L-11

INCOME UNDER THE HEAD

“SALARIES” AND ITS
COMPUTATION
 Meaning of Salary

Salary income refers to the compensation received by an

employee from a current or former employer for the
execution of services in connection with employment.
Thus, income is taxable as salary under Section 15 only if
an employer-employee relationship exists between the
payer and payee.
Charging Section of Salary:-
As per sec 15 of the Income Tax Act 1961 salary is taxable:-
a) On due or receipt basis whichever is earlier
b) Any arrears of salary received are fully taxable in the year
of receipt subject to relief u/s 89(1).
 Salary U/S 17(1)
Salary in common parlance means any amount paid by an employer to his
employees in lieu of services rendered by them. However income tax act
1961 defines the term “ salary” u/s 17(1) to include the following
monetary as well as non monetary payments :-
a) Wages
b) Annuity or pension
c) Any Gratuity
d) Any fees, commission, perquisite or profits in lieu of or in addition to any
salary or wages
e) Any Advance of Salary
f) Leave Encashment
g) Employers contribution to provident fund in excess of 12% of Salary
h) The contribution by the central government or any other employer in the
Previous year to the account of an employee under a pension scheme u/s
80CCD
 Place of accrual of salary income U/S 9(1)
Under section 9(1)(ii), salary earned 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 an
end.
Example: If an employee gets pension paid abroad in respect of
services rendered in India, the same will be deemed to accrue in
India. Similarly, leave salary paid abroad in respect of leave
earned in India is deemed to accrue or arise in India.
The simple rule is that Salary accrues at the place where the
services are rendered. Therefore, even if a non-resident is paid
salary outside India in respect of services rendered in India, it is
deemed to accrue or arise in India.
 List of Different Forms of Salary for Computation of Income under the head
'Salary'

Basic Salary Taxable.

Dearness allowance / Pay Taxable.

Advance Salary Taxable in the year of receipt.

Arrears of Salary Taxable in the year of receipt, if not taxed on due basis earlier.

Leave Encashment while in Taxable.

Service
Leave encashment at the 1.In case of Government employees. it is fully exempt from tax.
time of retirement or at the 2.in case of non-Government employees, it is exempt from tax to the extent
time of leaving the job of the least of the following:
1. Cash equivalent of leave salary in respect of the period of earned
leave at the credit of employee at the time of retirement (which
cannot exceed 30 days’ “average salary” for every
completed year of service); or
2. 10 months “average salary; or
3. Amount specified by the Government, i.e., Rs. 3,00,000; or
4. Leave encashment actually received at the time of retirement.
 Contddd…..

Salary in lieu of Taxable

notice
Salary to Partner Not chargeable under the head “Salaries” but taxable under the head “Profits and
gains of business or profession”.
Fees and Taxable.
Commission
Bonus Taxable on receipt basis if not taxed earlier on due basis.

Gratuity 1.In case of Government employee it is fully exempt from tax.

2.In case of non-Government employee covered by the Payment of Gratuity Act,
1972 it is exempt from tax to the extent of the least of the following:
1. 15 days’ salary for each year of service (or part thereof exceeding 6
months);
2. Rs. 10,00,000; or
3. Gratuity actually received.
3.In case of non-Government employee (not covered by the Payment of Graft liv
Act) it is exempt from tax to the extent of the least of the following:
1. Rs. 10,00,000;
2. Half month’s salary for each completed year of service; or
3. Gratuity actually received.
 Contddd…..

Pension Uncommuted pension is taxable in all cases. Commuted

pension is fully exempt from tax in the case of a Government
employee (i.e.. an employee of the Central Government, State
Government, local authority and statutory corporation).
In the case of non-Government employee, commuted pension
is exempt to the extent given below —
1.1/3 of normal pension is exempt if the employee receives
gratuity; or
2.1/2 of normal pension is exempt from tax if the employee
does not receive gratuity.

Pension under new pension 1.Employer’s contribution is first included in salary and then a
scheme in the case of a deduction is available (to the extent of 10 % of salary) under
Government employee or any section 80CCD.
other employee joining on or 2.Employee’s contribution is deductible under section 80CCD
after January 1, 2004 . to the extent of 10 % of salary.
3.When pension is received out of the aforesaid amount, it
will be taxable in the year of receipt.
 Contddd…..

Annuity from employer Taxable as salary.

Annual accretion to the 1.Excess of employer’s contribution over 12% of salary is

credit balance in taxable.
recognized provident fund 2.Excess of interest over notified interest is taxable (notified rate
of interest is 9.5 % ).

Retrenchment Exempt from tax to the extent of least of the following:

compensation i.Amount calculated under section 25F(b) of the Industrial
Disputes Act; or
ii.An amount specified by the Government (i.e., Rs. 5,00,000).
When compensation is paid under any scheme approved by the
Central Government, these limits are not applicable and the entire
amount is exempt.
 Contddd…..

