Unit – 2
Computation of Income under different heads - 1
Meaning of Salary
Section 17(1)
gives an inclusive definition of ‘Salary’
Salary includes
–
(i) wages;
(ii) any annuity
or pension;
(iii) any
gratuity;
(iv) any fees, commission,
perquisites or profits in lieu of or in addition to any salary or wages;
(v) any advance
of salary;
(vi) any payment
received by an employee in respect of any period of leave not availed by him;
(vii) Employer’s
contribution to Recognized Provident Fund (RPF) in excess of 12% of employee’s
salary and interest credited to recognized provident fund in excess of 9.5%
p.a;
(viii) the
aggregate of all sums that are comprised in the transferred balance of an
employee participating in a recognized provident fund to the extent to which it
is chargeable to tax;
(ix) the
contribution made by the Central Government or any other employer in the
previous year, to the account of an employee under a notified pension scheme
referred to in section 80CCD.
Basis of charge
(Section 15)
(i) Section 15
deals with the basis of charge. Salary is chargeable to tax either on ‘due’
basis or on ‘receipt’ basis, whichever is earlier.
(ii) However,
where any salary, paid in advance, is assessed in the year of payment, it cannot
be subsequently brought to tax in the year in which it becomes due.
(iii) If the
salary paid in arrears has already been assessed on due basis, the same cannot
be taxed again when it is paid.
Arrears of Salary
Salary is
taxable on ‘due’ or ‘receipt’ basis whichever is earlier, but if there are any
arrears of salary which have not been taxed in the past, such arrears will be
taxed in the year in which these arrears are paid or allowed to the employees.
For example, if the government announces increases in dearness allowances in
the previous year 2019-2020 which is effective from 1.1.2017 then arrears from
1.1.2017 to 31.3.2019 were never due earlier. These arrears will be taxed in
the previous year in which these are paid or allowed although the arrears of salary
relate to the past years. In such cases the assessee can claim relief of
income-tax under section 89, if he so desires.
Advance Salary
Advance salary
is taxable when it is received by the employee irrespective of the fact whether
it is due or not. It may so happen that when advance salary is included and
charged in a particular previous year, the rate of tax at which the employee is
assessed may be higher than the normal rate of tax to which he would have been
assessed. Section 89(1) provides for relief in these types of cases.
House Rent Allowances [Section 10(13A)]
House Rent
Allowances is given by the employer to the employee to meet the expenses in
connection with rent of the accommodation which the employee might have to
take. House Rent Allowances is taxable under the head ‘salaries’ to the extent
it is not exempt under section 10(13A). House Rent Allowances is exempt under
section 10(13A) to the extent of the minimum of the following three amounts:
a. Actual House
Rent Allowances received by the employee in respect of the relevant period.
b. Rent paid –
10% of salary for the relevant period.
c. 50% of the
salary where the residential house is situated at Mumbai, Kolkata, Delhi or
Chennai and 40% of the salary where the house is situated at any other place,
for the relevant period.
The minimum of
the above three amounts shall be exempt from tax and the balance shall be
taxable and thus included in gross salary of the employee.
Entertainment Allowances:
Entertainment
Allowance received is fully taxable and is first to be included in the salary
and thereafter the following deductions is to be made. This deduction is
allowed only to a Government employee. In case of entertainment allowances, the
assessee is not entitled to any exemption but he is entitled to a deduction
under section 16(ii) from gross salary. The amount of deduction will be minimum
of the following three limits:
a. Actual
Entertainment Allowances received.
b. One-fifth of
his basic salary; or
c. Rs. 5000
Amount actually
spent by the employee towards entertainment out of entertainment allowance
received by him is not a relevant consideration at all.
Professional tax on employment
Professional tax
or taxes 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 first included as salary income and then allowed as a deduction
u/s 16.
