INCOME FROM SALARY

Meaning of salary: As per Indian Income Tax Act Salary includes:-

• Wages
• Annuity or pension
• Any gratuity over and above the exemption limit
• Any fees
• Commission
• Any advance salary
• Amount contributed by the employer towards the recognized provident fund in
excess of 12% of salary
• Interest on balance in RPF in excess of specified limit.
• Value of any perquisites
• Any benefits given to the employee by the employer
• Any amount of profit in lieu of salary
• Arrears of salary received in current year but not taxed in earlier years.
• Leave encashment etc.

Explanations:

Leave salary: If received during employment, is taxable. Salary received on

retirement, is taxable subject to certain conditions.

Salary in lieu of notice period: is taxable in the year, it is received.

Pension: Pension is an annuity received by an employee after his retirement.

Periodical pension is fully taxable. Commuted pension is exempt subject to
certain conditions.

Pension received by a widow: (generally called family pension) falls under the
head ‘Income from other sources’.

Profit in lieu of salary:

1. Any compensation due to or received by an employee from his employer or
former employer at or in connection with the termination of his employment or
modification of the terms and conditions relating thereto.

2. Any Payment (Other than Receipts exempt from tax) under section 10, due to
or received by employee from his employer or former employer or from a
provident fund or other fund to the extent it does not consist of contributions by
the assessee or interest on such contributions or any sum/bonus received
under a Keyman Insurance Policy.

3. Any amount whether in lump-sum or otherwise, due to or received by an

assessee from his employer, either before his joining or after leaving the
employment.

Tax on Salary borne by employer:

When the salary is paid ‘tax free’, that is, the tax due on the salary is paid in
to government account by the employer, the employee has to return in his total
income the gross salary i.e. the aggregate of the net salary received plus the
amount of tax paid on his behalf by the employer. It does not make any
difference whether the tax is borne by the employer voluntarily or under a
contractual obligation.

RECEIPT IN THE NATURE OF EXEMPT FROM INCOME TAX

There are few receipts under head of salary income which are exempt subject
to certain conditions. Those terms and conditions are not explained here in
details because the purpose of writing this term is only to give brief and basic
idea of income tax act for learners. Following are few receipts which are
exempt from income tax:-

1. Leave Travel Concession

2. Gratuity
3. Commuted pension
4. Leave encashment
5. Retrenchment compensation
6. Payment on Voluntary retirement
7. Traveling allowance on tour or on transfer, including any sum paid for packing
and transportation of personal effects on transfer.
8. Daily allowance or tour or for the period of journey on transfer.
9. Conveyance Allowance – Rs.1600/= per month.
10. Transport allowance @ Rs.3200/= per month granted to an employee, who is
blind or orthopaedically handicapped with disability of lower extremities to meet
his expenditure for the purpose of commuting between the place of his
residence and the place of duty.
11. Any allowance granted to meet the expenditure incurred on a helper where
such helper is engaged for the performance of official duties.
12. Any allowance granted for encouraging the academic research and training
pursuits, in educational and research institution.
13. Uniform allowance.
14. Children education allowance Rs.100/= per month maximum for 2 children.
15. Any allowance to meet the expenditure on hostel on his child Rs. 300/= per
month, maximum for 2 children.
16. Gratuitous payment to widow/legal heirs if the employee who dies while in
service.
17. Any income by way of pension received by Government employees or family
pension received by any member of family, who has been awarded Param Vir
Chakra/Maha Vir Chakra/Vir Chakra/other notified gallantry award.
18. Any allowance in lieu of rent free accommodation paid to High Court Judges or
Supreme Court Judges.
19. House Rent Allowance (HRA) exemption (u/s10) is entitled least of the
following :-

• Actual HRA received, or

• Rent paid in excess of one-tenth of salary or
• 50% of salary if the accommodation is situated at Delhi, Mumbai, Kolkata, or
Chennai or
• 40% of salary if the accommodation is situated at any other place.

Note: HRA will not be exempt if the residential accommodation is occupied by

the assessee, is owned by him or the assessee has not actually spent any
expenses on account of rent.

