To understand the meaning of the expression salary under the Income Tax Act, it is essential to identify the nature of the relationship between the person making the payment and the person receiving it. Salary is chargeable to tax only when there is a relationship of employer and employee or master and servant between the payer and the recipient. The employer can be any individual, firm, company, association of persons, Central or State Government, corporation, or local authority. Similarly, the employee can be a full-time or part-time worker. The employer doesn’t need to be located in India; foreign employers are also included under this definition if the employee is rendering services under a contract of employment.
A Member of Parliament or a Member of State Legislature does not have an employer-employee relationship with the Government. Therefore, the salary and allowances received by them are not taxable under the head Salaries. Instead, they are taxed under the head Income from Other Sources as per the relevant section of the Act.
Salary and Wages
There is no conceptual difference between the terms salary and wages for taxation. Both are considered taxable under the head Salaries regardless of the terminology used in employment agreements or payment structures.
Salary from Multiple Sources
If an individual receives salary from more than one employer during the same financial year, either due to a change of employment or by being employed simultaneously with different employers, the entire salary received from all sources is taxable under the head Salaries. The source or number of employment does not change the taxability.
Salary from Former, Present, or Future Employer
Salary received from a former employer, the current employer, or a future prospective employer is chargeable to tax under the head Salaries. The timing or nature of the employment contract does not affect the taxability of the amount received if it is linked to employment.
Foregoing Salary
Under section 15, salary is taxable based on accrual or receipt, whichever is earlier. If an employee voluntarily waives their salary after it becomes due, such waiver does not exempt the amount from tax. The salary is considered to have accrued, and its subsequent waiver is treated as an application of income, meaning it is still chargeable to tax.
Salary Paid Tax-Free
If an employer agrees to bear the tax liability on behalf of the employee and pays salary tax-free, the employee must include both the salary and the tax paid by the employer in their total taxable income. It is immaterial whether the employer is contractually obliged to pay tax on behalf of the employee or chooses to do so voluntarily. The tax paid is treated as a perquisite and included in the gross salary of the employee.
Voluntary Payments
Any amount paid voluntarily to an employee by way of salary, perquisites, or allowances is taxable even if there is no formal obligation to pay the amount. The Income Tax Act does not distinguish between payments made under a legal obligation and those made gratuitously. The fact that a payment is termed as a gift or is non-contractual does not exclude it from taxability under the head Salaries.
Definition of Salary under Section 17(1)
Section 17(1) of the Income Tax Act provides an inclusive definition of salary. According to this section, salary includes wages, annuity or pension, gratuity, fees, commission, perquisites or profits instead of or in addition to salary or wages, advance salary, payment for leave not availed, taxable accretion in a recognized provident fund, taxable transferred balance from a recognized provident fund, and contributions made by the employer to the employee’s account under a notified pension scheme referred to in section 80CCD.
Basis of Charge of Salary Income
The basis for charging salary income to tax is specified in section 15 of the Income Tax Act. Salary is taxable on either a due basis or a receipt basis, whichever occurs earlier. If salary becomes due in a particular year but is received later, it is taxable in the year it became due. Conversely, if salary is received in advance, it is taxable in the year of receipt. For example, if salary for the financial year 2024-25 is received in the financial year 2023-24, it will be taxed in 2023-24 on a receipt basis. Similarly, if salary due in 2022-23 is received in 2023-24, it is taxed in 2022-23 on a due basis.
The accounting method followed by the employee is irrelevant for this purpose. Whether the employee maintains books of account on a cash basis or accrual basis, salary is always taxed based on the principle of due or receipt, whichever is earlier, as laid down in section 15.