Gratuity
Gratuity is a
payment made by the employer to an employee in appreciation of the past service
rendered by the employee. Gratuity can either be received by the employee
himself at the time of his retirement or the legal heir on the event of the
death of the employee. Now-a-days gratuity becomes a normal payment applicable
to all employees. In fact, Payment of Gratuity Act, 1972 is a statutory
recognition of the concept of gratuity. Almost all employees enter into an
agreement with employees to pay gratuity.
Exemption in
respect of Gratuity [Section 10(10)]
1. Retirement
gratuity received under the Pension Code Regulations applicable to members of
the Defence Service is fully exempt from tax.
2. Central /
State Government Employees: Any death cum retirement gratuity is fully exempt
from tax.
3. No-government
employees:
(i)
Non-government employees covered by the Payment of Gratuity Act, 1972
Any death cum retirement
gratuity is exempt from tax to the extent of least of the following:
a. Rs. 10,00,000
b. Gratuity actually received
c. 15 days’ salary based on last
drawn salary for each completed year of service or part thereof in excess of 6 months.
(ii)
Non-government employees not covered by the Payment of Gratuity Act, 1972
Any death cum retirement
gratuity is exempt from tax to the extent of least of the following:
a. Rs. 10,00,000
b. Gratuity actually received
c. Half months’ salary (based on
last 10 months’ average salary immediately preceding the month of retirement or death) for each
completed year of service.
Leave Salary or Leave Encashment
Generally,
employees are allowed leaves during the period of service. Employee may avail
such leaves or in case the leaves are not availed, then the leaves may either
be lapsed or accumulated for future or allowed to be encashed every year or at
the time of termination/retirement. The payment received on account of
encashment of unavailed leave would be form part of salary. However, section
10(10AA) provides exemptions in respect of amount received by way of encashment
of unutilized earned leave by an employee at the time of his retirement whether
on superannuation or otherwise. Leave encashment to an employee, while he
continues to be in service with the same employer, is fully taxable.
Exemption of
amount received by way of encashment of unutilized earned leave on retirement
[Section 10(10AA)]
The provisions
of this clause are mentioned below:
(a) Government
employee: Leave salary received at the time of retirement is fully exempt from
tax.
(b) Non-
government employee: Leave salary received at the time of retirement is exempt
from tax to the extent of least of the following:
(i) Rs. 3,00,000
(ii) Leave salary actually
received
(iii) 10 months’ salary (on the
basis of average salary of last 10 moths)
(iv) Cash equivalent of leave
(based on last 10 moths’ average salary immediately preceding the date of retirement) to the credit
of the employee at the time of retirement or death. Earned leave entitlement cannot exceed 30 days for
every year of actual service rendered for the employer
from whose service he has retired.
Profits in lieu of Salary [Section 17(3)]
It includes the
following:
(i) Compensation
on account of termination of his employment
The amount of
any compensation due to or received by an assessee from his employer or former
employer at or in connection with the termination of his employment.
(ii)
Compensation on account of modification of the terms and conditions of
employment
The amount of
any compensation due to or received by an assessee from his employer or former
employer at or in connection with the modification of the terms and conditions
of employment.
Usually, such
compensation is treated as a capital receipt. However, by virtue of this
provision, the same is treated as a revenue receipt and is chargeable as
salary.
(iii) Payment
from provident fund or other fund
Any payment due
to or received by an assessee from his employer or former employer from a
provident or other fund other than
- Gratuity [section 10(10)]
- Pension [section 10(10A)]
- Compensation received by a
workman under Industrial Disputes Act, 1947 [section 10(10B)]
- From provident fund or public
provident fund [section 10(11)]
- From recognized provident fund
[section 10(12)]
- From approved superannuation
fund [section 10(13)]
- Any House Rent Allowance
[section 10(13A)]
To the extent to
which it does not consist of employee’s contributions or interest on such
contributions.
(iv) Keyman
Insurance policy
Any sum received
by an assessee under a Key man Insurance policy including the sum allocated by
way of bonus on such policy.
