INCOME UNDER THE

HEAD “SALARIES”

Shubhangi Gupta
ROLL NO. 11
Financial Management
Bhartiya vidya bhavan
Acknowledgement:-
Completing the task is never one-man effort. It is other often the
result of valuable contribution of manner of individuals in a
direct or indirect manner that helps in shaping and achieving
something.
This project report bears the imprint of those who had rendered
their wholehearted support and encouragement without
whose help this effort of mine would be in vain
I would like to give this note for N.K GUPTA my project guide
and mentor, as he was the sole responsible person for
motivating me in pressing circumstances to complete this
project and honoured by the responsible bestowed upon me. I
am grateful to him for his valuable instruction and constant
support and guidance.
 Index:-
1. Introduction
2. What is salary..?
-Characteristics of salary
-Basis of charge
-Salary includes
3- Allowances
-Fully taxable allowances
-Partially exempted allowances
a) HRA
b) Entertainment Allowances
c) Allowance to meet personal expenses
-Fully exempted Allowances
4-Treatment of retirement Benefits
-Pension
-Leave encashment
-Gratuity
5- Provident Fund
6- Perquisites
-Valuation of rent free house/ accommodation at concessional rate
a) furnished
b) unfurnished
-Valuation of motor car
7- Deductions from salary
8- PRACTICAL
 Introduction:-
Income of a person is classified into 5 categories. Thus income belonging to a
particular category is taxed under a separate head of income pertaining to that
category. Section 14 of the Act, has classified five different heads of income for
the purpose of computation of total income. The five heads of income are:
1) Income under the head salaries (Section 15 – 17)
2) Income from house property (Section 22 – 27)
3) Profits and gains from business or profession (Section 28 – 44)
4) Capital gains (Section 45 – 55)
5) Income from other sources (Section 56 – 59)
It may be noted here that an income belonging to a specific head must be compute under that head only. If an
income cannot be placed under any of the first four heads, it will be taxed under the head “Income from other
sources”.
Certain expenses incurred in earning incomes under each head are allowed to be
deducted from its gross income according to the provisions applicable to that
specific head. Then, the net income under various heads is aggregated together to
compute gross total income of the person. After making certain deductions which
are allowed from gross total income (relating to certain expenses incurred or
payments made or certain incomes earned) we arrive at the figure of total income
for taxation purpose.
What is salary..??
Salary, in simple words, means remuneration of a person
which he has received from his employer for rendering
services to him. But receipts for all kinds of services
rendered cannot be taxed as salary. The remuneration
received by professionals like doctors, architects, lawyers
etc. cannot be covered under salary since it is not received
from their employers but from their clients. So, it is tax
under business or profession head. In order to understand
what is included in salary, let us discuss few characteristics
of salary.
CHARACTERISTICS OF SALARY
1. The relationship of payer and payee must be of employer and employee
for an income to be categorized as salary income. For example: Salary
income of a Member of Parliament cannot be specified as salary, since it is received from
Government of India which is not his employer.
2. The Act makes no distinction between salary and wages, though generally salary is paid
for non-manual work and wages are paid for manual work.
3. Salary received from employer, whether one or more than one is included
in this head.
4. Salary is taxable either on due basis or receipt basis which ever matures
earlier:
i) Due basis – when it is earned even if it is not received in the previous
year.
ii) Receipt basis – when it is received even if it is not earned in the previous
year.
iii) Arrears of salary- which were not due and received earlier are taxable
when due or received, which ever is earlier.
5. Compulsory deduction from salary such as employees’ contribution to
Provident fund, deduction on account of medical scheme or staff welfare
scheme etc. are examples of instances of application of income. In these
cases, for computing total income, these deductions have to be added back.
Basis of Charge (Section 15)
1. Any salary paid or allowed to him in the previous year by or
on behalf of the employer or a former employer, even if it is
not due.
2. Any salary due from an employer or a former employer in
the previous year , whether paid or not
3. Any arrears of salary paid or allowed in the previous year
by or on behalf of the employer or a former employer, if not
charged to tax for any earlier previous year.
 Salary includes:-
 Wages ( fully taxable)
 Annuity (fully taxable)
 Gratuity( taxable subjected to section10(10A))
 Pension (fully taxable)
 Any fees (fully taxable)
 Commission (fully taxable)
 Perquisite in lieu of salary ( taxable to the extent the value determined
under rule3)
 Profit in lieu of or in addition to any salary or wages (fully taxable as
define u/s 7(3))
 Advance salary (fully taxable)
 Employers contribution to PF( taxable in excess of 12% of employee’s
salary and intrest credited in excess of 9.5% p.a)
 Leave salary (taxable subjected to 10(10AA))
Allowances:-
 Allowance is a fixed monetary amount paid by the employer to the
employee
 (over and above basic salary) for meeting certain expenses,
whether personal or
 for the performance of his duties. These allowances are generally
taxable and are
 to be included in gross salary unless specific exemption is provided
in respect of
 such allowance. For the purpose of tax treatment, we divide these
allowances into 3 categories:-

