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"Salary" is the remuneration received by or accruing periodically to an individual for service rendered as a
result of expressed or implied contract.
Compensation or remuneration even in the following circumstances is chargeable to Income-tax under the
head 'Salaries': -
a) When due from the former employer or present employer in the previous year, whether paid or not.
b) When paid or allowed in the previous year, by or on behalf of a former employer or present employer,
though not due or before it becomes due.
c) When arrears of salary are paid in the previous year by or on behalf of a former employer or present
employer, if not charged to tax in the period to which it relates.
It is, therefore, clear that apart from current years salary, even advance salary and/or arrears of salary may
be taxed in the year of receipt. More specifically and elaborately, the Income-tax Act has stipulated that
salary includes :-
Receipts from Provident Fund chargeable to tax; Profit in lieu of or in addition to salary or wages; Gratuity;
Contribution of employer to Recognized Provident Fund in excess of prescribed limit; Interest on credit
balance of Recognized Provident Fund in excess of notified rates;
No, payment can be taxed under this section unless the relationship of employer and employee exists
between the payer and payee. The employer and employee relationship is the relationship of a master and
servant, and it distinctly differs from that existing between a principal and agent. Primarily, the degree of
control of the employer over the employee would be a deciding factor, as the agent is generally not under
the complete Control and supervision of his principal.
That is why even the emoluments received by an Member if Parliament/ M.L.A. are not taxable under the
head "Salary" because of the absence of employer and employee relationship.
The I.T. Act contemplates tax on salary which is due, whether paid or not, tax is attracted at the latest
possible point of time which is the date when the salary accrues or becomes due. However, where any
salary paid in advance is assessed in the year of payment, it cannot be taxed again when it becomes due.
Similarly, if arrears of salary have been assessed on the 'due' basis in the past, they are not liable to be
taxed again when they are paid.
A 'perquisite' is defined in the Oxford as 'any casual emolument, or profit attached to an office or position
in addition to the salaries or wages'. In sunlit words, perquisites are the benefits in addition to normal salary
to which the employee has a right to by virtue his employment. In simple language, 'perquisites are benefits
or amenities provided in kind by the employer free of cost or at a concessional rate. Their value, to the
extent these go to reduce expenditure that the employee normally would have otherwise incurred in
obtaining these benefits and amenities, is regarded as part of taxable salary. As a golden rule, the taxable
value of perquisites in the hands of the employee, is its cost to the employer.
The value of any benefits other than those mentioned above granted or provided free of cost or at
concession rate are taxable only in the hands of following specified employees:
a. Director employee (even for a single day anytime during the previous year.)
b. Employee having substantial interest in employer company ( preferably 20% or more
beneficial ownership even for a single day anytime during the previous year)
c. Employee drawing salary in excess of Rs. 50000/- ( Income under the head salary by
considering only monetary payments.)
Step 2: Add: 10% per annum of original cost of furniture if furniture is owned by employer;
OR
Actual hire charges, f the furniture is hired or rented by employer.
If the assessee pays any rent for the same to be reduced from total perquisites chargeable to tax.
E) Free or Concessional
Educational Facility
Value of loan to employee or any member of his household shall be at the rates charged by State
Bank of India (SBI) on 1st Day of relevant previous year (i.e. 01.04.2009 for the current previous
year which is 2009-10), in respect of loans for the same purpose advanced by employer, as
reduced by interest actually paid by employee or member of his household.
EXCEPTION: Perquisite value of loans given for medical treatment of specified disease or petty
loans up to Rs. 20000/- is not taxable.
Value of benefit shall be 10% p.a. of actual cost of asset or the rent charges paid by the
employer as reduced by amount paid by the employee.
Value of benefit on transfer of movable assets shall be the actual cost of asset to the employer as
reduced by depreciation expense as per following table:
v. 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.
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.
iii. Allowances from UNO organisation to its employees are fully exempt from tax.
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 (HRA) 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.
If an employee is living in his own house and receiving HRA, it will be fully taxable.
Illustration:
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 2010-11
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
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.
Gratuity is the payment Employees covered under Payment of Gratuity Act, 1972.
made by the employer to
an employee in In case of employees who are covered under Payment of Gratuity Act, the
appreciation of past minimum of the following amounts are exempted from tax:
services rendered by the • Amount of gratuity actually received
employee. It is received • 15 days of salary for every completed years of service or part thereof in
by the employee on his excess of six months.
retirement. Gratuity is (15 / 26 x [basic salary + Dearness Allowance] x No. of years of service+1
exempted upto certain [if fraction > 6 months]).
limit depending upon the • Rs.3, 50,000 (amount specified by government).
category of employee.
For the purpose of Other employees.
exemption, employees In case of employees not falling in the above two categories, gratuity
are divided into 3 received
categories: from the employers is exempt to the extent of minimum of following
amounts:
• Actual amount of gratuity received.
• Half month average salary for every completed year of service
(1/2 x average salary of last 10 months x completed years of service).
• Rs.3, 50,000 (amount specified by government)
Retrenchment Compensation:
1. In cases where the scheme is approved by the Central Government, the entire amount is exempt.
2. In other cases, minimum of the following is exempt:
a. Amount calculated in accordance with S. 25F(b) of the Industrial Disputes Act.
b. Such amount as notified by Government ( Currently it is Rs. 5,00,000/-)
c. Actual amount received
Any amount received or receivable by an employee of a person not being an Individual, H U F or a Firm,
AOP or BOI. At the time of his voluntary retirement or termination or separation under a scheme framed in
accordance with guidelines prescribed by Act:
Provident Fund
Provident Fund Scheme is a welfare scheme for the benefit of employees. Under this scheme, certain
amount is deducted by the employer from the employee’s salary as his contribution to Provident Fund every
month. The employer also contributes certain percentage of the salary of the employee to the Fund. The
contributions are invested outside in securities. The interest earned on it is also credited to the Provident
Fund Account. At the time of retirement, the
accumulated balance is given to the employee.
Tax treatment of provident fund depends upon the type of provident fund being maintained by the employer.
Sr. Particulars Statutory PF Recognized PF Unrecognized PF Public PF
No.
1. Employees Contribution Exempted from tax Exempted upto Exempted from tax Employer does
to PF 12% of salary not contribute
excess of
employer’s
contribution in
included in gross
salary
2. Deduction under Available Available Not Available Available
Section 80C on
employee’s contribution
3. Interest credited to PF Exempted from tax Exemption upto Exempted from tax Exempted from
notified rate tax
(9.50%) per
annum) Excess of
interest included
in gross salary
4. Lump sum payment Exempted from tax Exempted from Lumpsum includes : Exempted from
given to employee on tax (if rendered a) Own Contribution- Tax
retirement Continuous Exempt
service of more b) Interest on own
than 5 years contribution - taxable
as income from other
sources
c)Employer’s
contribution and
interest thereon
taxable so included in
gross salary
Income tax slabs Previous Year 2009-2010 (for Senior Citizens) in India:
Income Tax Slab (in Rs.) Tax
0 to 2,40,000 No Tax
2,40,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%