What is Salary:

Income under heads of salary is defined as remuneration received by an individual for services rendered by
him to undertake a contract whether it is expressed or implied. According to Income Tax Act there are
following conditions where all such remuneration are chargeable to income tax:

• When due from the former employer or present employer in the previous year, whether paid or not
• 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.
• When arrears of salary is 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.

What Income Comes Under Head of Salary:

Under section 17 of the Income Tax Act, 1961 there are following incomes which comes under
head of salary:

• Salary (including advance salary)

• Wages
• Fees
• Commissions
• Pensions
• Annuity
• Perquisite
• Gratuity
• Annual Bonus
• Income From Provident Fund
• Leave Encashment
• Allowance
• Awards

What is Leave Encashment:

Leave encashment is the salary received by an individual for leave period. It is a chargeable income whether
he is a government employee or not. Under section 10(10AA) (i) there is also a provision of exemption in
case of leave encashment depending upon whether he is a government employee or other employees.

What is Annuity:
It is an annual income received by the employee from his employer. It may be paid by the employer as
voluntarily or on account of contractual agreement. It is not taxable until the right to receive the same arises.
Under section 56, Income Tax Act, 1961 other annuities come under a will or granted by a life insurance
company or accruing as a result of contract which comes as income under from other sources.

What is Gratuity:
It is salary received by an individual paid by the employee at the time of his retirement or by his legal heir in
the case of death of the employee.

What is Allowance:
It is the amount received by an individual paid by his/her employer in addition to salary. Under section 15 of
the Income Tax Act, 1961 these allowance are taxable excluding few condition where they are entitled of
deduction/ exemptions.

Under Income Tax Act following types of allowance are defined

House Rent Allowance:

Under sections 10(13A) of Income Tax Act, 1961 allowance is defined as an amount received by an
employee paid by his/ her employer as a rent of his/her house. It is a taxable income. There is no exemption
in tax if he is living in his own house or house for which he is not paying rent. There are following amount
which are exempt from tax:
 Actual house rent paid by that individual
 Rent paid for the accommodation over 10% of the salary
 50% of the salary if house is placed at Delhi, Mumbai, Kolkata, Chennai or 40% of the salary in it is
placed in any other city
Entertainment Allowance:
It is the amount paid by employer for availing entertainment services. Under section 16(ii) of Income Tax
Act, 1961 it is entitled to deduction in tax from is salary. But in this case deduction is given to his gross
salary which also includes entertainment allowance. Deduction in tax against this allowance can be divided
into two parts :
In case of Government employee entitled to minimum deduction of
 Entertainment allowance received
 20% of basic salary excluding any other allowance
 Rs. 5000 In case of other employee entitled to minimum deduction of
 (a) Entertainment allowance received
 20% of basic salary excluding any other allowance
 Rs. 7500
 Entertainment allowance received during 1954-1955Other Special Allowances
 Children Education Allowance
 Tribal Area Allowance
 Hostel Expenditure Allowance
 Remote Area Allowance
 Compensatory Field Area Allowance
 Counter Insurgency Allowance
 Border Area Allowance
 Hilly Area Allowance
Allowances for there is a provision of exempt in income tax are:
 Allowance given to a citizen of India, who is a government employee, for rendering services outside India
 Allowances given to Judges of High Courts
 Allowance given Judges of Supreme Court
 Allowances received by an employee of UNO
What is Perquisite
Under section 17(2) of Income Tax Act, 1961 perquisite is defined as:
 Amount paid for the rent-free accommodation provided to the assessee by his employer
 Any concession in the matter of rent respecting any accommodation provided to the assessee by his
employer
 Any benefit or amenity granted or provided free of cost or at concessional rate in any of the following
cases:
1. By a company to an employee, who is a director thereof
2. By a company to an employee being a person who has a substantial interest in the company
3. By any employer to an employee whose income under the head 'Salaries' exceeds Rs.24000 excluding
the value of non monetary benefits or amenities
4. Any sum paid by the employer in respect of any obligation which, but for such payment, would have been
payable by the assessee
5. Any sum payable by the employer whether directly or through a fund, other than a recognised provident
fund or EPF, to effect an assurance on the life of the assessee or to effect a contract for an annuity

There are following perquisites which are tax free:

 Medical facility
 Medical reimbursement
 Refreshments
 Subsidised Luch/ Dinner provided by employer
 Facilities For Recreation
 Telephone Bills
 Products at concessional rate to employee sold by his/ her employer
 Insurance premium paid by employer
 Loans to employees by given by employer
 Transportation
 Training
 House without rent
 Residence Facility to member of Parliament, judges of High Court/ Supreme Court
 Conveyance to member of Parliament, judges of High Court/ Supreme Court
 Contribution of employers to employee's pension, annuity schemes and group insurance
Deductions from Salary income
Certain deductions are available while determining the taxable salary income.

