

Salary Page 14
 Laws of Taxation

However, there are schemes like group annuity scheme, employees state
insurance scheme and fidelity insurance scheme, under which insurance premium
is paid by employer on behalf of the employees. Such payments are not regarded
as perquisite in view of the fact that the employees have only an expectancy of
the benefit in such schemes.

4. 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.
5. the amount of any contribution to an approved superannuation fund by the
employer in respect of the assessee, to the extent it exceeds ` 1 lakh and
fifty thousand
6. The value of any other fringe benefit or amenity as may be prescribed by
the CBDT.9

 Perquisites exempt from tax in all cases:

1. The following perquisites are exempt from tax in all cases –
2. Telephone provided by an employer to an employee at his residence;
3. Goods sold by an employer to his employees at concessional rates;
4. Transport facility provided by an employer engaged in the business of carrying of
passengers or goods to his employees either free of charge or at concessional
rate;
5. Privilege passes and privilege ticket orders granted by Indian Railways to its
employees;
6. Perquisites allowed outside India by the Government to a citizen of India for
rendering services outside India;
7. Sum payable by an employer to a RPF or an approved superannuation fund or
deposit- linked insurance fund established under the Coal Mines Provident Fund
or the Employees’ Provident Fund Act;
8. Employer’s contribution to staff group insurance scheme;
9. Leave travel concession;

9
Dr.Jyoti Rattan, Taxation Laws, 6th Edition,Bharat Publisher (2015-16).
Salary Page 15
 Laws of Taxation

10. Payment of annual premium by employer on personal accident policy effected by

him on the life of the employee;
11. Refreshment provided to all employees during working hours in office premises;
12. Subsidized lunch or dinner provided to an employee;
13. Recreational facilities, including club facilities, extended to employees in general
i.e., not restricted to a few select employees;
14. Amount spent by the employer on training of employees or amount paid for
refresher management course including expenses on boarding and lodging;
15. Medical facilities subject to certain prescribed limits; [Refer to point 10 of para
4.20]
16. Rent-free official residence provided to a Judge of a High Court or the Supreme
Court;
17. Rent-free furnished residence including maintenance provided to an Officer of
Parliament, Union Minister and a Leader of Opposition in Parliament;
18. Conveyance facility provided to High Court Judges under section 22B of the High
Court Judges (Conditions of Service) Act, 1954 and Supreme Court Judges under
section 23A of the Supreme Court Judges (Conditions of Service) Act, 1958.
 Perquisites taxable only in the hands of specified employees
[Section 17(2)(iii)]: The value of any benefit or amenity granted
or provided free of cost or at concessional rate which have not
been included in 1 & 2 above will be taxable in the hands of
specified employees:

Specified employees are:

Director employee: An employee of a company who is also a director is a specified

employee. It is immaterial whether he is a full-time director or part-time director. It
also does not matter whether he is a nominee of the management, workers, financial
institutions or the Government. It is also not material whether or not he is a director
throughout the previous year.

An employee who has substantial interest in the company: An employee of a

company who has substantial interest in that company is a specified employee. A
person has a substantial interest in a company if he is a beneficial owner of equity
shares carrying 20% or more of the voting power in the company.
Salary Page 16
 Laws of Taxation

Beneficial and legal ownership: In order to determine whether a person has a

substantial interest in a company, it is the beneficial ownership of equity shares
carrying 20% or more of the voting power that is relevant rather than the legal
ownership.

Example: A, Karta of a HUF, is a registered shareholder of Bright Ltd. The amount

for purchasing the shares is financed by the HUF. The dividend is also received by
the HUF. Supposing further that A is the director in Bright Ltd., the question arises
whether he is a specified employee. In this case, he cannot be called a specified
person since he has no beneficial interest in the shares registered in his name. It is
only for the purpose of satisfying the statutory requirements that the shares are
registered in the name of A. All the benefits arising from the shareholding goes to
the HUF. Conversely, it may be noted that an employee who is not a registered
shareholder will be considered as a specified employee if he has beneficial interest in
20% or more of the equity shares in the company.

Employee drawing in excess of 50,000: An employee other than an employee

described in (i) & (ii) above, whose income chargeable under the head ‘salaries’
exceeds

50,000 is a specified employee. The above salary is to be considered exclusive of the

value of all benefits or amenities not provided by way of monetary payments.

