INTRODUCTION OF SALARY

What is salary
Salary is the remuneration received by or accruing to an individual, periodically, for service
rendered as a result of an express or implied contract. The actual receipt of salary in the previous
year is not material as far as its taxability is concerned. The existence of employer-employee
relationship is the sine-quanon for taxing a particular receipt under the head salaries. For instance
the salary received by a partner from his partnership firm carrying on a business is not
chargeable as Salaries but as Profits & Gains from Business or Profession. Similarly, salary
received by a person as MP or MLA is taxable as Income from other sources, but if a person
received salary as Minister of State/ Central Government, the same shall be charged to tax under
the head Salaries. Pension received by an assessee from his former employer is taxable as
Salaries whereas pension received on his death by members of his family Family Pension is
taxed as Income from other sources.

Meaning of salary
Salary in simple words, means remuneration of a person which he has received from his
employer for rendering services to him. But receipts for all kinds of services rendered cannot be
taxed as salary. The remuneration received by professionals like doctors, architects, lawyers etc.
cannot be covered under salary since it is not received from their employers but from their
clients. So, it is taxed under business or profession head. In order to understand what is included
in salary, let us discuss few characteristics of salary.

Characteristics of Salary
1. The relationship of payer and payee must be of employer and employee for an income to be
categorized as salary income. For example: Salary income of a Member of Parliament cannot be
specified as salary since it is received from Government of India which is not his employer.
2. The Act makes no distinction between salary and wages, though generally salary is paid for
non-manual work and wages are paid for manual work.
3. Salary received from employer, whether one or more than one is included in this head.
4. Salary is taxable either on due basis or receipt basis which ever matures earlier:
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i) Due basis when it is earned even if it is not received in the previous year.
ii) Receipt basis when it is received even if it is not earned in the previous year.
iii) Arrears of salary- which were not due and received earlier are taxable when due or
received, which ever is earlier.
5. Compulsory deduction from salary such as employees contribution to provident fund,
deduction on account of medical scheme or staff welfare scheme etc. are examples of instances
of application of income. In these cases, for computing total income, these deductions have to be
added back.

What does salary include

Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of
Salaries including therein (i) Wages (ii) Annuity or pension (iii) Gratuity (iv) Fees,
Commission, perquisites or profits in lieu of salary (v) Advance of Salary (vi) Amount
transferred from unrecognized provident fund to recognized provident fund (vii) Contribution of
employer to a Recognised Provident Fund in excess of the prescribed limit (viii) Leave
Encashment (ix) Compensation as a result of variation in Service contract etc. (x) Contribution
made by the Central Government to the account of an employee under a notified
pension scheme.

INCOMES FORMING PART OF SALARY

Section 17 of the Act gives an inclusive definition of salary. Broadly, it includes:
1. Basic salary
2. Fees, Commission and Bonus
3. Taxable value of cash allowances
4. Taxable value of perquisites
5. Retirement Benefits
Although, all the components of salary income are included in salary, there are certain incomes
in each of these categories, which are either fully exempt or exempt upto a certain limit. The
aggregate of the above incomes, after the exemption(s) available if any is known as Gross
Salary. From the Gross Salary, the following three deductions are allowed under Section 16 of
the Act to arrive at the figure of Net Salary:
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Standard deduction - Section 16 (i)

Deduction for entertainment allowance Section 16 (ii)

Deduction on account of any sum paid towards tax on employment Section 16(iii).

1.Basic salary
All employees are entitled to a basic salary which is fixed as per their respective terms of
employment either as a fixed amount or at a graded system of salary. Under this graded system,
apart from the basic salary at which the employee will start, annual increments to be given to the
employee are pre fixed in the grade. For example, if a person is employed on 1st May, 2004 in
the grade of 12000 300 15000, this means that he will start at a basic salary of Rs.12000 from
1st May, 2004. He will get an annual increment of Rs.300 w.e.f. 1st May, 2005 and onwards
every year on the same date till his basic salary reaches Rs.15, 000. No further increment is given
thereafter till he is promoted and placed in other grade.

Advance Salary, if received in previous year for next year is taxable on receipt basis in the same
previous year.

SUM:
X joins service in the grade of Rs.12000 300 13800 400 17800 on 1st June,
1999. Compute his basic salary for the previous year 2005-06.
Solution:
For the previous year 2005-06, basic salary of X will be calculated as follows:
1st June 1999 31st May 2000

12000

1st June 2003 31st May 2004

13200

1st June 2000 31st May 2001

12300

1st June 2004 31st May 2005

13500

1st June 2001 31st May 2002

12600

1st June 2005 31st May 2006

13800

1st June 2002 31st May 2003

12900

Basic Salary for April and May 2005 (Rs.13500 x 2)

27,000

Basic Salary for June 2005 March 2006 (Rs.13800 x 10)

1, 38,000

Basic Salary for previous year

1, 65,000

2. Fees, commission and bonus

Any fees or commission paid or payable to an employee is fully taxable and is included in salary.
Commission payable may be at a fixed amount or a fixed percentage of turnovers. In both the
cases, it is taxable as salary only when it is paid or payable by the employer to the employee.
When commission is based on fixed percentage of turnover achieved by employee, it is included
in basic salary for the purpose of grant of retirement benefits and for computing certain
exemptions that we will discuss later on.

3. Taxable value of allowances

Allowance is a fixed monetary amount paid by the employer to the employee (over and above
basic salary) for meeting certain expenses, whether personal or for the performance of his duties.
These allowances are generally taxable and are to be included in gross salary unless specific
exemption is provided in respect of such allowance. For the purpose of tax treatment, we divide
these allowances into 3 categories:

I. Fully taxable cash allowances

II. Partially exempt cash allowances
III. Fully exempt cash allowances
I.Fully taxable allowances
This category includes all the allowances, which are fully taxable. So, if an allowance is not
partially exempt or fully exempt, it gets included in this category. The main allowances under
this category are enumerated below:

(i) Dearness Allowance and Dearness Pay:

As is clear by its name, this allowance is paid to compensate the employee against the rise in
price level in the economy. Although it is a compensatory allowance against high prices, the
whole of it is taxable. When a part of Dearness Allowance is converted into Dearness Pay, it
becomes part of basic salary for the grant of retirement benefits and is assumed to be given under
the terms of employment.
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(ii) City Compensatory Allowance:

This allowance is paid to employees who are posted in big cities. The purpose is to compensate
the high cost of living in cities like Delhi, Mumbai etc. However, it is fully taxable.