(v) Lump sum
payment or otherwise
Any amount,
whether in lump sum or otherwise, due to the assessee or received by him, from
any person-
(a) Before joining employment with that person,
or
(b) After cessation of his
employment with that person.
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 issued under any law. It also
includes compensation paid on transfer of employment under section 25F or
closing down of an undertaking under section 25FF of the Industrial Disputes
Act, 1947.
It may be noted
that compensation on account of termination and due to modification in terms
and conditions of employment would be taxable as ‘profits in lieu of salary’.
However, the retrenchment compensation would be exempt under section 10(10B),
subject to following limits.
(a) Amount calculated in accordance with the provisions of section 25F of the Industrial Disputes Act, 1947
X Avg. salary of last 3 month X completed
years of services and part thereof in excess of 6 month
Or
(b) An amount,
not less than Rs. 5,00,000 as may be notified by the Central Government in this
behalf; whichever is lower.
Provident Fund
Provident fund
scheme is a scheme intended to give substantial benefits to an employee at the
time of his retirement. Under this scheme, a specified sum is deducted from the
salary of the employee as his contribution towards the fund. The employer also
generally contributes the same amount out of his pocket, to the fund. The
contribution of the employer and the employee are invested in approved
securities. Interest earned thereon is also credited to the account of the employee.
Thus, the credit balance in a provident fund account of an employee consists of
the following:
(i) Employee’s
contribution
(ii) Interest on
employee’s contribution
(iii) Employer’s
contribution
(iv) Interest on
employer’s contribution
The accumulated
balance is paid to the employee at the time of his retirement or resignation.
In the case of death of the employee, the same is paid to his legal heirs.
Types of
Provident Fund
1. Statutory
Provident Fund (SPF)
The Statutory
Provident Fund is governed by Provident Funds Act, 1925. It applies to
employees of government, railways, semi-government institutions, local bodies,
universities and all recognized educational institutions.
2. Recognized Provident Fund (RPF)
Recognized
Provident Fund means a provident fund recognized by the Commissioner of
Income-tax for the purposes of income-tax. It is governed by Part A of Schedule
IV to the Income-tax Act, 1961. This schedule contains various rules regarding
the following:
(a) Recognition
of the fund
(b) Employee’s
and Employer’s contribution to the fund
(c) Treatment of
accumulated balance etc.
A fund
constituted under the Employees’ Provident Fund and Miscellaneous Provisions
Act, 1952 will also be a Recognized Provident Fund.
3. Unrecognized
Provident Fund (URPF)
A fund not
recognized by the Commissioner of Income-tax is Unrecognized Provident Fund.
4. Public
Provident Fund (PPF)
Public Provident
Fund is operated under the Public Provident Fund Act, 1968. A membership of the
fund is open to every individual though it is ideally suited to self-employed
people. A salaried employee may also contribute to PPF in addition to the fund
operated by his employer. An individual may contribute to the fund on his own
behalf as also on behalf of a minor of whom he is the guardian. For getting a
deduction under section 80C, a member is required to contribute to the PPF a
minimum of Rs. 500 in a year. The maximum amount that may qualify for deduction
on this account is Rs. 1, 50, 000 as per PPF rules. The rate of interest, at
present, under the scheme is 8.0%.

Perquisites
The term
‘perquisites’ indicates some extra benefit in addition to the amount that may
be legally due by way of contract for services rendered. In modern times, the
salary package of an employee normally includes monetary salary and perquisite
like housing, car etc.
- -- Perquisite may be provided in
cash or in kind.
- -- Reimbursement of expenses
incurred in the official discharge of duties is not a perquisite.
- -- Perquisite may arise in the
course of employment or in the course of profession. If it arises from a relationship of employer-employee, then the value of the perquisite is taxable
as salary. However, if it arises during the course of profession, the value of
such perquisite is chargeable as profits and gains of business or profession.
