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Chapter 1: Introduction

What is a Tax?
Let us begin by understanding the meaning of tax. Tax is a fee charged by a government on
product, income or activity. There are two types of taxes direct taxes and indirect taxes. If
tax is levied directly on the income or wealth of a person, then it is a direct tax e.g. income-
tax. If tax is levied on the price of a good or service, then it is called an indirect tax e.g.
excise duty. In the case of indirect taxes, the person paying the tax passes on the incidence to
another person.


Why are Taxes Levied?
The reason for levy of taxes is that they constitute the basic source of revenue to the
government. Revenue so raised is utilized for meeting the expenses of government like
defence, provision of education, health-care, infrastructure facilities like roads, dams etc.







type of
tax
direct
income
tax
wealth tax
indirect
excise
duty
customs
duty
service tax
value
added tax
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Overview of Income-Tax Law in India
Income-tax is the most significant direct tax. We would be introducing the Income-tax law of
India. The income-tax law in India consists of the following components

The various instruments of law containing the law relating to income-tax are explained
below:
Income-tax Act, 1961: The levy of income-tax in India is governed by the Income-
tax Act, 1961. This Act came into force on 1st April, 1962. The Act contains 298 sections
and XIV schedules. These undergo change every year with additions and deletions brought
about by the annual Finance Act passed by Parliament. In pursuance of the power given by
the Income-tax Act, 1961 rules have been framed to facilitate proper administration of the
Income-tax Act, 1961.

The Finance Act: Every year, the Finance Minister of the Government of India
presents the Budget to the Parliament. Part A of the budget speech contains the proposed
policies of the Government in fiscal areas. Part B of the budget speech contains the detailed
tax proposals. In order to implement the above proposals, the Finance Bill is introduced in the
Parliament. Once the Finance Bill is approved by the Parliament and gets the assent of the
President, it becomes the Finance Act.

components
of income tax
law
income tax act
annual finance
act
income tax
rules
legal decisions
of courts
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Income-tax Rules: The administration of direct taxes is looked after by the Central
Board of Direct Taxes (CBDT). The CBDT is empowered to make rules for carrying out the
purposes of the Act. For the proper administration of the Income-tax Act, 1961, the CBDT
frames rules from time to time. These rules are collectively called Income-tax Rules, 1962. It
is important to keep in mind that along with the Income-tax Act, 1961, these rules should also
be studied.

Circulars and Notifications: Circulars are issued by the CBDT from time to time
to deal with certain specific problems and to clarify doubts regarding the scope and meaning
of the provisions. These circulars are issued for the guidance of the officers and/or assessees.
The department is bound by the circulars. While such circulars are not binding the assessees
they can take advantage of beneficial circulars.

Case Laws: The study of case laws is an important and unavoidable part of the study of
income-tax law. It is not possible for Parliament to conceive and provide for all possible
issues that may arise in the implementation of any Act. Hence the judiciary will hear the
disputes between the assessees and the department and give decisions on various issues. The
Supreme Court is the Apex Court of the country and the law laid down by the Supreme Court
is the law of the land. The decisions given by various High Courts will apply in the respective
states in which such High Courts have jurisdiction.

Levy of Income-Tax
Income-tax is a tax levied on the total income of the previous year of every person. A person
includes an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body
of Individuals (BOI), a firm, a company etc.







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Chapter 2: concept of income

Concept of Income
The definition of income as per the Income-tax Act, 1961 begins with the words Income
includes. Therefore, it is an inclusive definition and not an exhaustive one. Such a definition
does not confine the scope of income but leaves room for more inclusions within the ambit of
the term. Certain important principles relating to income are enumerated below -
Income, in general, means a periodic monetary return which accrues or is expected to
accrue regularly from definite sources. However, under the Income-tax Act, 1961,
even certain incomes which do not arise regularly are treated as income for tax
purposes e.g. Winnings from lotteries, crossword puzzles.
Income normally refers to revenue receipts. Capital receipts are generally not
included within the scope of income. However, the Income-tax Act, 1961 has
specifically included certain capital receipts within the definition of income e.g.
Capital gains i.e. gains on sale of a capital asset like land.
Income means net receipts and not gross receipts. Net receipts are arrived at after
deducting the expenditure incurred in connection with earning such receipts. The
expenditure which can be deducted while computing income under each head is
prescribed under the Income-tax Act.
Income is taxable either on due basis or receipt basis. For computing income under
the heads Profits and gains of business or profession and Income from other
sources, the method of accounting regularly employed by the assessee should be
considered, which can be either cash system or mercantile system.
Income earned in a previous year is chargeable to tax in the assessment year.
Previous year is the financial year, ending on 31st March, in which income has
accrued/ received. Assessment year is the financial year (ending on 31st March)
following the previous year. The income of the previous year is assessed during the
assessment year following the previous year. For instance, income of previous year
2013-14 is assessed during 2014-15. Therefore, 2014-15 is the assessment year for
assessment of income of the previous year 2013-14.