(iii) Tiffin / Lunch Allowance:

It is fully taxable. It is given for lunch to the employees.
(iv) Non practicing Allowance:
This is normally given to those professionals (like medical doctors, chartered accountants etc.)
who are in government service and are banned from doing private practice. It is to compensate
them for this ban. It is fully taxable.

(v) Warden or Proctor Allowance:

These allowances are given in educational institutions for working as a Warden of the hostel or
as a Proctor in the institution. They are fully taxable.

(vi) Deputation Allowance:

When an employee is sent from his permanent place of service to some place or institute on
deputation for a temporary period, he is given this allowance. It is fully taxable.

(vii) Overtime Allowance:

When an employee works for extra hours over and above his normal hours of duty, he is given
overtime allowance as extra wages. It is fully taxable.

(viii) Fixed Medical Allowance:

Medical allowance is fully taxable even if some expenditure has actually been incurred for
medical treatment of employee or family.

(ix) Servant Allowance:

It is fully taxable whether or not servants have been employed by the employee.

(x) Other allowances:

There may be several other allowances like family allowance, project allowance, marriage
allowance, education allowance, and holiday allowance etc. which are not covered under
specifically exempt category, so are fully taxable.

II.Partially exempt allowances

This category includes allowances which are exempt upto certain limit. For certain allowances,
exemption is dependent on amount of allowance spent for the purpose for which it was received
and for other allowances, there is a fixed limit of exemption.

(i) House Rent Allowance (H.R.A.):

An allowance granted to a person by his employer to meet expenditure incurred on payment of
rent in respect of residential accommodation occupied by him is exempt from tax to the extent of
least of the following three amounts:

a) House Rent Allowance actually received by the assessee

b) Excess of rent paid by the assessee over 10% of salary due to him
c) An amount equal to 50% of salary due to assessee (If accommodation is situated in Mumbai,
Kolkata, Delhi, Chennai) Or an amount equal to 40% of salary (if accommodation is situated in
any other place).
Salary for this purpose includes Basic Salary, Dearness Allowance (if it forms part of salary for
the purpose of retirement benefits), Commission based on fixed percentage of turnover achieved
by the employee.

The exemption of HRA depends upon the following factors:

(1) Basic Salary

(3) Rent paid

(2) Place of residence

(4) HRA received

If an employee is living in his own house and receiving HRA, it will be fully taxable.

SUM:
Mr. X is employed in A Ltd. getting basic pay of Rs.20, 000 per month and dearness allowance
of Rs.7, 000 per month (half of the dearness allowance forms part of salary for the purpose of
retirement benefits). The employer has paid bonus @Rs.500 per month, Commission @1% on
the sales turnover of Rs.20 lakhs, and house rent allowance of Rs.6, 000 per month. X has paid
rent of Rs.7,000 per month and was posted at Agra.

Compute his gross salary for the assessment year 2006-07

Solution:

Computation of Gross Salary

Amount / Rs.

Basic Salary (Rs.20,000 x 12)

2,40,000

Dearness Allowance (Rs.7,000 x 12)

84,000

Bonus (Rs.500 x 12)

6,000

Commission (1% of Rs.20,00,000)

20,000

House Rent Allowance

(Rs.6,000 x 12 Amount exempt Rs.53,800)

18,200
Gross Salary:

3,68,200

Amount of HRA exempt is least of 3 amounts:

1. 40% of Salary (Rs.2,40,000 + Rs.42,000 + Rs.20,000)

= Rs.3,02,000

2. Actual HRA received (Rs.6, 000 x 12)

= Rs. 72,000

3. Rent paid (Rs.7, 000 x 12 10% of salary Rs.30, 200)

= Rs. 53,800

Amount of HRA exempt is

= Rs. 53,800

(ii) Entertainment Allowance:

This allowance is first included in gross salary under allowances and then deduction is given to
only central and state government employees under Section 16 (ii).

(iii)Special Allowances for meeting official expenditure:

Certain allowances are given to the employees to meet expenses incurred exclusively in
performance of official duties and hence are exempt to the extent actually incurred for the
purpose for which it is given. These include travelling allowance, daily allowance, conveyance
allowance, helper allowance, research allowance and uniform allowance.

(iv) Special Allowances to meet personal expenses:

There are certain allowances given to the employees for specific personal purposes and the
amount of exemption is fixed i.e. not dependent on actual expenditure incurred in this regard.
These allowances include:
a) Children Education Allowance:
This allowance is exempt to the extent of Rs.100 per month per child for maximum of 2
children (grand children are not considered).
b) Children Hostel Allowance:
Any allowance granted to an employee to meet the hostel expenditure on his child is exempt to
the extent of Rs.300 per month per child for maximum of 2 children.
c) Transport Allowance:
This allowance is generally given to government employees to compensate the cost incurred in
commuting between place of residence and place of work. An amount uptoRs.800 per month
paid is exempt. However, in case of blind and orthopaedically handicapped persons, it is exempt
up to Rs. 1600p.m.
d) Out of station allowance:
An allowance granted to an employee working in a transport system to meet his personal
expenses in performance of his duty in the course of running of such transport from one place to
another is exempt upto 70% of such allowance or Rs.6000 per month, whichever is less.
III.Fully exempt allowances
(i) Foreign allowance:
This allowance is usually paid by the government to its employees being Indian citizen posted
out of India for rendering services abroad. It is fully exempt from tax.
(ii) Allowance to High Court and Supreme Court Judges of whatever nature are exempt from tax.
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(iii) Allowances from UNO organisation to its employees are fully exempt from tax.

