Salary Income

Income chargeable under the head salary

a) Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is earlier.

b) Existence of relationship of employer and employee is must between the payer and payee to tax the income under this head.

c) Income from salary taxable during the year shall consist of following:

Salary due from employer (including former employer) to taxpayer during the previous year, whether paid or not;
Salary paid by employer (including former employer) to taxpayer during the previous year before it became due;
Arrear of salary paid by the employer (including former employer) to taxpayer during the previous year, if not charged to tax in any earlier year;

Exceptions –

1. Remuneration, bonus or commission received by a partner from the firm is not taxable under the head Salaries rather it would be taxable under the head business or profession.

2. If lecturer is paid for setting question paper by university the remuneration is not salary, and is taxable under the head income from other sources.

house rent allowance (section 10(13A)

HRA is special allowance specifically granted to an employee by his employer toward payment of rent for residence of the employee. HRA granted to an employee is exempt to the extent of least of the following.

Metro cities	Other cities
HRA actually received	HRA actually received
Rent paid-10% of salary for the relevant period	Rent paid-10% of salary for the relevant period
50% of salary for the relevant period	40% of salary for the relevant period

Notes

Exemption is not available to an assessee who is lives in his own house or in a house for which he has not incurred the expenditure of rent.
Salary for this purpose means basic salary, dearness allowance, if provided in terms of employment and commission as a fixed percentage of turnovers.
Relevant period means the period during which the house was occupied by the assessee during the relevant previous year.

Employees Provident Fund section 10(12)

Tax treatment in respect of contributions made to and payment from various provident funds are summarized in the table given below:

Particulars	Statutory provident fund	Recognized provident fund	Unrecognized provident fund	Public provident fund
Employers contribution to provident fund	Fully Exempt	Exempt only to the extent of 12% of salary*	Fully Exempt	-
Deduction under section 80C on employees contribution	Available	Available	Not Available	Available
Interest credited to provident fund	Fully Exempt	Exempt only to the extent rate of interest does not exceed 9.5%	Fully Exempt	Fully Exempt
Payment received at the time of retirement or termination of service	Fully Exempt	Fully Exempt (Subject to certain conditions and circumstances)	Fully Taxable (except employee’s contribution)	Fully Exempt

* Salary = Basic Pay + Dearness Allowance (to the extent it forms part of retirement benefits) + turnover based commission
Payment from recognized provident fund shall be exempt in the hands of employees in following circumstances:
a) If employee has rendered continue service with his employer (including previous employer, when PF account is transferred to current employer) for a period of 5 years or more
b) If employee has been terminated because of certain reasons which are beyond his control (ill health, discontinuation of business of employer, etc.)

Allowances prescribed for the purposes of section 10(14) (ii)
1	Any special compensatory allowance in the nature of special compensation allowance	Rs 800 or 700 or 300 per month depending upon the specified location
2	Tribal areas/schedule areas	Rs 200 per months
3	Any allowance granted to an employee working in any transport system to meet his personal expenditure during his duty	70% of such allowance up to maximum of 10,000 per months.
4	Children education allowance	100 per month child up to a maximum of two children
5	Any allowance granted to an employee to meet the hostel expenditure on his child	Rs 300 per month per child up to a maximum of two children
6	Compensatory filed area allowance	Rs 2,600 per month in specified areas.
7	Transport allowance granted to an employee	Rs 1,600 per months
8	Any transport allowance granted to an employee who is blind or beaf and dumb or orthopedically handicapped with disability of the lower extremities	Rs 3200 per month
9	Underground allowance	Rs 800 per month

Pension

Pension as a periodic payment made especially by Government or a company or other employers to the employee in consideration of past service payable after his retirement.

Pension is two types: commuted and uncommuted

Uncommuted pension: it refers to pension received periodically .it is fully taxable in the hands of both government and non- government employees.

Commuted pension: it means lump sum amount taken by the whole or part of the pension.