 I. Fully Taxable cash allowances

 II. Partially exempt cash allowances
 III. Fully exempt cash allowances
Fully Taxable Allowance
This category includes all the allowances, which are fully taxable. So, if an
allowance is not partially exempt or fully exempt, it gets included in this category.
The main allowances under this category are enumerated below.
(i) Dearness Allowance and Dearness Pay:-
As it is clear by its name, this allowance is paid to compensate the employee against
the rise in price level in the economy. Although it is a compensatory allowance
against high prices, the whole of it is taxable. When a part of Dearness
Allowance is converted into Dearness Pay, it becomes part of basic salary for the
grant of retirement benefits and is assumed to be given under the terms of
employment.
(ii) City Compensatory Allowance:-_
This allowance is paid to employees who are posted in big cities. The purpose is
to compensate the high cost of living in cities like Delhi, Mumbai etc. However,
it is fully taxable.
(iii) Tiffin / Lunch Allowance:-
It is fully taxable. It is given for lunch to the employees.
(iv) Non-Practising Allowance:-
This is normally given to those professionals (like medical doctors, chartered
accountants etc.) who are in government service and are banned from doing
private practice. It is to compensate them for this ban. It is fully taxable.
(v) Warden or Proctor Allowance:-
These allowances are given in educational institutions for working as a Warden of
the hostel or as a Proctor in the institution. They are fully taxable.
Fully Taxable Allowances
(contd.)
(vi) Deputation Allowance:-
When an employee is sent from his permanent place of service to some place or
institute on deputation for a temporary period, he is given this allowance. It is
fully taxable.
(vii) Overtime Allowances:-
When an employee works for extra hours over and above his normal hours of duty, he is given overtime
allowance as extra
Wages. It is fully taxable.
(viii) Fixed Medical Allowance:-
Medical allowance is fully taxable even if some expenditure has actually been
incurred for medical treatment of employee or family.
(ix) Servant Allowance:-
It is fully taxable whether or not servants have been employed by the employee.
(x) Other allowances:-
There may be several other allowances like family allowance, project allowance,
marriage allowance, education allowance, and holiday allowance etc. which are
not covered under specifically exempt category, so are fully taxable.
PARTIALLY EXEMPTED
ALLOWANCES

This category includes allowances which are exempted upto

certain limit. For certain
allowances, exemption is dependent on amount of allowance
spent for the
purpose for which it was received and for other allowances,
there is a fixed limit
of exempt….like,
(i) House Rent Allowance (H.R.A.)
(ii) Entertainment Allowance
(iii) Special Allowances for meeting official expenditure
HOUSE RENT ALLOWANCE (Sec 10(13A)
AND RULE2A)

The least of the following is exempt from tax:

1.50% of Salary where the assessee lives in Mumbai, Delhi
,Chennai & Calcutta and 40% in other cases
2.Actual HRA received
3.Excess of rent paid over 10% of Salary.
(Salary for HRA means basic salary , commission if based on
fixed percentage of sale & DA ,if it is part of retirement
benefits)
Treatment of Entertainment
Allowance (Sec 16(ii))
 This deduction is allowed only to a government employee.
 The entire entertainment allowance received by any
employee is added in the computation of the gross salary. The
Government employee is, then entitled to the deduction from
gross salary under sec 16(ii) on account of such
entertainment allowance to the extent of minimum of the
following 3 limits.
 (i) Actual entertainment allowance received during the
previous year
 (ii) 20% of his salary exclusive of any allowance, benefit
or other perquisite
 (iii)Rs.5000
 Leave Encashment( cont.)
LEAVE ENCASHMENT AT TIME OF RETIREMENT:
He is exempted on basis of least of the following:

1.Cash equivalent of unvailed leave calculated on the basis of

maximum 30 days leave for every year of actual service rendered
to the employer from whose service he has retired. The cash
equivalent is to be calculated on the basis of the average salary.

