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UNIVERSITY INSTITUTE OF LEGAL STUDIES PANJAB

UNIVERSITY, CHANDIGARH

TAXATION LAW

PROJECT TOPIC
INCOME FROM SALARIES (S. 15 TO 17)

SUBMITTED TO SUBMITTED BY

Ms. Kriti Simranpreet

B.A.LL.B. (H.)

Semester – 10th

Section: - A

Roll no- 27
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ACKNOWLEDGEMT

I take this opportunity to express my gratitude and deep regards to my teacher

‘Ms. Kriti’ for her exemplary guidance and constant encouragement
throughout the course of this project.

I would also like to thank my family and friends for their continuous support
throughout the making of this project.

Thank You
Simranpreet
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Contents
INTRODUCTION ............................................................................................................................... 4
M E A N I N G O F W O R D S A L A R Y ...................................................................................... 4
RELEVANT PROVISIONS ............................................................................................................ 4
IMPORTANT CONCEPTS REALTED TO INCOME FROM SALARIES ...................................... 5
❏ Employer-Employee relationship must exist between payer and payee ..................................... 5
Full time or Part-time Employment - it doesn’t matter.................................................................... 6
❏ Place of accrual – ........................................................................................................................ 7
BASIS OF CHARGE [SECTION 15] ................................................................................................. 7
DEFINITION OF SALARY (SECTION 17) ...................................................................................... 8
17(1) Salary includes ....................................................................................................................... 8
(2) " PERQUISITES”..................................................................................................................... 15
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INTRODUCTION
Section 14 classifies all income into five heads (up to assessment year 1988–89, six) for
the purposes of charge to income-tax and computation of total income. The ‘total income
has been defined in section 2(45), to mean “the total amount of income referred to in
section 5, computed in the manner laid down in this Act.”

As per section 14, following are the heads of the income:

➢ Income from Salary (sections 15-17 )

➢ Income from House Property (s. 22-27 )
➢ Profit & Gains from Business & Profession (S. 28-44D )
➢ Capital Gain (S.45-55A)
➢ Income from Other Sources (S. 56-59)
In this project we will study about income from salaries.

M E ANI NG O F W O RD S ALA RY

The term ‘salary’ means every payment by an employer to his employee for services
rendered. Any such payment would be chargeable to tax as income from salaries. The
meaning of the term ‘salary’ for purposes of income tax is much wider than what is
normally understood. The term ‘salary’ for the purposes of income tax act, 1961 will
include both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as
well as non-monetary facilities (e.g. housing accommodation, medical facility, interest free
loans etc.)

RELEVANT PROVISIONS

SEC. 15 TO SEC. 17 OF THE INCOME TAX ACT,1961 deal with income from salary.
Section 15 lays down what is to be treated as, or included in, “salary” for the purpose of
chargeability to income-tax. Section 16 gives the deductions to be made from such gross
income. Section 17 gives the related definitions.

Following diagram makes this clear:

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BASIS OF CHARGE [SECTION 15]

-Salary due
- paid or allowed, though not due
- Arrears of Salary

DEDUCTION [SECTION 16]

-Standard deduction
- Entertainment Allowance
-Professional tax

MEANING [SECTION 17]

- Salary
-Perquisite
-Profits in lieu of salary

IMPORTANT CONCEPTS REALTED TO INCOME FROM

SALARIES

❏ Employer-Employee relationship must exist between payer and payee

In a employer-employee relationship, employee performs his duties and the employer

provides him salary. For example: - Mr. X is an employee of Deloitte, lecturer working in
college etc.
it is to be noted that Member of Parliament or State Legislature are not a Govt. Employee
and therefore, remuneration received by them is not taxable as salary income but as income
from other sources. However, Salary received by Ministers working in Govt. Dept. is
taxable under head Salary
Similarly, Salary, bonus, commission or remuneration by whatever name called due
to/received by partner of a firm shall not be regarded as Salary
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Full time or Part-time Employment - it doesn’t matter

For a salary to be taxable as income, it is immaterial that whether the employee is working
as a full time employee or a part time employee. Both are employees under the income tax
act,1961.
For example: if employee works with more than one employer, all the
salaries should be clubbed together for chargeability under the head salary