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Income [Section 2(24)]
Section 2(24) of the Act gives a statutory definition of income. This definition is inclusive
and not exhaustive. Thus, it gives scope to include more items in the definition of income as
circumstances may warrant. At present, the following items of receipts are included in
income:
1. Profits and gains.
2. Dividends.
3. Voluntary contributions received by a trust/institution created wholly or partly for
charitable or religious purposes or by an association or institution referred to in
section10(21) or section (23C)(iiiad)/(iiiae)/(iv)/(v)/(vi)/(via) or an electoral trust

Research association approved under section 35(1)(ii) 10(21)

Universities and other educational
institutions
10(23C)(iiiad)/ (vi)
Hospitals and other medical institutions 10(23C) (iiiae) / (via)
Notified funds or institutions established for
charitable purposes
10(23C)(iv)
religious purposes or wholly for public
religious and charitable purposes
10(23C)(v)

Electoral trust 13B 13B

4. The value of any perquisite or profit in lieu of salary taxable under section 17.
5. Any special allowance or benefit other than the perquisite included above,
specifically granted to the assessee to meet expenses wholly, necessarily and
exclusively for the performance of the duties of an office or employment of profit.
6. Any allowance granted to the assessee to meet his personal expenses at the place
where the duties of his office or employment of profit are ordinarily performed by
him or at a place where he ordinarily resides or to compensate him for the increased
cost of living.
7. The value of any benefit or perquisite whether convertible into money or not,
obtained from a company either by a director or by a person who has a substantial
interest in the company or by a relative of the director or such person and any sum
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paid by any such company in respect of any obligation which, but for such payment
would have been payable by the director or other person aforesaid.
8. The value of any benefit or perquisite, whether convertible into money or not, which
is obtained by any representative assessee mentioned under section 160(1)(iii) and
(iv), or by any beneficiary or any amount paid by the representative assessee for the
benefit of the beneficiary which the beneficiary would have ordinarily been required
to pay.
9. Deemed profits chargeable to tax under section 41 or section 59.
10. Profits and gains of business or profession chargeable to tax under section 28.
11. Any capital gains chargeable under section 45.
12. The profits and gains of any insurance business carried on by Mutual Insurance
Company or by a cooperative society, computed in accordance with Section 44 or
any surplus taken to be such profits and gains by virtue of the provisions contained in
the first Schedule to the Act.
13. The profits and gains of any business of banking (including providing credit
facilities) carried on by a co-operative society with its members.
14. Any winnings from lotteries, cross-word puzzles, races including horse races, card
games and other games of any sort or from gambling, or betting of any form or nature
whatsoever. For this purpose,
Lottery includes winnings, from prizes awarded to any person by draw of
lots or by chance or in any other manner whatsoever, under any scheme or
arrangement by whatever name called;
Card game and other game of any sort includes any game show, an
entertainment programme on television or electronic mode, in which people
compete to win prizes or any other similar game.
15. Any sum received by the assessee from his employees as contributions to any
provident fund (PF) or superannuation fund or Employees State Insurance Fund (ESI)
or any other fund for the welfare of such employees.
16. Any sum received under a Keyman insurance policy including the sum allocated by
way of bonus on such policy will constitute income. Keyman insurance policy
means a life insurance policy taken by a person on the life of another person where
the latter is or was an employee or is or was connected in any manner whatsoever
with the formers business.
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17. Any sum referred to clause (va) of section 28. Thus, any sum, whether received or
receivable in cash or kind, under an agreement for not carrying out any activity in
relation to any business; or not sharing any know-how, patent, copy right, trade-mark,
licence, franchise, or any other business or commercial right of a similar nature, or
information or technique likely to assist in the manufacture or processing of goods or
provision of services, shall be chargeable to income tax under the head profits and
gains of business or profession.
18. Any sum of money or value of property referred to in section 56(2) (vii) or section
56(2) (viia).
19. Any consideration received for issue of shares as exceeds the fair market value of the
shares referred to in section 56(2)(viib). Students should carefully study the various
items of receipts included in the above definition. Some of them like capital gains are
not revenue receipts. However, since they have been included in the definition, they
are chargeable as income under the Act. The concept of revenue and capital receipts
is discussed hereunder
The Act contemplates a levy of tax on income and not on capital and hence it is very essential
to distinguish between capital and revenue receipts. The distinction between capital and
revenue receipts is somewhat blurred. Even then, capital receipts cannot be taxed, unless they
fall within the scope of the definition of income and so the distinction remains real and
most material for tax purposes. Certain capital receipts which have been specifically included
in the definition of income are Compensation for modification or termination of services,
income by way of capital gains etc.It is not possible to lay down any single test as infallible
or any single criterion as decisive, final and universal in application to determine whether a
particular receipt is capital or revenue in nature. Hence, the capital or revenue nature of the
receipt must be determined with reference to the facts and circumstances of each case.