2.10 months *average monthly salary

3. the amt. specified by the government Rs.3,00,000

4. leave encashment actually received at the time of retirement

Allowances to meet personal expenses which are
exempted to the extent of amount received or the limit
specified ,whichever is less:
 Transport Allowance: Exempted upto Rs.800 per month,
but for handicapped employees Rs.1600. If only used for
travel between home and place of work
 Medical expenses: Exempted upto Rs.15000, but if
treatment is done in a government hospital or if treatment
is for specified ailment or disease in an approved hospital,
fully exempt
 Allowance to transport employees: 70% of the allowance,
maximum Rs.6000 p.m
 Children education allowance: Rs.100 p.m per child for a
maximum of 2 children.
 Border/Remote/Disturbed Area: exemption varies from
Rs.200 p.m to Rs.1300 p.m
 Underground Allowance: exempted upto Rs.800
 Allowances (cont.)
Hostel expenditure allowance: Rs300 p.m per child for a
maximum of 2 children
Tea & snacks: during office hours are not charged to tax as
perquisite while free meals in excess of Rs50 per meal is a
perquisite
Tribal area/ Schedule area/ Agency area Allowance: exempted
upto Rs.200
High altitude allowance: exemption varies from Rs.300 p.m to
Rs.7000 p.m
Gifts: Perquisite in respect of gift where it is below Rs.5000, the
value is taken as nil
FULLY EXEMPT ALLOWANCES
(i) Foreign allowance:-
This allowance is usually paid by the government to its employees being
Indian citizen posted out of India for rendering services abroad. It is
fully exempt from tax.

(ii) Allowance to High Court and Supreme Court Judges of whatever

nature are exempt from tax.

(iii) Allowances from UNO organisation to its employees are fully exempt
from tax.
Pension:-
1.Pension from UNO It is not chargeable to tax…

2. Pension received by Exempted…

the family of armed
forces
3. Family pension
received by family Taxable as in the hands
members after the of recipient as income from
death of employee
other sources…
4. Pension received in
any other case It is taxable as per rules…
 PENSION:-
There are two type of pension:- uncommuted and commuted Pension

Uncommuted pension:- It is fully taxable in the hands of all employees, whether

government Or non-government

Commuted pension:-
(i) Central/State govt. ,Local authority with or
without gratuity exempted fully.
(ii) Non-govt. employees:-
A- Where employee receives
Gratuity also, the commuted value of 1/3rd of the
Pension, which is entitled to receive over and above
Is exempted from tax.
B-Where employee does not receive any Gratuity,
the commuted value of half of the pension, which is entitled
to receive, is exempted from tax. Any amount received in excess of the exempt
Amount would be taxable.
 Leave Encashment
Employees are entitled to various types of leave while they are
in service. The leave may be availed by them or in case they are not
Availed of, these may either lapse or these are allowed to be
encashed every year or these accumulated or encashed after
Retirement or death.

For the purpose of exemption of accumulated leave

Encashment, employees are divided into categories :

A- GOVERNMENT EMPLOYEES:-which means only central and state

government employees, whether on superannuation or otherwise,
are fully exempted
B- OTHER EMPLOYEES:- leave encashment of accumulated leave
At the time
HOW TO FIND OUT
AVERAGE MONTHLY SALARY?

