I. Important Points :
1. Relationship of employer and employee must exist to create salary income.
2. Only receipts from employer are taxable under this head. Receipt from a person other than employer are taxable under “Other Source”.
3. In case Salary is received after deduction of following items... these are added back to get fully Salary :
(i) Own Contribution to Provident Fund.
(ii) Tax Deducted at Source (TDS)
(iii) Repayment of Loan etc.
(iv) LIC Premium, if deducted from salary.
(v) Group Insurance Scheme.
(vi) Rent of House provided by employer.
- Previous Year in case of Salaries is always Financial Year i.e. for the Assessment Year 2015-2016 it is 1-4-2015 to 31-3-2016.
II. Salary U/s 17(1) :
1.Wages. Fully Taxable.
2.Annuity or Pension. Fully Taxable
3.Gratuity. It has been treated separately.
4. (a) Any Fees -- Fully Taxable
(b) Commission -- Fully Taxable
(c) Bonus -- Fully Taxable
(d) Perquisites -- (Perks) These are treated separately u/s 17(2)
(e) Profit in lieu of Salary -- These are treated separately u/s17(3)
5.Salary in lieu of Leave / Leave Encashment. Fully Taxable.
6.Advance Salary. Fully Taxable
7.Arrears of Salary. Fully Taxable.
8.Refund of Provident Fund (PF)
(a) If SPF -- Fully exempted
(b) If RPF -- Fully exempted if service is more than 5 years.
(c) If URPF -- Taxable portion is added in salary income. Taxable portion is equal to employer’s contribution + interest on this part. Interest on own contribution to URPF is taxable under the head “ Income from Other Sources.”
III. Allowances :
A. Fully Exempted Allowances:
Foreign Allowance given by Govt. to its employees posted abroad. HRA given to Judges of High Court & Supreme Court.
B. Fully Taxable Allowances:
(i) Dearness Allowance / Additional D.A. / High Cost of Living Allowance -- Fully Taxable.
(ii) City Compensation Allowances (CCA).
(iii) Capital Compensatory Allowance
(iv) Lunch Allowance
(v) Tiffin Allowance
(vi) Marriage / Family Allowance
(vii) Overtime Allowance
(viii) Fixed Medical Allowance.
(ix) Electricity and Water Allowance
(x) Entertainment Allowance. It is fully added in employee’s Salary.
In case of Government employees a deduction is allowed u/s 16(ii) at the rate of least of following :
(a) Statutory Limit Rs. 5,000 p.a.
(b) 1/5 (20%) th of Basic Salary ; or
(c) Actual Entertainment Allowance received.
C. Partly Taxable Allowances:
1. House Rent Allowance ( HRA)
(a) Fully Exempted, if received by the Judges of High Court and Supreme Court.
(b) Fully Taxable, if received by an employee who is living in his own house or in a house for which no rent is paid.
(c) Exempted upto least of following for those employees who are living in rented houses:
(i) Actual HRA received by the employee.
(ii) Rent paid - 10% of Salary ; or
(iii) 40% of Salary in ordinary town ; 50% of Salary in Mumbai, Kolkata, Chennai or Delhi.
Ø Taxable HRA = HRA Received - Least of Above.
Ø Salary = Pay + D.A. which enters into Pay for Service or Retirement Benefits + Commission on Turnover Achieved by Him.
Following Allowances are Exempted upto actual expenditure incurred for employment. Excess, if any, shall be taxable...
2. Uniform Allowance
3. Conveyance Allowance
4. Traveling Allowance
Following Allowance are Exempted up to amount so notified..
5. Special Compensatory Allowance
6. Border Area Allowance
7. Tribal Area Allowance -- Exempted upto Rs. 200 p.m. if received in the States of M.P., Tamil Nadu, U.P., Karnataka, Tripura, Assam, West Bengal, Bihar, or Orissa.
8. Children’s Education Allowance -- Exempted up to Rs.100 p.m. per child for education in India of own two children only.
9. Hostel Expenditure Allowance -- Exempted up to Rs. 300 p.m. per child for Hostel expenditure on own two children only.
IV. Perquisites :
A. Exempted Perquisites:
1. Leave Travel Concession subject to conditions & actual spent only for travels.
2. Computer/ Laptop provided for official / personal use.
3. Initial Fees paid for corporate membership of a club.
4. Refreshment provided by the Employer during working hours in office premises.
5. Payment of annual premium on Personal Accident Policy.
6. Subscription to periodicals and journal required for discharge of work.
7. Provision of Medical Facilities.
8. Gift not exceeding Rs. 5,000 p.a.
9. Use of Health Club, Sports facility.
10. Free telephones whether fixed or mobile phones.
11. Interest Free / concessional loan of an amount not exceeding Rs.20,000 (limit not application in the case of medical treatment)
12. Contribution to recognised Provident Fund / approved super annuation fund, pension or deferred annuity scheme & staff group insurance scheme.
13. Free meal provided during working hours or through paid non transferable vouchers not exceeding Rs. 50 per meal or free meal provided during working hours in a remote area.
The value of any benefit provided free or at a concessional rate (including goods sold at concessional rate) by a company to the Employees by way of allotment of shares etc., under the Employees stock option plan as per Central Government Guidelines.