SUM:
From the following particulars, compute gross salary of Mr X for the assessment year 2006-07.
He is employed in textile industry in Mumbai at a monthly salary of Rs.4000. He is entitled to
commission of 1% on sales achieved by him, which were Rs.10 lakh for the year.
In addition, he received the following allowances from the employer during the previous year:

1. Dearness Allowance Rs.2000 per month which is granted under terms of

employment and counted for retirement benefits.
2. Bonus Rs.32000
3. House Rent Allowance Rs.1000 per month (Rent paid for house in
Mumbai Rs.1200 per month)
4. Entertainment Allowance Rs.1000 per month
5. Children Education Allowance Rs.500 per month
6. Transport Allowance Rs.1000 per month
7. Medical Allowance Rs.500 per month
8. Servant Allowance Rs.200 per month
9. City Compensatory Allowance Rs.300 per month
10. Research Allowance Rs.500 per month (amount spent on research
Rs.3000)

Solution:
Computation of Income from Salary of Mr. X
for the Assessment Year 2006-07
Amount / Rs.
Basic Salary

48,000

Dearness Allowance

24,000

Commission

10,000

Bonus

32,000

House Rent Allowance

5,800

(Rs.1000 x 12 Amount exempt Rs.6200)*

Entertainment Allowance

12,000

Children Education Allowance

3,600

(Rs.500 x 12 Amount exempt Rs.100 x 2 x 12)

Transport Allowance

2,400

(Rs.1000 x 12 Amount exempt Rs.800 x 12)

Medical Allowance (fully taxable)

6,000

Servant Allowance (fully taxable)

2,400

City Compensatory Allowance (fully taxable)

3,600

Research Allowance

3,000

(Rs.500 x 12 Amount exempt Rs.3000)

Gross Salary:

152,800

* Amount of HRA exempt is least of 3 amounts

a) 50% of Salary (Basic Salary + DA granted under terms of employment +

Commission based on percentage of turnover Rs.48,000 + Rs.24,000 +
Rs.10,000 = Rs.82,000) = Rs.41,000
b) Actual HRA received : Rs.1000 x 12 = Rs.12,000
c) Rent paid (Rs.1200 x 12) 10% of Salary (Rs.82,000) Rs.14,400 Rs.8,200 = Rs.6,200
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Deduction from salary income

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 government
employee to the extent of Rs. 5000/- or 20% of his salary or actual amount received, whichever
is less.

4.PERQUISITES:
Perquisite may be defined as any casual emolument or benefit attached to an office or position
in addition to salary or wages.
Perquisite is defined in the section17(2) of the Income tax Act as including:

(i) Value of rent-free/concessional rent accommodation provided by the employer.

(ii) Any sum paid by employer in respect of an obligation which was actually payable by the
assessee.
(iii) Value of any benefit/amenity granted free or at concessional rate to specified employees etc.
(iv) 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
assesssee.
(v) The amount of any contribution to an approved superannuation fund by the exployer in
respect of the assessee, to the extent it exceeds one lakh rupees; and
(vi) the value of any other fringe benefit or amenity as may be prescribed.

Valuation of perquisites:
SAs a general rule, the taxable value of perquisites in the hands of the employees is its cost to the
employer. However, specific rules for valuation of certain perquisites have been laid down in
Rule 3 of the I.T. Rules. These are briefly given below.
Valuation of residential accommodation provided by the employer:-

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(a) Union or State Government Employees- The value of perquisite is the license fee as
determined by the Govt. as reduced by the rent actually paid by the employee.

(b) Non-Govt. Employees- The value of perquisite is an amount equal to 15% of the salary in
cities having population more than 25 lakh, (10% of salary in cities where population as per 2001
census is exceeding 10 lakh but not exceeding 25 lakh and 7.5% of salary in areas where
population as per 2001 census is 10 lakh or below). In case the accommodation provided is not
owned by the employer, but is taken on lease or rent, then the value of the perquisite would be
the actual amount of lease rent paid/payable by the employer or 15% of salary, whichever is
lower. In both of above cases, the value of the perquisite would be reduced by the rent, if any,
actually paid by the employee.

Value of Furnished Accommodation- The value would be the value of unfurnished

accommodation as computed above, increased by 10% per annum of the cost of furniture
(including TV/radio/ refrigerator/AC/other gadgets). In case such furniture is hired from a third
party, the value of unfurnished accommodation would be increased by the hire charges
paid/payable by the employer. However, any payment recovered from the employee towards the
above would be reduced from this amount.

Value of hotel accommodation provided by the employer- The value of perquisite arising out of
the above would be 24% of salary or the actual charges paid or payable to the hotel, whichever is
lower. The above would be reduced by any rent actually paid or payable by the employee. It may
be noted that no perquisite would arise, if the employee is provided such accommodation on
transfer from one place to another for a period of 15 days or less.

Perquisite of motor car provided by the employer- W.e.f. 1-4-2008, if an employer providing
such facility to his employee is not liable sto pay fringe benefit tax, the value of such perquisite
shall be :
a) Nil, if the motor car is used by the employee wholly and exclusively in the performance of
his official duties.

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b) Actual expenditure incurred by the employer on the running and mainenance of motor car,
including remuneration to chauffeur as increased by the amount representing normal wear and
tear of the motor car and as reduced by any amount charged from the employee for such use (in
case the motor car is exclusively for private or personal purposes of the employee or any member
of his household).
c) Rs. 1800- (plus Rs. 900-, if chauffeur is also provided) per month (in case the motor car is
used partly
in performance of duties and partly for private or personal purposes of the employee or any
member of his household if the expenses on maintenance and running of motor car are met or
reimbursed by the employer). However, the value of perquisite will be Rs. 2400- (plus Rs. 900-,
if chauffeur is also provided) per month if the cubic capacity if engine of the motor car exceeds
1.6 litres.
d) Rs. 600- (plus Rs. 900-, if chauffeur is also provided) per month in case the motor car is
used partly in performance of duties and partly for private or personal purposes of the employee
or any member of his household if the expenses on maintenance and running of motor car for
such private or personal use are fully met by the employee. However, the value of perquisite will
be Rs. 900- (plus Rs. 900-, if chauffeur is also provided) per month if the cubic capacity of
engine of the motor car exceeds 1.6 litres.
If the motor car or any other automotive conveyance is owned by the employee but the actual
running and maintenance charges are met or reimbursed by the employer, the method of
valuation of perquisite value is different. (See Rule 3(2)).

Perquisite arising out of supply of gas, electric energy or water :- This shall be determined as the
amount paid by the employer to the agency supplying the same. If the supply is from the
employers own resources, the value of the perquisite would be the manufacturing cost per unit
incurred by the employer. However, any payment received from the employee towards the above
would be reduced from the amount [Rule 3(4)]

Free/Concessional Educational Facility :- Value of the perquisite would be the expenditure

incurred by the employer. If the education institution ismaintained & owned by the employer, the

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value would be nil if the value of the benefit per child is below Rs. 1000/- P.M. or else the
reasonable cost of such education in a similar institution in or near the locality. [Rule 3(5)].