In other words, for computing the limit of ` 50,000, the following items have to be
excluded or deducted all non-monetary benefits, monetary benefits which are exempt
under section 10. This is because the exemptions provided under section 10 are
excluded completely from salaries. For example, HRA or education allowance or
hostel allowance are not to be included in salary to the extent to which they are
exempt under section 10.

Deduction for entertainment allowance [under section 16(ii)] and deduction toward
professional tax [under section 16(iii)] are also to be excluded.

If an employee is employed with more than one employer, the aggregate of the
salary received from all employers is to be taken into account in determining the
above ceiling limit of

` 50,000, i.e. Salary for this purpose

Salary Page 17
 Laws of Taxation

= Basic Salary + Dearness Allowance + Commission, whether payable monthly or

turnover based + Bonus + Fees + Any other taxable payment + Any taxable
allowances + Any other monetary benefits – Deductions under section 16]10

Medical facilities (proviso to sec 17(2))

The following medical facilities will not amount to a perquisite:

a. The value of any medical treatment provided to an employee or any member of his
family in any hospital maintained by the employer;

b. Any sum paid by the employer in respect of any expenditure actually incurred by the
employee on his medical treatment or treatment of any member of his family in any
hospital maintained by the Government/local authority/any other hospital approved
by the Government for the purpose of medical treatment of its employees;

c. Any sum paid by the employer in respect of any expenditure actually incurred by the
employee on his medical treatment or treatment of any member of his family in
respect of the prescribed disease or ailments in any hospital approved by the Chief
Commissioner having regard to the prescribed guidelines. However, in order to claim
this benefit, the employee shall attach with his return of income a certificate from the
hospital specifying the disease or ailment for which medical treatment was required
and the receipt for the amount paid to the hospital.

i. Thus, the two types of facilities are covered:

ii. payment by the employer for treatment in a Government hospital and

iii. payment by an employer for treatment of prescribed diseases in any hospital

approved by the Chief Commissioner.

d. Any premium paid by an employer in relation to an employee to effect an insurance

on the health of such employee. However, any such scheme should be approved by
the Central Government or the Insurance Regulatory Development Authority (IRDA)
for the purposes of section 36(1).

e. Any sum paid by the employer in respect of any premium paid by the employee to
effect an insurance on his family under any scheme approved by the Central
Government for the purposes of section 80D.

10
N.M.Tripathi, 1976 GrishAhuja, Direct taxes law and practice, Bharat, 18th Edition, Bharat
Publisher (2008-09).
Salary Page 18
 Laws of Taxation

f. Any sum paid by the employer in respect of any expenditure actually incurred by the
employee on his medical treatment or treatment of any member of his family to the
extent of ` 15,000 in the previous year.

g. Any expenditure incurred by the employer on the following:

i. medical treatment of the employee or any member of the family of such employee
outside India;

ii. travel and stay abroad of the employee or any member of the family of such employee
for medical treatment;

iii. travel and stay abroad of one attendant who accompanies the patient in connection with
such treatment.11

Conditions:

1. The perquisite element in respect of expenditure on medical treatment and stay abroad
will be exempt only to the extent permitted by the RBI.

2. The expenses in respect of traveling of the patient and the attendant will be exempt if
the employee’s gross total income as computed before including the said expenditure
does not exceed ` 2 lakh.

Note: For this purpose, family means spouse and children of an individual. Children
may be dependent or independent, married or unmarried. It also includes parents,
brothers and sisters of the individual if they are wholly or mainly dependent upon
him.

11
File: /chapter-4-income-from-salaries.pdf
Salary Page 19
 Laws of Taxation

VALUATION OF PERQUISITES

The Income-tax Rules, 1962 contain the provisions for valuation of perquisites. It is important
to note that only those perquisites which the employee actually enjoys have to be valued and
taxed in his hand. For example, suppose a company offers a housing accommodation rent-
free to an employee but the latter declines to accept it, then the value of such accommodation
obviously cannot be evaluated and taxed in the hands of the employees. For the purpose of
computing the income chargeable under the head “Salaries”, the value of perquisites provided
by the employer directly or indirectly to the employee or to any member of his household by
reason of his employment shall be determined in accordance with new Rule 3.

