CS EXECUTIVE TAX LAWS INCOME UNDER HEAD “SALARIES” 

CS EXECUTIVE TAX LAWS INCOME UNDER HEAD “SALARIES” 

Income under the head “Salaries” is the first head under the Income Tax. Comparing the Other head in Income Tax, Salaries is the one that has numerous components and related computation in assessing the taxable income under the head. Let’s dive in to understand the Salary meaning, what Salary includes, Salary Allowances, Retirement Benefits, Leave Encashment and Salary Perquisites.

 

SALARY MEANING

Salary is the remuneration received by or accruing to an individual, for service rendered through an express or implied contract and where such remuneration is periodical. The existence of an employer-employee relationship is the most fundamental element for taxing a particular receipt under the head “salaries.”

The remuneration received by an individual, in whatsoever form shall be treated as salary only if the employer and employee or master and servant relationship between payer and payee. As far as the nature of the persons under the head Salary, an employer may be an individual, firm, association of persons, company, corporation, Central Government, State Government, public body or a local authority, etc., maybe operating in India or from abroad. As far as the employee, he is an individual who may be a full-time employee or part-time employment.

However, a Member of Parliament or State Legislature is not treated as an employee of the Government. Salary and allowances received by him are, therefore, not chargeable to tax under the head “Salaries”, however, they are chargeable to tax under section 56 under the head “Income from other sources”.

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WHAT DOES “SALARY” INCLUDE?

As per Section 17(1) of the Income Tax Act “Salary” includes:

1. Wages
2. Annuity or pension
3. Gratuity
4. Fees, Commission, any perquisites or profits in lieu of salary in whatsoever name
5. Advance of Salary
6. Any amount transferred from an unrecognized provident fund to a recognized provident fund
7. Contribution of the employer to a Recognized Provident Fund of the employee in excess of the prescribed limit specified under the applicable provisions
8. Leave Encashment
9. Compensation paid to the employee as a result of variation in Service contract etc.
10. The contribution made by the Central Government or any other employer to the account of an employee under a notified pension scheme referred to in section 80 CCD.

 

Though the list covers most of the part, it is just an inclusive list and not an exhaustive definition.

Browse the video lecture from here on Income under the Head “Salary”  for CS Executive Tax laws.

 

BASIS OF CHARGE OF SALARY INCOME – SECTION 15

The charging section, Section 15 states that salary is taxable on a “due” or “paid” basis whichever is earlier. That is, if it is due, it is included in taxable salary, irrespective of whether it is paid or not, and if it is paid, it is taxable, irrespective of whether it is due or not. Therefore, it is only logical to note that if it has already been taxed on the due basis, the same cannot be taxed again when it is paid. Similarly, if a salary which was paid in advance, if it has already been taxed in the year of payment, it cannot subsequently be taxed when it becomes due.

It is to be noted that – It is worthwhile to mention that salary is chargeable to tax on “due” or “receipt” basis (whichever matures earlier) regardless of the fact whether books of account, are maintained by the assessee on a mercantile basis or cash basis. The method of accounting cannot vary the basis of charge fixed.

To bring in more clarity, Advance salary is taxable; however, an Advance against Salary is essentially a loan that will be recovered later from the Employee, and therefore that isn’t taxable.

 

SALARY ALLOWANCES

Salary Allowances can be defined as a fixed amount of money or other substance given regularly in addition to salary for meeting specific requirements of the employees. There are several examples such as dearness allowance, conveyance allowance, etc. As per the provisions of computation of salary all allowances are included in the total income unless specifically exempted.

It is also taxed on a due/accrued basis whether it is paid in addition to the salary or lieu thereon. These allowances are generally taxable and are to be included in the gross salary unless a specific exemption has been provided in respect of allowances provided under the Act.

 

FULLY TAXABLE SALARY ALLOWANCES

The following salary allowances are fully taxable:

1. Dearness Allowance, Additional Dearness Allowance, etc.
2. Fixed Medical Allowance
3. Tiffin Allowance
4. Servant Allowance
5. Non-practicing Allowance
6. Hill Allowance
7. Warden Allowance and Proctor Allowance
8. Deputation Allowance
9. Overtime Allowance
10. Other Allowance

 

NOT FULLY TAXABLE SALARY ALLOWANCES

House Rent Allowance u/s 10(13A) -HRA received by any employee is exempt to the extent of least of the following, i.e. whichever is Lower:

1. 50% of Salary for Metro Cities (Delhi, Mumbai, Kolkata, and Chennai), else 40% of Salary
2. HRA actually received
3. Rent paid minus 10% of Salary

Note: for the purpose of calculation of Salary for HRA, Salary = Basic + DA (if forming part of salary/retirement benefit) + Commission as a fixed % of Turnover

 

SPECIAL SALARY ALLOWANCES

Apart from the allowances, Section 10(14) deals with:

1. All special allowances specifically granted to meet expenses, incurred, for the purposes of performance of duties

• Wholly
• Exclusively &
• Necessarily

These are exempt to the extent such expenses are actually incurred or the amount received whichever’s less. Examples include Travelling & Conveyance, Relocation, and Helper & Uniform Allowances. (No cap or upper limit)

1. Special allowances granted to an assessee either to meet his personal expenses at the place of duty OR to compensate for the increased cost of living. Allowances that are granted to meet personal expenses are exempt to the extent of the amount received or the limits specified whichever is less.

