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Basis of Charge, Rules of Salary income, allowances, perquisites, valuation of perks, provident fund,.....Jolly Joseph, HOD Commerce,St. Teresa's Arts & Science College, Kottakkal Mala


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INCOME FROM SALARY THE FIRST HEAD OF INCOME Jolly Joseph Nirmala College, Chalakudy


BASIS OF CHARGE SEC.15 Salary due from the present or former employer for the service rendered during the previous year. Salary received before it becomes due. Advance salary. Arrears of salary, if it was not assessed earlier .

Principles of salary:

Principles of salary Voluntary Surrender of Salary: Salary is chargeable on due basis. It will become income only after it has fallen due. Therefore, voluntary surrender or forgoing of salary after it has become due will be mere application of income and hence taxable. .

Principles of salary:

Principles of salary Employer-Employee Relationship: A payment is treated as ‘salary’ only when there is relationship of employer and employee between assessee and payee Payment received by M.Ps, MLAs, examiner’s remuneration, family pension and partners remuneration will not be treated as “Salary Income ”.

Principles of salary:

Principles of salary Tax-free salary: In the case of tax free salary, the employee will be taxable in respect of gross salary, i.e. Aggregate of salary received and the amount of tax paid by employer on behalf of employee

Principles of salary:

Principles of salary Deductions made by Employer: Salary is paid to an employee after making some deductions in respect of any loan advanced to him, employee’s contribution towards PF and E.S.I, income tax, professional tax, life insurance premium etc. Such deductions are treated as application of salary income and tax is chargeable on the gross salary without any deductions .

Principles of salary:

Principles of salary Due date of Salary: In the case of government and semi government employees, salary becomes due on the first day of next month. In the case of other employees, salary becomes due on last day of each month .

Salary includes….Sec. 17(1):

Salary includes….Sec. 17(1) Wages; Annuity or pension; Gratuity; Fees, Commission, perquisites or profits in lieu of salary; Any advance salary; Leave salary; Annual accretion; and Transferred balance


TAX TREATMENT OF DIFFERENT KINDS OF SALARIES 1. Basic Salary or Wages : Both salary and wages mean a payment or compensation of work done, or service rendered. Ordinarily salary paid in respect of non-manual work and wages for manual work. Basic salary is taxable. 2. Fees and Commission from Employer for doing any Extra Work: These items are taxable as salary income.

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3. Leave Salary : Leave salary received before retirement is taxable as salary income. 4 . Pension : Pension received by assessee during the P.Y. is taxable as salary income. 5 . Bonus : Bonus paid by employer to employee is taxable on receipt basis as salary income

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Allowance is the regular cash payment to meet the expenses incurred while rendering the job

Types of Allowances:

Types of Allowances

Exempted Allowances:

Exempted Allowances Foreign Allowance : These are the allowances granted by Government of India to its citizens who are working abroad on Indian Government Service. Sumptuary allowances to High Court or Supreme Court Judges Allowances from U.N.O . Per-diem Allowances : It is paid for the purpose of use of hotel, boarding and lodging facilities to an employee.

Partially Exempted allowances:

Partially Exempted allowances House Rent Allowance Sec.10(13A) The least of the following is exempted… Actual H.R.A received, Rent paid – 10% of salary 40% of salary(50% in the case of Delhi, Chennai, Mumbai & Kolkata.) Salary = basic salary + D.A. if it form part of salary + Commission on turnover at fixed percentage.

….partially exempted allowances:

….partially exempted allowances 2.Children Education Allowance: - It is exempt in whole of India @ Rs.100 p.m. per child up to a maximum of two children. 3.Children Hostel Allowance: - It is exempt in whole of India @ Rs.300 p.m. per child up to a maximum of two children. 4.Transport Allowance: - It is granted to meet expense on traveling from residence to work place and return back. It is exempted from tax @ Rs.800 p.m. In the case of physically handicapped employees, it is exempted up to Rs.1600 p.m.

….partially exempted allowances:

….partially exempted allowances 5.Any allowance granted by an employer, who is a transport undertaking to its employees to meet personal expenditure during his duties. ( Flight or running allowance):- 70% of such allowance up to Rs.6000 p.m. is exempted from tax. 6.Underground allowance: - It is granted to an employee who is working in uncongenial and unnatural climate in underground mines. It will be exempted from tax up to Rs.800 p.m.

Taxable allowances:

Taxable allowances Dearness Allowance D.A. is allowed to employees to meet high cost of living. Sometimes it is given under the terms of employment and sometimes without it. When it is given under the terms of employment, it is included in the salary for determining the exemption limit of H.R.A, Gratuity, and P.F. etc. Sometimes D.A. is given as Dearness Pay. It means that it is being given under terms of employment .

……taxable allowances:

……taxable allowances 2. Fixed Medical Allowance. 3. Tiffin allowance 5. Non-practicing allowance 4. Servant allowance. 6. Hill allowance in a place is located at less than 1000 meter height from sea level.

