Income under the head salaries (Section 15 – 17)

Meaning of Salary

Salary, in simple words, means remuneration of a person, which he has

received from his employer for rendering services to him. In order to
understand what is included in salary, let us discuss few characteristics of
salary.

Any remuneration paid by an employer to an employee in consideration of

his services is called salaries. It includes monetary value of those benefits
and facilities, which are provided by the employer and are taxable.

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.

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.

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. Salaryreceivedfromemployer,whetheroneormorethanoneis included in
this head.

4. Salary is taxable either on due basis or receipt basis which ever matures
earlier:

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.

INCOMES FORMING PART OF SALARY

Section 17 of the Act gives an inclusive definition of salary. Broadly, it

includes:

● Wages
● Any annuities or pension
● Any gratuity
● Any fees, commission
● Allowances
● Perquisites( received in kind)
● Profit in lieu of salary
● Advance of salary
● Any accretion(addition) due to interest on provident fund paid
out of the employer’s contribution.
● The contribution paid by employer under notified pension
scheme
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 up to 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 two deductions are allowed under
Section 16 of the Act to arrive at the figure of Net Salary:

1. Deduction for Standard Deduction-Sec 16 (I)

2. Deduction for ‘Entertainment Allowance’ – Section 16 (ii)
3. Deduction on account of ‘Professional Tax paid by Employee’ –
Section 16(iii).
Permissible deductions allowed from Gross Salary

The income chargeable under the head salaries is computed after making
the following deductions under Section 16:

1) Deduction for Standard Deduction: From Financial YEAR 2018-2019, a

standard deduction of Rs. 40,000 has been introduced in lieu of transport
allowance and medical reimbursements. The amount has been increased to Rs.
50,000 from 2019-2020 onwards.

2) Entertainment Allowance [section 16(ii)] of the Act

As given earlier, entertainment allowance received from employer is first

included in gross salary and thereafter, a deduction is allowed to
government employees (State or Central Government) to the extent of least
of following 3 amounts:

(i) Rs.5000

(ii) 20% of basic salary

(iii) Amount of Entertainment Allowance actually received during the
year.

3) Professional Tax [Section 16(iii)] of the Act.

Professional tax or tax on employment levied by a State under Article 276

of the Constitution is allowed as a deduction only in the year when it is
actually paid. If the professional tax is paid by the employer on behalf of the
employee, it is first included in gross salary as a perquisite (since it is an
obligation of employee fulfilled by employer) and then the same amount is
allowed as deduction on account of professional tax from gross salary.

Some Important Terms

a) 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 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.

b) FEE, COMMISSION AND BONUS

Any fee 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.

c) 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.

(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 up to 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(Actual
Rent Paid- 10% of salary)
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).

Note:
 Salary for this purpose includes Basic Salary, Dearness Allowance (if it
forms part of salary for the purpose of retirement benefits) and Commission
on turnover or sales.
If an employee is living in his own house and receiving HRA, it will be
fully taxable.
(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) to the extent of least of following 3 amounts:
(a) Rs.5000
(b)20% of Salary or 1/5th of salary
(c)Amount of Entertainment Allowance actually received during the
year.

Salary for this purpose includes Basic Salary, Dearness Allowance (if it forms part
of salary for the purpose of retirement benefits) and Commission on turnover or
sales.

(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. Upto

Financial year 2017-18, an amount upto Rs.1600 per month paid was exempt and
in case of blind and Orthopedically handicapped persons, it was exempt up to Rs.
3200p.m.

From Financial YEAR 2018-2019, a standard deduction of Rs. 40,000 has been
introduced in lieu of transport allowance and medical reimbursements. From
Financial YEAR 2019-2020 standard deduction limit has been revised to Rs.
50,000 in lieu of transport allowance and medical reimbursements.

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.10000 per month, whichever is less.

III. FULLY EXEMPT ALLOWANCES

(i) Foreign allowance

(ii)

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.

(iii) Allowance to High Court and Supreme Court Judges of whatever nature are
exempt from tax.