- -- Perquisite will become taxable
only if it has a legal origin. An unauthorized advantage taken by an employee
without his employer’s sanction cannot be considered as a perquisite under the
Act.
The term ‘perquisite’ is defined under section
17(2). The definition of perquisite is an inclusive one. Based on the
definition, perquisites can be classified n following three ways:
1. Perquisites
taxable in the case of all employees.
2. Perquisites
exempt from tax in the case of all employees.
3. Perquisites
taxable only in the hands of specified employees.
1. Perquisites taxable in the case of all
employees.
The following
perquisites are taxable in the hands of all employees:
(i) Rent free
accommodation provided by the employer to the employee, Such accommodation may
be furnished or unfurnished.
(ii) Any
concession in the matter of rent in respect of the accommodation provided or
granted by the employer to the employee.
(iii) Any sum
paid by the employer in discharging the monetary obligation of the employee
which otherwise would have been payable by the employee e.g. the school fees of
the children of the employee paid by the employer or the Income-tax of the
employee paid by the employer.
(iv) Any sum
payable by the employer whether directly or through a fund (other than
Recognized Provident Fund (RPF), Approved Superannuation Fund, or Deposit Linked
Insurance Fund) to effect an assurance on the life of the assessee or to effect
a contract for an annuity.
(v) The value of any other fringe benefit or amenity as may be prescribed.
2. Perquisites exempt from tax in the case of all
employees.
Following perquisites are exempt from tax in the hands of all employees:
1. Telephone |
Telephone provided by an
employer to an employee at his residence. |
2.Transport facility |
Transport facility provided by
an employer engaged in the business of carrying of passengers or goods to his
employees either free of charge or at a concessional rate. |
3.Perquisites allowed outside
India by the Government |
Perquisites allowed outside India
by the Government to a citizen of India for rendering services outside India. |
4. Refreshment |
Refreshment provided to all
employees during working hours in office premises. |
5.Annual premium by employer on personal accident policy |
Payment of annual premium by
employer on personal accident policy effected by him on the life of the
employee. |
6.Subsidized lunch |
Subsidized lunch or dinner
provided to an employee. |
7.Recreational facilities |
Recreational facilities,
including club facilities, extended to employees in general i.e., not
restricted to a few selected employees. |
8. Amount spent on training of
employees |
Amount paid by the employer on
training of employees or amount paid for refresher management course
including expenses on boarding and lodging. |
9. Sum payable by employer to a
RPF or an superannuation fund |
Sum payable by employer to a RPF
or an superannuation fund or deposit-linked insurance fund established under
the Coal Mines Provident Fund or the Employee’s Provident Fund Act. |
10. Leave travel concession |
Leave travel concession, subject
to the conditions specified under section 10. |
11.Medical facilities |
Medical facilities subject to
certain prescribed limits. |
12.Rent free house/ Conveyance
facility |
Rent free official residence and
conveyance facilities provided to a Judge of the Supreme Court / High Court
is not a taxable perquisite. |
13. Residence to officials of
Parliament |
Rent free furnished residence
(including maintenance thereof) provided to an officer of the Parliament, a
Union Minister or Leader of Opposition in Parliament is not a taxable
perquisite. |
Residential
accommodation provided by employer;
1.
Unfurnished accommodation
a.
Accommodation provided by the Government to its employees
The
license fee determined by Union or State Government as reduced by the rent
actually paid by the employee.
b. Accommodation provided by any other employer

2.
Furnished accommodation
Value of
perquisite shall be determined as if it is an unfurnished accommodation. Such
value shall be increased by 10% p.a. of the cost of furniture (including
television sets, refrigerators, other household appliances, air conditioning
plant or equipment or other similar appliances or gadgets) or if such furniture
is hired from a third party, the actual hire charges payable for the same. Such
valuation of furniture shall be as reduced by any charges paid or payable for
such furniture by the employee during the previous year.
***********