UNIVERSITY INSTITUTE OF LEGAL STUDIES

PANJAB UNIVERSITY, CHANDIGARH

TAXATION LAW PROJECT

TOPIC: ‘SALARY’

SUBMITTED TO:
Prof. Kriti Bhatia
SUBMITTED BY:
Gavneet Singh

Section- A
Roll No. 34/19
BALLB (Hons.)
Semester 10th
 ACKNOWLEDGEMENT

I would like to express my gratitude towards my teacher Adv. Kriti Bansal for
giving me this opportunity to work on this project on the topic ‘Salary’ under
Taxation Law. This project helped me to have a better understanding of the topic
and have conceptual clarity on the same. Further, I am grateful to my friends for
helping me with this project.

Gavneet Singh

10th Semester, BALLB(Hons.)

 TABLE OF CONTENTS

1. INTRODUCTION

2. SALARY:

a) Meaning of salary

b) Chargeability of Salary

c) What is to be included in salary?

3.PERQUISITES:

(a) Taxability of Perquisites

(b) Perquisites includes

4. ALLOWANCES

5. DIFFERENCE BETWEEN ALLOWANCE AND SALARY

6. DEDUCTIONS

7. CONCLUSION

8. BIBLIOGRAPHY
 INTRODUCTION
The Income Tax Act of India serves as the legal framework for the imposition of income tax on
various entities, including individuals, Hindu Undivided Families (HUFs), companies, firms, co-
operative societies, trusts, and other artificial persons. Each of these entities is subject to separate
tax levies, regulated by the Income Tax Act of 1961.

Under chapter 4 of Income Tax Act, 1961 (Section 14), income of a person is calculated under
various defined heads of income. The total income is first assessed under heads of income and
then it is charged for Income Tax as under rules of Income Tax Act.
Among the different sources of income specified by the Income Tax Act, the income earned
under the head “Salaries” holds paramount significance. This category encompasses the earnings
received by individuals in the form of remuneration, wages, commissions, or any other monetary
compensation arising from employment. Understanding the provisions and implications
associated with income under the head ‘Salaries‘ is crucial for both taxpayers and tax authorities.
It enables individuals to effectively comply with their tax obligations while ensuring a fair and
equitable assessment of taxable income.

For calculating income tax, conferring its liability, providing exemptions, and concessions and
making the process of Income tax filing simple, Section 14 of the Income Tax Act, 1961 provides
5 heads of Income. These are as follows-
1. Salary
2. Income from house property
3. Profit and gains from business or profession
4. Capital gain.
5. Income from other sources
The aggregate income under 5 heads is called Gross Total Income.

1
 SALARY
Section 17(1) of the Income Tax Act, 1961, provides an inclusive definition of salary, which
means it covers various forms of payments or benefits received by an employee from an
employer, but it is not exhaustive.

Salary is the remuneration received by or accruing to an individual, periodically, for service

rendered as a result of an express or implied contract.

The existence of employer employee relationship is the sine qua non for taxing a particular
receipt under the head “salaries.

For the purpose of income tax, the meaning of the term ‘salary’ is much wider than what it gives
an inclusive definition of salary.

Employer-Employee Relationship: For a payment to qualify as “salaries,” there must be an

employer-employee relationship between the payer and payee. While every servant is an

employee, an agent may or may not be considered an employee. In the case of CIT v. Govinda
swaminathan1 it was held that there is no employer-employee relationship between State
Government and Advocate General. In CIT v. Shiv Charan Mathur, it was held that no
employee-employer relation existed between MLA or MP.

Persons who are not included-

a. Member of Parliament or State Legislature is not a Government employee and therefore,

remuneration received by him is not taxable as salary income, but as income from other
sources. However, the salary received by the Minister in the Government is taxable under
the head salary.

b. High court judges are also not considered to be employees under the government as they
are appointed under the constitution.

