INCOME FROM SALARY

Definition of Salary [Section 17(1)]

The payment made by an employer to an employee is known as Salary. The term Salary includes
wages, annuity, pension, gratuity, fees, commission, perquisite / profit in lieu of salary, leave salary,
advance salary, provident fund receipt or any other receipt from the employer in terms of employment.

Basis of Charge [Section 15]

Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier. However,
where any salary, paid in advance, is assessed in the year of payment, it cannot be subsequently
brought to tax in the year in which it becomes due. If the salary paid in arrears had already been
assessed on due basis, the same cannot be taxed again when it is paid.

Element Description
Wages The amount paid for any service or work.
Dearness It is an extra amount given to an employee to meet the burden of inflation or
Allowance increased cost of living.
Treatment: it is fully taxable in all cases
House Rent Least of the following is exempt:
Allowance (a) HRA actually received
[10(13A)] (b) Rent paid less 10% of Salary
(c) 50% of Salary, if accommodation is located in Mumbai, Kolkata, Delhi
or Chennai.
40% of Salary, if the accommodation is located in any other city.
Note:
1) Salary = Basic + DA(if it forms part of retirement benefit) + Commission
as a fixed % of turnover.
2) Exemption is not available if employee lives in his own house, or in a
house for which he doesn’t have to pay any rent.
Other City Compensatory Allowance, tiffin Allowance, Medical Allowance, Servant
Allowances Allowance, Entertainment Allowance
Treatment : Fully Taxable
Special Section 10(14)(i) deals with the allowances, deduction from which depends on
Allowance u/s actual expenditure-
10(14) Travel or transfer Allowance, Daily Allowance, Conveyance Allowance,
Helper/Assistant Allowance, Research Allowance, Professional Development
Allowance, Uniform Allowance
Treatment : Minimum of actual amount received or actual expenditure incurred
for such purpose.

Section 10(14)(ii) deals with the allowances, deduction from which do not
depend on actual expenditure-
Special The amount of exemption varies from ₹300
Compensatory (Hill p.m. to ₹7000 p.m.
Areas) Allowance
Border area The amount of exemption varies from ₹200
allowance p.m. to ₹1300 p.m.
Tribal ₹200 p.m.
areas/scheduled areas
allowance
Allowance for Exempt up to 70% of such allowance or

Page1
 INCOME FROM SALARY

transport employees ₹10000 p.m., whichever is lower.

Children education ₹100 p.m. per child up to a maximum of two
Allowance children

Children Hostel ₹300 p.m. per child up to a maximum of two

expenditure children
Allowance
Compensatory field Exempt up to ₹2600 p.m.
area allowance

Compensatory Exempt up to ₹1000 p.m.

modified allowance
Counter insurgency Exempt up to ₹3900 p.m. in some cases
allowance
Transport Allowance Nil (₹3200 per month for an employee who
is blind or deaf or dumb or orthopaedically
handicapped)
Underground Exempt up to ₹800 p.m.
Allowance
High altitude Exempt up to ₹1060 p.m. (for altitude of
allowance 9000 to 15000 feet).
Exempt up to ₹1600 p.m. (for altitude above
15000 feet).
Highly active field Exempt up to ₹4200 p.m.
area allowance
Island duty allowance Exempt up to ₹3250 p.m.

Allowances Allowance to Government Employees outside India(the assesse must be a citizen

exempt from of India working outside India), Allowance received from United Nations
tax Organisation, Compensatory Allowances under Article 222(2) of the
Constitution, Allowances to judges of the High Court or the Supreme Court.
Fees, Fees: the extra remuneration for doing specific job under the terms of
Commission & employment.
Bonus Commission: percentage of turnover or profit.
Bonus: May be contractual or Voluntary

Treatment: All are fully taxable. For Bonus, Contractual Bonus is taxable as
Bonus and Voluntary Bonus is taxable as perquisite.
Gratuity Gratuity received during service period is fully taxable.
[10(10)] But when it is being received at the time of retirement the following deduction is
available:
Category Exemption
Govt. Fully exempted u/s 10(10)(i).
Non-Govt. Covered under Least of the following three:
Gratuity Act, 1972 a) ₹20, 00, 000/-
b) Actual receipt.
c) Last month’s salary x (15/26) x
No. of completed year of
service or partly completed

Page2
 INCOME FROM SALARY

i.e.> 6 months.
Note: Salary = Basic + D.A.

