This document discusses principles of taxation related to income from salary in India. It covers: 1) Key sections of the Income Tax Act (15-17) that deal with salary income and its chargeability. Salary includes payments from employer as well as some perquisites. 2) Common components of salary like basic pay, dearness allowance, bonuses, pensions, leave encashment and their tax treatment. 3) Exemptions available on leave encashment for government vs non-government employees. 4) Taxability of various allowances like HRA, entertainment allowance, academic allowance and conveyance allowance.

1. Principles of Taxation
UNIT III
Income from Salary (A.Y. 2023-2024)
Adv.Dr. Chitra K. Deshpande
M.P. Law College Aurangabad.

2. Basic Concept:
 Every Payment made by an employer to his employees for
service rendered by him would be to tax as income
from salaries. Provisions regarding income under head of
salaries given under section15,16and17.
 U/S 15- deals with chargeability U/S 15- deals with
chargeability Salaries Due or paid or advance
 U/S 16-Standard deduction , Entertainment allowance &
profession tax
 U/S 17 –Salary includes perquisites and profits in lieu of salary
Adv. Dr. Chitra K. Deshpande

3. SALARY INCOME
CHARGEABILITY.
Existence of ‘master-servant’ or ‘employer-employee’
relationship is absolutely essential for taxing income under
the head “Salaries”. Where such relationship does not exist
income is taxable under some other head as in the case of
partner of a firm, advocates, chartered accounts, LIC agents,
small saving agents, commission agents etc. Besides, only
those payments which have a nexus with the employment
are taxable under the head “salaries”.
‘Salary’ is chargeable to income tax on due or paid basis,
whichever is earlier.

4.  Any arrears of salary paid in the previous year, if not
taxed in any earlier previous year, shall be taxable in the
year of payment. (Sec.15).
 “Salary” includes
 (i) wages,
 (ii) annuity or pension,
 (iii) any gratuity over and above the exemption limit,
 (iv) any fee, commission,
 (v) any advance of salary
 (vi) amount contributed by the employer towards the
recognized provident fund in excess of 12% of salary
and interest on balance in R.P.F. in excess of 9.5%,

5.  (vii) the value of any perquisites and benefits to
the employee provided by the employer,
 (viii) any amount of profit in lieu of salary,
 (ix) payment received by an employee in
respect of any period of leave not availed of by
him,
 (x) transferred balance in a R.P.F. to the extent
it is taxable under Rule 11 (4) of Part A of
Fourth Schedule of the Income Tax Act, 1961,
and
 (xi) Central Government’s Contribution in a
previous year to an employee’s account under
notified pension scheme u/s.80CCD

6.  Salary paid by a foreign Government to its employees serving
in India is taxable under the head ‘salary’.
 Salary is considered for the months of April to March or March
to February, depending upon when it becomes due or payable.
In case of Government employees, salary for the months of
March to February is considered.

7. DIFFERENT FORMS OF SALARY
 Basic Salary
 Dearness Allowance/Pay
 Advance Salary
 Arrears of Salary
 Leave Salary
 Salary in lieu of notice
 Salary to partner
 Fees and Commission
Adv. Dr. Chitra K. Deshpande

8. Different Forms of Salary……
 Bonus
 Gratuity :-
 Pension :- Uncommuted/ Commuted
 Annuity
 Retrenchment Compensation
 Remuneartion for Extra Duties
 Compensation under VRS
 Profit in lieu of Salary
 Salary from UNO Adv. Dr. Chitra K. Deshpande

9. Leave Salary
The accumulated leaves standing to the credit off an employee
may be availed by the employee during his service time.
Adv. Dr. Chitra K. Deshpande
Nature of Leave
Encashment
Status of Employee Whether it is Taxable
Leave Enclashment during
continuity of employment
Government / Non-
Government Employee
It is Chargeable to Tax.
However relief can be taken
under section 89
Leave Encashment at the time
of retirement/leaving job
Government Employee It is fully exempt from tax
under section 10(10AA) (i)
Leave Encashment at the time
of retirement/leaving Job
Non-Government Employee It is fully or Partly exempt
from tax under section
10(10AA) (ii)