•Salary for this purpose means:-

1.Basic salary and includes

2. Dearness allowances if terms of employment so provide
but excludes all other allowance and perquisite
3.Commision if it is fixed % based on turnover

•It is calculated on the basis of average salary

drawn
During the period of 10 months immediately preceding his
retirement.
Leave travel concession [sec10(5)]:- Is exempted
twice in a block of FOUR years.
-It is available to Indian citizen for proceeding on
leave for himself and his family (family includes
spouse, children, dependent parents ,brother and
sister)
-Amount of exemption is the actual fare paid for
travel anywhere in India by the economy class
airfare of national carrier by shortest route, or first
class air conditioned rail fare, or any other mode not
exceeding the shortest first class rail fare.
 GRATUITY Sec 10(10)
Gratuity is a payment made by the employer to an employee in the
appreciation of the past services rendered by the employee. Gratuity can
either be received by.
1. the employee himself at the time of his retirement; or
2. the legal heir on the event of the death of the employee.
Gratuity received by an employee on his retirement is taxable under the
head “salary” whereas gratuity received by the legal heir of the deceased
employee shall be taxable under the head “Income from the source”

For the purpose of exemption of gratuity under sec 10(10), the employees
are divided into 3 categories:-
1-Government employee –fully exempt
2-Non-government employees covered by the Payment of Gratuity Act,1972-
fully or partially exempt under section 10
3-Other employees
GRATUITY (cont.)
-IN CASE OF GOVT EMPLOYEES:
wholly exempt
-IN CASE OF EMPLOYEES COVERED UNDER
PAYMENT OF GRATUITY ACT:
a. 15 days salary based on last drawn for each year of service (26 days a
month as working days)
b. Rs.3,50,000
c. gratuity actually received
(the least of the above 3 is exempt from tax and the balance is taxable)
-IN CASE OF OTHER EMPLOYEES:
a. Actual amount of gratuity received
b- half month’s average salary for every completed year of service.
c- Rs.350000
Provident Fund:-
 Provident fund scheme is a welfare for the benefit of the employees.
Under this scheme, certain sum is deducted by the employer from the
employee’s salary as his contribution to the provident fund every month.
These contribution are deposited/ invested. The interest earned on these
investment is also credited to the provident fund account of the
employees. The balance thus accumulating year after year . At the time of
retirement/resignation, the accumulated amount is given to the employee.
 There are four types of provident fund:-
a- Statutory Provident Fund (SPF)
b- Recognised Provident Fund (RPF)
c- Unrecognised Provident Fund (URPF)
d- Public Provident Fund (PPF)
 Particulars SPF RPF PPF
URPF
Employee’s Deduction Deduction No deduction u/s 80c is available Deduction u/s 80c
u/s 80c is u/s 80c is is available from
Contribution
available available gross total income
from gross from gross subject to the the
total income total income limit specified
subject to subject to the therein
the the limit the limit
specified specified
therein therein
Employer’s Fully Exempt upto Not exempt but also not taxable every Not applicable as
exempt from 12% of year there is only
Contribution tax salary assessee’s own
contribution

Interest on Fully Interest Not exempt but also not taxable every Fully exempt
Provident Fund exempt from Exempted year
tax upto 9.5%
p.a

Repayment of Fully Exempt Accumulated employee’s contribution Fully exempt from

lump sum exempt from subjected to is not taxable, whereas its interest is tax u/s 10(11)
amount on tax u/s certain taxable as income from other
10(11) condition sources.. Accumulated employer’s
retirement/ contribution+ interest is taxable as
resignation profit in lieu of salary.
 PERQUISITES
A perquisite is defined in the oxford dictionary as any
Emolument, fee, or profit, attached to an office or
Position in addition to the salary or wages.
In simple words it means any benefit in addition to
salary and wages. Perquisites reduces the expenditure
That the employee normally would have otherwise
Incurred in obtaining these benefits and amenities as
Part of the taxable salary.
-eg. Rent free house accommodation,
car, amenities provided free of cost,
-concessional interest on housing loan, etc
Taxability of Perquisites:-
 FOR INCOME-TAX PURPOSES, PERQUISITES MAY BE
DIVIDED INTO FIVE CATEGORIES:-
A- Perquisites which are taxable in the hands of all categories of
employees.
B- Perquisites which are taxable only when the employee belongs
to a specified group.
C- Specified security or sweat equity shares alloted or
transferred by the employer to the assessee.
D- Contribution by the employer to the approved super
annuation fund in respect of assessee to the extent it exceeds
Rs.1,00,000
E- Tax-free perquisites.
 SPECIFIED EMPLOYEE
 A director of a company is a specified employee
 An employee who holds 20% or more voting power.
It means that even if a person is not a registered holder of
shares in a company but has beneficial interest in such shares.
 Where an employee is drawing salary of more than
Rs.50,000 . Income for this purpose shall include all taxable
monetary payments like basic salary, dearness allowance,
bonus, commission, taxable allowances/perquisites but shall
not include the value of any monetary benefits/perquisites.
Rent free accommodation or accommodation
provided at concessional rate:-
Accommodation provided to the employee may be:-
a) Unfurnished
b) Furnished
Further Such accommodation may be provided;
a) Rent free; or
b) at concessional rate
ACCOMMODATION PROVIDED TO THE GOVT. EMPLOYEES:-Central & State
Govt. Employees:- Accommodation provided to MPs, judges of High court &
Supreme Courts, employees who are in Govt. service being provided
accommodation by virtue of their employment is exempted from any tax
 Valuation of Rent Free Unfurnished
Accommodation:-
Population as Property owned by Property taken
per 2001 Employer on Lease or rent
census by the employer
Above 25lakhs 15% of salary for the Amount of lease
period rent or 15% of
salary
Between 10% of salary for the Same as above
period
10- 25lakhs