The employee who is receiving the HRA up to a certain limit, is not required to
produce the rent receipts. However, at the time of regular assessment, the
employee has to produce the rent receipt.

For this purpose of calculation of exemption of HRA, Salary includes Dearness

Allowance if the terms & conditions of employment so provide i.e. where
Dearness Allowance is taken into account while calculating Provident Fund &
Allowance etc.

Note: Conveyance allowance is not exempted from tax for financial year
2018-19 (assessment year 2019-20)

PERQUISITES: Perquisites are a gain or profit incidentally made from

employment in addition to regular salary.

TAXABLE PERQUISTES: Following are few perquisites which are taxable

under head ‘salary income’:-

1. Value of rent free accommodation.

2. Value of any accommodation provided by employer at concessional rent.
3. Any sum paid by the employer in respect any obligation which but for such
payment, would have been payable by the assessee.
4. Value of any other benefits or amenity as may be prescribed, such as free
meals, club facility, credit card, gift, interest free or concessional loans, etc.
 PERQUISITES NOT TAXABLE: There are certain perquisites which are not
taxable and not added in ‘salary income’. Following are such perquisites which
are exempt from income tax:-

• Value of medical treatment provided to an employee or his family member in a

hospital maintained by his employer.
• Reimbursement of expenditure incurred on medical treatment of an employee or
his family member in a Government approved hospital (like CHS or CGHS)
• Reimbursement of expenditure incurred by the employee in a hospital
approved by the Chief Commissioner in connection with the medical treatment
of the employee or any member of his family. This concession will be
admissible for treatment of prescribed diseases or ailments. The employee is
required to attach with his return of income:-

• A certificate from hospital of disease.

• A receipt of amount paid to hospital

• Medical insurance premium paid by the employer for the health of the
employee or his family member under a scheme approved by the Central
Government.
• Reimbursement of expenditure incurred on medical treatment of an employee or
his family member up to Rs.15000/=.

Note: Family for this purposes means: The spouse, children of employee and
the parents, brother & sisters, wholly or mainly dependent on individual.

• Free meal of value up to Rs.50/= per meal provided by the employer during
office hours at business premises
• Gift or Gift Voucher up to a certain specified limit in a year. If the value of Gift
Voucher is more than that specified limit then whole amount shall be taxable.
The specified limit for this purpose for financial year 2016-17 is Rs.5000/=.
• Tea or snacks provided during office hours.
• Free meals during working hours provided in a remote area or a offshore
installation.

Note: Reimbursement of medical expenses is not exempted from tax for

financial year 2018-19 (assessment year 2019-20)

Difference Between Allowances and Perquisites::- From the point of view of

employer, both are the expenses, incurred by employer for employees. But in
case of allowances, these are received by the employee in cash to meet some
specific expenses on regular basis whether these expenses are incurred or no
by the employee.In case of perquisites, the expenses are incurred by the
employer on behalf of employee.

PERMISSIBLE DEDUCTIONS FROM SALARY INCOME

1. With effect from financial year 2018-19 (assessment year 2019-20), a standard
deduction of Rs.40000/= or the aamount of salary, whichever is less, shall be
allowed under section 16(ia).
2. Professional Tax
3. Interest on home loan taken.
4. Deduction under chapter VI-A of Indian Income Tax Act. Certain payments
made by employees are permitted as deduction from salary income subject to
certain terms and conditions. For example:-