(1) Valuation of residential accommodation [Sub-rule (1)] - The value of

residential accommodation provided by the employer during the previous year shall be
determined in the following manner –

Sl. Circumstances In case of unfurnished In case of furnished

No. accomodation accommodation
(1) (2) (3) (4)
(1) Where the License fee determined The value of perquisite as
accommodation is by the Central determined under column
provided by the Government or any (3) and increased by 10%
Central Government State Government in per annum of the cost of
or any State respect of furniture (including
Government to the accommodation in television sets, radio sets,
employees either accordance with the refrigerators, other
holding office or post rules framed by such household appliances, air-
in connection with Government as reduced conditioning plant or
the affairs of the by the rent actually paid equipment).
Union or of such by the employee. If such furniture is hired
State. from a third party, the
actual hire charges payable
for the same as reduced by
any charges paid or payable
for the same by the

Salary Page 20
 Laws of Taxation

employee during the

previous year should be
added to the value of the
perquisite determined under
column (3).
(2) Where the I. 15% of salary in
accommodation is cities having
provided by any population
other employer exceeding 25
lakhs as per The value of perquisite as
(a) where the 2001 census; determined under column (3)
accommodation is II. 10% of salary in and increased by 10% per
owned by the cities having annum of the cost of
employer population furniture (including
exceeding television sets, refrigerators,
10 lakhs but not other household appliances,
exceeding 25 lakhs air-conditioning plant or
as per 2001 census; equipment or other
III. 7.5% of salary similar appliances or
in other areas, gadgets).
in respect of the If such furniture is hired
period during from a third party, the actual
which the said hire charges payable for the
accommodation same
was occupied by as reduced by any charges
the employee paid or payable for the same
during the by the employee during the
previous year as previous year, should be
reduced by the added to the value of
rent, if any, perquisite determined under
actually paid by column (3).

Salary Page 21
 Laws of Taxation

(b) where the

Actual amount of The value of perquisite as
accommodation is lease rental paid or determined under column (3)
taken on lease or payable by the and increased by 10% per
rent by the employer or 15% of annum of the cost of furniture
employer. salary, whichever is (including television sets, radio
lower, as reduced sets, refrigerators, other
by the rent, if any, household appliances, air-
actually paid by the conditioning plant or equipment
employee. or other similar appliances or
gadgets).

If such furniture is hired from a

third party, the actual hire
charges payable for the same as
reduced by any charges paid or
payable for the same by the
employee during the previous
year should be added to the
value of perquisite determined
under column (3).
(3) Where the Not applicable 24% of salary paid or payable
accommodation is for the previous year or the
provided by any actual charges paid or payable
employer, whether to such hotel, which is lower,
Government or any for the period during which such
other employer, in a accommodation is provided as
hotel. reduced by the rent, if any,
actually paid or payable by the
employee.12

12
https://www.incometaxindia.gov.in/Documents/Left%20Menu/Income-from-salary.htm
Salary Page 22
 Laws of Taxation

Notes:
1. If an employee is provided with accommodation, on account of his transfer from one
place to another, at the new place of posting while retaining the accommodation at the
other place, the value of perquisite shall be determined with reference to only one such
accommodation which has the lower perquisite value, as calculated above, for a period
not exceeding 90 days and thereafter, the value of perquisite shall be charged for both
such accommodations.
2. Any accommodation provided to an employee working at a mining site or an on-shore
oil exploration site or a project execution site, or a dam site or a power generation site or
an off-shore site would not be treated as a perquisite, provided it satisfies either of the
following conditions -
3. the accommodation is of temporary nature, has plinth area not exceeding 800 square
feet and is located not less than eight kilometers away from the local limits of any
municipality or a cantonment board; or
4. the accommodation is located in a remote area i.e. an area that is located at least 40
kms away from a town having a population not exceeding 20,000 based on latest
published all-India census.
5. Where the accommodation is provided by the Central Government or any State
Government to an employee who is serving on deputation with any body or undertaking
under the control of such Government,-
6. the employer of such an employee shall be deemed to be that body or undertaking where
the employee is serving on deputation; and
7. the value of perquisite of such an accommodation shall be the amount calculated in
accordance with Sl. No.(2)(a) of the above table, as if the accommodation is owned by
the employer.
8. “Accommodation” includes a house, flat, farm house or part thereof, or accommodation
in a hotel, motel, service apartment, guest house, caravan, mobile home, ship or other
floating structure.
9. “Hotel” includes licensed accommodation in the nature of motel, service apartment or
guest house.