❏ Surrender of Salary –

Meaning - If an employee opts to surrender his salary to the central government under
section 2 of the voluntary surrender of salaries Act, 1961, the salary so surrendered would
be excluded while computing his taxable income.
If an employee surrenders his salary to the Central Government under section 2 of the
Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so
surrendered would be exempt while computing his taxable income.
Example:- Employees have offered to surrender their salary in parts for good of national interest,
viz help for kargil, help for Gujarat earthquake. in such conditions as such amount is transferred to
relief fund, such amount goes direct excluded from the salary calculation (generally they offer 1/2
days salary)1

❏ Foregoing of Salary –

It means waiving the right to receive the salary i.e. work has been performed and salary has
accrued but employee voluntarily says that he will not take salary. It is treated as
application of income and thus would be taxable in the hands of an employee.
Example - Suppose Mr A worked for the whole month at a salary of 25000 per month, On salary
date, he says that he does not want to received salary, this is called foregoing of salary. 2

❏ Tax Free Salary –

It means the employer has paid the tax on salary due to such employee. Thus, the amount
paid as tax by employer would also be considered as income of the employee and will be
added in his salary.

1 www.quora.com
2 Ibid.
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❏ Place of accrual –

Meaning- place where services are rendered

Exception- In case a Citizen of India who is Govt. employee and renders services
outside India, salary received by him would be treated as income deemed to
accrue or arise in India

Example: Mr. Z an Indian citizen posted in UK as Indian Ambassador, salary

received by him for rendering services outside India shall be treated as deemed
to accrue or arise in India

❏ Salary paid by Foreign Govt./Enterprises –

to its employees is taxable under the head salaries unless it is specifically exempt under
section 10 like 10(6)

BASIS OF CHARGE [SECTION 15] 3

Salary is chargeable to tax either on due basis or receipt basis whichever is earlier. This
means that even if the employee has not been paid for in respect of the period of services
rendered by him the same shall be taxable in the hands of the employee on due basis.
However, 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.
As per Section 15, Salary consists of the following:

(a) any salary due from an employer or a former employer to an assessee in the
previous year, whether paid or not ( Normal salary )

(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 or before it became due to him.
(Advance Salary)

Advance salary is taxable when it is received by the employee irrespective of the

fact whether it is due or not. it may so happen that when advance salary is included
and charged in a particular previous year, the rate of tax at which employee is
assessed may be higher than normal rate of tax to which he would have been
assessed. Section 89(1) provides for relief in these types of cases.

3 Income tax act,1961

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Loan is different from salary. When an employee takes a loan from his employer, it
is brought to tax as salary of the employee. Similarly, advance against salary is
different from advance salary. It is an advance taken by the employee from his
employer. This advance is generally adjusted with his salary over a specified time
period. It cannot be taxed as salary.

(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 year. (Arrears of Salary)
Normally speaking salary arrears must be charged on due basis. However, there are
circumstances when it may not be possible to bring the same to charge on due basis.
For example if the pay commission is appointed by the central government and it
recommends revision of salaries of employees, the arrears received in that
connection will be charged on receipt basis. Here, also relief under section 89(1) is
available.
Illustration : If A draws his salary in advance for the month of April 2014 in the
month of March 2014 itself, the same become chargeable on receipt basis and is to
be assessed as income of the P.Y. 2013-14 i.e. A.Y. 2014-2015. However, the salary
for the A.Y. 2015-16 will not include that of April 2014.
Similarly, if the salary due for the month of March 2014 is received by A later in the
month of April 2014. It is still chargeable as income of the P.Y.2013-14 i.e.
A.Y.2014-15 on due basis. Obviously, the salary for the A.Y. 2015-16 will not
include that of March 2014
Place
DEFINITION OF SALARY (SECTION 17)
It is an inclusive definition and includes monetary payments as well as non-monetary
facilities." Salary"" perquisite" and" profits in lieu of salary" defined For the purposes of sections
15 and 16 and of this section,

17(1) Salary includes

(i) Wages;
A sum of money paid under contract by the employer to the employees for services
rendered is called wages. The employee may generally receive it under various names such
as basic pay, salary, remuneration etc. The payment may be for paid leaves, actual work or
the actual amount received or due during the relevant previous year.