Remuneration for extra Fully taxable under section 15.

duties
Compensation received Exempt up to Rs. 5 lakh, if a few conditions are satisfied.
under Voluntary One of the conditions is the amount payable on account of
Retirement Scheme voluntary retirement or voluntary separation of the employees
(VRS) does not exceed
1.the amount equivalent to 3 months’ salary for each
completed year of service, or
2.salary at the time of retirement multiplied by the balance
months of service left before the date of his retirement on
superannuation. (Relief under Section 89 is not available. )

Salary from UNO Not chargeable to tax.

Salary received by a Not Taxable up to 2 years
Teacher / Researcher
from a SAARC member
State
 Salary Allowances in India
Any monetary benefit offered by the employer to its
employees for meeting expenditures, over and above the
basic salary are known as Salary Allowances.

The employers offer various kinds of additional benefits in

monetary terms to their employees over and above the
basic salary, which are known as salary allowances. These
salary allowances are given to meet the expenditure of
particular nature. According to Income Tax Act,
allowances are added to the salary of an individual and
taxed under the head Income from Salaries. The salary
allowances can be bifurcated into three broad categories,
taxable, non-taxable and partly taxable allowances.
 Taxable Allowances
1. Dearness Allowance (DA): DA is provided for converse the inflationary effect from
the cost of living of the people. Income Tax Act does not provide any exemption on
DA.
2. City Compensation Allowance: It is offered to the employees for meeting the
highly inflated costs in the large or metro cities.
3. Entertainment Allowance: It is an amount given to the employees for achieving the
expenses incurred towards the meal, beverages, hotels, etc. for the business clients
of the company. An exemption u/s 16(ii) can be claimed for entertainment
allowance by the Government employees. Non-government employees are taxed
entirely.
4. Overtime Allowance: It is provided to the employees for working more than the
regular working hours.
5. Tiffin Allowance: It is provided to meet the food expenses.
6. Cash Allowance: Any cash allowance provided by the employer becomes taxable.
For instance, marriage allowance, holiday allowance, etc.
7. Project Allowance: Allowance provided to bear the expenses relating to the project.
8. Servant/helper Allowance: Amount provided for hiring a servant is fully taxable in
the hands of an employee.
 Partly Taxable Allowances
1. House Rent Allowance: HRA is offered to meet the residential rent expenses of
the employee for its accommodation. It is partially exempt u/s 10(13A), and the
remaining amount after deduction is taxable.
2. Leave Travel Allowance: LTA is offered for travelling anywhere in India.
Deduction on the fare cost is provided to some extent, and the balance is taxable.
3. Conveyance Allowance: An amount of Rs. 1600 per month is offered to the
employees for commuting from home to office and vice-versa. Any expense over
and above that is taxable.
4. Medical Bills Reimbursement Allowance: A token of Rs. 15000 is given by the
employer for meeting the treatment costs in case the employee or its family falls
ill. Any expenditure incurred above Rs. 15000 is taxable.
5. Education Allowance: Employees are given a certain amount to educate their
children in India. Any sum spent more than the provided limit of Rs. 100 per
month per child for maximum two children, is taxable.
6. Hostel Allowance: Per Child Rs. 300 per month for maximum two children is
allowed as a deduction.
 Fully Exempt Allowances
1. Allowance to Government Employees: Any amount
paid as a provision for rendering services outside
India by the Government Employees is exempt.
2. Allowances to Judges of Supreme Court or High
Court are not taxable.
3. Benefits received by the people working in United
Nations Organisation (UNO) are fully exempt.
 House Rent Allowances
Who Can Claim Tax Deduction on HRA – Eligibility
Criteria
A part of HRA can be claimed as a tax deduction according
to Section 10(13A) of the Income Tax Act, if the following
eligibility criteria are met:
1. You should be a salaried individual.
2. You should receive HRA as a salary component.
3. You should live in a rented house.
4. You should be actually paying house rent, i.e., the rent
name.
 How is House Rent Allowance (HRA) Calculated?

The amount of tax deduction that can be claimed over HRA

is the least of the following:
Actual rent paid minus 10% of salary, or
Actual HRA offered by the employer, or
50% of salary when residential house is situated in
Mumbai, Delhi, Chennai or Kolkata; 40% of salary when
residential house is situated elsewhere

NOTE: Salary refers to the sum of basic salary, dearness

allowance (DA) and any other commissions, if applicable
for the purpose of HRA calculation.
 Example of HRA
 Mr. A, who lives in a rented house, works as a salaried employee in
Delhi. He pays a monthly rent of Rs. 12,000 and receives a monthly
HRA of Rs. 15,000. Now, let us understand how much tax
deduction he can claim on the basis of this allowance.
 The following table shows the salary structure for Mr. A.

