Income from the head

Salary
Meaning of Salary
Relationship between payer and payee - Income under the
head Salaries covers all remuneration due/paid to a person
in respect of services rendered by him under an express or
implied contract of employment.
Charge under this head of income presumes the relationship of
an employer and an employee between the payer and payee in
contrast to that of a principal and an agent.
The distinction between the two types of relationship is vital
because income earned by an employee from his employer is
chargeable under the head Salaries, whereas income earned
by an agent is chargeable either under the head Profits and
gains of business or profession or under the head Income
from other sourcesCowan v. Seymour [1920] 1 KB 500 (CA).
 EMPLOYER AND EMPLOYEE VIS-A-VIS PRINCIPAL AND AGENT - An
employee works under the direct control and supervision of his
employer. He not only receives instructions from his employer but is
subject to right of the employer to control the manner in which he
should carry out the instructions. On the other hand, an agent is
generally free to carry out his principals instructions according to his
own discretion.
Section 17 (1)
Salary includes:
a. wages ;
b. any 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. any payment received in respect of any period of leave not availed by him ;
g. the portion of the annual accretion in any previous year to the balance at the credit of an
employee participating in Recognised Provident Fund to the extent it is taxable ;
h. transferred balance in a Recognised Provident Fund to the extent it is taxable; and
i. the contribution made by the Central Government in the previous year, to the account of an
employee under a pension scheme referred to in section 80CCD
Treatment of forms of salary
Advance salary- taxed on receipt basis
Arrear salary- taxed on receipt basis
Leave encashment-
During service- taxable

After leaving job: least of the below is exempt:

Months of leave* x avg. monthly salary
10 x avg. monthly salary
Rs. 3,00,000
actual leave encashment

(avg. sal. based on last 10 months)

 Months of leave:
((Years of service x leaves credited per year upto 30) leaves
availed)/30
Gratuity
Governed by Payment of Gratuity Act, 1972
For employees covered by the Act, the least of the following is
exempt:
1/2 months salary for each completed year of service
Rs. 10,00,000
Gratuity actually received

(sal. is last basic+DA)

Allowances
Allowance is generally defined as fixed quantity of money or other substance
given regularly in addition to salary for the purpose of meeting some particular
requirement connected with the services rendered by the employee or as
compensation for unusual conditions of that serviceMutual Acceptance Co. v.
FCT [1944] 69 CLR 389.
It is fixed, pre-determined and given irrespective of actual expenditure. Under
the Act, it is taxable under section 15 on due or receipt basis, whichever
comes earlier, irrespective of the fact that it is paid in addition to or in lieu of
salary
 Allowances exempt to the extent used
Travelling allowance/transfer allowance- Any allowance (by whatever name
called) granted to meet the cost of travel on tour or on transfer (including any
sum paid in connection with transfer, packing and transportation of personal
effects on such transfer).

Conveyance allowance -Conveyance allowance granted to meet the

expenditure on conveyance in performance of duties of an office (it may be
noted that an expenditure for covering the journey between office and
residence is not exempt from tax).

Daily allowance -Any allowance whether granted on tour or for the period of
journey in connection with transfer, to meet the ordinary daily charges
incurred by an employee on account of absence from his normal place of
duty.
Allowances where exemption not dependant on
expenditure
Transport allowance is granted to an employee to meet his
expenditure for the purpose of commuting between the place of his
residence and the place of his duty.
It is exempt up to Rs. 1600 per month (Rs. 3200 per month in the case of an
employee who is blind or orthopaedically handicapped).
Transport facility between office and residence is exempt.
House rent Allowance
The least of the below is exempt from tax:
50 % of salary (BDCM) or 40 % of salary
House rent allowance received by the employee in respect of the period
during which rental accommodation is occupied by the employee
The excess of rent paid over 10 per cent of salary

