BLOG on Income Tax Management for - AY 2022-23 & 2023-24

Computation of " Salary " Income [Section 15-17]

Salary income of an employee is to be computed in accordance with the provisions laid down in sections 15, 16 and 17. Section 15, as discussed earlier gives the scope of this head and tells us that which incomes shall form part of this head. Section 16 gives deductions to be allowed out of incomes taxable under this head. Section 17(1) defines the word ‘salary’ as mentioned in section 15. Section 17(2) and 17(3) further define the terms ‘Perquisites’ and “profits in lieu of salary”. These can be depicted in the form of chart given below :

How to Compute Salary Income

Different Forms of Salary Income - How Taxed

Tax treatment of different receipts is given below :

Different receipts	Tax treatment
Basic salary	Taxable.
Dearness allowance/pay	Taxable.
Advance salary	Taxable in the year of receipt.
Arrears of salary	Taxable in the year of receipt, if not taxed on due basis earlier.
Leave encashment while in service	Taxable
Leave encashment at the time of retirement or at the time of leaving job.	Exempt in the hands of a Government employee In the case of a non- Government employee’, it is exempt in some cases
Salary in lieu of notice	Taxable
Salary to partner	Not chargeable under the head “Salaries? but taxable under the head ‘Profits and gains of business or profession.
Fees and commission	Taxable.
Bonus	Taxable on receipt basis if not taxed earlier on due basis.
Gratuity	Exempt in the hands of a Government employee’. In the case of a non- Government employee’, it is exempt in some cases
Monthly pension (i.e., uncommuted pension)	Taxable
Lump sum payment of pension (i.e., commuted pension)	Exempt in the hands of a Government employee’. In the case of a non- Government employee’, it is exempt in some cases
Pension under National Pension Scheme (NPS)	At the time of receipt of pension it is chargeable to tax.
Annuity from employer	Taxable as salary.
Annual accretion to the credit balance in recognized provident fund	1 Excess of employer’s contribution over 12% of salary is taxable. 2. Excess of interest over notified interest is taxable (notified rate of interest is 9.5 %).
Retrenchment compensation	Exempt from tax to the extent of least of the following: a. Amount calculated” under section 25F(b) of the industrial Disputes Act; or b. An amount specified by the Government (i.e, Rs. 5,00,000).
Remuneration for extra duties	Fully taxable.
Compensation received under voluntary retirement scheme (VRS)	Exempt in some cases
Profits in lieu of salary	Taxable
Salary from UNO	Not chargeable to tax.