Free/Concessional journeys provided by an undertaking engaged in carriage of passengers or

Goods :- Value of perquisite would be the value at which such amenity is offered to general
public as reduced by any amount, if recovered from the employee. However, these provisions are
not applicable to the employees of an airline or the railways.

Provision for sweeper, gardener, watchman or personal attendant :- The value of benefit
resulting from provision of any of these shall be the actual cost borne by the employer in this
respect as reduced by any amount paid by the employee for such services. (Cost to the employer
in respect to the above will be salary paid/payable). [Rule 3(3)].

Value of certain other fringe benefits :(a) Interest free/concessional loans- The value of the perquisite shall be the excess of interest
payable at the prescribed interest rate over, interest, if any, actually paid by the employee or any
member of his household. The prescribed interest rate would be the rate charged by State Bank
of India as on the 1st Day of the relevant Previous Year in respect of loans of the same type and
for same purpose advanced by it to general public. Perquisite to be calculated on the basis of the
maximum outstanding monthly balance method. However, loans upto Rs. 20,000/-, loans for
medical treatment specified in Rule 3A are exempt provided the same are not reimbursed under
medical insurance.

(b) Value of free meals- The perquisite value in respect of free food and non-alcoholic
beverages provided by the employer, not liable to pay fringe benefit tax, to an employee shall be
the expenditure incurred by the employer as reduced by the amount paid or recovered from the
employee for such benefit or amenity. However, no perquisite value will be taken if food and
non-alcoholic beverages are provided during working hours and certain conditions specified
under Rule 3(7)(iii) are satisfied.

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(c) Value of gift or voucher or token- The perquisite value in respect of any gift, or voucher, or
taken in lieu of which such gift may be received by the employee or member of his household
from the employer, not liable to pay fringe benefit tax, shall be the sum equal to the amount of
such gift, voucher or token. However, no perquisite value will be taken if the value of such gift,
voucher or taken is below Rs. 5000- in the aggregate during the previous years.

(d) Credit card provided by the employer- The perquisite value in respect of expenses incurred
by the employee or any of his household members, which are charged to a credit card provided
by the employer, not liable to pay fringe benefit tax, which are paid or reimbursed by such
employer to an employee shall be taken to be such amount paid or reimbursed by the employer.
However, no perquisite value will be taken if the expenses are incurred wholly and exclusively
for official purposes and certain conditions mentioned in Rule 3(7)(v) are satisfied.

(e) Club membership provided by the employer- The perquisite value in respect of amount paid
or reimbursed to an employee by an employer, not liable to pay fringe benefit tax, against the
expenses incurred in a club by such employee or any of his household members shall be taken to
be such amount incurred or reimbursed by the employer as reduced by any amount paid or
recovered from the employee on such account. However, no perquisite value will be taken if the
expenditure is incurred wholly any exclusively for business purposes and certain conditions
mentioned in Rule 3(7)(vi) are satisfied.

The value of any other benefit or amenity provided by the employer shall be determined on the
basis of cost to the employer under an arms length transaction as reduced by the employees
contribution.
The fair market value of any specified security or sweat equity share, being an equity share in a
company, on the date on which the option is exercised by the employee, shall be determined as
follows:(a) In a case where,on the date of exercising of the option, the share in the company is listed on a
recognized stock exchange, the fair market value shall be the average of the opening price and
closing price of the share on the date on the said stock exchange.

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(b) In a case where, on the date of exercising of the option, the share in the company is not listed
on a recognized stock exchange, the fair market value shall be such value of the share in the
company as determined by a merchant banker on the specified date.

(c) The fair market value of any specified security, not being an equity share in a company, on
the date on which the option is exercised by the employee, shall be such value as determined by
a merchant banker on the specified date.

Perquisites exempt from income tax

Some instances of perquisites exempt from tax are given below:
Provision of medical facilities (Proviso to Sec. 17(2)): Value of medical treatment in
any hospital maintained by the Government or any local authority or approved by the Chief
Commissioner of Income-tax. Besides, any sum paid by the employer towards medical
reimbursement other than as discussed above is exempt upto Rs.15,000/-.
Perquisites allowed outside India by the Government to a citizen of India for rendering
services outside India (Sec. 10(7)).
Rent free official residence provided to a Judge of High Court or Supreme Court or an
Official of Parliament, Union Minister or Leader of Opposition in Parliament.
No perquisite shall arise if interest free/concessional loans are made available for medical
treatment of specified diseases in Rule 3A or where the loan is petty not exceeding in the
aggregate Rs.20,000/No perquisite shall arise in relation to expenses on telephones including a mobile phone
incurred on behalf of the employee by the employer.

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VARIOUS TYPES OF ALLOWANCE

Type of Allowance

Amount exempt

(i) Special Compensatory Allowance for hilly

Rs.800 common for various areas of North

areas or high altitude allowance or climate

East, Hilly areas of U.P., H.P. & J&K and Rs.

allowance.

7000 per month for Siachen area of J&K and

Rs.300 common for all places at a height of
1000 mts or more other than the above places.

(ii) Border area allowance or remote area

Various amounts ranging from Rs.200 per

allowance or a difficult area allowance or

month to Rs.1300 per month are exempt for

disturbed area allowance.

various areas specified in Rule 2BB.

(iii) Tribal area/Schedule area/Agency area

Rs.200 per month.

allowance available in M.P., Assam, U.P.,

Karnataka, West Bengal, Bihar, Orissa,
Tamilnadu, Tripura
(iv) Any allowance granted to an employee

70% of such allowance upto a maximum of

working in any transport system to

Rs.6000 per month.

meet his personal expenditure during duty

performed in the course of running of such
transport from one place to another place.
(v) Children education allowance.

Rs.100 per month per child upto a maximum 2

children.

(vi) Allowance granted to meet hostel

Rs.300 per month per child upto a maximum

expenditure on employees child.

two children.

