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Income under the Head “Salaries” Notes

Salaries

Basis of Charge

Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier.

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.

If the salary paid in arrears has already been assessed on due basis, the same cannot be taxed again when it is paid.

Exemption of certain Allowances

Section Particulars Benefits
10(13A) House Rent Allowance (Sec. 10(13A) & Rule 2A) Least of the following is exempt:
a) Actual HRA Received
b) 40% of Salary (50%, if house situated in Mumbai, Calcutta, Delhi or Madras)
c) Rent paid minus 10% of salary* Salary= Basic + DA (if part of retirement benefit) + Turnover based CommissionNote:
i.  Fully Taxable, if HRA is received by an employee who is living in his own house or if he does not pay any rent
ii. It is mandatory for employee to report PAN of the landlord to the employer if rent paid is more than Rs. 1,00,000 [Circular No. 08 /2013 dated 10th October, 2013].
10(14) Children Education Allowance Up to Rs. 100 per month per child up to a maximum of 2 children is exempt
10(14) Hostel Expenditure Allowance Up to Rs. 300 per month per child up to a maximum of 2 children is exempt
10(14) Transport Allowance granted to an employee to meet expenditure for the purpose of commuting between place of residence and place of duty Rs. 3,200 per month granted to an employee, who is blind or deaf and dumb or orthopedically handicapped with disability of lower extremities
10(14) Transport Allowance to an employee working in any transport business to meet his personal expenditure during his duty performed in the course of running of such transport from one place to another place provided employee is not in receipt of daily allowance. Amount of exemption shall be lower of following:
a) 70% of such allowance; or
b) Rs. 10,000 per month.
10(14) Conveyance Allowance granted to meet the expenditure on conveyance in performance of duties of an office Exempt to the extent of expenditure incurred
10(14) Any Allowance granted to meet the cost of travel on tour or on transfer Exempt to the extent of expenditure incurred
10(14) Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty Exempt to the extent of expenditure incurred
10(14) Helper/Assistant Allowance Exempt to the extent of expenditure incurred
10(14) Research Allowance granted for encouraging the academic research and other professional pursuits Exempt to the extent of expenditure incurred
10(14) Uniform Allowance Exempt to the extent of expenditure incurred
10(7) Foreign allowances or perquisites paid or allowed by Government to its employees (an Indian citizen) posted outside India Fully Exempt
Allowances to Judges of High Court/Supreme Court (Subject to certain conditions) Fully Exempt.
10(45) Following allowances and perquisites given to serving Chairman/Member of UPSC is exempt from tax:
a) Value of rent free official residence
b) Value of conveyance facilities including transport allowance
c) Sumptuary allowance
d) Leave travel concession
Fully Exempt
Allowances paid by the UNO to its employees Fully Exempt
10(45) Allowances to Retired Chairman/Members of UPSC (Subject to certain conditions) Exempt subject to maximum of Rs.14,000 per month for defraying services of an orderly and for secretarial assistant on contract basis.

The value of residential telephone free of cost and the number of free calls to the extent of 1500 per month shall be exempt.

10(14) Special compensatory Allowance (Hilly Areas) (Subject to certain conditions and locations) Amount exempt from tax varies from Rs. 300 per month to Rs. 7,000 per month.
10(14) Border area allowances, Remote Locality allowance or Disturbed Area allowance or Difficult Area Allowance (Subject to certain conditions and locations) Amount exempt from tax varies from Rs. 200 per month to Rs. 1,300 per month.
10(14) Tribal area allowance given in (a) Madhya Pradesh (b) Tamil Nadu (c) Uttar Pradesh (d) Karnataka (e) Tripura (f) Assam (g) West Bengal (h) Bihar (i) Orissa Rs. 200 per month
10(14) Compensatory Field Area Allowance. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations) Rs. 2,600 per month
10(14) Compensatory Modified Area Allowance. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations) Rs. 1,000 per month
10(14) Counter Insurgency Allowance granted to members of Armed Forces operating in areas away from their permanent locations. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations) Rs. 3,900 per month
10(14) Underground Allowance is granted to employees working in uncongenial, unnatural climate in underground mines Up to Rs. 800 per month
10(14) High Altitude Allowance is granted to armed forces operating in high altitude areas (Subject to certain conditions and locations) a) Up to Rs. 1,060 per month (for altitude of 9,000 to 15,000 feet)

b) Up to Rs. 1,600 per month (for altitude above 15,000 feet)

