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Income under heads of salary is defined as remuneration received by an individual for services rendered by
him to undertake a contract whether it is expressed or implied. According to Income Tax Act there are
following conditions where all such remuneration are chargeable to income tax:
• When due from the former employer or present employer in the previous year, whether paid or not
• When paid or allowed in the previous year, by or on behalf of a former employer or present
employer, though not due or before it becomes due.
• When arrears of salary is paid in the previous year by or on behalf of a former employer or present
employer, if not charged to tax in the period to which it relates.
What is Annuity:
It is an annual income received by the employee from his employer. It may be paid by the employer as
voluntarily or on account of contractual agreement. It is not taxable until the right to receive the same arises.
Under section 56, Income Tax Act, 1961 other annuities come under a will or granted by a life insurance
company or accruing as a result of contract which comes as income under from other sources.
What is Gratuity:
It is salary received by an individual paid by the employee at the time of his retirement or by his legal heir in
the case of death of the employee.
What is Allowance:
It is the amount received by an individual paid by his/her employer in addition to salary. Under section 15 of
the Income Tax Act, 1961 these allowance are taxable excluding few condition where they are entitled of
deduction/ exemptions.
A) Standard Deduction
Income tax slabs 2009-2010 (for Men) in India:
B) Professional Tax
Professional tax, which is paid, is allowed as deduction.
C) Arrears salary
If salary is received in arrears or in advance, it can be spread over the years to which it relates and be taxed
accordingly as per section 89(1) of the Income tax Act.
Therefore "salary" includes basic salary, encashment of leave salary, advance of salary,
arrears of salary, various allowances such as dearness allowance, entertainment
allowance, house rent allowance, conveyance allowance and also includes perquisites by
way of free housing, free car, free schooling for children of employees, etc.
The following are the essential conditions for income to be treated as salary income:-
# There must be relation of employer and employee between the payer of income and
receiver of income.
# Salary may be from more than one employer.
#Salary may be received from not just the present employer but also a prospective
employer and in some cases even from a former employer for example pension received
from a former employer.
# Salary income must be real and not fictitious there must an intention to pay and receive
salary.
# Forgoing of salary ie if an employee surrenders his salary to the central government,
then the salary so surrendered will not be treated as taxable income of the employee.
# Salary paid tax free - Tax free salary means the salary on which income tax is borne not
by the employee but by the employer. Tax free salary is also taxable in the hands of the
employee.
Salary is taxable in the year of receipt or in the year of earning of the salary income,
whichever is earlier. i.e. if the salary has been received first, then it will be taxable in the
year of receipt. If it has been earned first but not yet received then it will be taxable in the
year of earning. Salary income is taxable in the hands of individuals only. No other type
of person such as a firm or HUF, companies can earn salary income.
Allowances ..............................................................
House Allowances
The exemption of House Rent Allowance (HRA) received is exempt to the least of the
following:
HRA received the period during which the rental accommodation is occupied by the
employee in the previous year.
Excess of rent paid over 10 percent of salary.
50% of the salary, if the rented accommodation is situated at Mumbai, Calcutta, Delhi or
Chennai and 40% of salary in other cities. The salary is taken for the period during which
the rental accommodation is occupied by the employee in the previous year.
Salary:
Includes basic salary and dearness allowance if terms of employment so provide but does
not include any other allowance. However, any commission payable at a fixed percentage
of turnover achieved by the employee is included.
Entertainment Allowances
Any amount received by the employee, as entertainment allowance is taxable as salary.
However, deduction is available to the employee if he has been:
In continuous service with the present employer from a date before April 1, 1955, and
Receiving Entertainment Allowance from his present employer continuously from a date
before April 1, 1955 till the year for which the income is to be taxed.
Education Allowances
Education allowance of Rs. 50 per month per child for up to 2 children of the employee is
exempted. In case the children are in hostel, the exemption available is Rs.150 per month
per child for up to 2 children.
Special Allowances
The following allowances are exempt from tax:
Expenses incurred on conveyance in the performance of duties of office;
Cost of travel on tour or on transfer;
Daily ordinary charges incurred by the employee on account of absence from his normal
place of duty during a tour;
Expenditure on a helper where such helper is engaged for the performance of the duties
of office;
Allowances granted for encouraging the academic research and training pursuits in
educational and research institutions; or
Expenditure incurred on the purchase or maintenance of uniform for wear during the
performance of the duties of office.
Medical Allowances
This exemption is available in respect of :
Reimbursement upto Rs.15,000 for medical treatment of the employee and family
members.
Reimbursement of expenditure incurred by an employee and family members in
approved hospitals, dispensaries etc.
Group medical insurance for an employee and family members or reimbursement of
premium paid by an employee for medical insurance.
For medical treatment abroad, the actual expenditure incurred, including on travel and
stay abroad of the patient and one attendant (if permitted by the RBI). The ceiling for the
gross total income excluding the amount to be reimbursed is Rs.2 lakhs.
Up to Rs. 15,000, actually incurred by the employee on medical (other than the treatment
referred to above);
Premium paid by the employer towards medical insurance on the health of such
employee
The expenditure on medical treatment and stay abroad shall be excluded from perks :
only to the extent permitted by the Reserve Bank of India; and the employee's gross total
income, as computed before including the said expenditure, does not exceed Rs 2 lakhs.
As per the income tax law in India any income that is generated under the territory of the country
is subjected to the income tax. Salary is taxed differently than the products as income tax is
applicable on salary where as on commodities there is service tax and value added tax is
applicable on it. The term salary is defines as any kind of remuneration that is generated through
professional services, personal services and from different jobs in the organization.
Allowances:
• Basic salary
• Wages
• Annuity
• Provident fund (PF)
• House rent allowance (HRA)
• Gratuity
• Cess tax and incentives generated from the salary
• Miscellaneous amount
• Finance tax
• Any encashment of leave salary
• Transport allowance
The essential conditions to notify the income as the salary income:
• The employee and the employer relationship are of servant and master. There should be
a relationship. It is different than the principal and agent as agent won�t come under the
full control of the employer. In India M.L.A is not come under the head salary due to the
fact that it not comes under employee and employer relation ship bracket.
• In all the government organizations pension is deducted as it is mandatory to do so.
• Any salary that is generated outside India is taxable as per Indian income tax law.
• Provident fund is mandatory in government as well as in the private organization.
• As per Provident fund rule half of the amount is deducted from the salary of the employee
and half of the amount will be added by the company or government. Most of the time
employee claims their provident fund after leaving the job, however there is an
exceptional clause under which employee can claim half of his provident fund amount at
the time of buying a property or his/her wedding.
This is a myth that every income is taxable that is received from an employer:
1. Any traveling facility provided by an employer to its employee such as train or airplane
passes is not come under the tax bracket.
2. Gratuity amount is also not subjected to the income tax.
3. Any payment received by the employee of central or state government from the
encashment of his/her leave balance is entitled of exemption from tax.
4. As per the provident fund act 1925. Provident fund amount is also exempted from the tax
list.
5. Any sum received under life Insurance policy is exempted from the list as per sub section
(3) of section 80DDA.
6. Income received by way of pension received by an individual or family for a member who
was employed with central government/state government is also exempted from a tax list.
7. Armed force professional who won the gallantry award for their services towards the
country are exempted from the list of income tax. Employees of central or state
government who have won Param vir Chakra, Maha vir chakra and any other notified
gallantry awards are exempted from the tax list.