Salary includes remuneration received for personal services under a contract of employment. For income to be categorized as salary, there must be an employer-employee relationship. Salary is taxable on a due or receipt basis, whichever is earlier. Components of taxable salary include basic salary, bonuses, commissions, allowances, perquisites, and profits in lieu of salary. Certain allowances such as transport, house rent, and leave travel are partially or fully tax exempt. Perquisites include benefits provided by employers and are taxed as salary. Specified employees who are directors, substantial interest holders, or high salary earners face additional taxes on perquisites.

1. Salary – Sec 15,16,17
Lecture 7

2. What is salary?
• Salaries mean and include remuneration in
any form due for personal service as per the
contract of employment or service.
• Essential Element for Taxability of Income as
Salaries is Employer Employee Relationship

3. • Salary, in simple words, means remuneration of a
person, which he has received from his employer
for rendering services to him. But receipts for all
kinds of services rendered cannot be taxed as
salary.
• The remuneration received by professionals like
doctors, architects, lawyers etc. cannot be
covered under salary since it is not received from
their employers but from their clients. So, it is
taxed under business or profession head.

4. Characteristic of Salary
1. The relationship of payer and payee must be of
employer and employee for an income to be
categorized as salary income. For example: Salary
income of a Member of Parliament cannot be specified
as salary, since it is received from Government of India
which is not his employer.
2. The Act makes no distinction between salary and
wages, though generally salary is paid for non-manual
work and wages are paid for manual work.
3. Salary received from employer, whether one or more
than one is included in this head.

5. 4. Salary is taxable either on due basis or receipt basis which
ever matures earlier:
i) Due basis – when it is earned even if it is not received in the
previous year.
ii) Receipt basis – when it is received even if it is not earned in
the previous year.
iii) Arrears of salary- which were not due and received earlier
are taxable when due or received, which ever is earlier.
5. Compulsory deduction from salary such as employees’
contribution to provident fund, deduction on account of
medical scheme or staff welfare scheme etc. are examples
of instances of application of income. In these cases, for
computing total income, these deductions have to be added
back.

6. Components of Salary
1. Salaries, wages and advance against salary / wages
2. Annuity / pension
3. Gratuity
4. Fees/ commission
5. Perquisites
6. Profits in lieu of / in addition to salaries/ wages
7. Incentive/ bonus
8. Contribution made by Central Government or any other employer in the
account of the employee under new pension scheme effective 1.4.04
9. Leave encashment
10. Allowances
11. Annual accretion in RPF to the extent taxable
12. Transferred balance to a RPF to the extent taxable
To sum up, it is the gross salary that will be taxed and not the net received by
the employee

7. Allowances
• Allowances not charged to tax are
 Allowance to Government Employees outside India : is
exempt u/s 10 (7)
 Allowance to High Court or Supreme Court Judges u/s
is also exempt
 Allowance paid by United Nations Organization-Exempt
by virtue of Section 2 of United Nations (Privileges and
Immunities) Act, 1974
 Compensatory allowance under Article 222(e) of the
Constitution of India received by a Judge- Exempt from
tax.

8. • Transfer Allowance granted to meet the cost of travel on tour or on
transfer including any sum paid for transfer, packing and
transportation of personal effects on such transfer
• Tour/ Travelling Allowance whether granted on tour of for the
period of journey to meet the ordinary daily charges incurred by an
employee on account of absence from his normal place of duty;
• Conveyance Allowance granted to meet the expenditure incurred on
conveyance in performance of duties of an office or employment of
profit,
• Helper Allowance granted to meet the expenditure incurred on a
helper where such helper is engaged for performance of the duties
of an office or employment of profit
• Research Allowance granted for encouraging the academic, research
and training pursuits in educational and research institutions;
• Uniform Allowance granted to meet the expenditure on the
purchase or maintenance of uniform for wear during the
performance of duties of an office or employment of profit

9.  Children education allowance @ Rs. 100 p.m. per child, maximum
of 2 children.
 Children hostel allowance @ Rs. 300 p.m. per child maximum of 2
children
 Transport Allowance granted to an employee (other than in 10
below) to meet his expenditure for the purpose of Commuting
between the place of his residence and the place of his duty @ Rs.
800 p.m.
 Transport Allowance granted to an employee who is blind or
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 his duty @ Rs. 1,600 p.m.
 House Rent Allowance
 Leave Travel Concession Alowance

10. • Allowances Fully taxable in all cases:
• City Compensatory Allowance
• Fixed Medical Allowance
• Tiffin/Lunch/Dinner/Refreshment Allowance
• Servant Allowance
• Dearness Allowance
• Project Allowance
• Interim Allowance
• Any Other Cash Allowance

11. Perquisites ( Sec 10 {17(2)} )
• It means any benefit in addition to salary and wages.
• Any sum paid by the employer which otherwise would have
been payable by the employee.
• Eg. Rent free house accommodation, car, amenities provided
free of cost,concessional interest on housing loan, etc
• The benefit should be from the employer to be charged as
salary
• It could be in cash or kind
• It should have a legal origin

