Income From

Salary
The provisions pertaining to Income under the head “Salaries” are
contained in section 15, 16 and 17
 SEC 15 CHARGING SECTION- SOME IMPORTANT POINTS
• BEFORE AN INCOME CAN BECOME CHARGEABLE UNDER THE HEAD ‘SALARIES’, IT IS VITAL
THAT THERE SHOULD EXIST BETWEEN THE PAYER AND THE PAYEE, THE RELATIONSHIP OF AN
EMPLOYER AND AN EMPLOYEE
• ANY SALARY, BONUS, COMMISSION OR REMUNERATION BY WHATEVER NAME CALLED DUE TO
OR RECEIVED BY PARTNER OF A FIRM SHALL NOT BE REGARDED AS SALARY. THE SAME IS TO
BE CHARGED AS INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION AS THE
RELATIONSHIP BETWEEN THE FIRM AND ITS PARTNERS IS NOT THAT OF AN EMPLOYER AND
EMPLOYEE.
• REMUNERATION RECEIVED BY A MEMBER OF PARLIAMENT/STATE LEGISLATURE IS NOT
TAXABLE UNDER THE HEAD ‘SALARIES’ AS SUCH PERSON IS NOT A GOVERNMENT EMPLOYEE.
SUCH INCOME WOULD BE TAXABLE AS ‘INCOME FROM OTHER SOURCES’.
• SALARY IS CHARGEABLE TO TAX EITHER ON ‘DUE’ BASIS OR ON ‘RECEIPT’ BASIS,
WHICHEVER IS EARLIER.
• WHERE ANY SALARY, PAID IN ADVANCE, IS ASSESSED IN THE YEAR OF PAYMENT, IT CANNOT
BE SUBSEQUENTLY BROUGHT TO TAX IN THE YEAR IN WHICH IT BECOMES DUE
 If the salary paid in arrears has already been assessed on due basis, the same
cannot be taxed again when it is paid.
 Once the relationship of employer and employee exist, It does not matter whether
the employee is a full-time employee or a part-time one.
 If someone forgoes his salary still it is taxable as it is application of salary
 if an employee surrenders his salary, in the public interest, to the Central
Government, the salary so surrendered would be exempt
 Amount received before joining Job or at the time of leaving job, is always
taxable under the head salaries.
 If the employer bears the burden of the tax on the salary of the employee. In such a
case, the income from salaries in the hands of the employee will consist of his
salary income and also the tax on this salary paid by the employer.
 Any deductions made by the employer from salary like PF deduction, tax-deduction
at source, etc. shall also be included in “Salaries”.
 Salary earned in India is deemed to accrue or arise in India even if it is
paid outside India or it is paid or payable after the contract of employment
in India comes to an end.
 Leave salary paid abroad in respect of leave earned in India is deemed to
accrue or arise in India.
 Salaries payable by the Government to a citizen of India for services
outside India shall be deemed to accrue or arise in India.
 Advance salary is taxable when it is received by the employee irrespective
of the fact whether it is due or not.
 Advance against salary is different from advance salary. It is an advance
taken by the employee from his employer. This advance is generally
adjusted with his salary over a specified time period. It cannot be taxed as
salary.
SALARY 17(1)
 ALLOWANCES AND TAX IMPLICATIONS

• ALLOWANCES ARE MONETARY

PAYMENTS MADE BY THE EMPLOYER
TO THE EMPLOYEES FOR MEETING
SPECIFIC EXPENDITURE, WHETHER
PERSONAL OR FOR THE PERFORMANCE
OF DUTIES.
• ALLOWANCES RECEIVED BY
EMPLOYEES ARE EITHER FULLY
TAXABLE, PARTIALLY TAXABLE OR
FULLY EXEMPT.
 Fully Taxable Allowances