• Life Insurance Premium

• LIC Pension Plan (Jeevan Suraksha).
• Contribution of Notified Pension Scheme.
• Deposit in Public Provident Fund Account.
• Repayment of housing loan. (Principal amount only)
• Donation for charitable purposes subject to certain terms and conditions.
• Medical Insurance Premium for self up to Rs.25000/= (Rupees 30000/= in case
he/she is senior citizen. With effect from financial year 2018-19 the Medical
insurance premium for senior citizen is increased to Rs.50000/=.
• Additional deduction for medical insurance premium will be allowed for parent(s)
for Rs.25000/= (Rs.30000/= if the insured person is senior citizen).With effect
from financial year 2018-19 the Medical insurance premium for senior citizen
is increased to Rs.50000/=.
• Expenses incurred on Preventive Health check up is allowed up to Rs.5000/=.
This amount can be paid in cash also. Same rules for preventive health check
up applies for parents also. Please note that the amount spent on preventive
health check up will be included in amount on medical insurance premium.
Total of preventive health check up expenses and medical insurance premium
must not exceed the permissible limit under section 80D.
• With effect from 01.04.15, any expenses incurred for medical treatment of any
parent or parents, who is very senior citizen and not covered under medical
insurance, is allowed up to Rs.30000/=. Very senior citizen means the person
who has completed 80 years in the relevant financial year.
• Interest on loan taken for higher education from any financial institution.
• Tution fees of the children
• Donation for charitable purpose subject to certain terms and conditions.
• Expenditure on rent if the employee is not in receipt of house rent allowance.
• Installment paid for home loan taken.
• Contribution to Public Provident Fund.
• Investment in Infrastructure bonds.
• Fix deposit with banks for five years under tax saving scheme.
• Investment in National Saving Certificate etc.

Illustration:-

Mr. X was the employee of M/s XYZ during financial year 2016-17. He
received the following amounts from his employer:-

1. Basic Salary Rs700000/=

2. Conveyance Allowance Rs.60000/=

 3. House Rent Allowance Rs.240000/=

Mr. X spent the following amounts against salary income:-

1. Rent paid Rs.300000/=

2. Medical Insurance Premium for self Rs.8000/=
3. Expenses incurred in respect of preventive health check up of his wife
Rs.4000/=
4. Deposit in Public Provident Fund Account Rs.100000/=

Other Information:-

• Mr. X does not own any residential accommodation.

• His Employer Had deducted Employee’s Contribution for Provident fund
Rs.60000/=
• Mr. X lives in Delhi and he is 46 years old..

Compute his income from salary for financial year 2017-18.

Solution:

INCOME FROM SALARY

700000
Basic Salary
60000
Conveyance Allowance
Less: Allowed as deduction @ Rs.800/=
19200 40800
p.m.
240000
House Rent Allowance
230000 10000
Less: Allowed as deduction
(see notes)
750800
Gross Total Income
Less: Deductions under Chapter VI-A
 60000
Contribution to P.F. (u/s 80-C)
100000
Deposit in PPF (u/s 80-C)
Total 160000

150000
Gross deduction allowed u/s 80-C)
Preventive health check Expenses of
his wife(u/s 80-D) 4000
12000 162000
Medical Insurance premium (u/c 80-D) 8000
588800
Net Taxable Salary Income

Working Notes:

1. Maximum Deduction Allowed u/s 80-C is Rs.150000/=

2. Maximum deduction allowed u/s 80-D Rs.25000/=

3. Conveyance Allowance granted to an employee u/s 10, to meet his/her

expenditure for the purpose of commuting between the place of his/her
residence and the place of his/her duty is allowed maximum Rupees 1600/=
per month..

4. HRA:- (u/s 10)

Deduction against HRA u/s 10 will be

allowed least of the followings:
240000
HRA RECEIVED
350000
50% of Basic Salary
300000
RENT PAID
Rent paid Rs.300000 minus 10% of
230000
basic salary Rs. 700000
Rupees 230000/= is the lowest amount among above figures. Therefore,
Rupees 230000/= will be allowed as deduction against HRA received.

Illustration:-

Mr. X had the following income during financial year 2016-17:-.

Calculate the tax liability of Mr.X.

PARTICULARS AMOUNT
(IN
RUPEES)

SALARY FROM M/S XYZ LIMITED 2000000

INTEREST ON FDR FROM CITI BANK 60000
INTEREST FROM FDR – HDFC BANK 5000
INTEREST FROM PERSONAL LOAN 3000
INTEREST ON PPF ACCOUNT 30000
DIVIDEND RECD FROM MUTUAL FUNDS 20000

HIS EMPLOYER DEDUCTED HIS CONTRIBUTION TO

70000
P.F.
HE DEPOSITED IN PUBLIC PROVIDENT FUND
80000
ACCOUNT
HE MADE THE REPAYMENT OF HOUSE LOAN 300000
HE PAID INTEREST ON LOAN FOR RESIDENTIAL
110000
HOUSE PROPERTY