1 233 ITR 264 (Mad)

2
 CHARGEABILITY OF SALARY
Section 15 of the Income Tax Act, 1961 states that salary income is chargeable to tax either on
*due basis* or on *received basis*, whichever is earlier.

Due Basis

Whenever salary becomes due from the employer it will be chargeable to tax even if it is not
received by the employee, i.e., Salary will be included into the total income of the employee of
the Previous Year when it becomes due (when service is rendered).

For example, if an employee's salary for March 2024 is due on 31st March 2024, but he
or she receives it on 10th April 2024, then the salary income is taxable in the previous year 2023-
24, as it became due earlier than receipt.2

Received Basis

Whenever salary is received it would be chargeable to tax even if it has not become due to the
employee, i.e., Advance salary will be included in the total income of an employee of the
Previous Year when it is received even if it has not become due.

Example: Mr. A takes a salary of two months (April & May 2023) of the Previous Year
2023-24 in advance in March 2023 (during the Previous Year 2022-23). Hence, this salary of the
Previous Year 2023-24 received in advance in the Previous Year 2022-23 will become income of
the Previous Year 2022-23 taxable on a received basis though it was not due in that previous
year.

Arrears of salary

Arrears of salary would be taxable on a received basis if not taxable earlier on a due basis.3

2 How to Calculate Income Tax on Salary with Examples, available at: https://tax2win.in/guide/how-to-calculate-
income-tax-on-salary.
3 Dr. Jyoti Rattan, Taxation Laws 186 -187 (Bharat Law House Pvt. Ltd., New Delhi, 15th edn., 2023)

3
 4

SALARY INCLUDES
As per Section 17, the following are included in salary-

1. Wages- "Wages" means "pay given for labour, usually manual or mechanical, at short stated
intervals, as distinguished from salaries or fees.

2. Annuity or pension.- Annuity and pension paid by the employer are taxable under the head
"salary" whether they are paid voluntarily or under a contractual obligation." If annuity or
pension is paid by the employer, it is taxable under the head "salary", but if it is paid by a person

4 Computation of Salary Income [ Section15-17], available at: https://incometaxmanagement.com/Pages/Tax-

Ready-Reckoner/GTI/Salary/Computation-of-Salary-Income.html (last visited Feb 15, 2024).

4
other than the employer, e.g., annuities paid under an insurance policy or a deed or will, it is
taxable as under "income from other sources" and not a "salary".

In simple language, an "annuity" is a sum of money payable yearly or at any rate

periodically, from a source which is exclusively or at any rate primarily personal estate. Thus, in
legal parlance, "annuity" means a fixed sum payable yearly or periodically. A pension is a
periodical allowance or a stipend granted on account of past services.

3. Gratuity- A gratuity may be understood as a payment made by the employer to the employee
for the services rendered by him (the employee) to the employer. If gratuity is paid by a person,
other than the employer, it is taxed as "Income from other sources" and not as "salary".

4. Advance of salary. Salary received in advance is to be included in salary on a received basis

even if it has not become due.

5. Payment in respect of leave not availed of.- Any payment received by an employee in
respect of any period of leave not availed of by him shall be included within the meaning of
'salary' chargeable to income tax.

6. Annual accretion to the provident fund.-That portion of the annual accretion in any previous
year to the balance at the credit of the employee participating in a recognised provident fund
consists of :

a) Contributions made by the employer in excess of 10% of the employee's salary; and

b) Interest thereon which is in excess of one-third of the employee's salary or excess of the
amount calculated at the rate of 7.5 per cent per annum, shall be deemed to have been
received by the employee in that previous year and shall be included in his total income
for ‘income-tax’.

7. Sums in transferred balance. The amount transferred from an unrecognised provident fund
to a recognised provident fund account of the employee is included in the employee's total
income under the head “salary”. Clause (vii) of sub-section (1) of Section 17 provides that

5
“salary” includes 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.