Place of Accrual of Salary Income
Section 9(1) specifies the place of accrual of salary income. Salary is deemed to accrue or arise at the place where the services are rendered. If services are rendered in India, the salary is considered to accrue or arise in India. If services are rendered outside India, then the income is not deemed to be earned in India. However, there are exceptions to this rule. Salary received by an Indian citizen from the Government of India for rendering services outside India is considered to accrue or arise in India and is taxable in the hands of the employee. On the other hand, allowances and perquisites received from the Government of India for such services outside India are exempt from tax. Pension and leave salary paid abroad for services rendered in India are also deemed to accrue or arise in India and are taxable accordingly.
Computation of Salary Income
Salary income is computed by adding together the income from basic salary, allowances, and taxable perquisites to arrive at the gross salary. From the gross salary, certain deductions are allowed under section 16. These include a deduction for entertainment allowance and a deduction for professional tax paid. After deducting these amounts, the resulting figure is the income chargeable to tax under the head Salaries.
Tax Treatment of Different Salary Components
Salary includes many components, and the tax treatment varies depending on the nature of each component. Basic salary and dearness allowance are fully taxable. Advance salary and arrears of salary are also taxable in the year of receipt if not taxed earlier. Leave encashment received during service is taxable, while leave encashment at the time of retirement is exempt in the hands of a government employee and conditionally exempt in the case of non-government employees. Salary, instead of notice, commission, and bonus, is fully taxable. Gratuity is exempt in the case of government employees and partially exempt in the case of non-government employees, depending on conditions. Monthly pensions are taxable, while commuted pensions are exempt for government employees and conditionally exempt for non-government employees. Salary received from the United Nations is not taxable.
Leave Salary
When an employee does not take leave during their service, the leave can either lapse, be encashed, or be accumulated. The cash received in exchange for unavailed leave is known as leave salary. If leave encashment is received during service, it is taxable for all employees. If it is received at the time of retirement or leaving the job, it is exempt in the case of government employees. For non-government employees, it is conditionally exempt as per section 10(10AA)(ii). The exemption is limited to the least of the following amounts: the amount of earned leave to the employee’s credit at the time of retirement multiplied by the average monthly salary, ten months’ average salary, twenty-five lakh rupees, or the actual amount received.
To compute the period of earned leave at the time of retirement, the total years of service and leave entitlement are considered. The average monthly salary is based on the salary drawn during the ten months immediately preceding the retirement. If leave encashment is received from more than one employer, the total exemption in an individual’s lifetime is capped at twenty-five lakh rupees.
Additional Points about Leave Salary
Leave encashment is exempt even if retirement is voluntary. Relief under section 89 is available for leave encashment received while in service. Leave salary paid to legal heirs after the death of an employee is not taxable in their hands. Likewise, any amount received by the family of a deceased government servant as leave salary is not taxable.
Gratuity
Gratuity is a retirement benefit paid based on the duration of service. For government employees, gratuity is fully exempt under section 10(10)(i). For non-government employees, the tax exemption depends on whether the Payment of Gratuity Act applies. If the employee is covered under the Act, the exemption under section 10(10)(ii) is limited to the least of the following: fifteen days’ salary for each year of service, twenty lakh rupees, or the actual gratuity received. If the employee is not covered by the Act, the exemption under section 10(10)(iii) is based on half a month’s average salary for each completed year of service, twenty lakh rupees, or the actual amount received.
Service duration is counted by ignoring any period less than six months and rounding it off. The salary used for computing gratuity includes basic salary and dearness allowance but excludes bonuses, commissions, and other allowances. Fifteen days’ salary is computed as the last drawn salary divided by twenty-six.
If gratuity is received from more than one employer during a person’s lifetime, the total exemption cannot exceed twenty lakh rupees. If gratuity is received while in service, it is taxable, though relief under section 89 may be claimed.
Gratuity Received by Legal Heirs
If gratuity becomes due and is paid during the lifetime of an employee, it is taxable in the employee’s hands. If gratuity is due before retirement but is received by legal heirs after the death of the employee, it is also taxed in the name of the deceased through their legal heirs. However, if gratuity is sanctioned after the death of the employee and did not become due during their lifetime, it is not treated as income and is not taxable in the hands of legal heirs.
