Income from Salary

Income Tax
Income from Salary
-: Complied By :-
Prof. Rajesh Jain
rmjainca@gmail.com

Heads of Income :Chargeability
Income Head Chapter under
Income Tax Act
Sections Charging Section
Income from Salary IV-A 15-17 15
Income from House
Property
IV-C 22-27 22
Profit & Gains from
Business &
Profession
IV-D 28-44D 28
Capital Gain IV-E 45-55A 45 & 46(2)
Income from Other
Sources
IV-F 56-59 56

• As per Section 15, Salary consists of the following :
a) any salary due from an employer or former employer to an
assessee in the previous year, whether actually paid or not;
( Normal salary )
b) any salary paid to him in the previous year by an employer or
a former employer though not due or before it became due
to him. ( Advance Salary )
c) any arrears of salary paid to him by employer or former
employer, if not charged to income tax for any earlier
previous year. ( Arrears of Salary )
INCOME FROM SALARY
Basis of Charge
[Section 15 ]

Relationship between Payer and Payee.
Salary and wages, conceptually not different.
Salary from more than one Source.
Salary from former, present or prospective employer.
Salary income must be real and not fictitious.
Foregoing of salary. Taxable.
Surrender of Salary [ under Voluntary Surrender of
Salaries (Exemption from Taxation) Act,1961. ]
Tax free Salary
Voluntary payments by Employer.
Key Points : Salary Income

Once salary is taxed on receipt/due basis, it will not be
charged again on falling due or receipt basis, as the case
may be.
 The assessee can claim relief u/s 89(1) for arrears or
advance salary.
Loan from employer is not salary & not taxable, as it is
advance against salary & not advance salary.
Partner is not an employee of Firm, hence any salary,
bonus commission or remuneration received by him, is
not taxable as Salary, but taxable as Business Income.
System of Accounting followed by an employee is
irrelevant.
Key Points : Salary Income contd..

As per Sec 17(1), Salary includes the following :
a) Wages,
b) Any Annuity or Pension,
c) Any Gratuity,
d) Any Fees, commission, perquisites or profits in lieu of or
in addition to salary/wages,
e) Any Advance Salary,
f) Leave Salary,
g) Annual accretion to the Provident Fund to the extent it is
taxable,
h) Contribution made by the Central Govt or any other
employer to the account of employee under a pension
scheme referred to in Sec.80CCD.
Definition : Salary
[Sec 17 (1) ]

Computation of Income From Salary
Particulars Amount (₹) Amount ( ₹)
Basic Salary ..........
Allowances ..........
Profit in lieu of Salary ..........
Perquisites ..........
Gross Salary ..........
Less : Deduction u/s 16
a. Entertainment Allowance [ u/s 16(ii) ] ........
b. Professional Tax [ u/s 16 (i) ] ......... ........
INCOME FROM SALARY ..........

1) Entertainment Allowance [Sec 16 (ii) ] :
Only Govt employees can claim following deduction :-
a) Actual Entertainment Allowance.
b) 1/5TH of Salary........[ Here, Salary = Basic Pay ]
c) Rs.5000/-
Whichever is lower.
2) Professional Tax [Sec 16 (iii) ] :
 Deduction is available in the year in which professional tax is actually paid.
 If employee have paid professional tax of more than one year then entire
P.Tax so paid is allowed as deduction.
 If P.Tax is reimbursed by the employer then it will first added as perquisite (
in case of all employees, whether specified or not & then allowed as
deduction )
Deduction from Salary
[Sec 16 ]

Specific Exemptions from Salary
1. GRATUITY [ Sec 10 (10) ]
Sr Particulars Exemption
1 Gratuity Received by Govt &
Local Authority employees.
Fully Exempt
2 Gratuity in case of employees
covered by Payment of
Gratuity Act,1972.
(Here, Salary means,
= Basic + DA entire )
Lower of following,
a. Actual Gratuity
b. ₹ 10,00,000/-
c. Salary last drawn x [15/26] x
completed years of service or part
thereof in excess of 6 months.
3 Gratuity in respect of other
employees.
= Basic + DA, if terms of
employment so provide +
Commission, if based on fixed
% of turnover.)
Lower of following,
a. Actual Gratuity
b. ₹ 10,00,000/-
c. Salary last drawn x [15/30] x completed
years of service.
{ ignore fraction. Only completed years to
be taken, even more than 6 months not
to be considered.}