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Chapter 3: Heads of income: salary


Salary
The meaning of the term salary for purposes of income tax is much wider than what is
normally understood. Every payment made by an employer to his employee for service
rendered would be chargeable to tax as income from salaries. The term salary for the
purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic salary,
bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing
accommodation, medical facility, interest free loans etc).

1. Employer-employee relationship: 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.
Consider the following examples:
(a) Sujatha, an actress, is employed in Chopra Films, where she is paid a monthly
remuneration of Rs 2 lakh. She acts in various films produced by various producers.
The remuneration for acting in such films is directly paid to Chopra Films by the
different producers. In this case, Rs 2 lakh will constitute salary in the hands of
Sujatha, since the relationship of employer and employee exists between Chopra
Films and Sujatha.
heads of income
salaries house property
profits and gains
from business
and profession
capital gains
income from
other sources
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(b) In the above example, if Sujatha acts in various films and gets fees from different
producers, the same income will be chargeable as income from profession since the
relationship of employer and employee does not exist between Sujatha and the film
producers.
(c) Commission received by a Director from a company is salary if the Director is an
employee of the company. If, however, the Director is not an employee of the
company, the said commission cannot be charged as salary but has to be charged
either as income from business or as income from other sources depending upon the
facts.
(d) Salary paid to a partner by a firm is nothing but an appropriation of profits. 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. This is primarily
because the relationship between the firm and its partners is not that of an employer
and employee.

2. Full-time or part-time employment: It does not matter whether the employee is a
fulltime employee or a part-time one. Once the relationship of employer and
employee exists, the income is to be charged under the head salaries. If, for
example, an employee works with more than one employer, salaries received from all
the employers should be clubbed and brought to charge for the relevant previous
years.

3. Foregoing of salary: Once salary accrues, the subsequent waiver by the employee
does not absolve him from liability to income-tax. Such waiver is only an application
and hence, chargeable to tax.
Example: Mr. A, an employee instructs his employer that he is not interested in
receiving the salary for April 2013 and the same might be donated to a charitable
institution. In this case, Mr. A cannot claim that he cannot be charged in respect of the
salary for April 2013. It is only due to his instruction that the donation was made to a
charitable institution by his employer. It is only an application of income. Hence, the
salary for the month of April 2013 will be taxable in the hands of Mr. A. He is
however, entitled to claim a deduction under section 80G for the amount donated to
the institution.
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4. Surrender of salary: However, if an employee surrenders his salary to the Central
Government under section 2 of the Voluntary Surrender of Salaries (Exemption from
Taxation) Act, 1961, the salary so surrendered would be exempt while computing his
taxable income.