10.  Government Employee Getting Leave Encashment at the time
of Retirement Sec 10(10AA)(i) : It is always Exempt from Tax.
 Non-Government Employee Getting Leave Encashment at the
time of Retirement Sec 10(10AA)(ii):- Leave Salary is exempt
from Tax on the basis of least of the following :
 1] Period of earned leave to the credit of the employee at the
time of his retirement or leaving the job x Average Monthly
Salary (Leave at credit in months x average monthly salary)
 2] 10 x Average Monthly Salary
 3] Government Limit Rs. 3,00,000/-
 4] Leave Salary received at the time of retirement
Adv. Dr. Chitra K. Deshpande

11. Practical Question on Leave Salary
 X was employed by PQR Ltd. Upto March 15, 1989. at the
time of leaving PQR Ltd he was paid Rs. 3,50,000/- as leave
salary out of which Rs.57,000/- was exempt from tax under
section 10910AA)(ii). Thereafter he joined ABC(P) ltd and
received Rs.4,12,200 as leave salary at the time of his
retirement on December 31, 2022. Determine the amount of
taxable leave salary from the following information.
Adv. Dr. Chitra K. Deshpande

12.  Salary at the time of Retirement (per month) Rs.22,900/-
 Average Salary received during 10 months ending on Dec 31,
2022 a] From March 1st 2022 to 31st July 2022 Rs. 22,600/-
b] From 1st August 2022 to Dec 31st 2022 Rs. 22,900/-.
 Duration of Service 14 3/4th year
 Leave entitlement for every year of Service 45 days
 Leave availed while in service 90 days
 Leave at the credit of the employee at the time of retirement
[(14x45)-90/ 30] = 18 months
 Leave salary paid at the time of retirement (22,900pm x 18
months) = 4,12,200/-

Adv. Dr. Chitra K. Deshpande

13. SOLUTION
 NAME OF THE EMPLOYEE : Mr. X
 Previous Year : 1/4/2022 to 31/3/2023
 Assessment Year : 2023-2024
 Computation of Leave Salary Taxable to Mr. X for AY 2023-24
Adv. Dr. Chitra K. Deshpande

14. Adv. Dr. Chitra K. Deshpande
PARTICULARS AMOUNT
Leave Salary Received 4,12,200
Less : Least of the following is exempt from tax U/s
10(10AA)(ii)
2,27,500
1] Period of earned Leave to the credit of employee
at the time of retirement (Working Note 1)
2,50,250
2] 10 Months X Average Monthly Salary
(Working Note 2)
2,27,500
3] Government Exemption (Working Note 3) 2,43,000
4] Actual leave Salary received 4,12,200
Taxable leave Salary in the hands of Mr. X 1,84,700

15. Working Note 1
 Calculation of Period of Earned leave at the credit of the
Employee.
 Step 1 : Length of Service (14 3/4years) only completed years
to be considered so 14 years.
 Step 2: Rate of Leave Entitlement (X is entitled for 45 days
leave for each year of service, but as per governemt only 30
days leave for each year is available) so 14 years service means
14 months leave.
Adv. Dr. Chitra K. Deshpande

16. Working Note 1
 Step 3: Leave availed in Service : it is given as 90 days means
90days /30 days = 3 months (Converting days into month)
 Step 4 Leave to the credit of Employee at the time of
retirement = 14 Months – 3 months = 11 Months.
 Step 5 : leave at the credit X Average monthly Salary (WN2)
 = 11months X 22,750/- = 2,50,250/-
Adv. Dr. Chitra K. Deshpande

17. Working Note 2
 10 Months X Average Monthly Salary
 Step 1 : Average Monthly Salary
 Salary for this purpose means basic Salary + DA+ Commission
(if terms of employment so provide).
 Average Salary means Salary drawn during the period of 10
months immediately preceding the retirement.
 a] From March 1st 2022 to 31st July 2022 Rs. 22,600/-
 (22,600 X 5 months = 1,13,000)
 b] From 1st August 2022 to Dec 31st 2022 Rs. 22,900/-.
(22,900 X 5 months= 1,14,500)
Adv. Dr. Chitra K. Deshpande

