Income from salaries

(Sections 15 to 17)

Meaning of salary

 Fixed payment made by one person to another

 It arises due to a contract of employment
 It arises due to a employer-employee relationship
Situations where income will be taxed as salaries

Situations Whether taxable

as salary or not
Mr A works as a Manager in PQR Limited. He Yes taxable
receives remuneration of Rs 1 Lakh per month

Mr A works as a consultant in PQR Ltd. He Not taxable as there

receives remuneration of Rs 10 lakhs per is no employer
annum employee
relationship

Mr A has his own business. He draws Not taxable

remuneration of Rs 50,000/- per month from
the business

PQR is a partnership of 3 persons P, Q and R. Not taxable

Each partner gets a salary of Rs 10,000/- per
month
Salary (Defined u/s 17(1) of the Income tax Act)
Under Section 17(1) of the Income tax Act, “Salaries” include
(i) Wages, (ii) Annuity or pension
(iii) Gratuity, (iv) Fees, Commission, perquisites or profits in lieu of salary
(v) Advance of Salary
(vi) Amount transferred from unrecognized provident fund to recognized
provident fund
(vii) Contribution of employer to a Recognised Provident Fund in excess of the
prescribed limit
(viii) Leave Encashment
(ix) Compensation as a result of variation in Service contract etc.

Thus from the above definition salaries include

- Salaries for the current period
- Salaries paid under any head
- Outstanding salaries
- Advance of salary
- Salaries received from one employer or more than one
employer
- Salary is taxed when received
Situations where income will be taxed as salaries

Situations Whether taxable or

not as salaries

Mr A receives salaries for F.Y. 2020-21 Rs Taxable as salary

10,000/-

Mr A receives outstanding salary for April, Taxable as salary

2021 in June, 2021 Rs 5,000/-

Mr A receives advance salary for July, 2021 in Taxable as salary

June, 2021

Mr A receives Rs 10,000/- from M/s PQR Ltd Taxable as salary

and Rs 5,000/- from M/s ABC Ltd arising out
of employment
Narrower definition of salary

- Salaries received for the current period

- Salaries received for past period (outstanding salaries)
- Salaries received for future period (advance salaries)

Broader definition of salary

Salary includes

a. Salary (means anything received by an employee from an

employer in any head. For eg : - (basic pay, House rent allowance,
bonus, fees, commission)

b. Perquisites

c. Allowances

d. Profits in lieu of salary

Perquisites (Section 17(2) of the Income tax Act, 1961)

Perquisites are benefits received by an employee from an employer

due to his employment.

For eg : -

(1) Employer has taken a flat on rent and pays rent of Rs 15,000/-
per month. The said flat has been given to Mr C his employee for
staying. Mr C enjoys staying in the rented flat free of cost.

(2) Mr C is being paid tuition fees of his children of Rs 5,000/- per

month by his employer M/s Reliance Industries Ltd.
Perquisites can be divided into two segments

a. Perquisites taxable for all employees

b. Perquisites exempt for all employees

Perquisites exempt for all employees

1. Employer incurs expenditure for treating employees and their

family members for any sickness or ailment in his own hospital.
2. Employer incurs expenditure for treating employees and their
family members for any sickness or ailment in private hospitals.
3. Reimbursement of non hospitalisation expenses by an employer
to an employee upto Rs 15,000/- per annum (medical bills)
4. Group insurance premium paid by an employer for employees
and their family members
5. Expenditure on medical treatment of employees or their family
members abroad provided the salary of employee does not
exceed Rs 2 lakhs per annum
6. Family means employee, my spouse, children, dependent
parents or any other dependents.
7. Due to humanitarian considerations
Taxable perquisites for all employees