5. Salary paid tax-free: This, in other words, means that 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.

Definition of Salary
The term salary has been defined differently for different purposes in the Act. The
definition as to what constitutes salary is very wide. As already discussed earlier, it is an
inclusive definition and includes monetary as well as non-monetary items. There are different
definitions of salary say for calculating exemption in respect of gratuity, house rent
allowance etc.
Salary under section 17(1), includes the following:
Wages,
Any annuity or pension,
Any gratuity,
Any fees, commission, perquisite or profits in lieu of or in addition to any salary or
wages,
Any advance of salary,
Any payment received in respect of any period of leave not availed by him i.e. leave
salary or leave encashment,
The portion of the annual accretion in any previous year to the balance at the credit
of an employee participating in a recognised provident fund to the extent it is taxable
and
transferred balance in recognized provident fund to the extent it is taxable, the
contribution made by the Central Government or any other employer in the previous
year to the account of an employee under a pension scheme referred to in section
80CCD
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Basis of charge
1. Section 15 deals with the basis of charge. Salary is chargeable to tax either on due
basis or on receipt basis, whichever is earlier.
2. However, 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.
3. If the salary paid in arrears has already been assessed on due basis, the same cannot
be taxed again when it is paid.
Examples:
If A draws his salary in advance for the month of April 2014 in the month of March
2014 itself, the same becomes chargeable on receipt basis and is to be assessed as
income of the P.Y.2013-14 i.e., A.Y.2014-15. However, the salary for the A.Y.2015-
16 will not include that of April 2014.
If the salary due for March 2014 is received by A later in the month of April 2014, it
is still chargeable as income of the P.Y.2013-14 i.e. A.Y.2014-15 on due basis.
Obviously, salary for the A.Y.2015-16 will not include that of March 2014.

Place of accrual of salary
Under section 9(1) (ii), 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.
Example: If an employee gets pension paid abroad in respect of services rendered in India,
the same will be deemed to accrue in India. Similarly, leave salary paid abroad in respect of
leave earned in India is deemed to accrue or arise in India. Suppose, for example, A, a citizen
of India is posted in the United States as our Ambassador.
Obviously, he renders his services outside India. He also receives his salary outside India. He
is also a non-resident. The question, therefore, arises whether he can claim exemption in
respect of his salary paid by the Government of India to him outside India. Under general
principles of income tax such salary cannot be charged in his hands. For this purpose,
section9 (1) (iii) provides that salaries payable by the Government to a citizen of India for
services outside India shall be deemed to accrue or arise in India. However, by virtue of
section 10(7), any allowance or perquisites paid or allowed outside India by the Government
to a citizen of India for rendering services outside India will be fully exempt.

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Chapter 4: components of salary
Profits in lieu of salary [Section 17(3)]
It includes the following:
(i) The amount of any compensation due to or received by an assessee from his
employer or former employer at or in connection with the termination of his
employment.
(ii) The amount of any compensation due to or received by an assessee from his
employer or former employer at or in connection with the modification of the
terms and conditions of employment. Usually, such compensation is treated as a
capital receipt. However, by virtue of this provision, the same is treated as a
revenue receipt and is chargeable as salary.
Note: It is to be noted that merely because a payment is made by an employer to a person
who is his employee does not automatically fall within the scope of the above provisions. The
payment must be arising due to master-servant relationship between the payer and the payee.
If it is not on that account, but due to considerations totally unconnected with employment,
such payment is not profit in lieu of salary.

(iii) Any payment due to or received by an assessee from his employer or former
employer from a provident or other fund, to the extent to which it does not consist
of employees contributions or interest on such contributions.
Example: If any sum is paid to an employee from an unrecognised provident fund it is tobe
dealt with as follows:
a. That part of the sum which represents the employers contribution to the fund and
interest thereon is taxable under salaries.
b. that part of the sum which represents employees contribution and interest thereon is
not chargeable to tax since the same have already been taxed under the head salaries
and other sources respectively on an yearly basis.
Note: It does not include exempt payments from superannuation fund, gratuity,commuted
pension, retrenchment compensation, HRA.

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(iv) Any sum received by an assessee under a Keyman Insurance policy including the
sum allocated by way of bonus on such policy.
(v) Any amount, whether in lump sum or otherwise, due to the assessee or received
by him, from any person
a) before joining employment with that person, or
b) after cessation of his employment with that person
(vi) Any other sum received by the employee from the employer.

Advance Salary
Advance salary is taxable when it is received by the employee irrespective of the fact whether
it is due or not. It may so happen that when advance salary is included and charged in a
particular previous year, the rate of tax at which the employee is assessed may be higher than
the normal rate of tax to which he would have been assessed.

Loan or Advance against salary
Loan is different from salary. When an employee takes a loan from his employer, which is
repayable in certain specified instalments, the loan amount cannot be brought to tax as salary
of the employee.
Similarly, 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.

Arrears of salary
Normally speaking, salary arrears must be charged on due basis. However, there are
circumstances when it may not be possible to bring the same to charge on due basis. For
example if the Pay Commission is appointed by the Central Government and it recommends
revision of salaries of employees, the arrears received in that connection will be charged on
receipt basis.




