Head salary under taxation law.

1. Salary under section
15 and 16 and 17 of
income tax law.
NAME-SMIT SHAH
SUBJECT-INCOME TAX LAW
TOPIC-SALARY UNDER INCOME TAX LAW.(SECTION 15 ,16 ,17)
YEAR-5 YEAR.
ROLL NUMBER-95
UNIVERSITY-M.S.U VADODARA.

2. What is salary?
 Payer & Payee.
 Salary and wages conceptually no difference.
 More than one source.
 Salary from former/present/prospective employer.
 Foregoing salary is salary income.
 Tax free salary should include the tax paid by the employee.
 Voluntary payment.

3. Salary (section 17)
 (1) "salary "includes —
 (i) wages
 (ii) any annuity or pension;
 (iii) any gratuity.
 (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;
 (v) any advance of salary.
 (vi) the annual accretion to the balance at the credit of an employee participating in a recognised provident
fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule.
 (vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of
rule 11 of Part A of the Fourth Schedule of an employee participating in a recognised provident fund, to
the extent to which it is chargeable to tax under sub-rule (4) thereof; and
 [(viii) the contribution made by the Central Government or any other employer in the previous year, to the
account of an employee under a pension scheme referred to in section 80CCD;]
 Leave encashment

4. Basis of Charge
 Salary is chargeable to tax when it is due to be paid whether it is paid or
not
 Salary is chargeable to tax when any amount is paid whether it is due or
not
 Arrears of salary paid to employee is chargeable to tax.

5. Place of accrual of salary income
(sec.9(1)
 Income under the head “salaries "is deemed to accrue or arise at the place
where the service is rendered. Keeping in view the aforesaid general
observation the rules are given below-
 Under section 9(1)(ii)salary of service rendered in India is deemed to accrue or
arise in India even if it is paid outside India or it is paid or payable after the
contract of employment in India comes to the end.
 Pension paid abroad is deemed to accrue in India if it is paid in respect of
service rendered in India.
 Likewise leave salary paid abroad in respect of leave earned in India is deemed
to accrue or arise in India.
 By virtue of this section salary paid by Indian government to an Indian national
is accrue or arise in India even if he service rendered outside India.

6. Allowance.
 Allowance is generally defined as fixed quantity of money or other
substance given regularly in addition to salary for the purpose of meeting
some peculiar requirement connected with service rendered by employee
or as compensation for unusual condition of services.it is fixed ,pro-
determined and given irrespective of actual expenditure.

7. 1.Fully exempted allowances
 *These allowance are not at all taxable.
 1) Foreign allowance(sec.10(7))-Any allowance or perquisites paid or allowed outside
India by the government to an Indian citizen for rendering service outside India is wholly
exempted from tax.
 House rent Allowance given to judges of high court and supreme court.
 Sumptuary allowance given to judges of high court and supreme court/Upsc members
and its chairman.
 Allowance for UN employees
 House rent allowance.-
 upto 40% of basic salary (50% in case of employees staying in 4 metros - Delhi,
Mumbai, Chennai and Bangalore) subject to actual rent paid being more than HRA plus
10% of basic.

8. House Rent Allowance(sec.13(13A))
The least of the following is exempt from tax:
1.50% of Salary where the assessee lives in Mumbai, Delhi ,Chennai & Calcutta
and 40% in other cases
2.Actual HRA received
3.Excess of rent paid over 10% of Salary.
Exempted Amount= least of the above
Taxable Amount= Actual HRA Rec.- Exempted amt.
(Salary for HRA means basic salary , commission if based on fixed percentage
of sale & DA ,if it is part of retirement benefits)

9. Taxable allowance
 I. Dearness allowance.
 Overtime allowance.
 City compensatory allowance.
 Lunch/Tiffin/marriage/family/deputation/warden/non practising/project/overtime/medical
allowance/Servant allowance.
 .Entertainment allowances: Entertainment allowance is first included in salary income under the head
‘’Salaries” and therefore a deduction is given on the basis on the following;
 In case of government employee (central/state government employee)at least following is deductible .
 Rs 5000.
 20 percentage of basic salary.
 Amount of entertainment allowance granted during previous year.