10(14) Highly active field area allowance granted to members of armed forces (Subject to certain conditions and locations) Up to Rs. 4,200 per month
10(14) Island Duty Allowance granted to members of armed forces in Andaman and Nicobar and Lakshadweep group of Island (Subject to certain conditions and locations) Up to Rs. 3,250 per month

Exemption of Terminal Benefits

Section Particulars Benefits
a) Leave Encashment
10(10AA) Encashment of unutilized earned leave at the time of retirement of Government employees Fully Exempt
10(10AA) Encashment of unutilized earned leave at the time of retirement of other employees (not being a Government employee) Least of the following shall be exempt from tax:
a) Amount actually received
b) Unutilized earned leave* X Average monthly salary
c) 10 months Average Salary**
d) Rs. 3,00,000*While computing unutilized earned leave, earned leave entitlements cannot exceed 30 days for each year of service rendered to the current employer**Average salary = Average Salary*** of last 10 months immediately preceding the retirement

***Salary = Basic Pay + Dearness Allowance (to the extent it forms part of retirement benefits)+ turnover based commission

b) Retrenchment Compensation
10(10B) Retrenchment Compensation received by a workman under the Industrial Dispute Act, 1947(Subject to certain conditions). Least of the following shall be exempt from tax:
a) an amount calculated as per section 25F(b) of the Industrial Disputes Act, 1947;
b) Rs. 5,00,000; or
c) Amount actually receivedNote:
i. Relief under Section 89(1) is available
ii. 15 days average pay for each completed year of continuous service or any part thereof in excess of 6 months is to be adopted under section 25F(b) of the Industrial Disputes Act, 1947.
c) Gratuity
10(10)(i) Gratuity received by Government Employees (Other than employees of statutory corporations) Fully Exempt
10(10)(ii) Death -cum-Retirement Gratuity received by other employees who are covered under Gratuity Act, 1972 (other than Government employee) (Subject to certain conditions). Least of following amount is exempt from tax:
1. (*15/26) X Last drawn salary** X completed year of service or part thereof in excess of 6 months.
2. Rs. 20,00,000
3. Gratuity actually received.*7 days in case of employee of seasonal establishment.** Salary = Last drawn salary including DA but excluding any bonus, commission, HRA, overtime and any other allowance, benefits or perquisite
10(10)(iii) Death -cum-Retirement Gratuity received by other employees who are not covered under Gratuity Act, 1972 (other than Government employee) (Subject to certain conditions). Least of following amount is exempt from tax:
1. Half month’s Average Salary* X Completed years of service
2. Rs. 20,00,000
3. Gratuity actually received.*Average salary = Average Salary of last 10 months immediately preceding the month of retirement** Salary = Basic Pay + Dearness Allowance (to the extent it forms part of retirement benefits)+ turnover based commission
d) Pension
Pension received from United Nation Organization by the employee of his family members Fully Exempt
10(10A)(i) Commuted Pension received by an employee Central Government, State Government, Local Authority Employees and Statutory Corporation Fully Exempt
10(10A)(ii) Commuted Pension received by other employees who also receive gratuity 1/3 of full value of commuted pension will be exempt from tax
10(10A)(iii) Commuted Pension received by other employees who do not receive any gratuity 1/2 of full value of commuted pension will be exempt from tax
10(19) Family Pension received by the family members of Armed Forces Fully Exempt
57(iia) Family pension received by family members in any other case 33.33% of Family Pension subject to maximum of Rs. 15,000 shall be exempt from tax
e) Voluntary Retirement
10(10C) Amount received on Voluntary Retirement or Voluntary Separation (Subject to certain conditions) Least of the following is exempt from tax:
1) Actual amount received as per the guidelines i.e. least of the following
a) 3 months salary for each completed year of services
b) Salary at the time of retirement X No. of months of services left for retirement; or2) Rs. 5,00,000
g) National Pension System (NPS)
10(12A)/10(12B) National Pension System Any payment from the National Pension System Trust to an assessee on closure of his account or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed 60% of the total amount payable to him at the time of such closure or his opting out of the scheme.