 Gratuity received during continuation of service is
Fully Taxable.
 Maximum exemption available under this section
during life time of the assessee cannot exceed
₹ 10,00,000/-
 Completed year of service include period of service
under current employer as well as previous
employer ( if no gratuity has been received from
former employer at that time. )
----------
Specific Exemptions..
GRATUITY [ Sec 10 (10) ] key points

2. Pension [ Sec 10 (10 A) ]
1 Commuted Pension received
by Govt employees
Fully Exempt
2 Commuted Pension received
by Non-Govt employees :
 If Such employees receives
Gratuity
 If Such employees does not
receives Gratuity
 1/3rd of Commuted Value of Pension is
exempt.
½ of Commuted Value of Pension is
exempt.
3 Uncommuted Pension received
by ALL employees
Fully taxable as Salary.

3. Leave Encashment [ Sec 10 (10 AA) ]
1 Leave Encashment received by
Govt employees (State +
Central Govt )at the time of
retirement.
Fully Exempt
2 Leave Encashment received at
the time of retirement by
Other employees.
= Basic + DA, if terms of
% of turnover.)
Lower of following is Exempt :
a. Actual Leave Encashment.
b. Maximum ₹ 3,00,000/-
c. Avg. Monthly Salary x 10
d. Avg. Monthly Salary x earned leave
months.
3 Leave Encashment received
during continuous of Service.
Fully taxable as salary.

 Calculation of earned Leave :
a. No. of Years in Actual Service
b. No. of leave entitlement for each completed year of service as per rules of
employer (subject to 30 days)
c. Gross total leave ( in days ) ( a x b )
d. Less Leave encashed & availed ( in days )
e. Period of earned leave ( in days )
f. Period of leave in month ( e/30 days)
 Last 10 months average salary shall be considered from the date of immediately
before the date of retirement.
( for e.g. if employee retired on 15th Sept 2013, then last 10 months will be
considered from 15th Nov 2012 )
 Maximum leave of Rs.3,00,000/- will be reduced by amount of leave encashment
exempted under section 10(10AA) from previous employer.
 Leave Encashment received by legal heirs of deceased employee also covered for
exemption on compassionate grounds. ( CBDT Ciruclar )
Specific Exemptions..
Leave Encashment key points

4. House Rent Allowance [ Sec 10 (13A) ]
1 In case of all employees 
Basic + DA, if terms of
% of turnover.)
a. Actual HRA Received.
b. Rent paid in excess of 10% of Salary
c. 40% of Salary
[ 50% if house situated at Delhi ,Mumbai,
Kolkata & Chennai )

5. Retrenchment Compensation [ Sec 10 (10 B) ]
1 Compensation received at time
of retrenchment is exempt
from tax to the extent 
Basic + DA, if terms of
% of turnover.)
a. Actual Amount Received.
b. Maximum Amount ₹ 5,00,000/-
c. 15 days average pay for every completed
years of continuous service or any part in
excess of six months.

ndd
6. Compensation under V.R.S. [ Sec 10 (10C) ]
1 Compensation received at time
of Voluntary Retirement
Scheme ( VRS ) is exempt from
tax to the extent 
a. Actual Compensation Received.
b. Maximum Amount ₹ 5,00,000/-

Question 1 :
Abhishek, a Chartered Accountant is employed with Synergy Info Ltd, as an
internal auditor, and request the employer to call the remuneration as
internal audit fees. Abhishek, is chargeable to tax for such fees under
the head :
a) Income from Salary.
b) Income from Business & Profession
c) Income from Other Sources.
Review Questions