HIS EMPLOYER DEDUCTED TDS ON SALARY 420000

TDS DEDUCTED BY BANK ON INTEREST ON FDR 6000

Solution:-

NAME MR. X
STATUS INDIVIDUAL
ASS. YEAR 2017-18
PAN AAAAS1111K
DATE OF BIRTH 12.12.1980
COMPUTATION OF INCOME

INCOME FROM SALARY

SALARY RECEIVED (AS PER FORM – 16) –
2000000
XYZ LTD.

INCOME FROM HOUSE PROPERTY

INTEREST ON LOAN FOR RESIDENTIAL
-110000
HOUSE PROPERTY

INCOME FROM OTHER SOURCES

INTEREST ON FDR – CITI BANK 60000
INTEREST FROM FDR – HDFC BANK 5000
INTEREST FROM PERSONAL LOAN 3000
INTEREST ON PPF (EXEMPT) 30000/= 0
DIVIDEND RECD (EXEMPT) 20000/= 0 68000

1958000
GROSS TOTAL INCOME

LESS : DEDUCTIONS (CHAPTER VI-A)

SEC-80-C
CONTRIBUTION TO P.F. 70000
PPF 80000
REPAYMENT OF HOUSE LOAN 300000
GROSS DEDUCTIONS 450000

DEDUCTIONS RESTRICTED TO 150000

NET TAXABLE INCOME 1808000

TAX ON ABOVE 367400
ADD: EC + S&HEC @ 3% 11022
TOTAL TAX PAYABLE 378422

LESS: TAX PAID

TDS ON SALARY 420000
TDS ON INTREST ON FDR 6000 426000

NET REFUND DUE 47578

CALCULATION OF INCOME TAX

TAX
PARTICULARS INCOME TAX
RATE
UP TO 250000 250000 0 0
FROM 250001 TO 500000 250000 10% 25000
FROM 500001 TO 1000000 500000 20% 100000
1000001 ONWARDS 808000 30% 242400
TOTAL 1808000 367400

Example:

Calculation of salary in respect of financial year 2017-18 and financial year

2017-18 as follows:-

PARTICULARS F.Y. F.Y.

2018-
2017-18
19
BASIC SALARY 700000 700000
CONVEYANCE ALLOWANCE 0 19200
REIMBURSEMENT OF
0 15000
MEDICAL EXP.
GROSS INCOME FROM
700000 734200
SALARY
 LESS: STANDARD DEDUCTION 0 40000
AMOUNT DEPOSITED IN PPF
50000 50000
ACCOUNT
NET TAXABLE INCOME 650000 644200
TAX ON ABOVE 42500 41340
EDUCATION CESS @ 2% 850 0
S & HEC @1% 425 0
HEALTH & EDUCATION CESS
0 1654
@ 4%
TOTAL TAX PAYABLE 43775 42994

Note:-

• Conveyance allowance and reimbursement of medical expenses have been

finished in financial year 2018-19.
• Education cess ad S & HEC is also removed in financial year 2018-19
• Health Education cess is being introduced @ 4% on income tax and surcharge.
• Standard deduction of Rs.40000/= is being allowed in financial year 2018-19
irrespective of amount of salary. But if the amount of salary is less than
Rs.40000/= then the amount of standard deduction will be the actual amount of
salary.
 INCOME FROM HOUSE PROPERTY

The annual value of a property, consisting of any buildings or lands appurtenant thereto, of which the
assessee is the owner, is chargeable to tax under the head ‘Income from house property’. However, if a
house property, or any portion thereof, is occupied by the assessee, for the purpose of any business or
profession, carried on by him, the profits of which are chargeable to income-tax, the value of such
property is not chargeable to tax under this head. Thus, three conditions are to be satisfied for property
income to be taxable under this head:

1. The property should consist of buildings or lands appurtenant thereto.

2. The assessee should be the owner of the property.

3. The property should not be used by the owner for the purpose of any business or profession carried
on by him, the profits of which are chargeable to income-tax.