B. Taxable Perquisites:
1. Rent Free Accommodation
2. Provision of Motor Car or any other Conveyance for personal use of Employee.
3. Provision of Free or Concessional Education Facilities.
4. Reimbursement of Medical Expenditure.
5. Expenditure on Foreign Travel and stay during medical expenditure.
6. Supply of Gas, Electricity & Water.
7. Sale of an Asset to the Employee at concessioanal price including sale of Share in the Employer Company.
C. Perks Exempted for Employees but Taxable for Employer under Fringe Benefit Tax.
Value of the following benefits is not taxable in the hands of an employee. The employer has to pay tax on deemed income calculated as percentage of expenditure incurred.
- Any free or concessional ticket provided by the employer for private journeys of his employee or their family members
- Any contribution by the employer to an approved superannuation fund for employees;
- Expenditure incurred on entertainment ;
- Expenditure incurred on provision of hospitality of every kind by the employer to any person.
- Expenditure incurred on conference like conveyance, tour & travel (including foreign travel) , on hotel, or boarding and lodging in connection with any conference shall be deemed to be expenditure incurred for the purposes of conference.
- Expenditure incurred on sales promotions including publicity ;
- Expenditure incurred on employee’s welfare ;
- Expenditure incurred on conveyance
- Expenditure incurred on Hotel, Boarding & Lodging facilities ;
- Expenditure incurred on Repair, Maintenance of Motor Cars and the amount of Depreciation there on.
- Expenditure incurred on use of telephone and Mobile Phones.
- Expenditure incurred on maintenance of any accommodation in the nature of Guest House other than used for Training purpose.
- Expenditure incurred on Festival Celebrations.
- Expenditure incurred on use of Health Club and similar facilities.
- Expenditure incurred on gifts ;
Fringe Benefit Tax (FBT) is not applicable in case of following type of employers.
- An Individual or a sole Proprietor
- A Hindu Undivided Family
- A Political Party
- A person whose income is exempt u/s 10(23c)
- A Charitable Institution registered u/s 12AA.
V. Profits in Lieu of Salary :
Receipts which are included under the head ‘Salary’ but Exempted u/s 10.
1. Leave Travel Concession (LTC) - Exempt upto rules.
2. Any Foreign Allowance or perks - If given by Govt. to its employees posted abroad are fully exempted.
3. Gratuity : A Govt. Employee or semi-Govt. employee where Govt. rules are applicable -- Fully Exempted.
A. For employees covered under Payment of Gratuity Act.--
Exempt up to least of following :
(a) Notified limit = Rs. 3,50,000
(b) 15 days Average Salary for every one completed year of
service (period exceeding 6 months =1 year)
1/2 month’s salary = (Average monthly salary or wages x 15/26
(c) Actual amount received.
B. Other Employees -- Exempted up to least of following provided service is more than 5 years or employee has not left service of his own :
(a) Notified limit = Rs. 3,50,000
(b) 1/2 month’s average salary for every one year of completed service (months to be ignored.)
(c) Actual amount received.
>> Average Salary = Salary for 10 months preceding the month of retirement divided by 10.
4. Commutation of Pension :
In case commuted value of pension is received --
(a) If Govt. employee -- is Fully Exempted.
(b) If other employee who receive gratuity also -Lump sum amount is exempted upto commuted value of 1/3rd of Pension.
If other employee who does not get gratuity -- Lump sum amount is exempted upto commuted value of 1/2 of pension.
5. Leave Encashment u/s 10(10AA)
(a) If received at the time of retirement by a Govt. employee---Fully Exempted
(b) If received during service---Fully taxable for all employees
(c) If received by a private sector employee at the time of retirement exempted upto :
(i) Notified limit Rs. 3,00,000
(ii) Average salary x 10 months
(iii) Actual amount received.
(iv) Average Salary x No. of months leave due.
6. Any Tax on perks paid by employer. It is fully Exempted.
7. Any payment received out of SPF . Any payment received out of SPF is Fully Exempted.
8. Any payment received out of RPF . Any payment received out of RPF is Fully Exempted, If service exceeds 5 years.
9. Any payment received out of an approved superannuation fund . is Fully Exempted
Vi. Deduction Out Of Gross Salary [ Sec. 16]
1. Entertainment Allowance [ U/s 16(ii)]
Deduction u/s 16(ii) admission to govt. employee shall be an amount equal to least of following :
- Statutory Limit of Rs.5,000 p.a.
- 1/5 th of Basic Salary
- Actual amount of entertainment allowance received during the previous year.
2. Tax on Employment u/s 16(iii)
In case any amount of professional tax is paid by the employee or by his employer on his behalf it is fully allowed as deduction.
Vii. Deduction U/S 80C Out Of Gross Total Income (GTI)
The following are the main provisions of the newly inserted Section 80C. :
- Under Section 80C , deduction would be available from Gross Total Income.
- Deduction under section 80C is available only to individual or HUF.
- Deduction is available on the basis of specified qualifying investments / contributions / deposits / payments made by the taxpayer during the previous year.
- The maximum amount deduction under section 80C , 80CCC, and 80CCD can not exceed Rs.1 lakh.
Deduction u/s 80C shall be allowed only to the following assessee :
- An Individual
- A Hindu Undivided Family (HUF)