Allowances and Their Tax Treatment
Allowances are fixed periodic amounts paid by employers to employees for meeting specific requirements connected with the performance of their services. They are generally fully taxable, partially exempt, or fully exempt, depending on the nature of the allowance and specific provisions in the Income Tax Act. House Rent Allowance (HRA) is one of the most common allowances provided by employers. It is exempt under section 10(13A) of the Income Tax Act, subject to specific conditions and limits. The exemption is the least of the following: actual HRA received, 50% of salary if the employee resides in a metro city (Delhi, Mumbai, Kolkata, or Chennai), 40% if residing in a non-metro city, or rent paid more than 10% of salary. For this purpose, salary includes basic salary, dearness allowance (if it forms part of retirement benefits), and commission (if it is a fixed percentage of turnover achieved by the employee). Conveyance Allowance granted to meet the expenditure on commuting between residence and office is exempt up to a specified limit. However, post the introduction of standard deduction, this exemption is no longer separately available for salaried employees. Medical Allowance is a fixed amount paid to employees for medical expenses, and it is fully taxable. On the other hand, reimbursement of medical expenses by the employer up to a certain limit was earlier exempt but has now been subsumed under the standard deduction. Leave Travel Allowance (LTA) is exempt under section 10(5) for two journeys in a block of four calendar years, subject to conditions regarding the mode of travel and family members accompanying the employee. Children’s Education Allowance and Hostel Expenditure Allowance are exempt up to certain specified limits per child for a maximum of two children. Uniform Allowance is exempt to the extent it is spent for the purchase or maintenance of uniforms required for official duty. Daily Allowance given to employees when on tour or during the period of journey for official work is exempt to the extent of actual expenditure. Foreign Allowance received by government employees posted abroad is fully exempt. Other allowances, such as entertainment allowance, special compensatory allowance, project allowance, etc., are generally taxable unless a specific exemption is provided. It is important for taxpayers to refer to the latest provisions and circulars for the updated list of exemptions and their respective limits.
Perquisites and Their Valuation
Perquisites are benefits or amenities provided by the employer to the employee in addition to salary or wages. These may be in cash or kind and are usually taxable under the head of salaries. Perquisites may be classified as monetary or non-monetary. The taxability and valuation of perquisites are governed by Rule 3 of the Income Tax Rules, 1962. Rent-free accommodation provided by the employer is one of the most common perquisites. If the accommodation is owned by the employer, the taxable value is calculated as a percentage of the employee’s salary based on the population of the city. For example, in cities with a population exceeding 25 lakhs, the value is 15% of the salary. If the house is taken on lease or rent by the employer, the taxable value is the lower of the actual rent paid or the percentage as per the population-based criteria. Furnishing of accommodation attracts additional taxation at 10% per annum of the cost of furniture provided. Use of a motor car provided by the employer for personal or official use is another common perquisite. If used exclusively for official purposes and supported by proper records, it is not taxable. If used partly for personal purposes, a fixed amount is taxable based on engine capacity and whether expenses are borne by the employer or employee. Free or concessional education provided to the children of employees in the employer’s institution is taxable based on the cost incurred by the employer or the market value of similar education in nearby institutions. Free or subsidized meals, domestic servants, provision of gas, electricity, or water, interest-free loans, gifts exceeding a specified limit, club memberships, and credit card payments are other examples of perquisites subject to valuation and taxation rules. Medical facilities provided by the employer’s hospital or government-approved hospitals are not taxable. The provision of health insurance premiums by the employer is also exempt. The valuation rules are complex, and the actual taxable value depends on several factors such as usage, reimbursement, limits, and whether the benefit is extended uniformly to all employees or only to certain categories. Employers are responsible for calculating and deducting tax at source (TDS) on the value of perquisites, and employees are required to include the same in their income from salaries.