Question 2 :
Popular Publication Pvt Ltd pays a salary of Rs.2,30,000/- to his
employee Chetan and undertakes to pay the Income Tax amounting to
Rs.3,090/- during the previous year 2013-14 on his behalf. The Gross
salary of Chetan will be,
a) Rs.2,30,000
b) Rs.2,33,090
c) Rs.2,26,910
Review Questions

Question 3 :
Vivek, who is entitled to Salary of Rs.50,000/- pm took advance salary
from his employer for the months of Apr’14 & May’14 alongwith
Salary of Mar’14, on 31.03.2014. The gross salary of Vivek for
AY 2014-15 shall be,
a) Rs.6,00,000
b) Rs.7,00,000
c) Rs.5,00,000
Review Questions

Question 4 :
Sunil was employed with Sales Tax Dept on 01.07.2007, on the scale of
Rs.15000-400-17000-500-22000. His gross salary for AY 2014-15 shall
be,
a) Rs.1,99,200
b) Rs.2,04,000
c) Rs. 2,08,500
d) Rs.2,10,000
Review Questions

Question 5:
During FY 2013-14, Sameer is entitled to a basic Salary of Rs.50,000/-
p.m. and D.A of Rs.10,000/- p.m. 40% of which forms part of
retirement benefits. He is also entitled to HRA of Rs.20,000/- p.m. He
actually pays Rs.20,000/- per month as rent for a house in Delhi.
Compute the taxable HRA for AY 2014-15.
Review Questions

-: ALLOWANCES :-
Allowance is generally defined as a fixed quantity of money
given regularly in addition to salary for the purpose of
meeting some particular requirement connected with the
services rendered by the employee or as compensation for
unusual conditions for that service. It is fixed, pre-
determined and given irrespective of actual expenditure.
Under the Act, it is taxable under Sec 15 on due or receipt
basis, whichever is earlier irrespective of the fact that it is
paid in addition to or in lieu of salary.
Tax treatment of different allowances is given below 

-: ALLOWANCES :-
-: FULLY TAXABLE IN ALL CASES :-
 City compensatory Allowance
 Fixed Medical Allowance
 Tiffin/Lunch/Dinner/Refreshment Allowance.
 Servant Allowance
 Dearness Allowance
 Project Allowance
 Overtime Allowance.
 Interim Allowance
 Any other Cash Allowance.

-: OTHER ALLOWANCES WITH EXEMPTION LIMIT :-
SR Allowances Exemption Limit
1 Children Education Allowance Rs.100/- pm per child. Max 2 Children.
2 Children Hostel Exp Allowance Rs.300/- pm per child. Max 2 Children.
3 Tribal Area Allowance Rs.200/- pm
4 Transport Allowance (between
residence & office)
Rs.800/- pm ;
Rs.1600 pm for blind/handicapped.
5 Transport Allowance for
transport employee (During the
course of transport )
Least of 70% of Allowance or Rs.10000/-
pm
6 Underground Allowance Rs.800 pm
7 Compensatory Field Area
Allowance
Max Rs.2600 pm
8 Compensatory modified Hill
Area Allowance
Max Rs.1000 pm

-: OTHER ALLOWANCES WITH EXEMPTION LIMIT... :-
SR Allowances Exemption Limit
9 Special Compensatory hill area
or high altitude
Rs.300 to Rs.700 pm allowance etc.
10 Border Area, Remote Area,
Disturbed Area allowance
Rs.200 to Rs. 1300 pm
11 High Altitude allowance (Non-
Congenial climate )
Rs.1,060 pm ( Altitude for 9000 to 15000
ft ); Rs.1600 pm ( above 15000 ft )
12 Special Compensatory for highly
active filed area allowance to
member of armed force
Max Rs.4,200 pm
13 Island allowance to member of
armed force
Max Rs.3250 pm
14 Counter Insurgency allowance Max Rs.3900 pm

-: PERQUISITES :-
• Perquisites may be defined as benefits attached to an office or
position in addition to Salary or Wages.
• Perquisites may be provided in cash or in kind.
• Perquisites are included in salary only if they are received by
an employee from his employer ( may be former, present or
prospective.) Perquisites received from a person other than
employer, are taxable under the head “PGBP” or “IOS”.
• A benefit or advantage would be taxable as perquisites only if
it has legal origin. As unauthorised advantage taken by an
employee, without employer’s authority would create a legal
obligation to restore such advantage, it would not amount to
perquisite taxable under the Act.