A) Standard Deduction
Income tax slabs 2009-2010 (for Men) in India:

Income Tax Slab (in Rs.) Tax

0 to 1,60,000 No Tax
1,60,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%

Income tax slabs 2009-2010 (for Women) in India:

Income Tax Slab (in Rs.) Tax
0 to 1,90,000 No Tax
1,90,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%

Income tax slabs 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%

B) Professional Tax
Professional tax, which is paid, is allowed as deduction.

C) Arrears salary
If salary is received in arrears or in advance, it can be spread over the years to which it relates and be taxed
accordingly as per section 89(1) of the Income tax Act.

Salary Tax ..............................................................

Money which you earn from different sources is taxed differently. So if you are a salary
earner, your salary income to be taxed will be calculated in a different way from gains.
The term "Salaries" includes remuneration in any form for personal service, under an
expressed or implied contract of employment or service. Section 17 of Income Tax Act
defines salary to include:-
# Wages
# Pensions or Annuities
# Gratuities
# Advance of Salary
# Any cess, commission, perquisites or profits in lieu of or in addition to salary or wages.
# Any encashment of leave salary.
# Any amount of credit to provident fund of employee to the extent it is taxable.

Therefore "salary" includes basic salary, encashment of leave salary, advance of salary,
arrears of salary, various allowances such as dearness allowance, entertainment
allowance, house rent allowance, conveyance allowance and also includes perquisites by
way of free housing, free car, free schooling for children of employees, etc.
The following are the essential conditions for income to be treated as salary income:-

# There must be relation of employer and employee between the payer of income and
receiver of income.
# Salary may be from more than one employer.
#Salary may be received from not just the present employer but also a prospective
employer and in some cases even from a former employer for example pension received
from a former employer.
# Salary income must be real and not fictitious there must an intention to pay and receive
salary.
# Forgoing of salary ie if an employee surrenders his salary to the central government,
then the salary so surrendered will not be treated as taxable income of the employee.
# Salary paid tax free - Tax free salary means the salary on which income tax is borne not
by the employee but by the employer. Tax free salary is also taxable in the hands of the
employee.

Salary is taxable in the year of receipt or in the year of earning of the salary income,
whichever is earlier. i.e. if the salary has been received first, then it will be taxable in the
year of receipt. If it has been earned first but not yet received then it will be taxable in the
year of earning. Salary income is taxable in the hands of individuals only. No other type
of person such as a firm or HUF, companies can earn salary income.

# Allowances # Leave Encashment # Perquisites of Tax

Allowances ..............................................................
House Allowances
The exemption of House Rent Allowance (HRA) received is exempt to the least of the
following:
HRA received the period during which the rental accommodation is occupied by the
employee in the previous year.
Excess of rent paid over 10 percent of salary.
50% of the salary, if the rented accommodation is situated at Mumbai, Calcutta, Delhi or
Chennai and 40% of salary in other cities. The salary is taken for the period during which
the rental accommodation is occupied by the employee in the previous year.

Salary:
Includes basic salary and dearness allowance if terms of employment so provide but does
not include any other allowance. However, any commission payable at a fixed percentage
of turnover achieved by the employee is included.

Entertainment Allowances
Any amount received by the employee, as entertainment allowance is taxable as salary.
However, deduction is available to the employee if he has been:

In continuous service with the present employer from a date before April 1, 1955, and
Receiving Entertainment Allowance from his present employer continuously from a date
before April 1, 1955 till the year for which the income is to be taxed.

The amount of deduction available is restricted to least of the following:

# In case of government employees: Rs. 5,000; 20% of salary; or amount of
entertainment allowance granted during the previous year.
# In case of non-Government employees: Rs. 7,500; 20% of salary; amount of
entertainment allowance granted during the previous year, or
# Amount of entertainment allowance received during the financial year 1954-55. Salary
means basic salary and excludes all allowances, benefits or perquisites.
Transport Allowances
Transport allowance provided to an employee for commuting between his residence and
the place of his duty shall be exempt up to Rs. 800 per month. However, in case blind or
orthopaedically handicapped employee's, a sum of Rs. 1,600 per month is exempt from
tax.

Education Allowances
Education allowance of Rs. 50 per month per child for up to 2 children of the employee is
exempted. In case the children are in hostel, the exemption available is Rs.150 per month
per child for up to 2 children.