(vii) Compensatory field area allowance

Rs.2600 per month.

available in various areas of Arunachal

Pradesh, Manipur Sikkim, Nagaland,
H.P., U.P. & J&K.
(viii) Compensatory modified field area

Rs.1000 per month

allowance available in specified areas of

Punjab, Rajsthan, Haryana, U.P., J&K, H.P.,
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West Bengal & North East.

(ix) Counter insurgencyallowance to members

Rs.3900 Per month

of Armed Forces.
(x) Transport Allowance granted to an

Rs.800 per month.

employee to meet his expenditure for the

purpose of commuting between the place of
residence & duty.
(xi) Transport allowance granted to physically

Rs.1600 per month.

disabled employee for the purpose of

commuting between place of duty and
residence.
(xii) Underground allowance granted to an

Rs.800 per month.

employee working in under ground mines.

(xiii) Special allowance in the nature of high

Rs. 1060 p.m. (for altitude of 9000-15000 ft.)

altitude allowance granted to members of the

Rs.1600 p.m.

armed forces.

(for altitude above 15000 ft.)

(xiv) Any special allowance granted to the

Rs. 4,200/- p.m.

members of the armed forces in the nature of

special compensatory highly active field area
Allowance
(xv) Special allowance granted to members of

Rs. 3,250/- p.m.

armed forces in the nature of island duty

allowance. (in Andaman & Nicobar
& Lakshadweep Group of Islands)

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INTRODUCTION OF INCOME FROM OTHER SOURCES

Income from Other Sources is a residuary head of income. Any item of income chargeable to
tax but does not fall within the ambit of the other four specific heads of income shall be included
under this head of income.
There are some incomes, which are exempt, while others are taxable. The taxability of Income is
either under the head salary, house property, business income or capital gain. All of these heads
of income are mentioned under section 16 of the income tax act. You have read about these
income heads in the previous lessons.
The incomes, which are neither covered under the above heads of salary, house property,
business income, or capital gain, are covered in the head of income from other sources. This
head of income is a residual head because it tries to cover all other incomes which are uncovered
and which are not exempt from tax.
It is residuary head of Income which must satisfy the following conditions:1.

There must be an income;

2.

This income is NOT exempt under the IT Act 1961; and

3.

This income is not chargeable to tax under the other heads of income viz. "Salary",
"House property", "Business or Profession" and "Capital Gains".
Income from this source is computed after deducting the following:-

1.

Expenditure incurred during the previous year;

2.

Expenditure incurred wholly and exclusively for the purpose of earning the said income;

3.

After deducting allowances and deduction provided in Section 57 of the IT Act 1961;
And after disallowing the following:-

1.

Expenditure relating to personal expenses

2.

Interest, salary payable outside India on which TDS not made,

3.

Income / Wealth Tax paid, excessive-payments to relatives etc.

4.

Expenditure in respect of royalty and technical fees received by a foreign company;

5.

Expenditure in respect of winning from lottery.

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What income would fall under the head "income from other sources"?
Income of every kind, which is not chargeable to income tax under the heads 1) salary 2) income
from house property, 3) profits and gains of business and profession, and capital gains can be taxed
under the head "income from other sources". However such income should also not fall under
income not forming part of total income under the IT Act.

EXAMPLE OF INCOME FROM OTHER SOURCES

Some examples of certain incomes normally taxed under this head are given below:

Interest on bank deposits, loans or company deposits,

Family pension (received by legal heirs of an employee),

Income from sub-letting of house property by a tenant,

Agricultural income from agricultural land situated outside India,

Interest received from IT Dept. on delayed refunds,

Remuneration received by Members of Parliament,

Casual receipts and receipts of non-recurring nature,

Insurance commission,

Examiner-ship fees received by a teacher (not from employer),

Income from royalty,

Director's commission for standing as guarantor to bankers,

Income from letting out of machinery, plant or furniture, etc.

Any sum exceeding Rs. 50,000/- received without consideration shall be treated as
income provided that the sum of money is not received from any relative or on the occasion of
marriage of the individual or under a will or inheritance etc.

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INCOMES SPECIFIED IN SECTION 56

Income of every kind which are to be taxed, and which are not included in the income heads of
Salary, House Property, Capital Gains, Profession and Business shall be charged under the head
Income from Other Sources.
Following incomes are specifically mentioned in the I .T. Act U/s 56, which are included in the
income from other sources:
1. Dividend
2. Interest on securities if not chargeable under the head business or profession.
3. Wining from lotteries, crossword puzzles, races including horse races, card games and any
other sort of games or gambling or betting of any form.
4. Income from machine, plant or furniture let on hire.
5. Income from machinery, plant, or furniture along with building and letting thereof is
inseparable.
6. Any sum received under a key-man insurance policy including bonus if not taxable as salary
or business income.
Dividend is the share of profit, which is distributed by the company to its shareholders; this is an
income for shareholders. Interest on securities means interest on debentures, bonds etc. which is
an income of the person receiving this interest. Letting machine, plant, furniture generates the
rental income. We will study the taxation of the first three incomes i.e., dividend, interest and
winning briefly in the paragraphs given below.

INCOMES NOT SPECIFIED IN SECTION 56

Following incomes are not mentioned in the Income Tax Act but are to be
charged to tax. Therefore, these incomes are also included in the head of income
from other sources.
1. Income from subletting
2. Interest on bank deposits and loans and securities.
3. Agricultural income from a place outside India.
4. Rent of plot of land
5. Mining rent and royalty.

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6. Casual income under a will, contract, trust deed.

7. Salary payable to a member of parliament.
8. Income from undisclosed sources.
9. Gratuity paid to a director who is not an employee of a company.
10. Any casual income exceeding Rs. 5,000.

TAXABILITY OF SELECT INCOMES

Now, we will discuss in brief the taxability of dividend, winning from lotteries, interest on
securities and family pension.

