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Computation of Income Under Head 'Salaries'

Income under the head ‘Salaries’ 

Salary is defined to include:

a) Wages

b) Annuity

c) Pension

d) Gratuity

e) Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages

f) Advance of Salary

g) Leave Encashment

h) Annual accretion to the balance of Recognized Provident Fund

i) Transferred balance in Recognized Provident Fund

j) Contribution by Central Government or any other employer to Employees Pension Account as referred in Sec. 80CCD

Points to consider:

a) Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is earlier.

b) Existence of relationship of employer and employee is must between the payer and payee to tax the income under this head.

c) Income from salary taxable during the year shall consists of following:

i. Salary due from employer (including former employer) to taxpayer during the previous year, whether paid or not;

ii. Salary paid by employer (including former employer) to taxpayer during the previous year before it became due;

iii. Arrear of salary paid by the employer (including former employer) to taxpayer during the previous year, if not charged to tax in any earlier year;

Exceptions - Remuneration, bonus or commission received by a partner from the firm is not taxable under the head Salaries rather it would be taxable under the head business or profession.

Place of accrual of salary:

a) Salary accrues where the services are rendered even if it is paid outside India;

b) Salary paid by the Foreign Government to his employee serving in India is taxable under the head Salaries;

c) Leave salary paid abroad in respect of leave earned in India shall be deemed to accrue or arise in India.

Exceptions - If a Citizen of India render services outside India, and receives salary from Government of India, it would be taxable as salary deemed to have accrued in India.

Taxability of various components of salary:

No.

Section

Particulars

Taxability/Exemption

1.

17

Basic salary

Fully taxable

2.

17

Dearness Allowance (referred to as ‘DA’)

Fully taxable

3.

17

Bonus, fees or commission

Fully taxable

 

Deduction from Salary

1.

16 (ii)

Entertainment Allowance received by the Government employees (Fully taxable in case of other employees)

Least of the following is exempt from tax:

a) Rs 5,000

b) 1/5th of salary (excluding any allowance, benefits or other perquisite)

c) Actual entertainment allowance received

2.

16(iii)

Employment Tax/Professional Tax.

Amount actually paid during the year. However, if professional tax is paid by the employer on behalf of its employee than it is first included in the salary of the employee as a perquisite and then same amount is allowed as deduction.

 
  1. Salaries

    1. What is "Gross Salary" and how it is computed

    2. What is "Net Salary Income" according to Income-Tax Act.

    3. Allowance

      1. The amount of Exemption is Amount of Expenditure incurred in case of Special Allowance.

      2. House Rent Allowance

    4. Perquisites & Income Tax (Taxable and Exempted)

    5. Profit in lieu of Salary

    6. Amount of Exemption is Amount specified in the Income Tax Rules.

      1. Children Education Allowance & Hostel Allowance

      2. Leave Travel Concession (LTC)

      3. Leave Encashment

      4. Arrear of Salary

      5. Pension

      6. Gratuity

      7. Retrenchment Compensation

      8. Entertainment Allowance

      9. Rent Free House

    7. Deduction u/s 80C – How to find out

    8. Chat Showing- Computation of 'Salary' income
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