Note: Partial withdrawal from the NPS shall be exempt to the extent of 25% of amount of contributions made by the employee.

Provident Funds – Exemption & Taxability provisions

Tax treatment in respect of contributions made to and payment from various provident funds are summarized in the table given below:

Particulars Statutory provident fund Recognized provident fund Unrecognized provident fund Public provident fund
Employers contribution to provident fund Fully Exempt Exempt only to the extent of 12% of salary* Fully Exempt
Deduction under section 80C on employees contribution Available Available Not Available Available
Interest credited to provident fund Fully Exempt Exempt only to the extent rate of interest does not exceed 9.5% Fully Exempt Fully Exempt
Payment received at the time of retirement or termination of service Fully Exempt Fully Exempt (Subject to certain conditions and circumstances) Fully Taxable (except employee’s contribution) Fully Exempt

* Salary = Basic Pay + Dearness Allowance (to the extent it forms part of retirement benefits) + turnover based commission

Payment from recognized provident fund shall be exempt in the hands of employees in following circumstances:
a) If employee has rendered continue service with his employer (including previous employer, when PF account is transferred to current employer) for a period of 5 years or more
b) If employee has been terminated because of certain reasons which are beyond his control (ill health, discontinuation of business of employer, etc.)

Valuation of Perquisites [Section 17(2) read with Rule 3]

Rent-free residential accommodation
Category of Employee (A) Unfurnished accommodation (B) Furnished accommodation (C)
Government employee  License fee determined as per Government rules as reduced by the rent actually paid by the employee. Value determined under column (B)
Add: 10% p.a. of the furniture cost.
However, if the furniture is hired, then hire charges payable/paid should be added to the value determined under column (B),
as reduced by charges recovered from employee.
Non-government employee  Where accommodation is owned by employer

Location Perquisite value
In cities having a population > 25 lacs as per 2001 census 15% of salary
In cities having a population > 10lacs ≤ 25 lacs as per 2001 census 10% of salary
In other areas 7.5% of salary

The perquisite value should be arrived at by reducing the rent, if any, actually paid by the employee, from the above value.

Value determined under column (B)
Add:10% p.a. of the furniture cost.
However, if the furniture is hired, then hire charges payable/paid should be added to the value determined under column (B),
as reduced by
charges recovered from employee.
Where the accommodation is taken on lease or rent by employer

Lower of the following is taxable:
(a) actual amount of lease rent paid or payable by employer or
(b) 15% of salary

The lower of the above should be reduced by the rent, actually paid by the employee, to arrive at the perquisite value.

Value determined under column (B)
Add: 10% p.a. of the furniture cost.
However, if the furniture is hired, then hire charges payable/paid should be added to the value determined under column (B),
as reduced by
charges recovered from employee.
Interest free or concessional loan
In respect of any loan given by employer to employee or any member of his household (excluding for medical treatment for specified ailments or where loans amount in aggregate does not exceed Rs.20,000), the interest at the rate charged by SBI as on the first day of the relevant previous year at maximum outstanding monthly balance (aggregate outstanding balance for each loan as on the last day of each month) as reduced by the interest, if any, actually paid by him or any member of his household.
Use of movable assets by employee/ any member of his household
Asset given Value of benefit
(a) Use of laptops and computers Nil
(b)Movable assets, other than –
(i) laptops and computers; and
(ii)assets already specified
10% p.a. of the actual cost of such asset, or the amount of rent or charge paid, or payable by the employer, as the case may be

(-)

Amount paid by/ recovered from anemployee

Transfer of movable assets
Actual cost of asset to employer (-) cost of normal wear and tear (-) amount paid or recovered from employee
Assets transferred Value of perquisite
Computers and electronic items @50% on WDV for each completed year of usage
Motor cars @20% on WDV for each completed year of usage
Any other asset @10% of actual cost of such asset to employer for each completed year of usage [on SLM basis]
Motor Car
S. No. Car owned/ hired by Expenses met by Wholly official use Partly personal use (c)
1 Employer Employer Not a perquisite*
cc of engine Perquisite value
upto 1.6 litres Rs. 1,800 p.m.
above 1.6 litres Rs. 2,400 p.m.