a) Dearness Allowance: It is some extra money given to employee as a percentage of his basic
salary to minimize the impact of inflation.
b) City Compensatory Allowance: It is given to meet the increased cost of living in cities.
c) Medical Allowance: It is a fixed allowance paid to the employees to meet the medical
expenses, whether the employee has incurred any medical expenses or not.
d) Tiffin/Lunch/Dinner Allowance: It is given to meet the refreshment expenses of lunch, dinner,
etc.
e) Servant Allowance: It is given to engage the services of a servant.
f) Project Allowance: It is paid to the employees who are engaged in a specific project to
compensate for the expenses incurred due to their engagement in the project.
g) Interim Allowance: It is paid in lieu of the final allowance i.e. if there is unavoidable delay in
salary revision
h) Non-practicing Allowance: It is given to the Doctors who are working under central
government health centers, railways or in other departments of union/state government.
i) Family Allowance: It is given to an employee whose spouse has passed away and s/he has
dependent children.
j) Overtime Allowance: It is given to employees for working more than specified hours.
k) Warden Allowance: It is given to the employees working as Wardens in a hostel.
l) Transport Allowance: It is given to cover the expenses of travelling from home to work and
back.
 Partially Taxable Allowances

Two Types

Allowances which are exempt to the extent of Allowances which are exempt to the extent
expenditure mentioned in Law
Allowances which are exempt to the extent of expenditure

a)Travelling Allowance: It is given to cover the cost of travel or

tour for official purpose or on transfer (including packing and
transportation)
b)Conveyance Allowance: It is given to employees to meet the
expenditure on conveyance while performing official duties if
free conveyance is not provided by the employer.
c)Uniform Allowance: It is given to meet the expenditure on
purchase and maintenance of uniform.
d)Research Allowance: It is given for encouraging the
academic, research and training pursuits in educational and
research institutions.
e)Helper Allowance: It is given to the employees to keep a
helper which would help them in performing official duties.
f) Daily Allowance: Spent for Official Purpose
 ALLOWANCES EXEMPT TO THE EXTENT MENTIONED IN LAW

Allowances Amount Exempt

Any Special Compensatory Allowance in the nature of ₹ 800 per month on specified parts of
Special Compensatory (Hilly Areas) Allowance or High Manipur,Arunachal PradeshSikkim,U.P,
Altitude Allowance or Uncongenial Climate Allowance Himachal Pradesh ,J&K
or Snow Bound Area Allowance or Avalanche ₹7,000 per month in Siachen area of Jammu
Allowance and Kashmir
₹300 per month all other places located above
1000 metres or more
Any Special Compensatory Allowance in the nature of ₹1,300 or ₹1,100 or ₹1,050 or ₹750 or ₹300 or
border area allowance or remote locality allowance or ₹200 per month depending upon the specified
difficult area allowance or disturbed area allowance
locations(refer text)

Special Compensatory (Tribal Areas/Schedule ₹200 per month

Areas/Agency Areas) Allowance [Specified States
Compensatory Field Area Allowance [Specified areas ₹2,600 per month
in
Specified States]
Compensatory Modified Field Area Allowance ₹1,000 per month
[Specified
areas in Specified States]
Any special allowance in the nature of counter ₹3,900 per month
 Allowances Amount Exempt
Underground Allowance granted to an employee who is ₹800 per month
working in uncongenial, unnatural climate in underground
mines.
Any special allowance in the nature of High-Altitude
allowance granted to the member of the armed forces
operating in high altitude areas ₹1,060 per month
• For altitude of 9,000 to 15,000 feet ₹1,600 per month
• above 15,000 feet

Any special allowance in the nature ofspecial

compensatory highly active field area allowance granted to ₹4,200 per month
the member of the armed forces
Any special allowance in the nature of Island (duty) ₹3,250 per month
allowance granted to the member of the armed forces in
Andaman & Nicobar and Lakshadweep Group of Islands
 Some Important Limits

Allowances Amount Exempt

Any allowance granted to an employee working 70% of such allowance upto a

in any transport system to meet his personal maximum of ₹10,000 per month
expenditure during his duty performed in the
course of running such transport from one place
to another, provided that such employee is not in
receipt of daily allowance
₹100 per month per child upto a
Children Education Allowance maximum of two children
Any allowance granted to an employee to meet ₹300 per month per child upto a
the hostel expenditure on his child maximum of two children