 

These include,

1. Tribal Area Allowance capped to INR 200 per month is exempt.
2. Children Education Allowance capped to INR 100 per month (per child, max 2 children) is exempt.
3. Hostel Expenditure Allowance capped to INR 300 per month (per child, max 2 children) is exempt.
4. Transport Allowance for handicapped capped at INR 3200 per month is exempt.

Besides the above, there are compensatory allowances for hilly areas and work in difficult conditions too.

As per section 10(14), read with rule 2BB there are allowances granted to an employee are exempt from tax subject to a certain limit, it has an extensive list as well.

 

RETIREMENT BENEFITS

 Gratuity

Gratuity is normally paid in lieu of the long-term service of an employee (usually > 5 years), but is a voluntary payment by the employer, as an appreciation of the long-standing services. The Gratuity so received at the time of retirement or termination of employment or death of the employee is exempt as under:

1. For the Central / State Government employees and the members of the Defence Services, any amount received as Gratuity at the time of retirement/death is fully exempt
2. For all other employees in the private sector:

• In case the employee is covered under the Payment of Gratuity Act, 1972, any death-cum-retirement Gratuity is exempt to the extent of least of the following:

1. INR 20,00,000
2. Gratuity actually received

• 15 days’ Salary based on salary last drawn for each year of service or part thereof more than 6 months

 

Note: Here Salary would mean (Basic + DA) and the number of days in the month to be assumed to be 26.

 

• In case the employee is NOT covered under the Payment of Gratuity Act, 1972, any death-cum-retirement Gratuity is exempt to the extent of least of the following:

1. INR 20,00,000
2. Gratuity actually received

• Half months’ Salary based on last 10 months’ average salary drawn immediately preceding the month of retirement/death, for each completed year of service (fraction of year to be ignored)

Note: Here Salary would mean Basic + DA (only to the extent of forming part of the retirement benefits) + Commission as a % of Turnover and number of days in the month to be taken at 30.

 

LEAVE ENCASHMENT

Leave encashment means getting a salary equivalent to the number of leaves which were entitled to an employee but not availed (i.e. earned). Leave Encashment taken during employment is fully taxable for all employees.

Leave Encashment taken at the time of retirement is exempted as follows:-

• Leave Encashment Salary received by employees of the Government, is fully exempt from tax.
• For the Non-Government employees, the Leave Encashment Salary so received is exempt from tax to the extent of least of the following:
• INR 3,00,000
• Leave Salary actually received
• 10 month’s Salary on the basis of average salary drawn in the last 10 months
• Cash Equivalent of Leave standing to the credit of the employee at the time of retirement/death, based on the last 10 month’s average salary drawn. Earned leave entitlement per year cannot exceed 30.

 

Note: Here Salary would mean Basic + DA (only to the extent of forming part of the retirement benefits) + Commission as a % of Turnover and number of days in the month to be taken at 30.

 

SALARY PERQUISITES

“Perquisite” shall mean any casual emolument or benefit attached to an employment or position in addition to salary or wages.

 

Section 17 (2) of the Income-tax Act defines Salary “Perquisite” includes:

• Value of rent-free/concessional rent accommodation provided by the employer to the employee. (Value of Rent Free Accommodation)
• Any sum paid by the employer on behalf of the employee in respect of an obligation which was payable by the employee
• Value of any benefit/amenity granted free or at concessional rate to specified employees etc. either as part of the conditions of their employment or arising thereafter
• The value of any specified security or sweat equity shares allotted or transferred to the employee, by the employer or former employer, directly or indirectly. Even if they are allotted or transferred free of cost or at a concessional rate.
• The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees; and
• The value of any other fringe benefit or amenity provided by the employer as may be prescribed.

 

DEDUCTIONS FROM SALARY

Standard Deduction

Standard deduction of Rs. 50,000 (fifty thousand) or the amount of the salary, whichever is less w.e.f. Finance Act 2019 w.e.f. Assessment year 2020-21.

Entertainment Allowance

• Fully-taxable
• First to be included in salary and then deduction to be made
• In the case of Government Employees, the deduction is available, which would be lower of:
• 1/5th of Basic Salary Or
• INR 5000/- Or
• Actual Entertainment Allowance received

 

Profession Tax

It is allowed as a deduction when paid by the employee (recovered from salary) during the previous year.

 

Hope it helped you!

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