Salary for the purpose of HRA exemption means basic salary and includes
dearness allowance if terms of employment so provide. It also includes
commission based on a fixed percentage of turnover achieved by an employee as
per terms of contract of employment
Exemption is denied where an employee lives in his own house, or in a house for
which he does not pay any rent or pays rent which does not exceed 10 per cent of
salary.
HRA
The amount of exemption in respect of house rent allowance received by an
employee depends upon the following :
a. salary of the employee ;
b. house rent allowance ;
c. rent paid ; and
d. the place where house is taken on rent.
When these four are the same throughout the previous year, the exemption
should be calculated on annual basis. When, however, there is a change in
respect of any of the aforesaid factors, then the exemption shall be worked out
on monthly basis.
Perquisites
a gain or profit incidentally made from employment in addition to regular salary
or wages, especially one of a kind expected or promised.-Webster
any casual emolument or benefit attached to an office or position in addition to
salary or wages.- Murrays
property acquired otherwise than by inheritance : a casual profit : anything left
over that a servant or other has by custom a right to keep : a tip expected upon
some occasion : emoluments : something regarded as falling to one by right.-
The Chambers

signifies some benefit in addition to the amount that may be legally due by way
of contract for services rendered
Section 17(2)
Perquisite includes :
a. the value of rent-free accommodation provided to the assessee by his employer
b. the value of any concession in the matter of rent respecting any accommodation
provided to the assessee by his employer
c. the value of any benefit or amenity granted or provided free of cost or at
concessional rate
d. any sum paid by the employer in respect of any obligation which but for such
payment would have been payable by the assessee;
e. any sum payable by the employer, whether directly or through a fund other than
a recognised provident fund or approved superannuation fund or a deposit-linked
insurance fund, to effect an assurance on the life of the assessee or to effect a
contract for an annuity; and
f. the value of any other fringe benefit or amenity as may be prescribed
Types of perquisites- housing accomodation
Furnished/unfurnished house without rent or at concessional rent-
Where accomodation owned by employer: 15/10/7.5% of salary*
Where accomodation leased by employer: rent or 15% of salary whichever is lower.

Add: Cost of furniture

10% of original value or hire charges, whichever applicable

If concessional rent, then find out total cost and deduct amount paid as
rent. Balance would be the perquisite.

*Salary for this purpose: basic salary, dearness allowance/pay, if terms of employment so
provide, bonus, commission, fees, all other taxable allowances and any monetary payment
which is chargeable to tax (by whatever name called).
 Perquisites- LTC
Leave travel concession - twice in a block of four years
Current block 2014-17
For family including dependent parents, brothers and sisters
Actual expenditure (restricted to shortest route)

Employers contributions to the following are not treated as

perquisites:
Recognised provident fund (up to 12 per cent of salary of the
employee);
Approved superannuation fund (upto 1.5 lakhs);
Group insurance schemes;
Employees state insurance schemes;
Perquisites-Interest free loan/loan at concessional
interest
Step 1 Find out the outstanding balance as on the last day of each month.
Step 2 Find out rate of interest charged by the State Bank of India (SBI) as on the first day of the
relevant previous year for similar loans
Step 3 Calculate interest for each month of the previous year on the outstanding amount
mentioned in Step 1 at the rate of interest given in Step 2.
Step 4 From the total interest calculated for the entire previous year under Step 3, deduct interest
actually recovered, if any, from the employee during the previous year.
Step 5 The balancing amount [i.e. Step 3 minus Step 4] is taxable value of the perquisite.