18. Average Monthly Salary
 So average salary for 10 months= 1,13,000 + 1,14,500=
2,27,500/10 = 22,750/- Average Monthly salary.
Adv. Dr. Chitra K. Deshpande

19. Working Note 3
 Government is Rs.3,00,000/-
 But as X has already availed 57,000/- exemption after
retirement from PQR Ltd. Amount available for claiming
exemption is Rs.3,00,000 – Rs.57,000 = Rs. 2,43,000/-.
Adv. Dr. Chitra K. Deshpande

20. Class work
 LEAVE SALARY CALCULATION
 Samar, a Non-Government Employee, receives Rs. 3,75,000/-
as leave Salary at the time of retirement on February 20th 2022.
On the basis of the following information, determinethe amount
of taxable leave salary:
 Basic Pay Rs. 15,000 per month since 2009
Adv. Dr. Chitra K. Deshpande

21. Class Work continued….
 Duration of Service 26 years
 Leave at the credit while retirement 25 months
 Entitlement of leave salary : 60 days salary for each year of
service and actual leave availed while in service is 27 months.
 Calculate leave Salary Taxable in the hands of Samar on
retirement for AY 2023-24.
Adv. Dr. Chitra K. Deshpande

22. Gratuity Section 10(10)
 Gratuity is a retirement benefit. It is generally payable at the
time of cessation of employment and on the basis of duration of
service.
Adv. Dr. Chitra K. Deshpande

23. Advance Salary
 – is taxable in the year it is received. It is not included in the
income of recipient again when it becomes due. However, loan
taken from the employer against salary is not taxable.

24. Arrears of Salary
 is taxable in the year it is received, if it has not been taxed in
earlier years on due basis.
 Bonus – Bonus is taxable in the year in which it is received.

25. Pension
 – Pension received by the employee is taxable under ‘salary’.
Benefit of standard deduction is available to pensioner also.
Pension received by a widow after the death of her husband
falls under the head ‘Income from Other Sources’

26. Profits in lieu of salary:
 (i) 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;
 (ii) Any payment (other than “Receipts Exempt from Tax” under
section 10) due to or received by an employee from his employer or
former employer or from a provident 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.

27.  (iii) Any amount whether in lumpsum or otherwise, due to
or received by an assessee from his employer, either before his
joining employment or after cessation of employment.
Dearness Allowance/Additional Dearness Allowance are
fully taxable.

28. City Compensatory Allowance
 CCA is taxable as it is a personal allowance granted to meet
expenses wholly, necessarily and exclusively incurred in the
performance of special duties unless such allowance is related to
the place of his posting or residence. (Sec.10 (14) (ii) Proviso).
 Certain allowance prescribed under Rule 2BB, granted to the
employee either to meet his personal expenses at the place where
the duties of his office employment are performed by him or at the
place where he ordinarily resides, or to compensate him for
increased cost of living are also exempt. For details see under para
“Receipts Exempt from Income Tax”.

29. House Rent Allowance
 : HRA received by an employee residing in his own house or in
a house for which no rent is paid by him (e.g. residing with
parents) is taxable. In case of other employees, HRA is exempt
upto a certain limit.

30. Entertainment Allowance
 : Entertainment allowance is fully taxable, but a deduction is
allowed in certain cases

31.  Tiffin allowance, Meal Allowance, Refreshment Allowance,
Dinner Allowance, Health Allowance, Medical Allowance,
Telephone Allowance, Holiday Allowance, Education
Allowance, Special Qualification Allowance and Servant
Allowance are fully taxable.

32. Academic Allowance
 An allowance granted for encouraging academic research and
other professional pursuits, or for the books for the purpose,
shall be exempt u/s.10 (14). Similarly newspaper allowance
shall also be exempt.

33. Conveyance Allowance
 It is exempt to the extent it is paid and utilized for meeting
expenditure on travel for official work. (Sec.10(14)(i).

34. Any Other Allowance
 (Other than those mentioned in “Receipts Exempt from Income
Tax”) is fully taxable.