10.  Conveyance: Exempted upto Rs.800 per month if used for travel between
home and place of work
 Medical expenses: Exempted when it is a reimbursement of actual
expenses upto Rs.15000 .Beyond this limit, it is taxable.
 Tiffin allowance: It is taxable

11. Special allowance exempted-AS per
rule 2BB(sec10(14)(i)
 Tour/travel/transfer allowance: it also include any sum paid connection with transfer
packing and transportation of personal effect on such transfer.
 Any allowance whether granted on tour or for the period of journey in connection with
transfer to meet the ordinary daily charges taken by employee on the account from his
normal place of duty such as daily allowance.
 Uniform allowance –An allowance to meet the expenditure on the purchase/maintain
the uniform for wearing during the performance of duties of an office.
 Academic allowance –An allowance Granted for the encouragement the academic
research and other professional pursuit.
 Helper allowance :exempted up to actual amount spent on engaging a helper to
perform the official duties.

12. INCOME FROM SALARIES
(RETIREMENT)
 PENSION
 COMMUTED PENSION
 LEAVE ENCASHMENT SALARY
 GRATUITY
 RETRENCHMENT COMPENSATION
 COMPENSATION ON VOLUNTARY RETIREMENT

13. PENSION[sec.10(10A)]
1.Pension from UNO
2.Pension received by the
family of armed forces
3.Family pension received
by family members after
the death of employee
It is not chargeable to tax
Exempted
Taxable as in the hands
of recipient as income from
other sources

14. Pension is chargeable tax as follows-
 Uncommuted
Pension
 Commuted Pension
Commuted Pension
Govt. /Non Govt
 Employee
Govt. Employee
Non-Govt.
Employee
Taxable
Exempted
from Tax
It is fully or partly
Exempted

15. Uncommuted pension.
 It is periodical payment of pension. For example A gets monthly pension
of rs 1000 .it is taxable as salary under section 15 in hands of government
employees as well as nongovernment/private employees.
 Commuted pension
 It is lump some amount in liu of periodical payment.
 For example A after his retirement gets monthly Rs 2000 as monthly
pension. As per service rules he gets 25 percentage of his pension
commuted for rs60000 (after computation 75% remain he will receive) i.e.
rs 1500 by way of monthly pension.in this case Rs 60000 is commuted
pension which he is receive in lieu of 25 percentage of his monthly
pension.

16. COMMUTED PENSION (cont.)
Central /state Govt, Local
authority employee
Non Govt. Employee
Non Govt. Employee
With or without
Gratuity
Gratuity is received
Gratuity is not
received
Exempted
Fully
1/3 of normal
Exempted
½ of normal
is exempted

17. Leave encashment(section 10(10AA)
 As per service rules an employee gets different leaves. If a employee does
take a single leave within year as per service rule it may be lapse/it may
be encashed/it may be accumulated .the accumulated leaves standing to
the credit of an employee may be availed by the employee during his
service time or subject to service rules such leaves may be encashed at the
time of retirement or leaving the job. Encashment of leave by
surrendering leave standing to one’s credit is known as “leave salary”.

18. GOVERNMENT EMPLOYEES GETTING LEAVE ENCASHMENT
AT TIME OF RETIREMENT:
 Government 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
2.10 months *average monthly salary
3. the amount specified by the government Rs.3,00,000
4. leave encashment actually received at the time of retirement.

20. GRATUITY [SEC10(10)]
Gratuity is a payment made by employer to an employee in
appreciation of past service rendered by employee.
Gratuity is retirement benefit.it is generally payable at the time of cessation of
employment and on the basis of duration of service.
 1. GRATUITY WHILE IN SERVICE IS FULLY TAXABLE
-Government employee –any death-cum retirement gratuity received by
government employee is wholly non-taxable under section 10(10)(1)
 Non-government employee-fully or partially exempt under section 10
 Non-government employees not covered by the Payment of Gratuity Act
,1972- fully or partially exempt under section 10