8. Contribution by the central government or any other employer to the account of

employees under the pension scheme [S. 17 (1) (iii)] - It provides that "salary" shall include 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.

9. Contribution made by the central government to Agniveer Corpus Fund- By Finance Act,
2023, under Section 80CCH, the contribution made by the central government to Agniveer
corpus fund account of an individual enrolled in the Agnipath Scheme is taxable under salary if
beyond the exempted limit.

10. Fees, Commission, perquisites and profits in lieu of or in addition to salary are also
included under the head Salary-

(a) Fee. Fees may be understood to mean reward or compensation for services rendered or to be
rendered especially payment for professional services, optional amount, or fixed by custom or
laws, charge; pay.

(b) Commission. Commission means "the percentage or allowance made to a factor or agent for
transacting business for another. For this purpose, there is no difference between the commission
which is wholly dependent upon the work done and a fixed salary monthly. Thus, fees,
commissions, perquisites or profits may be in lieu of or in addition to regular remuneration and
include honorarium or purely voluntary payments.5

5 Kailash Rai, Taxation Laws 50 (Allahabad Law Agency, Faridabad, 9th edn., 2016).

6
 PERQUISITES
A perquisite is defined in the Oxford English Dictionary as any casual emolument, fee, or profit,
attached to an office or position in addition to the salary or wages. Perquisite has a known
normal meaning, namely, personal advantage. In simple words, perquisites are the benefits in
addition to the normal salary to which the employee has a right by virtue of his employment.

Thus, 'perquisites' are the benefits or amenities in cash or in kind, or in money or money’s worth
and amenities which are not convertible into money, provided by the employer to the employee
whether free of cost or at a concessional rate.6

IMPORTANT POINTS -

• All cash allowance is included in the ordinary meaning of perquisites: – all cash allowance
is included and hence taxable under section 17(2) of income tax act. City compensatory
allowance, bad climate allowance, shift allowance and incentive bonus are included as
perquisites under section 17(2) of income tax act.

• Any benefit once allotted or given to an employee by his employer is a taxable perquisite
whether or not it is used or enjoyed by the assessee. Where rent free accommodation was
allotted or given by the employer to his employee which was never used or enjoyed by the
employee during the previous year. However, once a perquisite is allotted to a person it
becomes taxable in his hands irrespective of whether or not it was enjoyed by him. [CIT v
Baba Singh Chauhan (1984) 150 ITR 8 (Del.)] Therefore, if a person is not interested in a
perquisite he should not accept it otherwise it would become taxable in his hands.

• Perquisite would be taxable as income if that benefit is authorised by the employer i.e., it
should be of legal origin. Unauthorised benefit taken by the employee from his employer is a
non-taxable perquisite for the employee.
Example: A professor of a university is not entitled for a domestic servant from the university,
therefore, if he uses a university peon as a domestic servant it is not taxable perquisite in the
hands of the professor. Similarly, where the employer's car is used by the employee for his

6 Supra note 1 at 90.

7
 personal use who was authorized to use it for official purposes then it would create a legal
obligation to return that advantage and hence would not be considered as a perquisite.
Therefore, such unauthorized benefit would not be a taxable perquisite for the employee, [CIT
v Kulandeivelu (1975) 100 TR 629 (Mad)].

• A perquisite is taxable as salary only when it is provided by the employer during the
continuance of employment: – any perquisites allowed by a person other than employer is
taxable as income from other sources. For example tips received by hotel waiters from
customers are taxable as income from other sources

TAXABILITY OF PERQUISITES

There are two types of perquisites-

A. Taxable perquisites

B. Non-taxable perquisites

A. TAXABLE PERQUISITES

Perquisites may be taxable in the hands of specified employees or all employees. Accordingly,
taxable perquisites are of two types:

(a) perquisites Taxable in the hands of specified employees.

(b) perquisites Taxable in the hands of all employees (specified or non-specified)

(a) Perquisites Taxable in the hands of specified employees:

In the case of specified employees, all perquisites given under section 17(2) (i)- (vii) shall be
taxable.