Ownership of house property It is only the owner (or deemed owner) of house property who is liable to
tax on income under this head. Owner may be an individual, firm, company, co-operative society or
association of persons. The property may be let out to a third party either for residential purposes or for
business purposes. Annual value of property is assessed to tax in the hands of the owner even if he is
not in receipt of the income. For tax purposes, the assessee is required to be the owner in the previous
year only.

Owner: An Individual shall be considered as owner of a property when the document of title to the
property is registered in his name.

Deemed Owner [Section 27] under the following circumstances, Income from House Property is taxable
in the hands of the Individual, even if the property is not registered in his name —

(a) Where the Property has been transferred to spouse for inadequate consideration other than in
pursuance of an agreement to live apart.

(b) Where the Property is transferred to a minor child for inadequate consideration (except a transfer to
minor married daughter)

(c) Where the Individual holds an impartible estate.

(d) Where the Individual is a member of Co-operative Society, Company, or other Association and has
been allotted a house property by virtue of his being a member, even though the property is registered
in the name of the Society / Company / Association.

(e) Where the property has been transferred to the individual’s name as part-performance of a contract
u/s 53A of the Transfer of Property Act, 1882. (i.e. Possession of the Property has been transferred to
Individual, but the Title Deeds have not yet been transferred).
(f) Where the Individual is a holder of a Power of Attorney enabling the right of possession or enjoyment
of the property.

(g) Where the property has been constructed on a leasehold land.

(h) Where the ownership of the Property is under dispute.

(i) )Where the property is taken on a lease for a period of not less than 12 years, then the lessee shall be
deemed as the owner of the property.

House Property Income Is Exempt from Tax to Certain Persons

1. An Ex-Ruler for his occupation (palace)

2. Local Authority.

3. Approved Scientific Research Association.

4. Institution for the development of Khadi and Village Industries.

5. Khadi and Village Industries Boards.

6. A body or authority for administering religious or charitable Trust or endowments.

7. Certain Funds, educational institutions, hospitals etc.

8. Registered Trade Union.

9. Statutory Corporation or an institution or association financed by the Government for promoting in

the interests of members of SC or ST.

10. Co-operative Society for promoting the interest of the members of SC or ST.

11. Charitable Trust.

12. Political Parties

DETERMINATION OF ANNUAL VALUE

The basis of calculating Income from House property is the ‘annual value’. This is the inherent capacity
of the property to earn income and it has been defined as the amount for which the property may
reasonably be expected to be let out from year to year. It is not necessary that the property should
actually be let out. The municipal value of the property, the cost of construction, the standard rent, if
any, under the Rent Control Act, the rent of similar properties in the same locality, are all pointers to the
determination of annual value.
Gross Annual value The Gross Annual Value is the municipal value, the actual rent (whether received or
receivable) or the fair rental value, whichever is highest. If, however, the Rent Control Act applies to the
property, the gross annual value Fair rental value or municipal value whichever is higher or Standard
rental value whichever is less. If the property is let out but remains vacant during any part or whole of
the year and due to such vacancy, the rent received is less than the reasonable expected rent, such
lesser amount shall be the Annual value.

The principle of determining GAV is: Expected Rental Value OR Actual Rent received for full year,
whichever is more

Here, Expected Rental Value is calculated as follows:

If the let out property is not subject to Rent Control Act ERV is: FRV or MRV whichever is higher.

If the let out property is subject to Rent Control Act ERV is: FRV or MRV whichever is higher OR
Standard Rental Value, Whichever is less.

Municipal Tax Municipal Tax includes services tax like Water Tax and Sewerage Tax levied by any local
authority. It can be claimed as a deduction from the Gross Annual Value of the Property.

Conditions:

(a) Paid by Owner. The tax shall be borne by the owner and tie same was paid by him during the
previous year.

(b) Property let out: Municipal Tax can be claimed as a deduction only in respect of let out or deemed to
be let out properties (i.e. more than one property self occupied).

(c) Year of payment: Municipal Tax relating to earlier previous years, but paid during the current
previous year can be claimed as deduction only in the year of payment.