Taxability of dividend
Taxability of Dividends [Sec 56(2) (i)]
Dividends is taxable, irrespective of the fact, whether it is paid in cash or in kind or it is
paid out of taxable income or tax free income whether it is paid out of revenue profits or capital
gains. Dividend includes deemed dividend mentioned u/s 2(22).
Normally, dividend is taxable on the basis of its declaration while deemed dividend and
interim dividend is taxable on the basis of payment.
A company at the end of the year after calculating its profit recommends the distribution
of some part of its profit to its shareholders. The profit distributed among shareholders is called
dividend.
Generally, dividend is given at the end of financial year. But some high profit company
also gives the dividend in between of the year without calculating its year-end profits. This
dividend is called interim dividend.
Dividends from Indian Company are exempt from tax since 1.6.97. But dividend from
any other company is taxable. Similarly any deemed dividends U/S 2(22) are also taxable.
(a) any distribution by a company to its shareholders to the extent of accumulated profits whether
capitalized or not resulting in the release of all or any part of the assets of the company,
(b) any distribution to its shareholders by a company
(i) Of debentures, debenture-stock or deposit-certificates with or without interest;
(ii) Distribution of bonus shares to the preference shareholders by the company, to the extent of
accumulated profits, whether capitalized or not,
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(c) any distribution made to the shareholders by a company on its liquidation to the extent to
which the distribution is attributable to the accumulated profits of the company, whether
capitalized or not, (d) Any distribution by a company to its shareholders on account of reduction
of share capital to the extent of which the company possesses accumulated profits, whether
capitalized or not.
(e) any payment to the extent of accumulated profits by a company, not being a company in
which public are substantially interested, of any sum by way of :
(i) Loan or advance to a shareholder who holds the beneficial ownership of equity shares
carrying not less than 10% voting power,
(ii) loan or advance to any concern (HUF, firm, AOP, Body of Individuals or a company) in
which such shareholder is a member or partner holding substantial interest (20% or more
beneficial interest at any time during the previous year),
(iii) Any payment on behalf of or for the individual benefit of any such shareholder made to any
person.
Deduction of expenses on collection and interest on loan, taken for investment in shares,
is available against dividend income. If the dividend is more than the specified limit under
section 194 (which is at present Rs. 2,500 in a year) then the dividend actually received will be
after deducting a specified percentage of tax of TDS (Tax Deducted at Source). In these cases,
some tax is deducted and the balance amount of Dividend is paid to the shareholder. The balance
amount paid to shareholder is called net dividend or dividend received and the total dividend is
called the gross dividend. Thus,

Gross Dividend = Dividend received + TDS

TDS = Gross Dividend * TDS Rate
Gross Dividend = Dividend received* 100 / (100- TDS)
TDS rate u/s 194 is 20% plus surcharge plus 2% Education cess. The surcharge vary from case to
case.

Taxability of winning
Taxability of Wining from Lotteries, cross word puzzles, horse races and card games etc.
is similar to the taxability of dividend with some changes like the rate of TDS is 30 % plus
23

surcharge plus 2% Education cess, and the exemption amount is Rs. 5,000 (however it is 2,500 in
case of horse races) and no deduction on account of any expense in relation to the winning is
allowed. That is the entire winning amount is taxable.
(a) No expenditure or allowance can be allowed against such income;
(b) No deduction under Chapter VI-A can be allowed;
(c) No benefit of carry forward and set off of loss/unabsorbed depreciation allowance is available
against such income; and
(d) No basic exemption limit is available.
This provision does not apply to income derived from owning and maintaining race horses in
respect of which normal rates of tax shall apply. Loss derived from this source shall be governed
by the provisions of Section 74A.
Gross amount = Rs. 5,000 + (net income received on wining 5,000)*100
(100-TDS)
Rs. 5,000 will be Rs. 2,500 in the case of wining from horse races.
Rs. 5,000 is an exemption, which is available because it is a casual receipt. Winning on lotteries
races, crossword puzzles are all casual income.

Taxability of interest on securities

Taxability of interest on securities is also similar to the taxability of dividend with some
changes like the rate of TDS is 10 % plus surcharge plus 2% Education cess (20% plus surcharge
plus 2% education cess in case of unlisted securities) and the exemption amount is Rs. 5,000 and
Deductions on interest income are collection charges interest on loan and any other revenue
expense incurred fully for the purpose of interest is allowed.
Gross interest = Net received * 100 / (100 TDS rate)
In case of tax-free govt. Securities, grossing up is not required as there is no deduction or TDS.
However, grossing up is required in case of following securities.
1. Tax-free non govt. Securities
2. Less tax non govt. Securities
3. Less tax govt. Securities
24

Rate of TDS
Govt. Securities - 10% plus education cess; Listed securities 10% plus education cess; Unlisted
non-govt. Securities - 20% plus education cess.

Taxability of family pension

Taxable as income from other sources, a standard deduction of 1/3rd of pension or
Rs. 15,000 whichever is less is allowed.

INCOME CHARGEABLE ONLY UNDER THIS HEAD

The following income shall be charged to tax only under the head Income from
Other Sources:
(1) Dividend income covered by sub-clause (a) to (e) of clause (22) of Section 2.
(2) Income by way of winnings from lotteries, cross word puzzles, races including horse race,
card games and other games of any sort, gambling, betting, etc. It requires mention here that such
winnings are chargeable to tax u/s 115BB at a flat rate of 30%.
(3) Any sum of money, the aggregate value of which exceeds Rs.50, 000 received from any
person without consideration by an individual or Hindu Undivided Family on or after
01.04.2006.
However, exemption is granted in respect of any sum of money received
(a) from any relative; or
(b) on the occasion of marriage of individual; or
(c) under a Will or by way of inheritance; or
(d) in contemplation of death of the payer or
(e) from a local authority; or
(f) from any fund, foundation, university, other educational institution, hospital,
medical institution, any trust or institution referred to in Section 10(23C); or
(g) From charitable institutions registered u/s 12AA.
In respect of above gifts, there is no ceiling limit and therefore, entire amount is
exempt from chargeability.
The defintion of the term relative for this purpose is as under :
(a) husband or wife of individual;
25

(b) brother or sister of the individual;