(iv) Allowances from UNO organization to its employees are fully exempt from
tax.

TAXABLE VALUE OF PERQUISITES

Perquisites are defined as any casual emolument or benefit attached to an

office or position in addition to salary or wages. It denotes some thing that
benefits a man by going into his pocket; it does not cover mere
reimbursement of necessary disbursements. Such benefits are normally
given in kind but should be capable of being measurable in money terms.
Perquisites are taxable and included in gross salary only if they are:

allowed by an employer to an employee,

allowed during the continuation of employment,
directly dependent on service,
resulting in the nature of personal advantage to the employee and
derived by virtue of employers authority.
As per Section 17 (2) of the Act, perquisites include:
1) Value of rent free accommodation provided to the employee by the
employer.
2)Value of concession in the matter of rent in respect of
accommodation provided to the employee by his employer.
3) Value of any benefit or amenity granted free of cost or at a
concessional rate in any of the following cases to a ‘Specified
Employee’:

a) by a company to an employee who is a director thereof

b) by a company to an employee who has substantial interest in the
company
c) by any employer to an employee who is neither a director, nor has
substantial interest in the company, but his annual monetary
emoluments under the head ‘Salaries’ exceeds

Rs.50,000.

Substantial interest – a person who holds 20% or more of shares / voting

power in a company is considered as having substantial interest in that
Company.

4) Any sum paid by the employer towards any obligation of the

employee.
5) Any sum payable by employer to effect an assurance on the life of
assessee.
6) The value of any other fringe benefit given to the employee as may be
prescribed.

Fringe Benefits - Means any privilege, service, facility, or amenity, directly

or indirectly provided by an employer to his employee, also includes
expense made by employer in the course of business on entertainment ,
hospitality, conferences, sales promotion, etc.

CLASSIFICATION OF PERQUISITES

For tax purposes, perquisites specified under Section 17 (2) of the Act may
be classified as follows:

(1) Perquisites that are taxable in case of every employee, whether

specified or not

(2) Perquisites that are taxable in case of specified employees only. (3)
Perquisites that are exempt from tax for all employees

Perquisites Taxable in case of All Employees

The following perquisites are taxable in case of every employee,

whether specified or not:

1. Rent free house provided by employer 2. House provided at

concessional rate

3. Any obligation of employee discharged by employer e.g. payment of club

or hotel bills of employee, salary to domestic servants engaged by
employee, payment of school fees of employees’ children etc.

4. Any sum paid by employer in respect of insurance premia on the life of

Employee.

5. Interest free or concessional loans to employees, use of movable assets,

transfer of moveable assets.

Perquisites taxable in case of Specified Employees only The following

perquisites are taxable in case of such employees:
1. Free supply of gas, electricity or water supply for household
consumption

2. Free or concessional educational facilities to the members of employees

Household

3. Free or concessional transport facilities

4. Sweeper, watchman, gardener and personal attendant

5. Any other benefit or amenity

Perquisites which are tax free for all the employees

This category includes perquisites which are tax free for the employees and
also other perquisites on which employer has to pay a tax (called Fringe
Benefit Tax) if they are given to the employees and so are not taxable for
them.

1. Medical benefits (provided within or out of India) subject to limits.

2. Value of Leave Travel Concession in India.
3. Free meals provided to the employees during working hours.
4. Amount spent by the employer as its contribution to staff welfare
schemes.

5. Laptops and computers provided for personal use.

6. Rent free official accommodation provided to a Judge of High Court or
Supreme Court or an official of Parliament including Minister and Leader of
Opposition in Parliament.

7. Health Insurance Premium of employee or member of household paid by

the employer.

8. All such facilities (like motor car, lunch refreshments, travelling, touring,
gift, credit cards, club etc.) provided by employer on which employer has to
pay Fringe Benefit Tax.
 VALUATION OF PERQUISITES

The perquisites which are taxable in the hands of employees are valued in

accordance with the provisions laid down under the Income Tax Rule 3.
These benefits can be provided to the employee or member of his
household.