(ii) any annuity or pension;

ANNUITY: As per the definition, ‘annuity’ is treated as salary. Annuity is a sum payable in
respect of a particular year. It is a yearly grant. If a person invests some money entitling
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him to series of equal annual sums, such annual sums are annuities in the hands of the
investor.
Annuity received by a present employer is to be taxed as salary. It does not matter whether
it is paid in pursuance of a contractual obligation or voluntarily.
Annuity received from a past employer is taxable as profit in lieu of salary.
Annuity received from person other than an employer is taxable as “income from other
sources.”

PENSION, Concise Oxford Dictionary defines ‘pension’ as a periodic payment made

especially by govt. or a company or other employers to the employee in consideration of
past service payable after his retirement.

When a person forgoes a portion of the pension and receives a lump sum amount by
surrendering such portion of pension, this is called commuted pension. The pension may be
fully or partly commuted.4

Uncommuted pension is the Periodical payment on monthly basis 5

4 https://taxguru.in/income-tax/pension-taxability.html#a_Uncommuted_pension
5 Ibid.
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pension

commuted pension uncommuted pension

employees of the other fully taxable

govt./local authority
/statutory corporation employees

if the
fully exempt if the employee
employee
under does not receives
receives
10(10A) (i) any grauity
gratuity also

1/3 x(commuted pension

received /commuted n0) x 100 1/2 x(commuted pension received
/commuted n0) x 100
fully exemptedv u/s. 10(10A)
(ii) (a) fully exemptedv u/s. 10(10A) (ii) (b)

(iii) Any gratuity;

Gratuity is a voluntary payment made by an employer in appreciation of services rendered

by the employee. Now-a-days gratuity has become a normal payment applicable to all the
employees. In fact, payment of gratuity act, 1972 is a statutory Recognition of the concept
of gratuity. Almost all employers enter into an agreement with employees to pay gratuity.
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GRATUITY

RECEIVED RECEIVED AT THE

DURING TIME OF
THE SERVICE RETIREMENT/DEATH

EMPLOYEES OF
FULLY OTHER
GOVT./LOCAL
TAXABLE EMPLOEES
AUTHORITIES

NOT COVERED COVERED

FULLY
UNDER PAYMENT UNDER
EXEMPT
OF PAYMENT OF
U/S 10(10)(i) GRATUITY ACT, GRATUITY
1972 ACT, 1972

(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or
wages;
"salary" Includes basic salary and dearness allowance if terms of employment so provide but does
not include any other allowance. However, any commission payable at a fixed percentage of
turnover achieved by the employee is included.
House Allowances
The exemption of House Rent Allowance (HRA) received is exempt to the least of the following:
HRA received the period during which the rental accommodation is occupied by the employee in
the previous year.
Excess of rent paid over 10 percent of salary.
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50% of the salary, if the rented accommodation is situated at Mumbai, Calcutta, Delhi or
Chennai and 40% of salary in other cities. The salary is taken for the period during which
the rental accommodation is occupied by the employee in the previous year.
Entertainment Allowances
Any amount received by the employee, as entertainment allowance is taxable as salary.
However, deduction is available to the employee if he has been:

In continuous service with the present employer from a date before April 1, 1955, and
Receiving Entertainment Allowance from his present employer continuously from a date
before April 1, 1955 till the year for which the income is to be taxed
The amount of deduction available is restricted to least of the following:
# In case of government employees: Rs. 5,000; 20% of salary; or amount of entertainment
allowance granted during the previous year.
# In case of non-Government employees: Rs. 7,500; 20% of salary; amount of
entertainment allowance granted during the previous year, or
# Amount of entertainment allowance received during the financial year 1954-55. Salary
means basic salary and excludes all allowances, benefits or perquisites.

Transport Allowances
Transport allowance provided to an employee for commuting between his residence and the
place of his duty shall be exempt up to Rs. 800 per month. However, in case blind or
orthopaedically handicapped employee's, a sum of Rs. 1,600 per month is exempt from tax.