21. GRATUITY (cont.)
 IN CASE OF GOVT EMPLOYEES:
 wholly exempt
 IN CASE OF EMPLOYEES COVERED UNDER PAYMENT OF GRATUITY ACT:
 15 days salary based on last drawn for each year of service (26 days a month as
working days)15/26 multiplicity last drawn salary multiple length of service
 Rs.10 LACS
 gratuity actually received
(the least of the above 3 is exempt from tax and the balance is taxable)

22. GRATUITY (cont.)
 how to find length of service -if 6mths or less then ignored else taken as
1 full year
 what is salary: Salary means last drawn by employee and includes
dearness allowance, dearness pay, comm. on sales
 how to determine 15 days salary -calculated by dividing salary last drawn
by 26 days

23. In case of Any other employee is
which is not covered by payment of
gratuity act. Any other gratuity received by an employee on retirement ,death,
termination ,resignation, or on his becoming incapacities prior to the
retirement shall be exempt to the extent of the minimum of of the
following amounts.
 Actual amount of gratuity .
 Half month’s average salary for every completed year of service.
 Rs 10 lakh.

24. RETRENCHMENT COMPENSATION [SEC 10(10B)]
Retrenchment compensation is exempted from tax to the extent
of the following –
1- The amount calculated in accordance with provision of
section 25F(b) of the industrial dispute act.
15/26 multiple average salary of 3 month multiple number of
years of service.
2-Rs 5 Lakh.
3-actual amount received
-salary=basic salary dearness allowance.
-No.of years of services-completed years or part thereof in
more than 6 month.
.

25. COMPENSATION ON VOLUNTARY RETIREMENT
[Sec.10(10C)]
 The exemption is least of-
 1-Higher of
 (a)’’salary”x 3 month x completed year of service.
 (b)“salary balance months to retire at superannuation.
 Actually compensation amount.
 Maximum statutory limit-rs 500000
 -Salary =Basic salary +dearness allowance(in
terms)+commission based on percentage of turnover .
 -No.of years of service=completed years.

26. PERQUISITES
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

27. 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)
 The amount of any contribution to an approved superannuation fund by the
employer in respect of the assesse to the extent it exceeds one lakh rupees.
 Sum paid by the employer in respect of any obligation of the assesses ,which
would otherwise have been payable by the assesses. For example , fees paid by
the employer directly to the school or tuition fees of the children of the
employee.
 The value of any specified security/sweat equity share allotted/transfeered at
free of cost/concessional rate , directly/indirectly by former/present employer
to employee/director of the company.

28. Perquisites taxable (with or without FBT)
 Any legal charged taken by employer for defense/save of employee who
face legal allegation .for example A is arrested in allegation of an accident
B is employer hire a lawyer for A for legal proceeding and save him. So
what expenditure take by employer behind legal proceeding is taxable
perquisites.
 Use of Employers movable assets are taxable except laptop, desktop & car

29. Perquisites taxable (Category B)
B1 Free Food & Beverage ( Rs.50 within office hours exempted)
B2 Gift voucher beyond Rs.5000
B3 Club Membership & credit Card.

30. 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.

31. Rent Free Unfurnished Accomodation
 Classified as Central & State Government Employees
 Private Sector Employees
 Central and state government employees-This category include state and
central govt. employees beside this category include central and state
government employees who are on deputation to a public sector
undertaking but the accommodation is provided by the central/state
government. Yes employee of local authority like V.M.C not covered by
this provision.
 Value of perquisite in respect of accommodation provided to such
employee is equal to the license fee which would been determined by
central/state government in accordance with rules framed by government
for allotment of houses to its officers.