Special Allowances
The following allowances are exempt from tax:
Expenses incurred on conveyance in the performance of duties of office;
Cost of travel on tour or on transfer;
Daily ordinary charges incurred by the employee on account of absence from his normal
place of duty during a tour;
Expenditure on a helper where such helper is engaged for the performance of the duties
of office;
Allowances granted for encouraging the academic research and training pursuits in
educational and research institutions; or
Expenditure incurred on the purchase or maintenance of uniform for wear during the
performance of the duties of office.

Leave Travel Assistance

LTA is paid for meeting travelling expenses incurred by an individual as also family
members (this includes only the spouse, two children and dependent parents, brothers and
sisters) while on holiday in India. The amount of exemption depends upon the mode of
journey. This exemption is available in respect of 2 journeys undertaken in a block of
four calendar years.

Medical Allowances
This exemption is available in respect of :
Reimbursement upto Rs.15,000 for medical treatment of the employee and family
members.
Reimbursement of expenditure incurred by an employee and family members in
approved hospitals, dispensaries etc.
Group medical insurance for an employee and family members or reimbursement of
premium paid by an employee for medical insurance.
For medical treatment abroad, the actual expenditure incurred, including on travel and
stay abroad of the patient and one attendant (if permitted by the RBI). The ceiling for the
gross total income excluding the amount to be reimbursed is Rs.2 lakhs.

Lunch and Refreshment

Refreshment at free or concessional rate is not taxable.
Exemptions of medical expenses incurred by or on behalf of the employee
# The following medical facilities provided to an employee are exempt from income tax:
# Treatment of an employee or his family in any hospital maintained by the employer;
# Reimbursement of any medical expenditure actually incurred by the employee for
himself or his family :
In any hospital maintained or approved by the Government, any local authority; or For
prescribed diseases or ailments in any hospital approved by the Chief Commissioner, or

Up to Rs. 15,000, actually incurred by the employee on medical (other than the treatment
referred to above);
Premium paid by the employer towards medical insurance on the health of such
employee

Reimbursement by the employer of premium paid by the employee towards insurance on

his health or of that of his family .
Expenditure incurred by the employer on
Medical treatment of the employee whose family is outside India;
Travel and stay abroad of the employee or his family including one attendant
accompanying the patient for medical treatment.

The expenditure on medical treatment and stay abroad shall be excluded from perks :
only to the extent permitted by the Reserve Bank of India; and the employee's gross total
income, as computed before including the said expenditure, does not exceed Rs 2 lakhs.

"Family" in relation to an individual means:

the spouse and children of the individual; and parents, brothers and sisters of the
individual wholly or mainly dependent on the individual

As per the income tax law in India any income that is generated under the territory of the country
is subjected to the income tax. Salary is taxed differently than the products as income tax is
applicable on salary where as on commodities there is service tax and value added tax is
applicable on it. The term salary is defines as any kind of remuneration that is generated through
professional services, personal services and from different jobs in the organization.

Allowances:

Section 17 of the income tax act includes:

• Basic salary
• Wages
• Annuity
• Provident fund (PF)
• House rent allowance (HRA)
• Gratuity
• Cess tax and incentives generated from the salary
• Miscellaneous amount
• Finance tax
• Any encashment of leave salary
• Transport allowance
The essential conditions to notify the income as the salary income:

• The employee and the employer relationship are of servant and master. There should be
a relationship. It is different than the principal and agent as agent won�t come under the
full control of the employer. In India M.L.A is not come under the head salary due to the
fact that it not comes under employee and employer relation ship bracket.
• In all the government organizations pension is deducted as it is mandatory to do so.
• Any salary that is generated outside India is taxable as per Indian income tax law.
• Provident fund is mandatory in government as well as in the private organization.
• As per Provident fund rule half of the amount is deducted from the salary of the employee
and half of the amount will be added by the company or government. Most of the time
employee claims their provident fund after leaving the job, however there is an
exceptional clause under which employee can claim half of his provident fund amount at
the time of buying a property or his/her wedding.

Exemption of tax in the salary:

This is a myth that every income is taxable that is received from an employer:

1. Any traveling facility provided by an employer to its employee such as train or airplane
passes is not come under the tax bracket.
2. Gratuity amount is also not subjected to the income tax.
3. Any payment received by the employee of central or state government from the
encashment of his/her leave balance is entitled of exemption from tax.
4. As per the provident fund act 1925. Provident fund amount is also exempted from the tax
list.
5. Any sum received under life Insurance policy is exempted from the list as per sub section
(3) of section 80DDA.
6. Income received by way of pension received by an individual or family for a member who
was employed with central government/state government is also exempted from a tax list.
7. Armed force professional who won the gallantry award for their services towards the
country are exempted from the list of income tax. Employees of central or state
government who have won Param vir Chakra, Maha vir chakra and any other notified
gallantry awards are exempted from the tax list.