Education Allowances
Education allowance of Rs. 50 per month per child for up to 2 children of the employee is
exempted. In case the children are in hostel, the exemption available is Rs.150 per month
per child for up to 2 children.

Special Allowances
The following allowances are exempt from tax:
Expenses incurred on conveyance in the performance of duties of office;
Cost of travel on tour or on transfer;
Daily ordinary charges incurred by the employee on account of absence from his normal
place of duty during a tour;
Expenditure on a helper where such helper is engaged for the performance of the duties of
office;
Allowances granted for encouraging the academic research and training pursuits in
educational and research institutions; or
Expenditure incurred on the purchase or maintenance of uniform for wear during the
performance of the duties of office.
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Leave Travel Assistance

LTA is paid for meeting travelling expenses incurred by an individual as also family
members (this includes only the spouse, two children and dependent parents, brothers and
sisters) while on holiday in India. The amount of exemption depends upon the mode of
journey. This exemption is available in respect of 2 journeys undertaken in a block of four
calendar years

Medical Allowances
This exemption is available in respect of :
Reimbursement upto Rs.15,000 for medical treatment of the employee and family
members.
Reimbursement of expenditure incurred by an employee and family members in approved
hospitals, dispensaries etc.
Group medical insurance for an employee and family members or reimbursement of
premium paid by an employee for medical insurance.
For medical treatment abroad, the actual expenditure incurred, including on travel and stay
abroad of the patient and one attendant (if permitted by the RBI). The ceiling for the gross
total income excluding the amount to be reimbursed is Rs.2 lakhs.

(v) any advance of salary;

(va) 6any payment received by an employee in respect of any period of leave not availed
of by him
The govt. and some private Employers compensate employees for the accumulated leaves.
They can give the payment during the services or after retirement or resignation. The
payment received for encashment of leaves unavailed during the service period will form
part of the salary.

6 Inserted by the Taxation Laws (Amendment) Act, 1984, w. r. e. f. 1- 4- 1978.

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leave
salary/leave
encashment

received during recieved on

the period of retirement whether
service on superannuation or
otherwise

fully taxable by govt. by any other

employee employee

fully exempt least of the

under following is
10(10AA) (i) exempt under
10(10AA) (ii)

10 months salary cash eqivalent of

(on the basis of unavailed leave
actual leave (based on last 10
Rs. 3,00,000 salary average salary of
last 10 months months average
received salary ) to his
preceding
retirement) credit at the time
of retirement

earned leave
entitlement cannot
exceed 30 days for
every year of actual
service
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(vi) the annual accretion to the balance at the credit of an employee participating in a
recognized provident fund, to the extent to which it is chargeable to tax under rule 6 of
Part A of the Fourth Schedule; and
(Excess of employer’s contribution over 12% of salary is taxable and excess of interest
over 9.5% is taxable)

(vii) 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 of an employee
participating in a recognized provident fund, to the extent to which it is chargeable to tax
under rule 6 of Part A of the Fourth Schedule; and

INCOMES TO BE INCLUDED IN GROSS SALARY

DIFFERENT RECEIPTS TAX TREATMENT

Wages/ remuneration/basic Taxable

salary
Annuity from employer Taxable

Bonus Taxable on receipt basis if

not taxed earlier on due basis
Salary in lieu of notice period Taxable

Fee and Commission Taxable

Overtime Payments Taxable

Allowances Taxable unless specific

exemption is provided
Retirement benefits Taxable in some specified
cases

(2) " PERQUISITES”

“Perquisite” may be defined as any casual emolument or benefit attached to an office or
position in addition to salary or wages.7 Perquisite may arise in the course of employment
or in the course of profession. If it arises from a relationship of employer-employee, then

7 VALUATION OF PERQUISITES, Tax Payers Information Series-36

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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” is defined in the section 17(2) of the Income tax Act as including:
(i) Value of rent-free/accommodation provided by the employer.
(ii) Value of any concession in the matter of rent respecting any accommodation provided
to the assessee by his employer.
(iii) Any sum paid by employer in respect of an obligation which was actually payable by
the assessee.
(iv)Value of any benefit/amenity granted free or at concessional rate to specified
employees etc.
(v) 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.
(vi) Any sum payable by the employer, whether directly or through a fund other than a
recognized provident fund or an approved superannuation fund to effect an assurance
on the life of the assessee or to effect a contract for an annuity.
(vii) The amount of any contribution to an approved superannuation fund by the employer
in respect of the assessee, to the extent it exceeds one lakh rupees; and
(viii) The value of any other fringe benefit or amenity as may be prescribed.