Exemption in respect of commuted pension [section10 (10A)]

Government employee /member of defence services
Non government employee

A) if the employee is in receipt of gratuity

Exemption =1/3rd of the amount of pension which he would have received had he commuted the whole of the pension = [1/3*commuted pension received/commutation%*100%]

B) if the employee does not receive any gratuity

Exemption =1/2 of the amount of pension which he would have received had he commuted the whole of the pension

= [1/2*commuted pension received/commutation%*100%]

Exemption in respect of Gratuity [section10 (10)]

Retirement gratuity received under the pension code regulations applicable to member of the defence service is fully exempt from tax.

Central/state government employees:-any death cum retirement gratuity is fully exempt from tax. Non government employees:

Non government employees covered by the payment of gratuity act 1972

Rs 10,00,000
Gratuity actually received
15 days salary based on last drawn salary for each completed year of service or part thereof in excess of 6 months.

Non government employees not covered by the payment of gratuity act 1972

Rs 10,00,000

gratuity actually received

Half months salary based on average salary of last 10 months preceding the month of retirement for each completed year of services.

= ½*average salary * years of services

Exemption of amount by way of encashment of unutilized earned leave on retirement [section10 (10AA)

During the period of services it is fully taxable in the hand of employee Received on retirement, whether on superannuation or otherwise

3,00,000
leave salary actually received
average salary 10 months
Cash equivalent of leave to the credit of the employee at the time of retirement or death. Leave entitlement cannot exceed 30 days for every year of actual service rendered for the employer from whose service he has retired.

Retrenchment compensation [section 10(10B)]

the retrenchment compensation means the compensation paid under industrial disputes act 1947 or under any act rule ,order or notification under section 25F or closing down of an undertaking under section 25FF of industrial disputes act 1947.

Rs 5,00,000
15/26 X average salary of last 3 month X completed years of services and part thereof in excess of 6 months

Voluntary Retirement Receipts [section10 (10C)]

lump sum payment or otherwise received by an employee at the time of voluntary retirement would be taxable as” profit in lieu of salary” However it would exempt subject to the following conditions.

Rs 5, 00,000
Actually received
Average of last three months salary X completed year of services
Average of last three months salary X remaining months of services

Perquisite

Perquisite is defined under section 17(2). The definition of perquisite is an inclusion one based of the definition, perquisites can be classified in following three way.

Exemption in respect of leave travel concession (section10 (5))

This clause exempts the leave travel concession (LTC) received by employee from their employers for proceeding to any place in India.

ither on leave or
after retirement from service or
after termination of his service

Limit of exemption – the exemption in all cases will be limited to the amount actually spent subject to such conditions as specification in rule 2B regarding the ceiling on the number of journeys for the place of destination.

Rule 2B exemption will be available in respect of 2 journeys’ performed in a block of 4 calendar years commencing from the year calendar year1986.

Entertainment allowance (section 16(ii))

Entertainment allowance received is fully taxable and is first to be included in the salary and thereafter the following deduction is made

However deduction in respect of entertainment allowance is available in case of government employees. The amount of deduction will be lower of:

One - fifth of his salary or
5000 or
entertainment allowance received

Professional tax on employments [section16 (ii)]

Professional tax or tax on employment levied by a state under article 276 of the constitution is allowed as deduction only when it is actually paid by the employee during the previous year.

if professional tax is reimbursed or directly paid by the employer on behalf of the employee the amount so paid is first included as salary income and then allowed as a

deduction u/s16

Relief under Section 89(1)

Where by any reason of any portion of assessee’s being paid in arrears or in advance, or in advance or by reason of his having received in any financial year, salary for more than twelve months, his income is assessed at a rate higher than You are allowed tax relief under Section 89(1)

Calculate the Tax Relief Yourself

Calculate the tax payable on the total income, including additional salary in the year it is received.
Calculate the tax payable on the total income, excluding additional salary in the year it is received
Calculate the difference between Step 1 and Step 2
Calculate the tax payable on the total income of the year to which the arrears relate, excluding arrears
Calculate the tax payable on the total income of the year to which the arrears relate, including arrears
Calculate the difference between Step 4 and Step 5
The excess amount at Step 3 over Step 6 is the tax relief that shall be allowed.

Note that if the amount at Step 6 is more than the amount at Step 3 no relief shall be allowed.

pending ex and basic of salary

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Income chargeable under the head salary

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