Profits instead of Salary
Profits instead of salary are amounts received by an employee from the employer or former employer in connection with the termination of employment or modification of terms of employment. These are taxable under section 17(3) of the Income Tax Act. Compensation received on termination or modification of employment is taxable unless specifically exempt under section 10(10C) or other provisions. For example, compensation received under a Voluntary Retirement Scheme (VRS) is exempt up to Rs. 5,00,000, provided the scheme is by Rule 2BA of the Income Tax Rules. Payments received from unrecognized provident funds or superannuation funds upon resignation or termination are taxable under this head. Any amount received before joining or after cessation of employment, such as advance salary, arrears of salary, or signing bonus, is also considered profit instead of salary and taxable accordingly. Gratuity and pension are also covered under this head if they do not qualify for exemption under sections 10(10) and 10(10A), respectively. Commuted pension is exempt for government employees and partially exempt for non-government employees, subject to certain conditions. Uncommuted pension is fully taxable. Retrenchment compensation received under the Industrial Disputes Act is exempt up to a specified limit, and the balance is taxable. Golden handshake payments, leave encashment at the time of retirement, and similar terminal benefits are included under this head and taxed based on specific exemption provisions. The characterization of income as profit instead of salary affects the timing of taxation and eligibility for relief under section 89 for arrears and advances.
Deductions from Salary
Certain deductions are allowed from gross salary income to arrive at taxable salary under section 16 of the Income Tax Act. These deductions reduce the tax burden on salaried employees. The standard deduction is a flat deduction introduced to simplify compliance and replace various exemptions. It was initially introduced at Rs. 40,000, later increased to Rs. 50,000 per annum, and is available to all salaried individuals and pensioners. Entertainment allowance deduction is available only to government employees and is the least of the actual allowance received, 20% of basic salary, or Rs. 5,000. Professional tax paid by the employee is also deductible under section 16(iii), limited to the actual amount paid during the year. These deductions are not dependent on actual expenditure or submission of proofs. Over and above these, salaried employees can also claim deductions under Chapter VI-A of the Income Tax Act for investments and expenses, such as contributions to provident fund, life insurance premium, principal repayment of housing loan, tuition fees under section 80C, health insurance premium under section 80D, interest on education loan under section 80E, donations under section 80G, and interest on housing loan under section 24(b) if they have income from house property. Relief under section 89 is available when salary includes arrears or advance salary, and the tax liability is higher due to the inclusion of such income in a single year. The relief is calculated by comparing tax liability with and without such income in the current and past years. Employers are required to compute tax liability on salary after considering these deductions and deduct tax at source accordingly. Employees must provide necessary declarations and proofs to claim these deductions through the employer; otherwise, they may claim them while filing their income tax return.
Tax Computation and TDS on Salary
Computation of income under the head salaries involves aggregating all income components, including basic salary, allowances, perquisites, and profits, instead of salary, and deducting the eligible deductions under section 16. The resulting figure is the taxable income under the head of salaries. This is then added to income from other heads to arrive at the gross total income. The applicable deductions under Chapter VI-A are reduced from the gross total income to compute the total income. Tax is calculated on this total income as per the applicable slab rates. The government notifies slab rates for different categories of taxpayers, such as individuals below 60 years, senior citizens (60 to 79 years), and super senior citizens (80 years and above). The tax payable is computed by applying the slab rates to the total income and adding surcharge, if applicable, and health and education cess at 4%. Employers are required to deduct tax at source (TDS) on salary payments under section 192 of the Income Tax Act. TDS is required to be deducted at the average rate of income tax computed on the estimated income of the employee for the financial year. The employer must obtain a declaration of other income and deductions from the employee in Form 12BB to compute the estimated income correctly. TDS must be deposited with the government within the due dates and reported in quarterly TDS returns. Employees can verify the TDS deducted through Form 26AS and Form 16 issued by the employer. If excess TDS has been deducted, the employee can claim a refund while filing the income tax return. In case of short deduction, the employee remains liable to pay the balance tax and interest. Proper tax planning, accurate declarations, timely investment, and communication with the employer are essential to ensure correct computation and deduction of tax on salary.