(d) Advance Taxes: Advance Municipal Tax paid shall not be allowed as deduction in the year of
payment, but can be claimed in the year in which it falls due.

(e) Borne by Tenant: Municipal taxes met by tenant are not allowed as deduction.

Unrealized Rent Unrealized Rent means the rent not paid by the tenant to the owner and the same shall
be deducted from the Actual Rent Receivable from the property before computing income from that
property, provided the following conditions are satisfied:

1. The tenancy is bonafide

2. The defaulting tenant should have vacated the property

3. The assessee has taken steps to compel the defaulting tenant to vacate the property

4. The defaulting tenant is not in occupation of any other property owned by the assessee
5. The assessee has taken all reasonable steps for recovery of unrealized rent or satisfies the Assessing
Officer that such steps would be useless.

Deduction from Net Annual Value

A. Standard Deduction u/s 24(a): Standard deduction of 30% of NAV (Net Annual Value) shall be
allowed to the assessee.
B. Interest on Loan u/s 24(b):

Income From Self – Occupied House Property The annual value of one self-occupied house property is
taken as ‘Nil’. From the annual value, only the interest on borrowed capital is allowed as a deduction
under section 24. The amount of deduction will be:

1. Either the actual amount accrued or Rs.30,000/- whichever is less if loan or borrowed capital taken
before 1/4/99

2. When borrowal of money or acquisition of the property is after 1.4.1999 - deduction is Rs.2,00,000/-
applicable to A.Y 2017-18 and onwards.

1. Purpose of loan: The loan shall be borrowed for the purpose of acquisition, construction,
repairs, renewal or reconstruction of the house property.
2. Accrual basis: The interest will be allowed as a deduction on accrual basis, even though it is
not paid during the financial year.
3. Interest on interest: Interest on unpaid interest shall not be allowed as a deduction.
4. Brokerage: Any brokerage or commission paid for acquiring the loan will not be allowed as a
deduction.

Deduction of interest in connection with house let-out on rent

If any loan from the financial institution has been taken for constructing, reconstructing, repairing of
house interest is to be paid on such loans. The amount is deducted out of net annual value of the house.
There is no maximum limit of deduction of interest in case of loan taken for house let for rent
Raju is the owner of 2 houses. From the following, find out Income from house property: House-1
House-2

House1 House2

Municipal value 30,000 35,000

Actual rent 40,000 32,000

FRV 36,000 30,000

SRV 30,000 36,000

Municipal tax paid 4,000 3,500

Insurance Expenses paid 7,000 7,000

Interest on borrowings 11,000 7,000

The following information is available in respect of two houses of owned by Neeraj. He let out the first
house for a yearly rent of Rs: 11,000. He paid Rs:1,000 as interest on borrowings. He paid Rs: 100 as
insurance premium. He let out his second house at a monthly rent of Rs:1,200. It is not rented out for 3
months. The unrealized rent for the past 5 years was Rs: 13,000. Compute the income from house
property of Mr. Neeraj for the AY 2013-14

House 2nd

Actual Rent received 14,400

Less: 30% Stanadard Deduction 4320

Less Unrelized rent for three month 3600

Add unrealized rent for the past 5 years was Rs: 13,000

Income from house property

Mr. Abhinand constructed one house in 2010. Half of the portion is let out and the remaining half is
used for his residence. The following particulars are available: MRV Rs: 12,500; Rent received Rs:10,000 ;
Municipal taxes Rs:2,500 ; Ground rent Rs; 250 ; Repairs Rs:2,000 ; Interest on loan taken for
construction Rs: 2,500. Compute income from house property of Mr. Abhinand for the AY 2013-14.

Income from house property

Annual Value of let out property

(MRV or Rent received whichever is higher) 10,000

Less: Muncipal Taxes paid 1250

Net Annual Value 8,750

Less; Deduction U/S 24

30% Standard Deduction of NAV 2625

Interest on borrowings 1250 3875

Income from house property 4875

Income from self occupied property

Net Annual Value

Less U/S 24

Interest on borrowings 1250

Income from house property 3625