-: Specified Employees :-
[u/s 17(2)(iii) ]
 Specified employees mean,
a) Director employee, or
b) Employees having 20% or more voting rights in employer company, or
c) Employee having salary more than Rs.50,000/- p.a.
( Here, salary means all taxable benefit after deduction
u/s 16)
Notes :
1) Certain Perquisites are taxable in the hands of ALL employees
2) Certain Perquisites are taxable in the hands of Specified employees only.
3) Any employee, other than a specified employee, is a “non-specified
employee”.
4) However, now-a-days, this classification does not have much practical
utility, because of Salary norms of Rs.50000/- p.a.

-: LIST OF PERQUISITES :-
1. Rent Free Accommodation or Concessional Accommodation.
2. Domestic Servants
3. Supply of Gas, Electricity & Water
4. Free or Concessional Education Facilities
5. Leave Travel Concession
6. Interest Free Loans
7. Use of Movable Assets
8. Sale of Movable Assets
9. Medical Facilities
10. Perquisite of Motor Car
11. Employee Stock Option Plan (ESOP)

1) Valuation Unfurnished Rent Free Accommodation :
Rent Free Accommodation
(Sec 17 (2)(i) )
Central/State
Govt Employees
Rent as per Govt
Rules
Other than
Govt Employees
Accommodation
Owned by
Employer
Population of City,
upto 10 Lacs
Taxable Value,
7.50% of Salary
Population of City,
Between 10 Lacs
to 25 Lacs
Taxable Value,
10% of Salary
Population of City,
above
25 Lacs
Taxable Value,
15% of Salary
Accommodation is taken on
Lease/Rent by
Employer
Perquisite is
Lower of below
a) 15% of Salary
b) Rent paid by
employer

-: (a) Valuation Furnished House :-
 If the furniture is provided then 10% p.a. Cost of furniture or actual
hire charges if taken on rent shall be added with unfurnished house.
 Here, Salary means
Salary = Basic
+ DA, (if terms of employment so provide)
+ Bonus (Current year)
+ Commission
+ taxable portion of all allowances
+ Any monetary payments which is chargeable
[ but not to include perquisites u/s 17(2) ]
 Rent Actually paid by employee will be reduced from the perquisite.

-: (b) Valuation of Hotel Accommodation... :-
 Valuation in respect of Hotel Accommodation :
Accommodation in a Hotel (other than provided for a period of
not exceeding 15 days on transfer )
Least of the following it taxable,
a) Actual Rental Charges or,
b) 24% of Salaries.
( if some part is paid by employee, that will be deducted.)

-: Rent free Accommodation when NOT chargeable.. :-
[ Rule 3(1) ]
 The value of perquisite shall be NIL in case of
* Judges of High Courts.
* Judges of Supreme Courts.
* Union Ministers.
* Opposition Leader.
* Official in Parliaments.
* Where the temporary accommodation is provided to an
employee working in mining site or project execution site or a
dam site or power generating site or offshore site.