12. Perquisites taxable (Category A )
Perquisites taxable in the hands of all employees
(fringe benefit tax whether payable or not by
employer)
 Furnished /Unfurnished house without rent or
at a concession (not in a remote area, house for
MPs, and stay in hotel on transfer not exceeding
15 days)
 Service of sweeper, gardener( not taxable for
non specified employee)
 Education facility to employees family members
(not taxable for non specified employee)

13. Contribution by employer to effect an
assurance on the life of the employee or to
effect an annuity
Interest free loan( exempted for loan not
exeeding Rs.20000, or loan for medical
treatment)
Use of Employers movable assets are taxable
except laptop, desktop & car

14. Perquisites taxable (Category B)
B1. Car or other automotive conveyance ( not
taxable for non specified employee)
B2. Transport facility by a Transport
undertaking( not railways & airlines)
B3 Traveling touring accomodation
B4 Free Food & Beverage ( Rs.50 within office
hours exempted)
B5 Gift voucher beyond Rs.5000
B6 Club Membership & credit Card

15. Specified Employee
• A director is a specified employee
• An employee who holds 20% or more voting
power (called substantial interest)
• Where an employee is drawing salary of more
than Rs.50,000 per year ( without considering
non monetary benefit and exemptions like
HRA) but , since the minimum exemption limit
is Rs.1,10,000, practically all tax payers are
specified employees.

16. PROFIT IN LIEU OF SALARY
[ U/S 17(3) ] includes
• Any compensation due or received in connection with the termination
of the employment of due to modification of the terms and conditions
of his employment.
• Payments from an employer or former employer from provident fund or
such other funds, excluding the amounts exempt from tax under Section
10 and excluding the amounts of contribution made by the assessee and
the interest thereon
• Any sum received under a Keyman Insurance Policy including the sum
allocated by way of Bonus on such policy.
• Amounts due to or received, whether in Lumpsum or otherwise by any
assessee from any person.

17. Deductions from salary (Section 16)
• Professional Tax paid in this year
• Entertainment allowance: available only for
Government employees
Least of the following is Exempt
a) 1/5 of Basic Salary
b) Rs 5,000
c) Amount Received as Entertainment
Allowance during the year.

18. Leave Encashment
• GOVERNMENT EMPLOYEES GETTING LEAVE ENCASHMENT
• AT TIME OF RETIREMENT:
 Govt employee at that time is exempted from tax.
 While leave encashment while in service is taxable

19.  NON GOVERNMENT EMPLOYEES are chargeable to tax on
leave encashment while in service
 LEAVE ENCASHMENT AT TIME OF RETIREMENT:
 He is exempted on basis of least of the following:
1. period of earned leave (in no.of months) to the credit of
employee at the time of his retirement or leaving the job)*
average monthly salary
2. months *average monthly salary
3. the amt. specified by the government Rs.3,00,000
4. leave encashment actually received at the time of
retirement

20. HOW TO FIND OUT
AVERAGE MONTHLY SALARY?
• Salary for this purpose means
 1.basic salary and includes
 2 .dearness allowances if terms of employment so
provide
 3.Commision if it is fixed % based on turnover
• It is calculated on the basis of average salary
drawn
 during the period of 10 months immediately
preceding the retirement.( date wise)

21. Leave travel concession is exempted twice in a block of FOUR
years.
It is available to Indian citizen for proceeding on
leave for himself and his family (family includes
spouse, children, dependent parents ,brother
and sister)
 Amount of exemption is the actual fare paid for
travel anywhere in India by the economy class
airfare of national carrier by shortest route, or
first class air conditioned rail fare, or any other
mode not exceeding the shortest first class rail
fare.
 The Present Block is Jan 1,2014 – Dec31,2018

22. Gratuity Sec 10 ( 10 )
 GRATUITY WHILE IN SERVICE IS FULLY TAXABLE
 Gratuity Received on retirement/ resignation is exempted from
tax as follows
A. Govt. Employee – Entire Amount Received is exempted from Tax.
B. Employee Covered Under Payment of Gratuity Act
Least of the following is exempted
1. 15 days salary for every completed year of service in part there of
in excess of 6 months
= (15/26) * Last Salary Drawn * Completed years of service
Last salary drawn = basic salary + dearness allowance
1. Amount Specified by the Government ( i.e. Rs 10,00,000)
2. Amount Actually Received

23. Gratuity Sec 10 ( 10 )
C. Other Employee
Least of the following is exempted
1. ½ month salary for every year of service
2. Amount specified by the government ( i.e.
Rs. 10,00,000)
3. Amount Actually Received

24. Pension ( Sec 10 { 10 A }
 Commuted Pension is exempt from tax as
follows
A. Govt. Employee – entire amount is exempted
from tax
B. Non Govt. Employee – Exemption is as follows
1. He receives Gratuity = 1/3 of the full value
2. He does not receive gratuity = ½ of the full
value.
3. Monthly Pension ( Un commuted Pension is
fully taxable )

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