Salary Page 23
 Laws of Taxation

Illustration
Mr. C is a Finance Manager in ABC Ltd. The company has provided him
with rent-free unfurnished accommodation in Mumbai. He gives you the
following particulars:

Basic salary ` 6,000 p.m.

Advance salary for April 2014 ` 5,000

Dearness Allowance ` 2,000 p.m. (30% is for

retirement benefits) Bonus ` 1,500 p.m.

Even though the company allotted the house to him on 1.4.2013, he

occupied the same only from 1.11.2013. Calculate the taxable value
of the perquisite for A.Y. 2014-15.

Solution
Value of the rent free unfurnished accommodation

= 15% of salary for the relevant period

= 15% of [(` 6000 × 5) + (` 2,000 × 30% × 5) + (` 1,500 × 5)] [See Note

below]

= 15% of ` 40,500 = ` 6,075.

Note: Since, Mr. C occupies the house only from 1.11.2013, we have to
include the salary due to him only in respect of months during which
he has occupied the accommodation. Hence salary for 5 months (i.e.
from 1.11.2013 to 31.03.2014) will be considered. Advance salary for
April 2014 drawn during this year is not to be considered because it
falls in respect of a period beyond the relevant previous year.13

13
file://chapter-4-income-from-salaries.pdf
Salary Page 24
 Laws of Taxation

PROFITS IN LIEU OF SALARY [SECTION 17(3)]

It includes the following:

1. The amount of any compensation due to or received by an assessee from his employer
or former employer at or in connection with the termination of his employment.

2. The amount of any compensation due to or received by an assessee from his

employer or former employer at or in connection with the modification of the
terms and conditions
i. of employment. Usually, such compensation is treated as a capital receipt. However,
by virtue of this provision, the same is treated as a revenue receipt and is chargeable as
salary.

ii. Note: It is to be noted that merely because a payment is made by an employer to a

person who is his employee does not automatically fall within the scope of the above
provisions. The payment must be arising due to master-servant relationship between
the payer and the payee. If it is not on that account, but due to considerations totally
unconnected with employment, such payment is not profit in lieu of salary.

iii. Example: A was an employee in a company in Pakistan. At the time of partition, he

migrated to India. He suffered loss of personal movable property in Pakistan due to
partition. He applied to his employer for compensating him for such loss. Certain
payments were given to him as compensation. It was held that such payments should
14
not be taxed as ‘profit in lieu of salary’ - Lachman Dass Vs. CIT

3. Any payment due to or received by an assessee from his employer or former employer
from a provident or other fund, to the extent to which it does not consist of employee’s
contributions or interest on such contributions.

i. Example: If any sum is paid to an empoyee from an unrecognised provident

fund it is to be dealt with as follows :

b. that part of the sum which represents the employer’s contribution to the fund
and interest thereon is taxable under salaries.

c. that part of the sum which represents employee’s contribution and interest thereon is not

i. 14 1980] 124 ITR 706 (Delhi).

Salary Page 25
 Laws of Taxation

chargeable to tax since the same have already been taxed under the head ‘salaries’ and
‘other sources’ respectively on an yearly basis.

i. Note: It does not include exempt payments from superannuation fund, gratuity,
commuted pension, retrenchment compensation, HRA.

4. Any sum received by an assessee under a Keyman Insurance policy including the sum
allocated by way of bonus on such policy.

5. Any amount, whether in lumpsum or otherwise, due to the assessee or received by him,
from any person -

a. before joining employment with that person, or

b. after cessation of his employment with that person.

6. Any other sum received by the employee from the employer.

Salary Page 26
 Laws of Taxation

ALLOWANCES [SECTION 17(3)]- FOR

COMPUTING ‘SALARY’ INCOME

Meaning and Tax Treatment of Allowances for Computing Salary Income

1. Fully Exempted Allowances

2. Fully Taxable Allowances
3. Partially Taxable Allowances ( House Rent Allowance - HRA )
4. Allowances covered U/s 10(14)

The term allowance has been derived from the word ‘to allow’. As per Oxford
Dictionary the word ‘Allowance’ means “any amount or sum allowed regularly”. As
such allowances are given in cash along with salary by the employer. These
allowances are given to an employee to meet some specific type of loss or
expenditure of the employee or to help him to meet certain type of expenses. For
example, house rent allowance is given to help the employee to pay house rent or to
get a house on rent. These are divided into three categories on the basis of their tax
treatment. These are :