Allowances and Their Tax Treatment
Allowances are financial benefits provided by employers to employees in addition to their regular salary. These are generally given to meet specific requirements or expenses incurred during employment. The taxation of allowances depends on the type and purpose. Some are fully taxable, some are fully exempt, and others are partially exempt.
Fully taxable allowances include dearness allowance, overtime allowance, city compensatory allowance, and lunch allowance. These are added to the salary and taxed as part of gross income under the head Salaries. Partially exempt allowances are provided under Section 10(14) of the Income Tax Act. Examples include house rent allowance (HRA), conveyance allowance, and children’s education allowance. The exemption is subject to prescribed limits and conditions. House rent allowance is one of the most common partially exempt allowances. The exempt portion is calculated as the minimum of the following three amounts: actual HRA received, 50% of salary if living in a metro city or 40% in a non-metro city, and rent paid minus 10% of salary. The remaining HRA, if any, is taxable.
Fully exempt allowances include foreign allowance to government employees posted abroad and allowances paid to judges of the High Court or Supreme Court. These are specifically exempt under the Act.
Perquisites and Their Valuation
Perquisites, commonly referred to as perks, are benefits or amenities provided by the employer to the employee in addition to the salary or wages. They may be provided in cash or kind. The taxability of perquisites depends on their nature and the status of the employer. Under Section 17(2) of the Income Tax Act, perquisites include rent-free accommodation, concession in rent, reimbursement of medical expenses, use of the employer’s car for personal purposes, free meals, club memberships, and stock options.
Perquisites are classified as taxable perquisites, tax-free perquisites, and perquisites taxable only in the hands of specified employees. Specified employees include directors, employees with substantial interest in the company, and employees with salary income exceeding a prescribed limit. The valuation of perquisites is done as per the rules prescribed in the Income Tax Rules. For example, the value of rent-free accommodation is calculated as a percentage of salary, depending on whether the house is owned or leased by the employer. Use of a motor car for both official and personal purposes is valued based on engine capacity and whether the driver’s salary is reimbursed. Free or subsidized meals provided by the employer are exempt up to Rs. 50 per meal. Beyond that, they are taxable. Club memberships and expenses incurred on behalf of the employee are taxable unless they are for official purposes. Reimbursement of medical expenses is exempt up to Rs. 15,000 per annum, provided certain conditions are met. Employer’s contribution to recognized provident fund exceeding 12% of salary is treated as a taxable perquisite. Similarly, interest credited to the provident fund beyond a notified rate is also taxable.
Certain perquisites like a laptop or computer provided for official use, telephone bills paid by the employer, and refreshment during office hours are exempt from tax.
Retirement Benefits and Their Tax Treatment
Retirement benefits are financial payments and provisions made to employees on retirement, termination, or resignation. These may include gratuity, pension, provident fund, leave encashment, and retrenchment compensation. The taxation of such benefits depends on the type of employment and the provisions of the Income Tax Act.
Gratuity is a lump sum payment made by an employer to an employee in recognition of past services. It is exempt up to a certain limit under Section 10(10). The limits and conditions vary for government employees, employees covered under the Payment of Gratuity Act, and others. For government employees, gratuity is fully exempt. For employees covered under the Payment of Gratuity Act, the exemption is limited to the least of actual gratuity received, Rs. 20 lakhs, or 15 days’ salary for every completed year of service. For others, the exemption is the least of actual gratuity, Rs. 20 lakhs, or half a month’s average salary for each completed year of service.
Pension can be received in two forms: commuted and uncommuted. Commuted pension is the lump sum amount received instead of monthly payments and is partially or fully exempt depending on the employee’s category. For government employees, commuted pension is fully exempt. For non-government employees, it is partially exempt, subject to certain limits. Uncommuted pension, i.e., periodic pension, is fully taxable.