Salary Amount
Component (Rs.)
Basic 23,000
HRA 15,000
Conveyance 3,000
Medical
1,250
Allowance
Special Allowance 2,300
Total 44,550
 Solution
The amount of tax deduction that can be claimed
will be the least of the following:
(Actual rent paid) – (10% of the basic salary) = Rs.
12,000 – (10% of Rs. 23,000) = Rs. 9,700; or
Actual HRA offered by the employer = Rs. 15,000; or
50% of the basic salary = 50% of Rs. 23,000 = Rs.
11,500.
The least of the above three is the actual amount paid as
rent minus 10% of the basic salary. Hence, Mr. A will
get an HRA exemption of Rs 9,700 on his total taxable
income.
 Questions for Practice

1. X who resides in Madras, gets Rs. 3,00,000 pa as basic

salary. He receives Rs. 50,000 pa as HRA. Rent paid by
him is Rs. 40,000 pa. Find out the amount of taxable HRA
for A/Y 2021-22.
2. X, a resident of Ajmer, receives Rs. 1,92,000 pa as basic
salary during the P/Y 2020-21. In addition he gets Rs.
19,200 pa as dearness allowance forming part of basic
salary for computation of all retirement benefits, 7%
commission on sales made by him sale made by X during
the relevant previous year is Rs. 86,000) and Rs. 24,000
pa as HRA. He, however, pays Rs. 21,500 pa as house
rent. Determine the quantum of HRA exempt from tax.
 Entertainment allowance U/S 16(ii)
Entertainment allowance as per Section 16(ii) is first included in salary income
under the head “Salaries” and thereafter a deduction is given on the basis
enumerated in the following points:
A. In the case of a Government employee (i.e., Central Government or a
State Government employee), the least of the following is deductible:
1. 5,000
2. 20 percent of basic salary ; or
3. Amount of entertainment allowance granted during the previous year.
Note: In order to determine amount of entertainment allowance deductible
from salary Income, the following points need consideration:
1. For this purpose “salary” excludes any allowance, benefit or other perquisites.
2. Amount actually expended towards entertainment (out of entertainment
allowance received) is not taken into consideration.

B. In the case of a non-Governmental employee (including employees of

statutory corporation and local authority), entertainment allowances is not
deductible, and are completely chargeable to tax.
 Questions for Practice
1. X, a Government employee, gets Rs. 6,00,000pa
as basic pay. In addition, he receives Rs. 72,000 as
entertainment allowances. His actual expenditure on
entertainment for official purposes, however, exceeds
Rs. 75,000. can he claim deduction of actual amount
spent by him on entertainment?
 Leave Encashment [S. 10(10AA)]
Encashment of earned leave while in service will be treated as
income U/ S 17(1)(v)(a).
Encashment of earned leave on retirement would however, be
exempt to the extent of least of:
➢ 10 months’ salary calculated on the basis of last 10 months
average salary or
➢ Rs. 3,00,000
➢ Amount equivalent to earned leave
➢ Actual amount paid by the employer

Entitlement of earned leave should not exceed 30 days for every year
of actual service. Limits provided for aggregate maximum from any
number of employers. Encashment of earned leave on retirement
would be wholly exempt for employees of Central/State Government
 Special Allowances [S. 10(14)]
Following prescribed special allowances are exempt:

➢ Allowance, not in the nature of perquisite, granted to

meet expenses wholly, necessarily and exclusively
incurred in the performance of duties, to the extent to
which actually incurred.
➢ Allowance granted to meet personal expense at the place
where duties of his office are ordinarily performed or at
the place where he ordinarily resides or to compensate for
increased cost of living as may be prescribed in Rule
2BB.
 Nature of allowance prescribed under Rule
2BB
1. For cost of travel on tour or on transfer,
2. For ordinary daily charges on account of absence from
normal place of duty on tour or for journey in
connection with transfer,
3. For conveyance in performance of duties, where free
conveyance is not provided,
4. For expenditure on helper engaged for performance of
office duties,
5. For encouraging academic, research and training
pursuits in educational and research institutions,
6. For purchase or maintenance of uniform,
7. Special Compensatory Allowance in specified areas to
extent specified,
8. Tribal Area Allowances in specified states up to Rs. 200
 Contdd……

9. For meeting personal expenditure of employee of transport

system running transport vehicle, up to 70% of allowance,
maximum of Rs. 10,000 p.m., provided no daily allowance for
the said duty is received.
10. Children educational allowance @ Rs. 100 p.m. per child,
maximum of two children,
11. Children hostel allowance @ Rs. 300 p.m. per child, maximum
of two children,
12. Compensatory Field Area Allowance in specified areas, @ Rs.
2,600 p.m.
13. Compensatory modified field area allowance @ Rs. 1,000 p.m.
14. Counter insurgency allowance @ Rs. 3,900 p.m. to members of
armed forces.
 Contdd……

15. Transport allowance granted to an employee, who is blind [or

deaf and dumb] or orthopedically 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 exempt upto Rs 3,200 per month
16. Underground allowance granted to employee of underground
coal mines : Rs. 800 per month.
17. Special allowance in the nature of high altitude to members of
armed forces : Rs. 1,060 per month for altitude of 9,000 to
15,000 ft. or Rs. 1,600 per month for altitude above 15,000 ft.
18. Special compensatory highly active field area allowance to
members of armed forces –Rs. 4,200 per month.
19. Island (duty) allowance to members of armed forces – Rs.
3,250/- per month.