Tax Treatment of Allowances for Computing Salary Income

A B C
Fully Exempted Fully Taxable Partially Taxable
1. Foreign Allowance 1. Dearness Allowance 1. House Rent Allowance
only in case of Additional Dearness
Government employees allowance 2. Entertainment
posted outside India High Cost of living Allowance for Govt.
allowance employees (see details)
2. House rent allowance
given to judges of High 2. City Compensatory 3. Allowances covered u/s
Court and Supreme Allowance 10(14)
Court. (i) Helper Allowance
3. Capital Compensatory
3. Sumptuary Allowance Allowance (ii) Uniform Allowance
given to judges of High (iii) Academic Allowance
Court and Supreme 4. Lunch Allowance
(iv) Conveyance Allowance
Court
5. Tiffin Allowance (v) Travelling Allowance
4. Allowances from (vi) Any special allowance

Salary Page 27
 Laws of Taxation

U.N.O 6. Marriage Allowance in the nature of Composite

Hill compensatory
5. Allowance to teacher 7. Family Allowance Allowance or High Altitude
or professor from Allowance or Uncongenial
SAARC member States 8. Deputation Allowance Climate Allowance or
Snow Bound Area
6. Allowance to member 9. Wardenship Allowance or Avalanche
of Union Public Service Allowance Allowance
Commission
10. Non practicing (vii) Any Special
Allowance Compensatory Allowance
in the nature of border area
11. Project Allowance or remote area or difficult
area or disturbed area
12. Overtime Allowance Allowance
(viii) Transport
13. Fixed Medical
Allowance (ix) Tribal Area
Allowance
Allowance
14. Entertainment (x) Running Allowance
Allowance for non- given to employees of
Govt. employees transport sector,
(xi) Children Education
15. Water and Electricity
Allowance
Allowance
(xii) Hostel Expenditure
16. Servant Allowance Allowance
(xiii) Compensatory Field
17. Holiday Trip
Area Allowance
Allowance
(xiv) Compensatory
Modified Field Area
Allowance
(xv) Special Allowance in
the nature of counter
insurgency allowance given
to the members of armed
forces operating in areas
away from their permanent
locations for a period of
more than 30 days.15

15
http://incometaxmanagement.com/Pages/Tax-Ready-Reckoner/GTI/Salary/10-
ALLOWANCES[Section-17(3)].html
Salary Page 28
 Laws of Taxation

Fully Exempted Allowance for Computing Salary Income

(i) Foreign allowance given by Govt. to its employees posted abroad is fully exempted.

(ii) House rent allowance given to Judges of High Court and Supreme Court is fully
exempted.

(iii) Sumptuary allowance given to Judges of High Court and Supreme Court is fully
exempted.

Fully Taxable Allowance for Computing Salary Income

1. Dearness Allowance/Additional Dearness Allowance/High cost of living

allowance/Interim Relief.

Employees having fixed income suffer the most due to rise in prices and to
compensate their loss, they are paid such allowances. So D.A. is nothing but an
additional salary and it is fully taxable.

Some times it is mentioned that

1. D.A. enters into pay for service benefits; or

2. D.A. enters into pay for retirement benefits; or
3. D.A. is given under the terms of employment; or
4. Dearness pay,

It is treated as part of salary for calculation of all benefits such as provident fund,
value of rent free house, house rent allowance, bonus, gratuity, leave encashment and
all other retirement benefits.

In case any part of D.A. enters salary for calculation of only some of the retirement

Salary Page 29
 Laws of Taxation

benefits (not all) then that part of D.A. will not form part of salary for the calculation
of any retirement benefit.

2. City/Capital compensatory Allowance.

These are given to compensate for the high cost of living in a particular big city of
India or any other capital city. These are also fully taxable.

3. Lunch / Tiffin / Marriage / FamiLy / Deputation / Wardenship / Non-

practising / Project / Overtime / Fixed Medical Allowance.

These allowances are fully taxable.

4. Entertainment Allowance :.

This allowance is fully taxable irrespective of any expenditure incurred on

entertainment of guests or customers. But in case any amount is reimbursed against
any expenditure incurred by employee on entertainment of guests or customers it shall
be fully exempted.