-: (2) Domestic Servants :-
[ Sec 17(2)(iii) - Rule 3(3) ]
Servant Appointed
By
Servant’s Salary
Paid By
Value of Perquisite Taxable in the
Hands of
Any one
(Employer or
Employee)
Employer Actual Cost on
Servant
ALL employees.
Any one Employee Nil --

-: (3) Supply of Gas, Electricity & Water :-
[ Sec 17 (2) (iii) - Rule 3(4) ]
Sr Particulars Valuation
1 Payment by Employer to the Agency Actual Cost Incurred
2 Supply out of Own Source Manufacturing Cost incurred by an
employer ( based on per unit basis )

-: (4) Valuation of Educational Facilities :-
Facilities Provided
to
Value of Perquisites Taxable in the
Hands of..
Provided in the
School Owned by
Employer
Provided in Any
other School
Children Cost of such
education in similar
school.
(An exemption of
Rs.1000/- pm per
child is available)
Cost of such
education.
(An exemption of
Rs.1000/- pm per
child is available)
Specified
Employees
Other Household
member
Cost of such
education in similar
school.
Cost of such
education.
Specified
Employees

-: (5) Leave Travel Concession :-
[ (Sec 10 (5) ]
• Leave Travel Concession received by or due to an employee for himself and
his family in connection with his proceeding on leave or on retirement or
termination of service to any place in India is exempt. ( Subject to condition
laid down by CBDT)
• Amount of Exemption
Journey is by Air Amount of Economy Class Fare of the
National carrier by the shortest route.
Journey is by Rail Amount of Air Conditioned First Class
Fare by Shortest route.
Other mode of
Transport
( Where rail is there )
Amount of Air Conditioned First Class
Fare by Shortest route.
Other mode of
Transport
( Where rail or public
transport is not there )
First Class or Deluxe Class Fare by the
Shortest route of the Public
Transport

-: Leave Travel Concession :-
Key points
• The exemption is available twice in block of four Calendar Years. (Relevant
blocks : Jan’2010 to Dec’2013, Jan’2014 to Dec’2017.)
• In case such travel concession is not availed by the individual during any
such block of four calendar years , he can avail concession in first year of
next block. ( Carry Forward Facility).
• The exemption is available in respect of Fare only.
• Family include, Spouse, Children of Individual. The Parents, brothers &
sisters of Individuals are also included, provided wholly or mainly
dependant on him.
• Exemption is available for two children born after 1.10.1998.
(in other words, exemption will be available for ALL children born before
1.10.1998)
• Fixed amount of LTC is fully taxable to tax.

-: (6) Interest Free Loan :-
• In case employer has granted interest free loan or concessional loan to its
employee in such case,
• Compute interest on the basis of SBI lending rates.
• Compare with actual interest paid by employee.
• The difference will be value of perquisite.
• Nothing is taxable if,
* Loan in aggregate do not exceed Rs.20,000/- or
* Loan is provided for treatment of specified disease.
Note :
Interest on maximum outstanding monthly balance of advance is considered
to determine any concession in interest. Maximum monthly balance means
balance of loan on the last day of each month.

-: (7) Use of Movable assets other than car :-
Asset Used Value of Benefit
a) Use of Laptops & PCs Nil
b) Movable Assets
(except Laptop, PCs & Car )
i) 10% of Actual Cost of Such Assets or
ii) Hire Charges/Rent paid by Employer
iii) Less : Amount recovered from
employee.

8) Sale of movable asset to
Employee
Computer &
Electronics
Motor Car Any other Asset
Original cost
(-) Depn. @
50% p.a. For
each
completed
year (RBM)
WDV
(-) ARFEe
XX
(XX)
XX
(XX)
Particulars Rs.
TVOP XX
Original cost
(-) Depn. @
20% p.a. For
each
completed
year (RBM)
WDV
(-) ARFEe
XX
(XX)
XX
(XX)
Particulars Rs.
TVOP XX
Original cost
(-) Depn. @
10% p.a. For
each
completed
year (FIM)
WDV
(-) ARFEe
XX
(XX)
XX
(XX)
Particulars Rs.
TVOP XX
RBM-Reducing Balance Method
FIM-Fixed Instalment Method