Non-specified employee: It means any employee who is not specified.

8
Specified employee: It means an employee mentioned under section 17(2)(iii) which includes
the following:

i. A director of a company who is an employee of that company: It is immaterial whether

the employee is a full-time director or part-time director, whether he is a nominee of
management, worker, government, or financial institution of the board. Similarly, it is
also immaterial whether he is the director throughout the Previous Year or not.

ii. An employee who has a substantial interest in the company: The substantial interest
here means the owner of the equity share carrying 20% or more voting powers in the
employer company. It is important to note that beneficial ownership is the criterion to
be adopted rather than legal ownership. Therefore, an employee holding even a
majority of equity shares in the employer company shall not be a specified employee
if he has no substantial interest in the shares.

iii. An employee drawing in excess of 50,000 An employee (who is not covered under the
above two categories) whose income chargeable under head salary exceeds Rs. 50,000
is a specified employee. However, for calculating 50,000 following shall be excluded:

-All non-monetary benefits

-Monetary benefits which are not taxable under Section 10

-Deduction on account of entertainment allowance and professional tax.

-Where salary is received from more than one employer the aggregate salary from the employers
will be considered for determining 50,000.

(b) Perquisites taxable in the hands of all employees specified as well as non- specified:

All perquisites are given under section 17(2)(i), (ii), (iv), (v), (vi) and (vii) and shall be taxable in
the hands of all employees. Only the perquisites under section 17(2)(iii) are not taxable in their
hands.7

7 Supra note 3 at 196.

9
PERQUISITES INCLUDES :-

Section 17(2) refers to the concept of “perquisites” in relation to taxation. This section provides
an analysis of various components that are considered perquisites for taxation purposes.

Following are the main components:

 Rent-free Accommodation
 Concession in Rent
 Specified Securities and Sweat Equity Shares
 Contributions to Funds
 Other Fringe Benefits or Amenities

(i) Valuation of Rent free accommodation [Section 17(2)(i)] & Accommodation at

concessional rates [Section 17(2)(ii)] :

Valuation of Rent free accommodation:

For determining the value of rent free accommodation or value of concession in rent when
accommodation is provided at concessional rent, accommodation may be divided into following
parts-

(I) Accommodation provided by the government;

(II) Accommodation provided by any other employer,

(III) Accommodation provided by the government or any other employer in a hotel:

(IV) Accommodation provided by the government or any other employer at the new place of
posting while the employee retains the accommodation at the earlier place.

I. Accommodation provided by the Government to its employees: Where the accommodation

is provided by Union or State Government to their employees either holding office or post in

10
connection with the affairs of Union or State Government, then the value shall be determined as
under:

(i) Where the accommodation is unfurnished: The value shall be the licence fee
determined by Union or State Government in respect of accommodation in
accordance with the rules framed by that government as reduced by the rent actually
paid by the employee.

(ii) Where the accommodation is furnished: The value of perquisite shall be determined
as if it is an unfurnished accommodation (i.e. value determined as per clause (a)
above.) Such value shall be increased by following:

a. If such furniture is owned by the employer- by 10% p.a. of the cost of furniture
(including television sets, radio sets, refrigerators, other household appliances, air
conditioning plant or equipment) or

b. If such furniture is hired from a third party- the actual hire charges paid or payable
for the same. The valuation of furniture shall be reduced by any charges paid or
payable for such furniture by the employee during previous year.

However, where house is provided at concessional rate of rent then value of furniture as
determined above shall be reduced by any charges paid or payable for such furniture by the
employee during the previous year.

