Salary refers to the remuneration received by an employee from an employer for services rendered under a contract of employment. It includes wages, pension, gratuity, fees, commission, bonus, annuity, and advance salary. The most important condition is the employer employee relationship. If this relationship exists, the income is taxed under the head Salaries. Salary may be received in cash or kind. Even if salary is not received but is due, it is taxable. Salary income is taxable on due or receipt basis, whichever is earlier.
Basis of Charge:
Income from salary is charged to tax under Section 15 of the Income Tax Act, 1961. Salary is taxable on the following basis:
- Salary due from an employer whether paid or not
- Salary paid or allowed in advance
- Arrears of salary paid during the year
Thus, salary is taxable either on due basis or receipt basis, whichever occurs earlier. Advance salary is taxable in the year of receipt. Arrears of salary are taxable in the year of receipt, but relief under Section 89 may be available.
Conditions of Chargeability:
For income to be taxable under salaries, the following conditions must be satisfied
- There must be an employer employee relationship
- The payment must be remuneration for services
- Salary may be received from present, past, or future employer
- Salary may be paid monthly, weekly, or annually
- Salary may be paid in India or outside India
If these conditions are satisfied, the income is taxable under salaries. If there is no employer employee relationship, the income will not be taxed under this head.
Allowances
Allowance is a fixed amount paid by the employer to the employee in addition to salary to meet certain expenses. Allowances may be taxable, partially exempt, or fully exempt.
Common allowances are explained below
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Dearness Allowance
Dearness allowance is paid to compensate for increase in cost of living. It is fully taxable. If it forms part of salary for retirement benefits, it is included in salary for provident fund and gratuity.
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House Rent Allowance
House Rent Allowance is paid to meet rent expenses. It is partially exempt under Section 10(13A). Exemption is least of the following
- Actual HRA received
- Rent paid minus 10 percent of salary
- 50 percent of salary for metro cities or 40 percent for non metro cities
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Conveyance Allowance
Conveyance allowance for commuting between residence and office is taxable. However, allowance given to differently abled employees is exempt up to the prescribed limit.
- Medical Allowance
Medical allowance is fully taxable. Actual medical reimbursement is also taxable under current rules.
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Special Allowance
Special allowance is fully taxable unless specifically exempt.
Perquisites
Perquisites are benefits or amenities provided by the employer to the employee in addition to salary. These are taxable in the hands of employees unless specifically exempt.
Examples of perquisites
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Rent free accommodation
Value of rent free accommodation is taxable as per rules depending on whether accommodation is owned or leased by employer.
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Motor car facility
If employer provides car for personal use, its value is taxable. If used only for official purpose, it is not taxable subject to conditions.
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Free education
Education facility provided to employee children is taxable beyond prescribed limits.
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Club Membership
Club fees paid by employer is taxable except when used wholly for official purposes.
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Medical facilities
Medical facilities provided in government hospitals are exempt. Other facilities are taxable subject to conditions.
Perquisites are valued as per Income Tax Rules and added to salary income.
Deductions from Salary:
Deductions from salary are allowed under Section 16.
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Standard Deduction
Standard deduction of Rs 50,000 is allowed to salaried employees and pensioners. This deduction is allowed irrespective of actual expenses.
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Entertainment Allowance
Entertainment allowance is deductible only for government employees. Deduction is least of Actual allowance received 20 percent of basic salary
Rs 5,000
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Professional Tax
Professional tax paid by employee is allowed as deduction. If paid by employer, it is first added to salary and then allowed as deduction.
Exemptions Related to Salary:
Certain receipts under salary are fully or partially exempt.
- Gratuity
Gratuity received by government employees is fully exempt. For non government employees, exemption is subject to prescribed limits.
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Pension
Uncommuted pension is taxable. Commuted pension is exempt fully for government employees and partially exempt for others.
- Leave Travel Allowance
LTA is exempt for travel expenses within India for two journeys in a block of four years. Only actual travel cost is exempt.
- Provident Fund
Employer contribution to recognized provident fund is exempt up to prescribed limit. Interest is also exempt up to specified rate.
- Leave Encashment
Leave encashment during service is taxable. At retirement, it is exempt for government employees and partially exempt for others.