U/s 16(u) a deduction is allowed to those persons who receive this allowance. Till
assessment year 2001-02 this deduction was admissible both to Government as well as
private sector employees. But with effect from assessment year 2003-04 this
deduction is admissible only to Government employees for an amount equal to least of
following :

1. Statutory Limit 5,000 ;

2. 1/5 th of basic salary only ; or
3. Actual entertainment allowance received during the previous year.

Salary Page 30
 Laws of Taxation

PROVIDENT FUND
Provident fund scheme is a scheme intended to give substantial benefits to an
employee at the time of his retirement. Under this scheme, a specified sum is
deducted from the salary of the employee as his contribution towards the fund. The
employer also generally contributes the same amount out of his pocket, to the fund.
The contribution of the employer and the employee are invested in approved
securities. Interest earned thereon is also credited to the account of the employee.
Thus, the credit balance in a provident fund account of an employee consists of the
following:

 employee’s contribution
 interest on employee’s contribution
 employer’s contribution
 interest on employer’s contribution.
The accumulated balance is paid to the employee at the time of his retirement or
resignation. In the case of death of the employee, the same is paid to his legal
heirs.

The provident fund represents an important source of small savings available to the
Government. Hence, the Income-tax Act, 1961 gives certain deductions on savings in
a provident fund account.

There are four types of provident funds:

(i) Statutory Provident Fund (SPF)

(ii) Recognised Provident Fund (RPF)

(iii) Unrecognised Provident Fund (URPF)

(iv) Public Provident Fund (PPF)

Salary Page 31
 Laws of Taxation

The tax treatment is given below:-

Particul Recogni Unrecogn Statut Public PF

ars zed PF ized ory PF
PF
Employe Amount Not Fully N.A. (as
r’s in excess taxable exempt there is only
Contribu of 12% of yearly assessee’
tion salary is s own
taxable contributi
on)
Employe Eligible forNot
deduction u/s 80C
Eligibl Eligible for
e’s eligible for e for deductin u/s 80C
Contribu deduction deducti
tion on u/s
80C
Interest Amount Not Fully Fully
Credited in excess taxable exemt exempt
of 9.5% yearly
p.a. is
taxable
Amount See Note See Note Fully Fully
received (1) (3) exempt exempt
on u/s u/s
retireme 10(11) 10(11)
nt, etc.
Notes:

1. Amount received on the maturity of RPF is fully exempt in case of an employee

who has rendered continuous service for a period of 5 years or more. In case the
maturity of RPF takes place within 5 years then the amount received would be
fully exempt only if the service had been terminated due to employee’s ill-health
or discontinuance or contraction of employer’s business or other reason beyond
control of the employee. In any other case, the amount received will be
taxable in the same manner as that of an URPF.
2. If, after termination of his employment with one employer, the employee obtains

Salary Page 32
 Laws of Taxation

employment under another employer, then, only so much of the accumulated

balance in his provident fund account will be exempt which is transferred to his
individual account in a recognised provident fund maintained by the new
employer. In such a case, for exemption of payment of accumulated balance by
the new employer, the period of service with the former employer shall also be
taken into account for computing the period of five years’ continuous service.
3. Employee’s contribution is not taxable but interest thereon is taxable under
‘Income from Other Sources’. Employer’s contribution and interest thereon is
taxed as Salary.
4. Salary for this purpose means basic salary and dearness allowance - if provided
in the terms of employment for retirement benefits and commission as a
percentage of turnover.

(1) Statutory Provident Fund (SPF): The SPF is governed by Provident

Funds Act, 1925. It applies to employees of government, railways, semi-government
institutions, local bodies, universities and all recognised educational institutions.
Under the Income-tax Act, 1961, the rules governing the SPF are as follows:
(2) Recognised Provident Fund (RPF): Recognised provident fund
means a provident fund recognised by the Commissioner of Income-tax for the
purposes of income-tax. It is governed by Part A of Schedule IV to the Income-tax
Act, 1961. This schedule contains various rules regarding the following:

 Recognition of the fund

 Employee’s and employer’s contribution to the fund

 Treatment of accumulated balance etc.

A fund constituted under the Employees’s Provident Fund and Miscellaneous

Provisions Act, 1952 will also be a Recognised Provident Fund.

(3) Unrecognised Provident Fund (URPF): A fund not recognised by

the Commissioner of Income-tax is Unrecognised Provident Fund.