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Annuity
1. As per the definition, annuity is treated as salary. Annuity is a sum payable in respect of a
particular year. It is a yearly grant. If a person invests some money entitling him to series of
equal annual sums, such annual sums are annuities in the hands of the investor.
2. Annuity received by a present employee is to be taxed as salary. It does not matter whether
it is paid in pursuance of a contractual obligation or voluntarily.
3. Annuity received from a past employer is taxable as profit in lieu of salary.
4. Annuity received from person other than an employee is taxable as income from other
sources.

Gratuity
Gratuity is a voluntary payment made by an employer in appreciation of services rendered by
the employee. Now-a-days gratuity has become a normal payment applicable to all
employees. In fact, Payment of Gratuity Act, 1972 is a statutory recognition of the concept of
gratuity. Almost all employers enter into an agreement with employees to pay gratuity.

Pension
Concise Oxford Dictionary defines pension as a periodic payment made especially by
Government or a company or other employers to the employee in consideration of past
service payable after his retirement.

Commuted pension: Commutation means inter-change. Many persons convert their future
right to receive pension into a lump sum amount receivable immediately. For example,
suppose a person is entitled to receive a pension of say Rs 2000 p.m. for the rest of his life.
He may commute th i.e., 25% of this amount and get a lumpsum of say Rs 30,000. After
commutation, his pension will now be the balance 75% of ` 2,000 p.m. = RS 1,500 p.m.







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Leave Salary
As per Service rules every employee is entitled to certain no. of leaves per annum. If an
employee does not utilize all his leaves available to him per annum such unutilized either get
lapsed or get carry forward which can be enchased later. If such carry forward leaves are
liquidated in cash form during the continuity of employment or on retirement, it is known as
leave salary. In Simple words from the above tabloid summary we can conclude that Leave
Salary is chargeable to tax only in two cases first accumulated leave being enchased by any
class of employee- Govt. or Non Govt. during the continuation of employment whereof it is
fully chargeable to tax.

Compensation received on Voluntary Retirement
Any compensation received by an employee of a public sector company or of any other
company or other specified bodies at the time of his voluntary retirement or termination of
his service is exempt upto a maximum limit of Rs 5,00,000. However, such payment should
be in accordance with a scheme of voluntary retirement or in the case of a public sector
company, a scheme of voluntary separation. Such schemes should be in accordance with
prescribed guidelines. These guidelines may include economic viability as one of the criteria.

Provident Fund
Provident fund scheme is a scheme intended to give substantial benefits to an employee at the
time of his retirement. Under this scheme, a specified sum is deducted from the salary of the
employee as his contribution towards the fund. The employer also generally contributes the
same amount out of his pocket, to the fund. The contribution of the employer and the
employee are invested in approved securities. Interest earned thereon is also credited to the
account of the employee. Thus, the credit balance in a provident fund account of an employee
consists of the following:
(i) employees contribution
(ii) interest on employees contribution
(iii) employers contribution
(iv) interest on employers contribution.
The accumulated balance is paid to the employee at the time of his retirement or resignation.
In the case of death of the employee, the same is paid to his legal heirs.
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The provident fund represents an important source of small savings available to the
Government. Hence, the Income-tax Act, 1961 gives certain deductions on savings in a
provident fund account.
There are four types of provident funds:
(i) Statutory Provident Fund (SPF)
(ii) Recognised Provident Fund (RPF) (iii) Unrecognised Provident Fund (URPF)
(iv) Public Provident Fund (PPF)

Approved Superannuation Fund
It means a superannuation fund which has been and continues to be approved by the
Commissioner in accordance with the rules contained in Part B of the VIth Schedule to the
Income-tax Act, 1961.
The tax treatment of contribution and exemption of payment from tax are as follows:
(i) Employers contribution is exempt from tax in the hands of employee (upto Rs 1,
00,000per employee per annum). Only such contribution exceeding Rs 1, 00,000 is taxable in
the hands of the respective employee;
(ii) Employees contribution qualifies for deduction under section 80C;
(iii) Interest on accumulated balance is exempt from tax.
Section 10(13) grants exemption in respect of payment from the fund
(a) to the legal heirs on the death of beneficiary (e.g. payment to widow of the beneficiary) or
(b) to an employee in lieu of or in commutation of an annuity on his retirement at or after the
specified age or on his becoming incapacitated prior to such retirement, or
(c) by way of refund of contribution on the death of the beneficiary or,
(d) by way of refund of contribution to an employee on his leaving the service in connection
with which the fund is established otherwise than in the circumstances mentioned in (b),to the
extent to which such payment does not exceed the contribution made prior to April1, 1962.
For example, where the amount received by an employee does not include any contribution
made prior to 1.4.1962, the whole amount is taxable.