(c) brother of husband of the individual;
(d) brother of wife of the individual;
(e) sister of husband of the individual;
(f) sister of wife of the individual;
(g) brother of father of the individual;
(h) brother of mother of the individual;
(i) sister of father of the individual;
(j) sister of mother of the individual;
(k) lineal ascendant of the individual (say, grandfather)
(l) lineal descendant of the individual (say, son, grandson, daughter)
(m) lineal ascendant of the husband of the individual
(n) lineal descendant of the husband of the individual
(o) lineal ascendant of the wife of the individual (say, wifes father)
(p) lineal descendant of the wife of the individual;
(q) wife or husband of the relatives listed at serial numbers (b) to (p)
Taxability of any sum received:
The objective of taxation of any sum received by an individual or HUF, without any
consideration is basically to bring into tax net the bogus transactions in the name of gifts from
unknown persons. Keeping this in mind, any gift received from non-relatives, subject to
exemptions listed above, has been subjected to tax u/s 56(2) (VI). Accordingly, any sum of
money received by an individual or HUF during the year, the aggregate of which is exceeding
Rs.50,000, shall be subject to tax in the hands of such individual or HUF.
It needs mention that the aggregate limit of Rs.50, 000 as provided in the Section is not in
the nature of basic exemption or a threshold limit. Accordingly, in case an individual or HUF
receives any sum of money exceeding Rs.50, 000, which are not covered by exemptions, the
whole of such sum shall be subject to tax under the head Income from Other Sources. For
example, in case where Mr. A receives gift of Rs.75, 000 from 3 of his friends, the entire amount
26

of Rs.75, 000 shall be chargeable to tax. Assessee cannot claim exemption of Rs.50, 000 as the
aggregate sum of money received has exceeded Rs.50, 000 and therefore, whole of such sum
received as gift shall be brought to tax. On the other hand, in case the aggregate amount of gift
received is Rs.45, 000, the entire sum shall be exempted as such aggregate amount does not
exceed the limit of Rs.50, 000 prescribed under the law.
Further, since the expression used in the laws is any sum of money. Therefore, it is to
be understood that gifts-in-kind, movable and immovable, are not liable to tax. They shall
continue to be regarded as capital receipts not having the character of income.
Though the law provides for chargeability of any gifts received by individual or HUF, all
the above clauses of the definition of the term relative is confined only with reference to
individuals. Therefore, an assessee, being a HUF, is not eligible to claim exemption provided by
clauses dealing with gifts received from relatives and gifts received on the occasion of
marriage as mentioned above.

TAX UPON INCOME FROM OTHER SOURCES

The following income shall be chargeable to income tax under the head "Income from other
sources", namely: -

1. Dividend;
2. Any annuity due or commuted value of any annuity paid under section 280D.
3. Any winning from lotteries, crossword puzzles, races including horse races, card games and
other games of any sort or from gambling or betting of any form or nature whatsoever.
4. Any sum, received by the assessee from his employees as contributions to any provident fund
or Superannuation fund or any fund set up under the provisions of the Employees State Insurance
Act, 1948 (34 of 1948), or any officer fund for the welfare of such employees, if such income is
not chargeable to income-tax under the head "Profits and gains of business or profession";
5. Income from machinery, plant or furniture belonging to the assessee and let on hire, if the
income is not chargeable to income -- tax under the head "Profits and gains of business or
profession";
6. Where an assessee lets on hire machinery, plant or furniture belonging to him and also
buildings, and the letting of the buildings is inseparable from the letting of the said machinery,
27

plant or furniture, the income from such letting, if it is not chargeable to income tax under the
head "Profits and gains of business or profession."
7. Any sum received under a Keyman insurance policy, including the sum allocated by way of
bonus on such policy, if such income is not chargeable to income tax under the heads "Profits
and gains of business and profession" or under the head "Salaries". (Keyman insurance policy
means a life insurance policy taken by a person on the life of another person who is/ was the
employee of the 1st mentioned person or who is/was connected in any manner whatsoever with
the business of the 1st mentioned person.)
What income is taxed under Income from Other Sources.
All those incomes which are not exempt and are to be taxed and are at the same time not covered
in any of the four heads of income namely salary, house property, capital gains and business and
profession is included in the head of income from other sources. The income included here is
taxable on cash or mercantile basis whichever method assessee follows. There are certain
incomes, which are specifically mentioned in section 56 of the income tax act to be included in
the head of income from other sources, but there are various other incomes, which are not
specified in section 56 of the income tax act but are still included in the income from other
sources. The following income shall be chargeable to income tax under the head "Income from
other sources", namely: 1. Dividend;
2. Any annuity due or commuted value of any annuity paid under section 280D.
3. Any winning from lotteries, crossword puzzles, races including horse races, card games and
other games of any sort or from gambling or betting of any form or nature whatsoever.
4. Any sum, received by the assessee from his employees as contributions to any provident fund
or Superannuation fund or any fund set up under the provisions of the Employees State Insurance
Act, 1948 (34 of 1948), or any officer fund for the welfare of such employees, if such income is
not chargeable to income-tax under the head "Profits and gains of business or profession";
5. Income from machinery, plant or furniture belonging to the assessee and let on hire, if the
income is not chargeable to income -- tax under the head "Profits and gains of business or
profession";
6. Where an assessee lets on hire machinery, plant or furniture belonging to him and also
buildings, and the letting of the buildings is inseparable from the letting of the said machinery,
28

plant or furniture, the income from such letting, if it is not chargeable to income tax under the
head "Profits and gains of business or profession."
7. Any sum received under a Keyman insurance policy, including the sum allocated by way of
bonus on such policy, if such income is not chargeable to income tax under the heads "Profits
and gains of business and profession" or under the head "Salaries". (Keyman insurance policy
means a life insurance policy taken by a person on the life of another person who is/ was the
employee of the 1st mentioned person or who is/was connected in any manner whatsoever with
the business of the 1st mentioned person.) So, basically "income from other sources" is the
residuary head of income, which takes within its ambit any income, which does not specifically
fall under any other head of income
So, basically "income from other sources" is the residuary head of income, which takes within its
ambit any income, which does not specifically fall under any other head of income.

If certain Income is not chargeable to tax under the specific head, can it be taxed under the head
"Income from other sources".
If a receipt falls under one of the specific heads of income, then such receipt can be taxed only in
accordance with the provisions relating to that head. Income of every kind, which is not
chargeable to income tax under the heads 1) salary 2) income from house property, 3) profits and
gains of business and profession, and capital gains can be taxed under the head "income from
other sources". However, this is subject to the condition that such income does not fall under
income, not forming part of total income under the IT Act and provided that it is not exempted
from taxation under any provision of the I-T Act.

Is the dividend income of all assessees liable to tax.