Basically the perquisites are divided in two parts i.e. monetary perquisites and non
monetary perquisites. Monetary perquisites are taxable for all employees and non monetary
perquisites are taxable in the hands of specified employees

TAXATION OF PERQUISITES

Perquisites can be divided in the following 3 categories:

1. Perquisites - taxable in all cases
2. Perquisites- not taxable
3. Perquisites which are taxable only in the hands of specified Employees.

PERQUISITES

NON- MONETARY MONETARY

PERQUISITES PERQUISITES

1) Free domestic servant at

1) Reimbursement of
employee’s home (e.g.
salary of servant
gardener, sweeper etc.)
2) Reimbursement of Gas,
2) Free gas, electricity, water
Electricity, Water bill
at employees home
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4) Free educational facilities 3) Reimbursement of school

for employees children fees >1000
>1000 4) Reimbursement of motor
car expenses
5) Use of motor car
5) Reimbursement of private
6) Private journey provided travel bill of transport
free of cost or concessional employees
rate to employee/family

TAXABLE FOR ALL

TAXABLE ONLY FOR
EMPLOYEES
SPECIFIED EMPLOYEES

Profits in lieu of salary [section 17(3)]

It includes the following:
(i) 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.
(ii) The amount of any compensation due to received by an assessee from his
employer or former employer at or in connection with the modification of
the terms and conditions of employment. Usually, such compensation is
treated as a capital receipt. However, by virtue of this provision, the same 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.
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 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.
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 not be taxed as ‘profit in lieu of salary’ –
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Lachman Dass v. CIT8

(iii) 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.
Example
If any sum is paid to an employee from an unrecognized provident fund it is
to be dealt with as follows:
(a) That part of the sum which represents the employer’s contribution to the
the fund and interest thereon is taxable under salaries.
(b) That part of the sum which represents employee’s contribution and
interest thereon is not chargeable to tax since the same have already been
taxed under the head ‘salaries’ and ‘other sources’ respectively on an
yearly basis.

DEDUCATION FROM SALARY INCOME (SECTION 16)

The following deductions from salary income are admissible as per section 16 of the
income-tax act.
(i) Professional/Employment tax levied by the State Govt.
(ii) Entertainment Allowance – Deduction in respect of this is available to a govt.
employee to the extent of Rs. 5000/- or 20% of his salary or actual amount
received, whichever is less.
Treatment of Entertainment Allowance
Entertainment allowance received is fully taxable and is first to be included in
salary income under the head “salaries” and thereafter a deduction is given.
Deduction in respect of Entertainment allowance is available from Gross salary
only to govt. employees. The amount of deduction will be lower of:
1. Rs. 5000
2. 20 percent of basic salary i.e. exclusive of any allowance, benefit or other
perquisite; or
3. Amount of entertainment allowance received during the previous year
4. In case of non-governmental employee entertainment allowance is not
deductible.
5. Amount actually spent towards entertainment (out of entertainment
allowance received) is not taken into consideration.

8 [1980] 124 ITR 706 (Delhi)

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CONCLUSION

Salary (sec. 15,16,17)

Salary [17(1)] Allowances Perquisites Profits in lieu of

[17(3) (ii)] [17(2)] salary [17(3)]

Less

Entertainment allowance Tax on employment

[16 (ii)] [16 (iii)]

16(
Income under the head salary
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REFERENCES
1. Bare act – income tax act-1961
2. Dr. Jyoti Rattan, Principles of taxation law
3. www.taxguru.com accessed on 27 march 2023 at 5:25 p.m.
4. www.legalservicesindia.com accessed on 27 march 2023 at 5:27 p.m.
5. www.quora.com accessed on 27 march 2023 at 5:30 p.m.