Provident Fund is another key component. The four types are statutory provident fund (SPF), recognized provident fund (RPF), unrecognized provident fund (URPF), and public provident fund (PPF). Contribution to SPF is fully exempt. In case of RPF, the employer’s contribution up to 12% of salary is exempt. Interest up to a notified rate is exempt. Withdrawal from RPF is exempt if certain conditions are fulfilled, such as completion of 5 years of continuous service. URPF is not recognized by the Commissioner of Income Tax, and its tax treatment differs. Employer’s contribution and interest thereon are taxable in the year of withdrawal. PPF is a government-backed scheme, and its contributions, interest, and withdrawals are fully exempt under Section 10(11).
Leave Encashment is the amount paid for earned leaves not availed by the employee. For government employees, it is fully exempt. For others, the exemption is the least of actual leave encashment received, Rs. 3 lakhs, or 10 months’ average salary, or cash equivalent of leave based on a maximum of 30 days leave per year of service. Retrenchment compensation is exempt under Section 10(10B) up to Rs. 5 lakhs or as prescribed under the Industrial Disputes Act, whichever is less.
Deductions Allowed from Salary Income
From the gross salary, certain deductions are allowed under Section 16 to arrive at the taxable salary income. These include standard deduction, entertainment allowance, and professional tax. The standard deduction is a flat deduction from salary income allowed to all salaried employees. It was reintroduced in the Finance Act, 2, and is currently fixed at Rs. 50,000 per annum. This replaces the earlier transport and medical reimbursement benefits.
Entertainment allowance deduction is allowed only to government employees. The deduction is the least of the actual entertainment allowance received, 20% of the basic salary, or Rs. 5,000. Other employees are not eligible for this deduction.
Professional tax or tax on employment is levied by some states. It is deductible from salary income under Section 16(iii). The deduction is allowed in the year in which it is paid. If the employer pays the professional tax on behalf of the employee, the same is first included in salary as a perquisite and then allowed as a deduction.
Apart from these, salaried employees can also claim deductions under Chapter VI, such as Section 80C, 80D, and otherswhile computing total income. These deductions are not specific to salary income but are available to all assessees depending on the nature of the investment or expense.
Computation of Gross Salary
Gross salary includes all payments received from the employer before any deductions. It comprises basic salary, dearness allowance, allowances, perquisites, bonuses, commissions, and retirement benefits. The process of computing salary income involves several steps.
First, identify the different components of the salary structure such as basic salary, DA, allowances, bonuses, perquisites, and benefits. Next, classify allowances into fully taxable, partially exempt, and fully exempt. Calculate the exemption for partially exempt allowances, such as HR, and reduce it from the total allowance received. Include the taxable portion in gross salary. Similarly, compute the value of perquisites as per the prescribed rules and include them in the gross salary. Add bonuses, commissions, and other variable components. Include retirement benefits if received during the year and determine their taxability.
Once all components are identified and their taxable value computed, the total gives the gross salary. From the gross salary, reduce the deductions under Section 16 to arrive at income under the head Salaries.
Illustration of Salary Income Computation
Let us consider an illustration to understand the computation process. Mr. A is a salaried employee with the following details: basic salary of Rs. 60,000 per month, dearness allowance of Rs. 10,000 per month, HRA of Rs. 20,000 per month, rent paid Rs. 18,000 per month, company-provided car used for both personal and official purposes, standard deduction applicable, and professional tax paid Rs. 2,500.
First, compute the total basic salary and DA for the year: Rs. 60,000 × 12 = Rs. 7,20,000; Rs. 10,000 × 12 = Rs. 1,20,000. Total HRA received = Rs. 20,000 × 12 = Rs. 2,40,000. HRA exemption is the minimum of: actual HRA = Rs. 2,40,000, 50% of salary = 50% of Rs. 8,40,000 = Rs. 4,20,000, and rent paid – 10% of salary = Rs. 2,16,000 – Rs. 84,000 = Rs. 1,32,000. So HRA exemption is Rs. 1,32,000. Taxable HRA = Rs. 2,40,000 – Rs. 1,32,000 = Rs. 1,08,000.