There are certain assessees who are exempted in respect of the taxability of dividend income and
therefore, dividend income in the hands of these particular assessees, to the extent as specified in
the section, is not taxable even though the same falls under the head "Income from other
sources". The dividend income, earned by the following entities or institutions, is exempt from
tax, namely:

29

1. Local Authorities.
2. An approved scientific research association.
3. A venture capital fund or venture capital company from investments made by way of equity
shares in a venture capital undertaking.
4. Notified news agency.
5. Pension fund set up by LIC or any other insurer approved by the Controller of Insurance or
Insurance Regulatory and Development Authority
6. Fund established for the welfare of employees.
7. Trust or society approved by Khadi and Village Industries Commission.
8. An authority whether known as Khadi and Village Industries Board or any other name for the
development of Khadi and Village Industries.
9. Any body or authority established, constituted or appointed under any enactment for the
administration or public, religious, or charitable trusts or endowments or societies for religious or
charitable purposes.
10. SAARC Fund for Regional Projects.
11. Secretariat of Asian Organization of Supreme Audit Institutions.
12. Insurance Regulatory and Development Authority.
13. Any person, receiving income on behalf of specified national funds, approved public
charitable institutions, educational institutes, and hospital.
14. Mutual funds registered under SEBI Act or set up by a public sector bank or a public
financial institution or authorized by the Reserve Bank of India. However, w.e.f. 1.4.20003,
income from units of the UTI and mutual funds will also be taxed.
15. Investor Protector Fund. Synonym
16. Credit Guarantee Fund Trust thesaurus
17. Infrastructure capital fund.
18. Statutory provident funds, Recognized provident funds, Approved Superannuation funds,
approved gratuity funds, and approved coal mines provident funds.
19. Registered Trade Unions or association of Registered Trade Unions.
20. Employees State Insurance Fund.
21. Members of a Scheduled Tribe, residing in Manipur, Nagaland, Tripura, Arunachal Pradesh,
Mizoram and Ladakh.
30

22. Statutory Corporation or a body/ institution financed by the Govt., formed for promoting the
interest of Scheduled castes/tribes, minority community.
23. Co-operative societies formed for promoting the interest of Scheduled castes/tribes.
24. Marketing authority, engaged in letting godowns and warehouses.
25. Certain Commodity Boards/ Authorities.
26. Political parties.

Would the interest income be assessed as 'business income' or as 'income from other sources'?
Interest Income is either assessed as 'Business Income' or as 'Income from other sources'
depending upon the activities carried on by the assessee. If the investment yielding interest is
part of the business of the assessee, the same would be assessable as 'business income' but where
the earning of the interest income is incidental to and not the direct outcome of the business
carried on by the assessee, the same is assessable as 'Income from other sources'. Business
implies some real, substantial and systematic or organized course of activity with a profit motive.
Interest, generated from such an activity, is business Income; else it would be interest from other
sources.
Method of Accounting Section 145
Income chargeable under the head Income from Other Sources shall be computed in
accordance with cash system of accounting or mercantile system of accounting regularly
employed by the assessee. The only exception to this general rule is deemed dividend income
covered by sub-clause (e) of clause (22) of Section 2 which is chargeable to tax on payment basis
as prescribed u/s 8 of the Income Tax Act and not on the basis of method of accounting
followed.

31

DEDUCTIONS ALLOWED UNDER THE HEAD 'INCOME FROM OTHER SOURCES'.

The income, chargeable under the head 'income from other sources,' shall be computed after
making the following deductions:

In the case of interest on securities, any reasonable sum, paid by way of commission or
remuneration to a banker or to any other person for the purpose of realizing such
dividend or interest on behalf of the assessee;

In the case of income, received by the assessee from his employees as contributions to
any provident fund or Superannuation fund or any fund set up under the provisions of the
Employees'' State Insurance Act, 1948, or any other fund for the welfare of such
employees, which is chargeable to income tax under the head "Income from other
sources" deductions so far, as may be in accordance with provisions of S 36(1) (va).

In the case of income from machinery, plant or furniture belonging to the assessee and let
on hire, if the income is not chargeable to income -- tax under the head "Profits and gains
of business or profession or where an assessee lets on hire machinery, plant or furniture
belonging to him and also buildings, and the letting of the buildings is inseparable from
the letting of the said machinery, plant or furniture, the income from such letting, if it is
not chargeable to income tax under the head "Profits and gains of business or profession",
deductions, so far as may, be in accordance with the provisions of clause (a), clause (3)of
Section 30, Section 31, and subsections (1) and (2) of Section 32 and subject to the
provisions of S 38.

In the case of income in the nature of family pension, a deduction of a sum equal to thirty
three and one third per cent of such income or fifteen thousand rupees, whichever is less.

Any other expenditure (not being capital expenditure) laid out or used wholly and
exclusively for the purpose of making or earning such income.

32

BIBLOGRAPHY

WWW.google .com

en.wikipedia.org/wiki/Income

http://www.du.ac.in

http://tips.thinkrupee.com

http://wirc-icai.org

www.incometaxmanagement.com

www.surfindia.com

SOURCES

Students Guide to Income Tax, Taxmann Publications, and New Delhi. Income Tax Law and
Practice, Pragati Publication, New Delhi. Income Tax Law and Accounts, Sahitya Bhawan,
Agra.

CONCLUSION
33

Income means a receipt in the form of money or moneys worth which is derived from
definite source with some sort of regularity or expected regularity. These definite sources of
income are salaries, house property, business or profession, capital gains and any other source. If
an income is not derived from any of these sources, it is not taxable under the Income Tax Act,
1961 (hereinafter referred as Act). Once we know what incomes of a person are taxable, then
weneed to know how to compute total taxable income according to the provisions of Income Tax
Act. This lesson is devoted to the first and most important head of income Salaries. The lesson
is divided into various sections. First we define the concept of salary income i.e. what are the
characteristics, which make an income fall under this head. Then, incomes falling under this
head are enumerated, followed by the detailed descriptions of income tax provisions regarding
three of these incomes. The description of remaining two incomes forming part of salary will be
covered in the next lesson along with procedure for computation of salary income.
The incomes, which are neither covered under the above heads of salary, house property,
business income, or capital gain, are covered in the head of income from other sources. This
head of income is a residual head because it tries to cover all other incomes which are uncovered
and which are not exempt from tax. After going through this you will be able to understand the
various incomes, which are included in the income from other sources. Also you will be able to
understand how income from dividend, income by way of interest is taxed and the concepts of
grossing and net.

34