Members of household shall include:

(1) Spouse (2) Children and their spouses (3) Parents (4) Servants and
dependents

(i) Valuationofrentfreeaccommodation

Accommodation can be: Furnished

Unfurnished

For Central and State Government employees

a) Valuation of Unfurnished accommodation:

If accommodation is provided by the State or Central Government to their

employees, the value of such unfurnished accommodation is simply the
amount fixed by the government (called the licence fees) in this regard.

b) Valuation of furnished accommodation:

Where the accommodation is furnished, 10% per annum of the original cost
of furniture given to the employee shall be added to the value of
unfurnished accommodation. If the furniture is taken on rent by employer,
then actual hire charges are to be added to the value.

Illustration

Mr X, a Senior Officer in Delhi administration draws Rs.20,000 per month

as basic salary. The government has provided him with a rent free
unfurnished flat whose market rent is Rs.3000 per month, though as per
government rules, its licence fee is fixed at Rs.700 per month. Determine
the value of perquisite in respect of rent free accommodation.
Solution:

In a case of government employee, the value of rent free accommodation is

Rs.8,400 (Rs.700 x 12) i.e. the licence fees fixed by the government.

For Other Employees

The valuation of accommodation for this category of non government

employees depends upon whether the accommodation given to the
employee is owned by the employer or taken on lease.

a) Valuation of Unfurnished accommodation: 1. Accommodation owned by

employer:

The value of unfurnished accommodation is:

(i) 7.5% of salary in cities having population not exceeding ten lakhs
or less as per 2001 census.
(ii) 10% of salary in population more than 10 lakhs upto 25 lakhs as
per 2001 census.
(iii) 15% of salary where population is more than 25 lakhs as per
2001 census.

2. Accommodation is taken on lease / rent by the employer:

The value of such accommodation is actual amount of lease rental paid or
payable by the employer or 15% of salary, whichever is lower.

Definition of salary for rent free accommodation: Basic Salary

+ Bonus or Commission + Dearness Allowance (if forming part of basic

salary for retirement benefits) + Taxable cash allowances

(ii)

(iii)

Valuation of furnished accommodation:

Where the accommodation is furnished, 10% per annum of the original cost
of furniture given to the employee shall be added to the value of
unfurnished accommodation. If the furniture is taken on rent by employer,
then actual hire charges are to be added to the value.

Sweeper, gardener or watchman provided by the employer:

The value of benefit of provision of services of sweeper, watchman,

gardener or personal attendant to the employee or any member of his
household shall be the actual cost to the employer. The actual cost in such
a case is the total amount of salary paid or payable by the employer or any
other person on his behalf for such services as reduced by any amount
paid by the employee for such services. If the above servants are engaged
by the employer and facility of such servants are provided to the
employees, it will be a perquisite for specified employees only. On the other
hand, if these servants are employed by the employee and wages of such
servants are paid / reimbursed by the employer, it will be taxable perquisite
for all classes of employees.

(iv) Free Supply of Gas, Electricity or Water

The value of these benefits is taxable in the hands of specified employees,

if the connection is taken in the name of the employer, and is determined
according to the following rules:

a) If the employer provides the supply of gas, electricity, and water from its
own sources, the manufacturing cost per unit incurred by the employer
shall be the value of perquisite.

b) If the supply is from any other outside agency, the value of perquisite
shall be the amount paid by the employer to the agency supplying these
facilities.

c) Where the employee is paying any amount in respect of such services,

the amount so paid shall be deducted from the value of perquisite
calculated under (a) or (b).

d) Where the connection for gas, electricity, water supply is in the name of
employee and the bills are paid or reimbursed by the employer, it is an
obligation of the employee discharged by the employer. Such payment is
taxable in case of all employees under Section 17 (2) (iv).