II. Where the accommodation is provided by any other employer: Where accommodation is
provided as rent free or at concessional rate by any employer other than government then it may
be owned by the employer or taken on lease or rent by the employer. However, the value shall be
determined as under:

(i) Where the accommodation is unfurnished:

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Nature of Accommodation Accommodation Accommodation
Accommodation provided in the city provided in a city provided in any
having population having population other city having
exceeding 25 lakhs) exceeding10 lakhs but population not
not exceeding 25 lakhs exceeding 10 lakhs
Accommodation is 15% of salary in respect 10% of salary in respect 7.5% of salary in
owned by the
of the period during of the period during respect of the period
employer
which the said which the said during which the
accommodation was accommodation was said accommodation
occupied by the occupied by the was occupied by the
employee during the employee during the employee during the
previous year previous year previous year.
Accommodation is  Actual amount of lease or rent paid or payable by the employer, or
taken on lease or  15% of salary
rent by the
whichever is lower.
employer

Where the accommodation is furnished: The value of perquisite shall be determined as if it is an

unfurnished accommodation (i.e. value determined as per chart given above.

a. Such value shall be increased by 10% p.a. of the cost of furniture (including
television sets, radio sets, refrigerators, other household appliances, air conditioning
plant or equipment or other similar appliances or gadgets) or

b. if such furniture is hired from a third party, the actual hire charges payable for the
same. Such valuation of furniture shall be as reduced by any charges paid or payable
for such furniture by the employee during the previous year.

III. Where the accommodation is provided by the employer (Government or other

employer) in a hotel- The value of the accommodation shall be-

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 (i) 24% of salary paid or payable for the previous year, or;

(ii) the actual charges paid or payable to such hotel:

whichever is lower, for the period during which such accommodation is provided

Exception- There will be no perquisite value if the accommodation is provided in a hotel if the
following two conditions are fulfilled.

(a) Such accommodation is provided for a period not exceeding 15 days; and

(b) It has been provided on the transfer of the employee from one place to another.

IV. Where on account of his transfer from one place to another, the employee is provided
with accommodation at the new place of posting while retaining the accommodation at the other
place, the value of perquisite shall be determined regarding only one such accommodation which
has the lower value (as determined according to the above provisions) for a period not exceeding
90 days and thereafter the value of perquisite shall be charged for both such accommodations.

Exception- Remote area

It means an area that is located at least 40 kilometres away from a town having a population not
exceeding 20,000 based on the latest published all-India census.

The accommodation provided by the employer shall be a tax-free perquisite if the

accommodation is provided to an employee working at a mining site, an onshore oil exploration
site, a project execution site, a dam site, a power generation site or an offshore site which

(a) being of a temporary nature and having a plinth area not exceeding 800 square feet, is located
not less than eight kilometres away from the local limits of any municipality or a cantonment
board; or

(b) is located in a remote area.

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Perquisite Taxable in case of specified employees Section 17 (2) (iii)]

When the employer provides perquisites in the form of facilities instead of discharging the
employee’s monetary obligations, these perquisites are taxable only for specified employees.

The value of any benefit or amenity granted or provided free of cost or at a concessional rate,
which has not been included in previous categories, will be taxable for specified employees.
Examples of such services include provision of a sweeper, gardener, watchman, or personal
attendant; use of gas, electricity, or water supplied by the employer; free or concessional tickets;
use of a motor car; and free or concessional educational facilities.

The valuation of these perquisites should follow the discussion on the valuation of perquisites
The term “specified employees” includes the following:

(i) Director employee: An employee who is also a director of a company, regardless of

their full-time or part-time status, nominee status, or duration of directorship.

(ii) Employee with substantial interest: An employee who has a substantial interest in
the company, defined as being a beneficial owner of equity shares carrying 20% or
more of the voting power in the company. Beneficial ownership, rather than legal
ownership, is considered.

(iii) Employee with income exceeding ₹50,000: An employee whose income chargeable

under the head ‘salaries’ exceeds ₹50,000 (excluding the value of non- monetary

benefits or amenities) and does not fall under the categories (i) and (ii) above.