Not exceeding 7.5% of salary for the Same as above

10lakhs period
Furnished accommodation:-
 Step 1: Find out the value of the accommodation without the
value of the furniture
 Add 10% of the value of furniture if owned by employer or
actual hire charges when hired
 ( Furniture includes TV, fridge, radio and any household
appliances)
Accommodation at Concessional Rate:-
Value is determined as follows:
 Find out the value of accommodation as if it is not provided
at a concession
 Deduct the value of rent charged from the employee
Exception to accommodation rules
 It is not applicable to an accommodation located in a
remote area( 40kms from town) and in a mining,
project ,oil exploration site
 Where on account of transfer, an employee is given
two accommodation , only one will be taxed for 90
days. Beyond that the lesser of the two will be taxed.
Furnished accommodation in a Hotel:-
It Includes accommodation in a motel, guest house.
The value of perquisite is the lower of the two.
 24% of salary paid during the period when accommodation
is taken or
 Actual paid by the employer
-not taxable if provided for 15 days in a P.Y. and when an
employee is transferred.
-however, if the employer pays rent, the value so determined
shall be reduced by the rent,
actually paid or payable by the employee
 Valuation of motor car:-
Car owned or hired by Employer and the running and maintenance expenses are
met by the employer-
a- is used wholly and exclusively in the performance of his official duties:- No
tax
b- is used exclusively for the personal purpose:- No tax
c -Partly used for private and personal purpose:-
(i) the expenses on maintenance and running are met by the employer

Where cubic capacity Where cubic capacity

Of engine does not Of engine exceeds
Exceed 1.6 litres 1.6 litres

Rs.1,800 p.m (plus Rs.900 p.m, if Rs.2,400 p.m( plus Rs. 900 p.m
Chauffer is also provided If chauffer is also provided
(ii) The expenses on running and maintenance for such private and personal use
are fully met by the employee

Where cubic capacity Where cubic capacity

Of engine does not Of engine does not
Exceed 1.6 litres Exceed 1.6 litres

Rs.600 p.m (plus Rs.900, Rs. 900 p.m ( plus Rs. 900,
If the chauffer is provided If chauffer is provided
Car owned or hired by Employee and the running and maintenance expenses are
met by the employer-
a- is used wholly and exclusively in the performance of his official duties:- No tax
b- is used exclusively for the personal purpose:- No tax
c -Partly used for private and personal purpose of the employee
Partly used for private and personal purpose of
the employee:-