Any transport allowance granted to an employee ₹3,200 per month

who is blind or deaf and dumb or orthopedically
handicapped with disability of the lower
extremities of the body, to meet his expenditure
for commuting between his residence and
place of duty
Question -1
Mr. Srikant has two sons. He is in receipt of children education allowance of ₹150 p.m. for his elder
son and ₹70 p.m. for his younger son. Both his sons are going to school. He also receives transport
allowances - 1,800 p.m
Compute his taxable allowances?Slide 15

Question -2
Examine with brief reasons, whether the following is chargeable to income-tax and the amount liable
to tax with reference to the provisions of the Income-Tax Act, 1961: Allowance received by an
employee Mr. Ram working in a transport system at ₹12,000 p.m. which has been granted to meet
his personal expenditure while on duty. He is not in receipt of any daily allowance from his employer.
Question -1
Computation of Taxable Allowances in the hands of Srikant for A.Y. 20XX-20XX
Particulars ₹
Children Education Allowance
Elder Son [(₹150 – ₹100) × 12] 600
Younger Son [(₹70 – ₹70) × 12] ---- 600
Transport Allowance (₹1,800 × 12) 21,600
Taxable Allowances 22,200

Question -2
Any allowance granted to an employee working in a transport system to meet his personal expenditure
during his duty is exempt provided he is not in receipt of daily allowance. The exemption is 70% of such
allowance, or ₹10,000, whichever is less
70% of Allowance = 70% × ₹12,000 = ₹8,400
Therefore, ₹8,400 shall be exempt, being less than ₹10,000.
Hence, taxable allowance = ₹12,000 – ₹8,400 = ₹3,600 p.m.
Total Taxable Allowance = ₹3,600 × 12 = ₹43,200
Dearness Allowance

Dearness Allowance is some extra money given to employee as a percentage of his

basic salary to minimize the impact of inflation.
There are two types of DAs:
• DA (in Terms)
• DA (Not in Terms)
DA (in terms) means that part of DA, that will be considered for calculating his
retirement benefits, i.e., Pension, Gratuity, etc.
DA (not in terms) means DA doesn’t form part of the retirement benefits.
Sometimes, when the question says “DA does not form part of the basic salary”, it
means it is DA (not in terms).
 House Rent Allowance Sec 10 (13 A)
House Rent allowance is granted to the employees to pay rent of their homes.
The extent of exemption is least of the following:

HRA Actually Received

Rent Paid – 10% of “Salary”

40%/50% of “Salary”
Notes:
1. “Salary” means Basic Salary + DA (in Terms) + Commission on Turnover
2. If the employee works in metro cities (Delhi, Kolkata, Mumbai, Chennai), then 50%
of Salary is to be considered for point (c) above.
3. Relevant Period means the duration for which the house was occupied by the
assessee during the previous year.
4. Exemption is not available to an assessee who lives in his own house, or in a
house for which he has not incurred the expenditure of rent.
Question -3
 Computation of Taxable HRA of Mr. Raj Kumar for A.Y. 2024-25

Particulars ₹

HRA Received (₹15,000 × 12) 1,80,000

Less: Exemption u/s 10(13A)

Least of the following:

(i) Actual Received 1,80,000

(ii) [Rent Paid – 10% of Salary] [(₹16,000 × 12) – (10% × ₹5,52,000)] 1,36,800

(iii) 40% of Salary (40% × ₹5,52,000) 2,20,800 1,36,800

Taxable HRA 43,200

 FULLY EXEMPT ALLOWANCE

1) Allowance to Supreme Court/High Court Judges: Any allowance paid to a Judge of a

High Court and Supreme Court is not taxable.
2) Allowance received from United Nations Organisation (UNO): Allowance paid by the
UNO to its employees is not taxable.
3) Compensatory allowance under Article 222(2) of the Constitution: Compensatory
allowance received by judge under Article 222(2) of the Constitution is not taxable
since it is neither salary not perquisite.
4) Sumptuary allowance: Sumptuary allowance given to High Court Judges and Supreme
Court Judges is not chargeable to tax.
5) Allowances payable outside India [Section 10(7)]: Allowances or perquisites paid or
allowed as such outside India by the Government to a citizen of India for services
rendered outside India are exempt from tax.