1. The value of rent free accommodation or concession in rent

provided by an employer to an employee.
2. The value of benefit, privilege, amenity provided by an
employer to an employee.
3. Any payment made by an employer on behalf of an employee
but for which the payment has to be made by the concerned
employee himself.
4. Value of sweat equity or stock options provided free of cost
or at a concessional price.
(Mr A is working in Infosys. Face value of share is Rs
10/-, market price Rs 10,000/-. Company gives me
stock options (shares) at Rs say 2,000/- per share.
Difference 8000/- per share is taxable as perquisite)
5. Employer’s contribution to superannuation fund above Rs
1,50,000/- per annum.
 Whether the following transactions are perquisites or not
which are taxable in the hands of employees
(plain understanding of whether a transaction is a perquisite
or not)
Transaction Whether taxable or
not as perquisite
X Ltd incurs expenditure of medical treatment of Mr Exempt perquisite.
Y his employee in private hospital Rs 15,000/-
A Ltd incurs Rs 40,000/- for treating husband of Exempt perquisite
Mrs C in its own hospital
Alpha Ltd has offered Group insurance worth Rs Exempt perquisite
10,00,000/- to Mr A and his three family members.
Mediclaim premium is paid by Alpha Limited
Club bills of Mr A an employee who is a member of Taxable perquisites
Bombay Gymkhana Rs 15,000/- per annum is as Mr A has received
reimbursed to him by Reliance Industries Ltd an extra benefit
Credit card bill of Ms D an employee of Bajaj Auto Taxable as
Ltd is paid directly to AXIS Bank by Bajaj Auto Ltd perquisite
 State whether the transactions are falling in the category
of perquisite or not
Transaction Whether taxable
as perquisite or
not
Mr A an employee of Axis Bank is offered rent free Taxable perquisite
accomodation stay by Axis Bank in Worli. Axis bank as employee has
pays his annual rent of Rs 6 lakhs per annum got a benefit
Mr A an employee of Yes Bank is offered to stay in a Taxable perquisite
rent free accommodation by Yes Bank. Rent is Rs 2 to the extent of Rs
lakhs per annum. Mr A pays only Rs 30,000/- per 1,70,000/-
annum
Ms R an employee of Infosys is offered stock options Taxabler
at a price of Rs 500/- per equity share. The current perquisite is Rs
market value is Rs 600/- per equity share at the time 100/- per equity
of offering the stock options. Face value is Rs 100/- share
per share
Employer has contributed Rs 5 lakhs to superannuation SA contribution upto
fund (SA) of Mr X in F.Y. 2020-21 Rs 1.50 lakhs is
exempt. Entire 5
lakhs is taxable
Rules for valuation of different types of perquisites (Rule 3)

Following items are covered

1. Value of rent free unfurnished/furnished accomodation (whether
owned by employer or taken on hire or lease)
2. Value of perquisite in the case of motor car/vehicle
3. Value of perquisite for sweeper, gardener, watchmen provided by
employer to employee
4. Value of perquisite in the case of education facilities
5. Value of perquisite in the case of free or concessional gas or electricity
6. Value of perquisite in the case of interest free or concessional loans
given to employee
7. Value of perquisites in the case of holiday home or concessional travel
8. Value of perquisites in the case of gifts received by employees
9. Value of perquisites in the case of payments to membership clubs
10.Value of perquisites in the case of payments for credit card
11.Value of perquisite if asset of employer is used by employee
12.Value of perquisite if asset of employer is sold to employee
13.Value of perquisite in the case of stock options
14.Value of any other perquisite
Deductions from gross salary

1. Standard deduction

100% of salary or Rs 50,000/- whichever is less

Examples

If total salary of an individual is Rs 40,000/-, then Standard

deduction will be computed as under

actual salary (100% of salary) - Rs 40,000/-

maximum deduction - Rs 50,000/-

whichever is less Rs 40,000/-
Deductions from Gross salary

2) Profession tax

actual profession tax deducted from an employee’s salary is

allowed as deduction.

quantum of profession tax varies from state to state

maharashtra profession tax is Rs 2,500/-. (maximum)

Deductions from salary

3) Entertainment allowance (only for government employees)

a. 1/5th of basic salary

b. Rs 5,000
c. actual amount received

Whichever is less