Not covered under Least of the following three:

Gratuity Act, 1972 a) ₹20, 00, 000/-
b) Actual receipt.
c) ½ x Average Salary of last 10
months x No of completed year
of service.
Note: Salary = Basic + D.A. (The
portion of retirement benefit) +
Commission of fixed % on turnover.
Annuity or Pension is a periodic payment made especially by Government or a company or
Pension other employers to the employee in consideration of past service payable after
[10(10A)] retirement.
Pension is of two types-
Uncommuted Pension: Uncommuted pension refers to pension received
periodically. It is fully taxable in the hands of both government and non-
government employees.
Commuted Pension: Commutation means inter-change. Commuted pension
means lump sum amount taken by commuting the whole or part of the pension.
Many persons convert their future right to receive pension into a lumpsum
amount receivable immediately.

Exemption u/s 10(10A) regarding commuted or lump-sum pension

Category of Exemption
Employee
Govt. Fully exempted.
Non-Govt. When the employee gets 1/3 x (commuted pension
Gratuity. received) x 100/commutation %
When the employee does ½ x (commuted pension
not get Gratuity. received) x 100/commutation %

Note:
1. High court or Supreme Court judges will get tax exemption maximum ½
of commuted pension.
2. If the commuted pension is being received from LICI will be exempted.
Leave Salary Leave salary means the salary for unutilised leaves. Such salary during service
[10(10AA)] period is fully taxable but when it is given at the time of retirement the following
exemption u/s 10(10AA) is available :
Exemption u/s 10(10AA)

Category Exemption
Govt. Fully exempted.

Page3
 INCOME FROM SALARY

Non-Govt. Least of the following four :

a) ₹25, 00, 000/-
b) Actual receipt.
c) 10 month’s salary (On the basis of
last 10 month’s average).
d) Cash equivalent of unutilized leave.
[Last 10 month’s average salary x
Unutilized leave/30]

[Salary = Basic + D.A. (Only the part of retirement benefit) + Fixed % of

commission on turnover.]

Note: Maximum leave salary exempted from tax is Rs. 25,00,000/- irrespective
of nos. of employers or nos. availing times.
Retrenchment Least of the following is exempt :
Compensation (i) Compensation actually received
[10(10B)] (ii) ₹500000
(iii) 15/26 x Average Salary of last 3 months x completed years of service
and part thereof in excess of 6 months.
Voluntary It is applicable to employees of State and Central Government, Public Sector
Retirement Company, any other company, local authority, co-operative society, IIT, etc.
Compensation Least of the following is exempt :
[10(10C)] (i) Compensation actually received
(ii) ₹500000
(iii) Last drawn salary x 3 months x completed years of service
(iv) Last drawn salary x remaining months of service
Profits in Lieu Following receipts are taxable as profits in lieu of salary:
of Salary - Amount of any compensation due or received by an assessee from his
employer or former employer at or in connection with termination or his
employment or modification of the terms and conditions of employment.
- Any payment due to or received by an assessee from his employer or former
employer except the following:
Gratuity exempted u/s 10(10)
HRA exempted u/s 10(13A)
Commuted Pension exempted u/s 10(10A)
Retrenchment Compensation exempted u/s 10(10B)
Payment from an approved Superannuation fund u/s 10(13)
Payment from SPF or PPF
Payment from RPF to the extent it is exempt u/s 10(12).
- Any payment from UPF or such other fund to the extent to which it does not
consist of contributions by the assessee or interest on such contributions.
- Any sum received by the employee under the Keyman Insurance Policy
including the sum allocated by way of bonus on such policy.
- Any amount due to or received by the employee (in lump sum or otherwise)
prior to employment or after cessation of employment.

Page4
 INCOME FROM SALARY

Tax Implication :
Provident
Fund Employer’s contribution:

Categories Contribution Interest At the time of Maturity

of PF
Recognized >12% of Salary. >9.5% of Exempted from Tax if service
Salary. period >= 5 years or < 5 years
but terminated by the ill
health of employer.
Un- Not taxable Not taxable Fully taxable.
recognized yearly. yearly
Public NA Exempted. Fully exempted u/s 10 (11).
as here the
employer does
not contribute.
Statutory Exempted. Exempted. Fully exempted u/s 10 (11).

Employee’s contribution:

Categories Contribution Interest At the time of Maturity

of PF
Recognized Eligible for >9.5% of Exempted from Tax if service
deduction u/s Salary. period >= 5 years or terminated by
80C. the ill health of employer.
Un- Not eligible for Not taxable NA (Interest is taxable under the
recognized deduction. yearly head “Income from Other
Sources”.
Public Eligible for Exempted. Fully exempted u/s 10 (11).
deduction u/s
80C.
Statutory Eligible for Exempted. Fully exempted u/s 10 (11).
deduction u/s
80C.

Note: Salary = Basic + DA (Only the portion of retirement benefit) + Commission as %

of turnover.

Page5