(v) Free Education

a) Cost of free education to any member of employees’ family provided in
an educational institution owned and maintained by the employer shall be
determined with reference to reasonable cost of such education in a similar
institution in a nearby locality. For education facilities provided to the
children of employee (excluding any other member of house hold), the
value shall be nil, if the cost of such education per child does not exceed
Rs.1, 000 per month.

b) Where free education facilities are allowed to any member of employees’

family in any other educational institution by reason of his being in
employment of that employer, the value of perquisite shall be determined
as in (a).

c) Inanyothercase:Thevalueofbenefitofprovidingfreeorconcessional
educational facilities for any member of the house hold (including children)
of the employee shall be the amount of expenditure incurred by the
employer.

d) While calculating the amount of perquisite in all in above cases, any

amount paid or recovered from the employee in this connection, shall be
deducted.

(vi) Free Transport

The value of any benefit provided by any undertaking engaged in the

carriage of passengers or goods to any employee or to any member of his
household for private journey free of cost or at concessional rate in any
conveyance owned or leased by it shall be taken to be the value at which
such benefit is offered by such undertaking to the public as reduced by the
amount, if any, paid by or recovered from the employee for such benefit. In
case of employees of the Railways and airlines, the value of transport
facility shall be exempt.

Free Motor Car Facility

a) When the car is owned or hired by the Employer:

If it is used wholly and exclusively for official purposes- Value of perquisite
is Nil
 If it is used exclusively for personal purpose by employee or any member
of his household.- Value of perquisite is: Actual expenses paid by the
employer + 10 % of the cost of car

If car is used partly for personal and partly for official purposes and
expenses are borne by the employer, value of perquisite is:

- Rs. 1800 per month for small car upto 1.6 ltrs

Rs 2400 per month for large car whose capacity is more than

1.6 ltrs.

Rs900 per month for driver(if provided)

b) When the car is owned or hired by the Employee

If it is used wholly and exclusively for official purposes-

Value of perquisite is Nil

If it is used exclusively for personal purpose by employee or any member of

his household and the running expenses are met or reimbursed by the
employer then value of perquisites actual expenses paid by the employer
for car

If car is used partly for personal and partly for official purposes and
expenses are borne by the employer, value of perquisite is:

- Rs. 1800 per month for small car is upto 1.6 ltrs
Rs 2400 per month for large car whose capacity is more than 1.6 lts.
Rs 900 per month for driver(if provided)
However, if actual expenses on running and maintenance for official
purposes are more than Rs. 1800 and Rs. 2400 pm then he can
claim such actual amount of expenditure as deduction by maintaining
specified documents.

If the expenses of personal purposes are borne by employee himself then value of
perquisite is Nil

(vii) Valuation of Medical Facilities

Medical facilities provided to employee are exempt from tax.

 Medical benefits within India which are exempt from tax include the following:

a) Medical treatment provided to an employee or any member of his family

in hospital maintained by the employer.

b) Any sum paid by the employer in respect of any expenditure incurred by

the employee on medical treatment of himself and members of his family :

(i) In a hospital maintained by government or local authority or approved by

the government for medical treatment of its employees.

(ii) In respect of the prescribed diseases or ailments in any hospital

approved by the Chief Commissioner.

(iii) Premium paid by the employer on health insurance of the employee

under an approved scheme.

c) Premium on insurance of health of an employee or his family members

paid by employer.

Limited Exemption: If the ordinary medical treatment of the employee or

any member of his family is done at any private hospital, nursing home or
clinic, the exemption is restricted to Rs.15, 000.

Medical Treatment outside India which is exempt from tax includes the
following:

a) Any expenditure incurred by employer on the medical treatment of the

employee or any member of his family outside India.

b) Any expenditure incurred by employer on travel and stay abroad of the

patient (employee or member of his family) and one attendant who
accompanies the patient in connection with such treatment, shall be
exempt to the following extent :

(i) The expenditure on medical treatment and stay abroad shall be exempt
to the extent permitted by the Reserve Bank of India.

(ii) The expenditure on travel shall be exempt in full provided the gross
total income of the employee (including this expenditure) does not exceed
Rs.2,00,000.