Exemption 1 If a loan is made available for medical treatment in respect of diseases specified (the
exemption is, however, not applicable to the amount reimbursed to the employee under any
medical insurance scheme).
Exemption 2 Where the amount of original loan (or loans) does not exceed Rs. 20,000.
Perquisites-Movable assets sold at nominal price
Cost to employer
Less normal wear and tear (WDV)
50% for electronic gadgets
20% for cars
10% for others
Less selling price
Balance: perquisite
Perquisited-Medical facilities
If facility owned/maintained by employer
Hospital of CG/SG/LA
Approved hospitals
spent/reimbursed by employer- entire amount exempt
If in other clinics- upto Rs. 15,000 pa.
Medical allowance is always taxable
Other perquisites
Lunch/ refreshment provision
Food and non-alcoholic beverages in office premises or through non-
transferable paid vouchers usable only at eating joints are tax free
Taxable only if value per meal exceeds Rs. 50
Gifts, vouchers or token: upto Rs. 5000
Credit cards
Club membership
Telephone/mobile
Others-Any amount paid by an employer in respect of any obligation
which otherwise would have been payable by the employee
Perquisites-Sweat equity shares
Sweat equity shares means equity shares issued by a company to
its employees or directors at a discount or for consideration other
than cash for providing know-how or making available rights in the
nature of intellectual property rights or value additions, by whatever
name called.
Eg. Equity shares, other shares, debentures, derivatives, units
If sweat equity shares qualify as perquisite
The perquisite will be taxable in the hands of employee in the previous year in
which shares or securities are allotted or transferred to the employee.
For this purpose, one has to find out fair market value of shares or securities
according to the prescribed method (it will be prescribed by the Central Board of
Direct Taxes).
Fair market value of shares or securities will be calculated on the date on which
the employee exercises the option.
Amount actually paid or recovered from the employee in respect of such shares
or securities shall be deducted.
Section 80 C
The following are the main provisions of section 80C
Under section 80C, deduction is available from gross total income.
Deduction under section 80C is available only to an individual or an HUF.
Deduction is available on the basis of specified qualifying
investments/contributions/deposits/payments made by the taxpayer during the previous
year.
The investment, deposit, etc. can be made out of taxable income or otherwise.
The gross qualifying amount is allowed as deduction subject to a maximum of Rs. 1,50,000.
The maximum amount deductible under sections 80C, 80CCC and 8CCD cannot exceed Rs. 1.5
lakhs.
80C
1. Life insurance premium
subject to a maximum of 10 per cent of sum assured
Self, spouse, children
Minimum 2 years

2. Employee provident fund (5 years)

3. 15 year public provident fund
4. National Savings Certificates,
5. Unit-linked insurance plan (ULIP) of Unit Trust of India or LIC Mutual
Fund (min 5 years)
80C
6. Notified annuity plan of LIC or any other insurer; notified units of
Mutual Fund or UTI
7. Tuition fees
not including any payment towards development fees/donation/payment of
similar nature
to any university/college/educational institution in India for full time
education of any two children
8. Payment towards the cost of purchase/construction of a residential
property
including repayment of loan taken from Government, bank, cooperative bank,
LIC, National Housing Bank, assessees employer
where such employer is public company/public sector company/university/
co-operative society) (min 5 years)
80C
9. Approved debentures and equity shares of infrastructure
public company; units of a mutual fund proceeds of which
are utilised for the developing, maintaining, etc., of a new
infrastructure facility

10. Amount deposited under Senior Citizens Saving Scheme.

11. Amount deposited in five year time deposit scheme in post

office or bank.
Section 80 CCD- Contribution to NPS
1. For individual contributions
Deduction upto 10% of salary by employee/ 10% of GTI
Deduction upto Rs. 1,50,000 (combined limit) plus Rs. 50,000

2. For joint contributions:

Contribution of employer and employee deductible upto 10% each of salary
Contribution of employee upto Rs. 1,50,000 (combined limit) plus Rs. 50,000
Contribution of employer over and above Rs. 1.5 lakhs combined limit (no
upper limit)
Sec 80D-medical insurance premium
For self/spouse /children- upto Rs. 25000
For parents- upto Rs.25,000
If senior citizens also included, another 5,000

Sec 80E- Interest paid while repaying education loan

Loan for higher education (any study after SSE)
For self/spouse/children/ward
Out of taxable income
Starting year+ 7 years or completion of interest
Sec 80 GG- Rent paid but no HRA received
Individual not receiving HRA (need not be an employee)
Pays rent for residential accommodation
No house owned at place of residence by self, spouse, minor child
If house owned at other place, no benefit of self occupied property claimed
Least of following is exempt:
Rs. 5000 per month
25% of total income (GTI less LTCG less general deductions)
Excess of rent paid over total income

Sec 80 TTA- Savings Bank account interest

Deduction of up to Rs. 10,000 from savings account with bank/ PO