If chauffeur is also provided, Rs. 900 p.m. should be added to the above value.

2 Employee Employer Not a perquisite* Actual amount of expenditure incurred by the employer as reduced by the perquisite value arrived at in (1) above.
3 Employer Employee
cc of engine Perquisite value
upto 1.6 litres Rs. 600 p.m.
above 1.6 litres Rs. 900 p.m.

If chauffeur is also provided, Rs. 900 p.m. should be added to the above value.

* Provided employer maintains the complete details of such journey and expenditure thereon and gives a certificate that such expenditure are incurred wholly for official use.
Note: Where car is owned by employer and expenses are also met by the employer, the taxable perquisites in case such car is used wholly for personal purposes of the employee would be equal to the actual expenditure incurred by the employer onrunning and maintenance expenses and normal wear and tear (calculated @10% p.a. of actual cost of motor car) less amount charged from the employee for such use.

Meaning of Salary

S. No. Calculation of exemption of Allowance/ Terminal benefit/Valuation of perquisite Meaning of salary
1 Gratuity (in case of non-Government employees covered by the Payment of Gratuity Act, 1972) Basic salary and dearness allowance.
2 a) Gratuity (in case of non- Government employee not covered by Payment of Gratuity Act, 1972)
b) Leave Salary
c) House Rent Allowance
d) Recognized Provident Fund
e) Voluntary Retirement Compensation
Basic salary and dearness allowance, if provided in terms of employment, and commission calculated as a fixed percentage of turnover.
3 Rent free accommodation and concessional accommodation All pay, allowance, bonus or commission or any monetary payment by whatever name called but excludes-

  1. Dearness allowance not forming part of computation of superannuation or retirement benefit
  2. employer’s contribution to the provident fund account of the employee;
  3. allowances which are exempted from the payment of tax;
  4. value of the perquisites specified in section 17(2)
  5. any payment or expenditure specifically excluded under the proviso to section 17(2) i.e., payment of medical insurance premium specified therein.
  6. lump-sum payments received at the time of termination of service or superannuation or voluntary retirement, like gratuity, leave encashment, voluntary retirement benefits, commutation of pension and similar payments.

Deductions from gross salary [Section 16]

Section

Particulars

Benefits

16(ia) Standard Deduction  

16 (ii)

Entertainment Allowance received by the Government employees (Fully taxable in case of other employees)

Least of the following is deductible :
a) Rs 5,000
b) 1/5th of salary (excluding any allowance, benefits or other perquisite)
c) Actual entertainment allowance received

16(iii)

Employment Tax/Professional Tax.

Amount actually paid during the year  is deductible. However, if professional tax is paid by the employer on behalf of its employee than it is first included in the salary of the employee as a perquisite and then same amount is allowed as deduction.

Relief when salary is paid in arrears or in advance [Section 89]

Step 1: 

Calculate tax payable of the previous year in which the arrears/advance salary is received by considering:
(a) Total Income inclusive of additional salary
(b) Total Income exclusive of additional salary

Step 2:

Compute the difference the tax calculated in Step 1 and Step 2 i.e., (a)-(b)

Step 3:

Calculate the tax payable of every previous year to which the additional salary relates:
(a) On total income including additional salary of that particular previous year
(b) On total income excluding additional salary.

Step 4:

Calculate the difference between (a) and (b) in Step 3 for every previous year to which the additional salary relates and aggregate the same.

Step 5:

Relief under section 89(1) = Amount calculated in Step 2 – Amount calculated in Step 4

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