32.  Accomodation provided to MPs, judges of High court & Supreme Courts,
employees who are in Govt. service being provided accomodation by
virtue of their employment is exempted from any tax
Central & State Govt. Employees

33. Meaning of salary for House
accomodation
 Salary includes –
- basic salary
- DA ( if terms of employment provide)
- bonus, commission, fees
- all other taxable allowances
- any monetary payment chargeable to tax, but not monetary payments in
the nature of perquisite

34. Furnished accomodation
 Step 1: Find out the value of the accomodation without the value of the
furniture
 Add 10% of the value of furniture if owned by employer or actual hire
charges when hired
( Furniture includes TV, fridge, radio and any household appliances)

35. Furnished accomodation in a Hotel
It Includes accomodation in a motel, guest house.
The value of perquisite is the lower of the two.
 24% of salary paid during the period when accomodation is taken or
 Actual paid by the employer
(not taxable if provided for 15 days in a P.Y. and when an employee is
transferred)

36. Accomodation at a concessional value
Value is determined as follows:
 Find out the value of accomodation as if it is not provided at a concession
 Deduct the value of rent charged from the employee

37. Perquisite of free domestic servants
 The actual cost of the employer shall be taxable in hands of employee .
 The actual cost in such a case shall be total amount of salary paid/Payable
by employer for such service as reduced by any amount paid by employee
for such service.
 If servants are provided in a rent free accommodation , they are not valued
separately .

38. Valuation of gas, electric energy or water
supply
 The value of the benefit to the employee resulting from supplying
gas/electric energy/water for his household consumption shall be
determined a s sum equal to the amount paid an on that account by the
employer to the agency supplying the gas/electric energy/water.
 Where such supply is made from resources owned by employer/Master
without purchasing them from any other outside agency the value of
perquisites would be manufacturing cost per unit.
 Where the employee is paying any amount in respect of such services to
the employer then the amount of actual expenses is reduced ,, it is
taxable perquisites in hands of employee.

39. Perquisites of gift
 The value of any gift or voucher or token in lieu of which such gift may be
received by employee or any member of his household on such
ceremonial occasion, birthday occasion. If the such gift value is more than
5000 rs then it is taxable.
 The provision are not applicable for not applicable for cheque/cash gifts
and they would be fully taxable even if they are less than 5000 rs.

40. Provident fund
 A provident fund is retirement benefit created for the employees so that they
receive lump some amount on retirement or termination of service. There are 4
type of p.f
 1.Statutory provident fund .
 This fund is applicable for government employees, this fund is maintained by
government , or semi-government departments like railways, RBI, colleges etc.
 2.Recognized provident fund .
 A fund which is approved by the chief commissioner of income tax is known as
recognized provident fund , This fund is maintained by industrial undertakings,
business houses ,banks etc. IN organisation where 20 or more workers do
their work they are covered under this provident fund.

41.  3.unrecognized provident fund
 If the p.f does not follow or comply with rules imposed upon it the
commissioner of income tax shall not grant the recognise and pf shall be
called as Unrecognised provident fund.
 4.Public provident fund .
 This fund is started for the self-employed people for example Actores,
Advocates, accountants etc.

42. Payment from an approved
superannuation fund(sec.10(13):
 Any payment from approved superannuation fund irrespective it is approved by the chief
commissioner or commissioner of income tax shall be fully exempted if the payment is made
to,
 1-the legal heirs on the death of the beneficiary.
 2-An employee in lieu or in commutation of an annuity on his retirement at or after a
specified age or on his becoming incapacitated prior to such retirement.
 3-An employee on his leaving the service in connection with which the fund is established
otherwise than , in the circumstance mentioned in point (2)above i.e leaving employment for
better pay etc… then the lump sum received will be fully taxable.
 - it is worthwhile to note that-
 1)during employment-employer’s contribution to such a fund in excess of 100000 p.a per
employee is taxable in hands of the employees under section 17(2)(vii)
 2)Employee’s contribution is entitled for deduction under section 80C from his gross total
income.
 3- interest on accumulated balance is exempt from tax every year.

43. Deductions from salary
 Standard deduction(sec.16(i)(ia)-Standard deduction is available as
follows -
 A for the assessment year 2006-07 to 2019 –Standard deduction is not
available.
 From The assessment year 2019-20: Standard deduction rs 40000 or
amount of the salary whichever is lower.
 Professional Tax paid BY THE ASSESSEE [Sec.16(iii)]
 Entertainment allowance: available only for Government employees
[sec.16(ii)]
 actual amt. received
 1/5 th of basic salary
 limit- rs. 500000
The least of the above will be the amount for deduction