Section 17 (2)(iv) : Amount paid by an employer in respect of any obligation which

otherwise would have been payable by the employee

Section 17 (2)(v) : Any sum paid or payable whether directly or through a fund, other
than a recognized one. provident fund or an approved superannuation fund or deposits-
linked insurance fund, to effect an assurance on the life of, the assessee or to effect a

14
contract for an annuity i.e. value of life insurance premium or deferred annuity premium
paid or payable by the employer.

Exception- However, the premium paid by the employer on an accident policy taken by it in
respect of the employee would not be a perquisite. [CIT v Lala Shri Dhur8 and CIT v Vinay
Bharat Ram (1981) 129 ITR 128 (Del)].

Section 17 (2)(vi) :

The value of any specified security or sweat equity shares allotted or transferred, directly or
indirectly, by the employer or former employer, free of cost or at concessional rate to the assesse.

Section 17 (2)(vii) :
The amount or aggregate of amounts of any contribution made

-in a recognised provident fund

-in NPS referred to in section 80CCD(1)

-in an approved superannuation fund

by the employer to the account of the assessee, to the extent it exceeds Rs7,50,000.

Section 17 (2)(viia) :

Any annual accretion by way of interest, dividend or any other amount of similar nature during
the previous year to the balance at the credit of the recognised provident fund or NPS or
approved superannuation fund to the extent it relates to the employer’s contribution in excess of
Rs. 7,50,000.

Section 17(2)(viii) :

The value of any other fringe benefit or amenity as prescribed. {Given in rule 3(7) of income tax
rules 1962}

8 (1972) 84 ITR 192 (Del).

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B. NON TAXABLE PERQUISITES

1. Medical facility or medical reimbursement:

(a) First-aid medical facility: The value of any medical treatment provided to an employee or any
member of his family in a hospital, dispensary or nursing home maintained by the employer.

(b) Medical expenditure incurred by the employee on his medical treatment or treatment of any
member of his family subject to a maximum of 15,000 in the previous year.

2. Food and beverages provided to employees: the following shall be a tax-free perquisite in
the hands of the employees-

(a) Any food or beverages provided by the employer to his employees in the office or factory.

(b) Any food or beverages provided to the employee by voucher which is not transferable and
usable only at eating joints. Where the employer is not liable to pay FBT under Chapter XII-H,
the exemption shall be up to 50 per meal.

3. Recreational facilities: Any recreational facility provided to a group of employees (not being
restricted to a selected few employees) by the employer is not taxable.9

There are a number of perquisites which are tax free. Some of them are listed below-

 Leave travel concession for two journeys in a block of four years.

 Education allowance up to Rs. 100 per month per child for a maximum of two children.

 Hostel expenditure allowance up to Rs. 300 per month per child for a maximum of two
children.

 Interest-free or concessional loans provided by the employer, subject to certain

conditions.

 Rent-free accommodation provided to a judge of High Court or Supreme Court or an

official of Parliament, Union Minister or Leader of Opposition.

9 Supra note 3 at 198.

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  Rent-free accommodation provided to an employee working at a mining site or a dam site
or a power generation site or an offshore site, subject to certain conditions.

Medical Perquisites in India

▪ Expenditure incurred or reimbursed on any medical treatment provided to an employee or
any member of his family is fully exempt without limit for treatment in any hospital,
dispensary etc.

 Maintained by the employer

 Maintained by the Govt.

 Maintained by any local authority or

▪ Health insurance premium (Accident insurance policy group insurance of employees)

incurred or reimbursed for insurance on the health of an employee or any member of his
family is fully exempt without limit

▪ Reimbursement of any medical insurance premium by an employer for a policy taken in the
name of the employee or his family member is exempt

Medical Facilities Outside INDIA:

▪ Medical expenses incurred by the employer shall be tax-free to the extent permitted by RBI

▪ Expenses on stay abroad of

▪ the employee or any member of his family for medical treatment

▪ with one attendant who accompanies the patient in connection with such treatment shall
be tax-free to the extent permitted by RBI

▪ Travel expenses shall be fully exempt if gross total income does not exceed Rs.
200.000(excluding such travel expenses but after including taxable medical and boarding if
GTI exceeds 200.000 Rs. then the total amount of travel expenses incurred by the employer
shall be taxable i.e., included in salary.