-: (9) Value of Medical Facilities:-
The Following shall NOT be treated as perquisites :-
a) Medical treatment of the employee or his family ( Spouse, children, dependent
parent, brothers & sisters)
- Provided in any hospital maintained by the Employer.
- Any sum paid by the Employer towards expenditure actually incurred by the
employer in any hospital :-
- Maintained by Employer, Govt or Local Authority or any other approved
hospital by CG or Chief Commissioner of ITax
b) Premium paid by an employer by cheque to GIC for medical insurance policy of its
employee.
c) Any sum not exceeding Rs.15,000/- paid to any hospital/nursing home/clinic other
than a & b above. Here reimbursement is also allowed upto Rs.15,000/- p.a.
d) Amount payable for treatment outside India :-
- Medical Expenses-to the extent permitted by RBI
- If Gross Total Income (before including the travel expenditure) of the employee
does not exceed Rs.2,00,000/- then travel abroad for patient and attendant- fully
deductible.

-: (10) Value of Perks for Motor Car :-
A] CAR IS OWNED OR HIRED BY EMPLOYER
Exclusively for Official
Purpose
Exclusively for Private
Purpose
Both Official & Private
Purpose
Nil. If specified documents
maintained.
Actual Run.& Maint Exp
+ Remuneration of Driver
+ Depreciation @10% pa
Or
Hire Charges, if car is taken
hire charges.
Less : Amt Recovered.
Running & Maint borne by
Employer Employee
Car <=1600cc
Rs1800 pm +
Rs 900 pm
for driver
Car <=1600cc
Rs.600 pm +
Rs.900 pm
for driver
Car >1600cc
Rs.2400 pm +
Rs.900 pm
for driver
Car >1600cc
Rs.900 pm +
Rs.900 pm
for driver

-: Value Perks for Motor Car.. :-
B] CAR IS OWNED BY EMPLOYEE
Exclusively for Official
Purpose
Exclusively for Private
Purpose
Both Official & Private
Purpose
Nil. If specified documents
maintained.
Actual expenditure
incurred by employer,
Less : amount recovered
from employee
Running & Maint borne by
Employer Employee
Actual Exp
Less :
Rs.900/- pm.
Nil

-: 11) Employees Stock Option Plan (ESOP ) :-
1. “Sweat equity Shares” mean equity shares issued by a
Company to its employee or directors at a discount or for
consideration other than for cash for providing know-how
or making available rights in nature of Intellectual Property
Rights.
2. “Specified Security” means the securities defined in Sec 2 (h)
of Securities Contract (Regulations) Act,1956 and also
include securities offered under Employees Stock Option
Plan (ESOP) .
3. Perquisite will be taxable as the difference between the fair
market value ( FMV ) of the shares as on the date of
exercise of the options less exercise price.

Provident Fund Chart
Particulars Statutory
P.F.
Recognised
P.F.
Unrecognised
P.F.
Public P.F.
Employee’s
Contribution
(Deduction u/s 80C)
Available Available Not Available Available
Employer’s
Contribution
Totally
Exempt
Exempt
upto 12%
of Salary,
excess is
taxable
Taxable on
retirement
Not
Applicable
Interest Credited to
Fund
Totally
Exempt
Exempt
upto 9.5%
p.a., excess
is taxable
Taxable on
retirement
Totally
Exempt
Amount withdrawn
from Fund
(at time of
retirement)
Totally
Exempt
(Sec.
10(12))
Totally
Exempt
(Sec.
10(12))
Taxable (Note
1)
Totally
Exempt
(Sec. 10(11))

Unrecognised P.F.
Employee’s
Contribution
Employer’s
Contribution
Interest on
Employee’s
Contribution
Interest on
Employer’s
Contribution
Already Taxed Taxable Taxable Taxable
Income from
Salary
Income from
Other Sources
Income from
Salary
Note 1:

Dearness Allowances
Forming part of salary for
calculating retirement benefits
Recognised
Not forming part of salary for
calculating retirement benefits
Ordinary
NOTE :
1) If question is silent, then entire D.A. Will be considered is ordinary D.A.
2) D.A. Is fully taxable allowance.
Even if salary is contributed to charity , then also it is taxable.

Income from Salary

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