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Salary from United Nations Organisation
Section 2 of the United Nations (Privileges and Immunities) Act, 1947 grants exemption from
income-tax to salaries and emoluments paid by the United Nations to its officials. Besides
salary, any pension covered under the United Nations (Privileges and Immunities) Act and
received from UNO is also exempt from tax.

Allowances
Different types of allowances are given to employees by their employers. Generally
allowances are given to employees to meet some particular requirements like house rent,
expenses on uniform, conveyance etc. Under the Income-tax Act, 1961, allowance is taxable
on due or receipt basis, whichever is earlier. Various types of allowances normally in vogue
are discussed below:

allowances
Fully taxable Partly taxable Fully exempt
(i) Entertainment Allowance
(ii) Dearness Allowance
(iii) Overtime Allowance
(iv) Fixed Medical Allowance
(v) City Compensatory
Allowance
(vi) Interim Allowance (to
meet increased cost of
living in cities)
(vii) Servant Allowance
(viii) Project Allowance
(ix) Tiffin/Lunch/Dinner
Allowance
(x) Any other cash allowance
(xi) Warden Allowance
(xii) Non-practicing Allowance
(i) House Rent
Allowance [u/s
10(13A)]
(ii) Special
Allowances [u/s
10(14)]
(i) Allowance granted to
Government employees outside
India.
(ii) Sumptuary allowance
granted to High Court or
Supreme Court Judges
(iii) Allowance paid by the
United Nations
Organization.
(iv) Compensatory
Allowance received by a
judge


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Perquisites
(1) The term perquisite indicates some extra benefit in addition to the amount that may be
legally due by way of contract for services rendered. In modern times, the salary package of
an employee normally includes monetary salary and perquisite like housing, car etc.
(2) Perquisite may be provided in cash or in kind.
(3) Reimbursement of expenses incurred in the official discharge of duties is not a perquisite.
(4) Perquisite may arise in the course of employment or in the course of profession. If it
arises from a relationship of employer-employee, then the value of the perquisite is taxable as
salary. However, if it arises during the course of profession, the value of such perquisite is
chargeable as profits and gains of business or profession.
(5) Perquisite will become taxable only if it has a legal origin. An unauthorised advantage
taken by an employee without his employers sanction cannot be considered as a perquisite
under the Act.
For example, suppose A, an employee, is given a house by his employer. On 31.3.2013, he is
terminated from service. But he continues to occupy the house without the permission of the
employer for six more months after which he is evicted by the employer. The question arises
whether the value of the benefit enjoyed by him during the six months period can be
considered as a perquisite and be charged to salary. It cannot be done since the relationship of
employer-employee ceased to exist after 31.3.2013. However, the definition of income is
wide enough to bring the value of the benefit enjoyed by employee to tax as income from
other sources.
(6) Income-tax paid by the employer out of his pocket on the salary of the employee is
perquisite in the hands of the employee whether the payment is contractual or voluntary.


Taxable salary: basis of charge
19 | P a g e

Chapter 5: findings and conclusion
Following findings were evaluated from the project after working on the most important part
of the income i.e. salary which constitutes the highest amount of tax each year. Salary as a
whole includes various components included within it which are described and mentioned
throughout. The aim of the project being working on taxable salary and its basis of charge the
various numbers of components were analysed as well as studied to find out their
chargeability under the head salaries. The various components and its basis of charge is
mentioned in the table below and its chargeability to tax on due or receipt basis.
Component of salary Chargeability
Profit in lieu of salary
On termination of former or current
employee
On modification in terms of
employment
From a person before joining his
employment or after cessation from
his employment
Any sum from employer


Due or received whichever is earlier

Due or received whichever is earlier


Due or received whichever is earlier

Only when Received
Advance salary Only when received
Arrears of salary Basically due basis
Only when not possible received basis
Annuity Due or received whichever is earlier
Gratuity Due or received whichever is earlier
Pension Due or received whichever is earlier
Leave salary (leave encashment) Only receipt basis
Voluntary retirement compensation Due or received whichever is earlier
Provident fund Due or received whichever is earlier
Super annuation compensation Due or received whichever is earlier
Salary from united nations (un) Exempt
Allowances Due or received whichever is earlier
Perquisites Due or received whichever is earlier

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