Perquisite value of car, assuming engine capacity less than 1.6L and driver provided, is Rs. 1,800 + Rs. 900 = Rs. 2,700 per month = Rs. 32,400 annually.
Total gross salary = Basic + DA + taxable HRA + perquisite = Rs. 7,20,000 + Rs. 1,20,000 + Rs. 1,08,000 + Rs. 32,400 = Rs. 9,80,400. Deductions under Section 16: standard deduction = Rs. 50,000, professional tax = Rs. 2,500. Total deductions = Rs. 52,500.
Net income under the head Salaries = Rs. 9,80,400 – Rs. 52,500 = Rs. 9,27,900.
Relief under Section 89(1)
Employees who receive salary arrears or advance salary in a financial year may end up paying more tax due to the additional income falling into a higher tax bracket. Section 89(1) provides relief to such individuals. The relief is calculated by recomputing tax liability as if the income were received in the year(s) it was due. The steps include calculating tax for the current year with and without the additional income, and for the previous year(s) with and without the respective portion of arrears or advance. The difference in tax liabilities is treated as relief under Section 89(1).
Form 10E Filing Requirement
To claim relief under Section 89(1), filing Form 10E online on the Income Tax Department’s portal is mandatory. Failure to submit this form may result in the denial of relief even if the computation shows eligibility. It is advisable to submit Form 10E before filing the income tax return.
Tax Deduction at Source on Salary
Employers are responsible for deducting tax at source (TDS) from employees’ salaries under Section 192 of the Income Tax Act. TDS is calculated based on the estimated income of the employee for the financial year, considering all deductions and exemptions declared. The employer may consider other income reported by the employee for TDS computation, though they are not obligated to do so. Employees must submit proofs of deductions and investments to ensure appropriate TDS is deducted. Form 16, issued annually, serves as a certificate of TDS deducted and deposited on behalf of the employee.
Form 16: TDS Certificate
Form 16 is a crucial document for salaried individuals. It is divided into two parts—Part A contains details of TDS deducted and deposited quarterly, PAN of the employee, TAN of the employer, and other basic details. Part B is an annexure detailing salary breakup, deductions claimed under Chapter VI-A, exemptions under Section 10, and tax computation. Employees must cross-check Form 16 with their records and Form 26AS to verify TDS.
Treatment of Perquisites in Form 16
Perquisites are reported in Form 16 Part B under the salary breakup. Employers are required to calculate the value of taxable perquisites and include them in the gross salary. They must also provide a separate statement called Form 12BA if the salary exceeds ₹1,50,000. This statement lists each prerequisite and its value. Some perquisites are taxed in full, while others have exemptions or concessional valuation rules, such as accommodation and motor car facility.
Salary Received from More than One Employer
If a person has worked for more than one employer during the year, they must aggregate the salary from all employers to compute total income under the head “Salaries.” Relief under Section 89(1) may be available in case of overlapping payments. It is the responsibility of the taxpayer to ensure all salary income is reported. TDS certificates from multiple employers (multiple Form 16s) must be considered while filing the return.
Computation of Salary for Different Employment Types
The computation of salary income differs slightly based on the employment arrangement. For permanent employees, all allowances, perquisites, and bonuses are included. For contractual employees, only the salary and directly related allowances are generally taxed. Government employees may have additional components such as gratuity, pension, and leave encashment, which are partially or fully exempt. Foreign citizens employed in India must also pay tax on salary earned in India, and DTAA provisions may apply.
Salary in Foreign Currency
If salary is received in foreign currency for services rendered in India or by a resident Indian abroad, it must be converted into Indian rupees using the telegraphic transfer buying rate on the date of receipt. This income is taxable in India unless exempted under specific DTAA provisions or Section 10. Indian residents working abroad for Indian companies may still be taxed in India, depending on their residential status.