17
Profits in lieu of salary or in addition to salary [Section 17(3)] :

Profit in lieu of salary or in addition to salary includes following:

(a) The amount of compensation due to or received by the employee from his employer or
previous employer at the time of or in connection with termination of service.
(b) The amount of compensation due to or received by the employee from his employer or
previous employer in connection with the modification of terms and conditions of employment.
(c) Any lump sum amount received prior to employment or after cessation of employment.
(d) The lump sum amount received by assessee from Unrecognized Provident Fund to the extent
of employer's contribution and interest on that.
(e) Any amount (including bonus) received under a Keyman Insurance Policy (KIP).
(f) Any lump sum due to or received by an assessee from his employer or previous employer at
the time beyond exempted limit in following cases;

• Payment of retrenchment compensation Section 10(10B).

• Payment from Statutory or General Provident Fund (SPF or GPF) or Public Provident Fund
(PPF) Section 10(11).

• Payment from Recognized Provident Fund (RPF) Section 10(12).

• Payment from an approved superannuation fund Section 10(13).

• Payment of HRA Section 10(13A).

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 ALLOWANCES

Allowances are fixed amounts paid by the employer to the employee to meet certain expenses,
such as house rent, travel, medical, etc. Whereas Perquisites are benefits or facilities provided by
the employer to the employee, either free of cost or at a concessional rate, such as rent-free
accommodation, interest-free loan, car, etc.

Both allowances and perquisites are part of salary income, but some of them may be exempt
from tax, either fully or partially, subject to certain conditions and limits.

TYPES OF ALLOWANCES

a. Exempted Allowances: Certain allowances are exempted and hence not taxable in the
hands of the assessee (employee). However, the limit of exemption is mentioned under
this Act. Further exempted allowances are of two types:

(i) exempted in general

(ii) exempted in special cases

(i) Exempted in general (Discussed in detail in Exempted income): allowances exempted in

general include: HRA [Section 10(13A)] and Notified special allowance [Section 10(14)]

(ii) Exempted in special cases: Allowances exempted in special cases include allowances to
Indian citizens given by the Government of India for rendering service outside India [Section
10(7)]; allowances to Member of Parliament [Section 10(17)], allowances from UNO.

b. Deducted Allowances: Certain allowances are deductible i.e. first these are included in
gross salary and then the deduction is given. However, the limit of deduction is also
fixed. An example is entertainment allowance [Section 16(ii)].

19
 c. Partly taxable allowance: If the assessee receives exempted or deducted allowance
which is beyond the exempted or deducted limit then the balance would be taxable.

Example: Maximum limit in case of Entertainment allowance [Section 16(i)) for

deduction is 5,000 therefore if the assessee is receiving 6,000 as Entertainment allowance
then 1,000 will be taxable.

d. Fully taxable allowance: There are certain fully taxable allowances-

Dearness allowance; Medical allowance; Lunch/Tiffin allowance; Warden allowance

Servant allowance; Overtime allowance; NPA (Non-Practicing allowance);

DIFFERENCE BETWEEN PERQUISITES AND ALLOWANCE:

Parameters Perquisites Allowance

Employer-provided benefits on Employer-provided fixed
Definition account of the professional services amount to meet specific
provided by them. expenses of the employee
It can be taxable or non-taxable When paid along with salary,
Tax liability depending on its type and may not allowances are taxed. Thus, it
increase your tax liability. increases your tax liability.
Employers pay perquisites in
Employers generally pay
Mode of payment consideration mainly. However, they
allowances in cash.
pay reimbursements in cash.
When allowances are added to
Influence on in-hand In-hand salary is not affected in any
your salary, it increases your
salary way by perquisites.
take-home pay.
Rent-free accommodation,
Medical allowances, house
Examples transportation facilities provided by
rent allowance, etc.
the company, etc.