Where cubic capacity Where cubic capacity

Of engine does not Of engine
Exceed 1.6 litres Exceeds 1.6 litres

Rs.1,800 p.m (plus Rs. 2,400 (plus Rs. 900,

Rs900 if chauffer is If chauffer is provided)
provided )
Deductions from salary:-
Following deductions are allowed under section 16
 Tax on employment- as per the constitution of India, the state
government/local authorities are empowered to make law and collect taxes on
professions, trades, callings and employment. However, the total amount payable
in respect of any one person shall not exceed Rs.2500 p.a
 Entertainment allowance:
 The entire entertainment allowance received by any employee is added in the
computation of the gross salary. The Government employee is, then entitled to the
deduction from gross salary under sec 16(ii) on account of such entertainment
allowance to the extent of minimum of the following 3 limits.
 (i) Actual entertainment allowance received during the previous year
 (ii) 20% of his salary exclusive of any allowance, benefit
or other perquisite
 (iii)Rs.5000
Practical:-
Mr. JOGINDER PAL is employed with a transport company firm. He is a member of an recognised
provident fund. He is drawing salary @8,000 p.m since 1-1-2009. Dearness Allowance, forming part
of pay for superannuation benefits, is paid @ 10% of his salary. He gets house rent allowance
Rs.1,200 p.m. He pays rent of Rs.2,000 p.m. He contributes @ 10% of his salary to the fund and the
employer contributes @ 20%. The employer also reimburse his personal club bills amounting to
Rs.19,000. Besides he is paid Rs.400p.m as transport allowance.
He retires on1-1-2010 after 28 years and 9 months of service. He gets Rs.8,000 as accumulated balance
from provident fund. It consists of Rs.15,000 as his contribution and Rs.11,000 interest thereon . The
employer’s contribution is Rs.30000 and interest there on is Rs.24,000. he also gets gratuity of
Rs.1,60,000.
After retirement, he gets pension @ Rs.3,000 p.m. On 1-3-2010 he surrenders one half pension for
consolidated amount of Rs.1,20,000.
He has made the following payments/investments during the year 2009-10
a- life insurance premium amounting to Rs.2000 on the policy taken on the life of his married son
b- Public Provident Fund deposit Rs.5,000
c- Refund of Rs.10000 to the life insurance corporation of India on account of loan taken for the
purchase of a flat, allotted in march 1994
d- Purchase of national savings certificates VIII issue, amounting to Rs.3,000
e- contribution of Rs.5,000 under the Jeevan Dhara Scheme of life insurance corporation of India
 Solution:-
INCOME FROM SALARY
Salary (8000x9) april to dec(9months) 72,000
D.A (10%of salary) 7,200
Club bills reimbursed by employer 19,000
1-H.R.A(10,800-10,080) 720
Transport allowance(400x9) i.e Rs.3,600-exempt 70% 1,080
Pension (3,000x2 + 1,500x1) 7,500
2-Commuted pension (1,20,000-80,000) 40,000
3-Gratuity (1,60,000-1,23,200) 36,800
Employer’s contribution of URPF 30,000
Interest on employer’s contribution to URPF 24,000
GROSS SALARY 2,38,300
less: 4-deduction NIL
INCOME FROM SALARY 2,38,300
INCOME FROM OTHER SOURCES
Interest received on own contribution URPF 11,000
GROSS TOTAL INCOME 2,49,300
Less: deduction u/s 80c 25,000
TOTAL INCOME 2,24,300
Working Note:-
1- HRA is exempted to the extent of the minimum of the following:
a) HRA received (1,200x9) 10,800
b) rent paid- 10%of salary Rs.79,200 (18,000-7,920) 10,080
c) 40% of salary 31,680
Therefore, Rs.10,080 will be exempt
2- Commuted pension will be exempted to the extent of commuted value 1/3 rd
of the pension as the assessee is also entitled to gratuity. The exemption amount will be (1,20,000x 2x 1/3)=80,000
3- Assuming that he is not covered under payment of gratuity act, out of gratuity received the minimum of the
following shall be exempted
a) half month’s average salary for every completed year of service i.e
(28x 1/2x 8,800) 1,23,200
b) actual gratuity received 1,60,000
c) Specified amount 3,50,000
Therefore, Rs.1,23,000 will be exempted
4-The following payments qualify for deduction u/s 80c
a) LIC premium 2,000
b) PPF 5,000
c) jeevan dhara scheme 5,000
d) repayment of housing loan 10,000
e) purchase of NSC VII issue 3,000
25,000
References:-
 Ahuja Girish and Ravi Gupta (2010), Systematic Approach to
Income Tax and Sales Tax, Bharat Publication, Sahitya
Bhawan, Agra
 Chandra Mahesh and D.C. Shukla (2010), Income Tax Law
and Practice,
Pragati Publication, New Delhi.
 Mehrotra H.C. (2010), Income Tax Law and Accounts,
Sahitya Bhawan, Agra.
 .Singhania V.K. and Monica Singhania (2010), Students
Guide to Income Tax,
Taxmann Publications, New Delhi.
THANK YOU