……taxable allowances:

……taxable allowances 7. Warden/Procter allowance 8. Deputation allowance 9. Overtime allowance 10. Project allowance 11. City compensatory allowance 12. Entertainment allowance 13. Special qualification allowance


PERQUISITES “ any casual emolument, fee or profit attached to an office, in addition to salary of wages ”. ….means a personal advantage to the employee. ….employee must have a vested right to receive it.

Tax free perquisites :

Tax free perquisites Medical benefits, Tea, snacks, free food, free lunch or beverages provided during office hours at work place, Accommodation provided at site, Telephone including mobile phone, Contribution to Staff Group Insurance Scheme, Scholarship to employees or their children, Conveyance facility from residence to office and return back

…….Tax free perquisites :

…….Tax free perquisites Refresher courses, Tax on perquisite paid by employer (Fringe benefit tax paid), Perquisites to government employee who are posted abroad, Rent free house and conveyances to Judges of High Court and Supreme Court, Rent free house provided to a minister, specified officers of Parliament or a Leader of Opposition in parliament ,

…….Tax free perquisites:

…….Tax free perquisites Laptops and computers provided by the employer to employee or family members. Interest free or concessional loan (below Rs.20,000), Transfer without consideration to an employee of a movable asset (other than computers, electronic items and car) by the employer after using it for a period of 10 years or more,

…….Tax free perquisites:

…….Tax free perquisites Leave travel concession, Any benefit or amenity on which employer is liable to pay Fringe Benefit Tax Periodicals and journals,

Taxable perquisites in all cases :

Taxable perquisites in all cases The value of rent-free accommodation [sec 17(2) (i)] The value of concessional accommodation [sec.17(2)(ii)] Any sum paid by employer in respect of any obligation which, but for such payment would have been payable by employee [sec.17(2 ) (iv)]

…….Taxable perquisites in all cases:

…….Taxable perquisites in all cases Any sum payable by the employer, whether directly or through a fund, other than recognized P.F. or recognized superannuation fund to effect an assurance on the life of assessee or family members [sec.17(2)(v)]. Value of any other fringe benefits as may be prescribed under Sec .17(2) (vi)

Perquisites taxable in specified cases :

Perquisites taxable in specified cases The value of any benefit or amount granted to an employee (on which employee has no obligation) is taxable only in the hands of specified employees. [Sec. 17(2) (iii)].

Specified Employee :

Specified Employee a person who satisfies any of the following conditions: By a company, an employee who is a director thereof; By a company, an employee who has a substantial interest in the company (i.e. Holding more than 20% of Equity shares); An employee whose salary, excluding value of perquisites, exceeds Rs.50000 during the P.Y.


Accommodation Government Employees Value=The licence fee or value determined by Govt authorities Non Govt employees If house owned by employer , the value will be 15% (above 25 lakh)or10%(10-25lakh) or 10%(below 10 lakh) of salary as per population of the city


…………….Accommodation House hired by the employer…. The value will be 15% of salary or rent paid by the employer whichever is lesser

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Car facility Car is owned by the employer. Car is used only for official purpose- it is not a perquisite.

……car is owned by the employer:

……car is owned by the employer Car is used exclusively for the private or personal purpose of employee or household members- The value = the actual amount met by the employer including driver’s salary + normal depreciation @ 10% of original cost of the car

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Car for personal and official use Small Car (Below 1.6 liter. CC) Large Car (Above 1.6 Liter. CC) If entire expense of running and maintenance of the car are borne by employer 1,800 p.m . 2,400 p.m .

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Car for personal and official use Small Car (Below 1.6 liter. CC) Large Car (Above 1.6 Liter. CC) If expense of personal use of the car are borne by employee 600 p.m . 900 p.m .


PROVIDENT FUND Statutory Provident Fund, Recognized Provident Fund, Unrecognized provident fund, Public Provident Fund.

Statutory Provident Fund :

Statutory Provident Fund Indian Provident Fund Act, 1925 applies Employee’s contribution: Eligible for deduction U/S 80C Employer’s contribution: Exempted from tax Interest: Exempted Lump sum amount received: Not taxable

Recognized Provident Fund :

Recognized Provident Fund Employees’ Provident Fund Act, 1952 applies & recognized by C.I.T . Employee’s contribution: Eligible for deduction U/S 80C Employer’s contribution: Exempted up to 12% of salary Interest: Exempted up to 9.5% p.a. Lump sum amount received: Not taxable

Unrecognized Provident Fund :

NOT RECOGNIZED by C.I.T . Employee’s contribution: NOT Eligible for deduction U/S 80C Employer’s contribution: FULLY TAXABLE WHEN LUMPSUM AMT RECEIVED Interest: FULLY TAXABLE AS SALARY INCOME AND OTHER SOURCES Lump sum amount received: EMPLOYER’S CONTRIBUTION & INTEREST THEREON IS TAXABLE Unrecognized Provident Fund

Deductions from gross salary:

Deductions from gross salary Entertainment Allowance [Sec.16 (ii)] 1/5th of Basic salary; Rs.5000; and Actual Entertainment allowance received the least is deductible only for Govt employees Employment or Professional tax paid [sec.16 (iii)]

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