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 DEDUCTIONS FROM SALARY

Section 16 of the Income Tax Act of 1961, provides for certain deductions from salary income,
which are as follows:

 Standard deduction: A flat deduction of Rs. 50,000 from gross salary income,
irrespective of the amount of salary or expenses incurred by the employee.

 Entertainment allowance ( Section 16 (ii)): A deduction of the least of the following

from gross salary income, only for government employees.10 Entertainment allowance is
also known as sumptuary allowance which is received by employees to entertain guests. It
is either of the following, whichever is less-

- Amount received as entertainment allowance.

- 1/5th or 20% of basic salary (exclusive of any allowance, benefit or other perquisites)

- Rs. 5,000

 Professional tax ( Section 16 (iii)): A deduction of the amount of professional tax paid by
the employee to any state government or local authority, from gross salary income. In
computing the income chargeable under the head 'salary', it allows a deduction of any sum
paid by the assessee on account of a tax on employment within the meaning of clause (2)
of Article 276 of the Constitution of India leviable by or under any law. The maximum tax
that can be levied by the local authority is Rs.2500.11

Net Salary=

10 Supra note 5.
11 Jyoti rattan

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Income from salary = Gross annual salary - Deductions under section 16.

Gross annual Salary = Basic Salary + Any amount under section 17 + Allowance + Bonus,
Overtime salary etc.

CONCLUSION

Section 15 of the Income Tax Act makes Income earned under the head “Salaries” chargeable to
income tax. This includes salary due from an employer or former employer, salary paid or
allowed to the employee, and arrears of salary not charged to income tax in any earlier year. The
definition of salary under section 17(1) is inclusive and covers various incomes, including
wages, annuity or pension, gratuity, fees, commissions, perquisites, and profits in lieu of or in
addition to any salary or wages. Perquisites under the head salary are the benefits which the
employee enjoys in lieu of or in addition to the salary and hence, it forms a part of his salary.
Section 16 provides for deductions, including a standard deduction of up to ₹50,000, a deduction

for entertainment allowance, and the deduction on account of any sum paid towards employment
tax.

The taxpayer can be clear as to the nature and calculation of the tax they are paying to the
Government, and be aware if he/ she is liable to pay tax. One can also claim any exemptions or
deductions as provided under the Income Tax Act. This makes the collection of said tax much
smoother and overall convenient for both the taxpayer and the government.

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 BIBLIOGRAPHY

PRIMARY SOURCES

Act/Statute

1. Income Tax Act, 1961 (Act 43 of 1961).

2. Finance Act, 2023 (Act 8 of 2023).

Case Laws

1. CIT v. Lala Shri Dhur (1972) 84 ITR 192 (Del)

2. CIT v. Vinay Bharat Ram (1981) 129 ITR 128 (Del).

3. CIT v Baba Singh Chauhan (1984) 150 ITR 8 (Del.)

4. CIT v Kulandeivelu (1975) 100 TR 629 (Mad)

SECONDARY SOURCES

Books

1. Dr. Jyoti Rattan, Taxation Laws (Bharat Law House Pvt. Ltd., New Delhi, 15th edn.,
2023).

2. Kailash Rai, Taxation Laws (Allahabad Law Agency, Faridabad, 9th edn., 2016).

Websites

1. How to Calculate Income Tax on Salary with Examples, available at: https://tax2win.in/
guide/how-to-calculate-income-tax-on-salary (last visited Feb 17, 2024).

2. Perquisites in Income Tax: Meaning, Examples, Types, Taxability & Exemption,

available at: https://cleartax.in/s/perquisites-in-income-tax (last visited Feb 18, 2024).

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