Computation of Net Taxable Salary
The step-by-step process of computing net taxable salary is as follows:
- Aggregate all salary incom,,e including basic pay, dearness allowance, bonus, commission, allowances, perquisites, and other benefits.
- Deduct exempt allowances under Section 1, such as HRA, LTA, and special allowances.
- Deduct entertainment allowance (Section 16(ii)) and tax on employment (Section 16(iii)).
- Deduct standard deduction of ₹50,000 under Section 16(i.
- The resulting figure is the net taxable salary to be included under the head “Salaries” in the income tax return.
Deductions under Chapter VI-A
After computing net taxable salary, the taxpayer can claim deductions under Chapter VI-A to arrive at total taxable income. These include:
- Section 80C: Deductions up to ₹1.5 lakh for investments like PPF, EPF, LIC premium, ELSS, tuition fees, principal repayment on home loan.
- Section 80D: Deduction for health insurance premium.
- Section 80E: Deduction for interest on education loan.
- Section 80G: Deduction for donations to specified funds and institutions.
- Section 80TTA/80TTB: Deduction for interest on savings accounts (₹10,000 for individuals, ₹50,000 for senior citizens).
- Other sections like 80CCD(1B), 80U, and 80DD are based on specific conditions.
Filing Income Tax Return for Salary Income
Salaried individuals usually file ITR-1 (Sahaj) if they have income only from salary, one house property, and income from other sources (like interest),, and the total income does not exceed ₹50 lakh. Individuals with higher income or multiple sources may have to file ITR-2 or ITR-3. The due date for filing the return is generally July 31st of the assessment year unless extended. It is important to verify the return and ensure TDS matches with Form 26AS.
Common Errors in Salary Computation
Some common mistakes to avoid in salary computation include:
- Not including salary from previous employers.
- Failing to consider perquisites and their taxability.
- Overstating or understating exempt HRA and LTA.
- Not filing Form 10E before claiming relief under Section 89(1).
- Not claiming deductions under Chapter VI-A.
- Not verifying TDS in Form 26AS.
Income from Salary in the Case of Pensioners
Pensions received by retired employees are taxable under the head “Salaries” if they are uncommuted, i.e., received periodically. Commuted pension (lump sum) may be fully or partially exempt based on whether the individual is a government or non-government employee. Family pensions received by legal heirs are not taxed under “Salaries” but under “Income from Other Sources,” and a standard deduction of ₹15,000 or one-third of the amount received (whichever is less) is allowed.
Income Tax Implications for Retrenchment Compensation
Retrenchment compensation received under the Industrial Disputes Act is exempt under Section 10(10B) up to a specified limit. The exemption is calculated as the lower of the amount received, ₹5,00,000, or an amount calculated based on 15 days’ average pay for each completed year of service. Amounts received beyond the exemption limit are taxable as salary income.
Gratuity Received
Gratuity received on retirement or death is exempt under Section 10(10) for government employees. For non-government employees covered under the Payment of Gratuity Act, the exemption is the least of the actual gratuity received, ₹20 lakh, or 15 days’ wages for each completed year of service. For employees not covered under the Act, the calculation is different, and similar exemption limits apply. Amounts over the exempted limit are taxed under the head “Salaries.”
Conclusion
Income under the head “Salaries” is one of the most critical components of personal taxation in India. It encompasses not only basic salary but also various allowances, perquisites, bonuses, and benefits. Understanding the detailed provisions of exemptions, deductions, and computation methods allows salaried taxpayers to optimize their tax liability legally. Careful documentation, accurate disclosure, and timely filing of forms and returns ensure compliance and avoid penalties. With increasing digitalization, tools such as Form 16, Form 26AS, and AIS (Annual Information Statement) have made salary income reporting more transparent and traceable. Taxpayers must remain updated on the latest amendments and use all available legal avenues to reduce taxable income effectively.