(4) Public Provident Fund (PPF): Public provident fund is operated under
the Public Provident Fund Act, 1968. A membership of the fund is open to every
individual though it is ideally suited to self-employed people. A salaried employee
may also contribute to PPF in addition to the fund operated by his employer. An

Salary Page 33
 Laws of Taxation

individual may contribute to the fund on his own behalf as also on behalf of a minor
of whom he is the guardian.

For getting a deduction under section 80C, a member is required to contribute to the
PPF a minimum of ` 500 in a year. The maximum amount that may qualify for
deduction on this account is ` 1,00,000 as per PPF rules.

A member of PPF may deposit his contribution in as many installments in multiples

of ` 500 as is convenient to him. The sums contributed to PPF earn interest at 8%.
The amount of contribution may be paid at any of the offices or branch offices of the
State Bank of India or its subsidiaries and specified branches of Nationalised Banks
or any Head Post Office.16

16
file:/chapter-4-income-from-salaries.pdf
Salary Page 34
 Laws of Taxation

DEDUCTIONS FROM SALARY

The income chargeable under the head ‘Salaries’ is computed after making the
following deductions:

(1) Entertainment allowance [Section 16(ii)]

(2) Professional tax [Section 16(iii)]

Entertainment allowance

Entertainment allowance received is fully taxable and is first to be included in the

salary and thereafter the following deduction is to be made:

However, deduction in respect of entertainment allowance is available in case of

Government employees. The amount of deduction will be lower of:

(i) One-fifth of his basic salary or

(ii) ` 5,000 or
(iii) Entertainment allowance received.

Amount actually spent by the employee towards entertainment out of the

entertainment allowance received by him is not a relevant consideration at all.

Professional tax on employment

Professional tax or taxes on employment levied by a State under Article 276 of the
Constitution is allowed as deduction only when it is actually paid by the employee
during the previous year.

If professional tax is reimbursed or directly paid by the employer on behalf of the

employee, the amount so paid is first included as salary income and then allowed as a

Salary Page 35
 Laws of Taxation

deduction u/s 16

Deduction under Section 16 :

The income chargeable under the head “salaries” shall be computed after making the
following deductions :

(i) Expenditure incidental to the employment (i.e., standard deduction ) [Section

16 (i)].

The income chargeable under the head "Salaries" shall be computed after making the
following deductions, namely :-

(i) In the case of an assessee whose income from salary, before allowing a deduction
under the clause, -

(a) Does not exceed one lakh rupees, a deduction of a sum equal to thirty-three and
one-third per cent of the salary or twenty-five thousand rupees, whichever is less;

(b) Exceeds one lakh rupees but does not exceed five lakh rupees, a deduction of a
sum of twenty thousand rupees.

For the purposes of above clause, where salary is due from, or paid or allowed by,
more than one employer, the deduction under this clause shall be computed with
reference to the aggregate salary due, paid or allowed to the assessee and shall in
no case exceed the amount specified under this clause;

(ii) A deduction in respect of any allowance in the nature of an entertainment

allowance specifically granted to the assessee by his employer –

(a) In the case of an assessee who is in receipt of a salary from the Government, a
sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other
perquisite) or five thousand rupees, whichever is less; and

Salary Page 36
 Laws of Taxation

(b) In the case of any other assessee who is in receipt of such entertainment allowance
and has been continuously in receipt of such entertainment allowance regularly
from his present employer from a date before the 1st day of April, 1955, the
amount of such entertainment allowance regularly received by the assessee from
his present employer in any previous year ending before the 1st day of April,
1955, or a sum equal to one-fifth of his salary (exclusive of any allowance, benefit
or other perquisite) or seven thousand five hundred rupees, whichever is the least;

(iii) Deduction of any sum paid on account of a tax on employment [Section 16

(iii)].

In computing the income chargeable under the head ‘salary’, it allows a deduction
of any sum paid by the assessee on account of a tax on employment within the
meaning of clause (2) of Article 276 of the Constitution of India leviable by or
under any law.

Salary Page 37
 Laws of Taxation

BIBLIOGRAPHY

BOOKS

 Rattan, Jyoti, “Taxation Law” Bharat Law House.

 Ahuja, Girish, “ Bharat’s Professional Approach to Direct Tax” Bharat Law House,
23rd ed

WEBSITES

 www.investopedia.com

 www.charteredclub.com

 www.caclubindia.com

 www.icai.org

BARE ACTS

• Income Tax Act, 1961

Salary Page 38