Chapter-6: Income under the Head “Salaries”

 Introduction

 

Income from salaries is a major component of the total income for many individuals. The Income Tax Act of India has specific provisions to tax salary income. This chapter provides an indepth understanding of the basis of charge for salary income, the essential norms, various allowances, perquisites, and deductions.

 

 A. Basis of Charge (Section 15)

 

Under Section 15 of the Income Tax Act, salary income is taxable in the year it is received or the year it is due, whichever is earlier. The essential points to understand are:

 

 Received: When the salary is actually received by the employee.

 Due: When the salary is earned and the employee has a legal right to receive it, even if it is not yet paid.

 

 Essential Norms of Salary Income

 

Salary includes:

 

 Wages: Regular payments for work done.

 Annuity or Pension: Regular payments made to a retired person.

 Gratuity: A lump sum payment made at the end of employment.

 Fees, Commission, Perquisites: Additional earnings from the employer.

 Leave Encashment: Money received in lieu of unutilized leave.

 Profits in lieu of Salary: Any compensation received instead of salary.

 

 Allowances

 

Allowances are financial benefits given to employees over and above their regular salary. Some common allowances include:

 

1. Basic Salary: The core part of an employee’s salary.

2. Dearness Allowance (DA): Compensation for inflation and increased cost of living.

3. City Compensatory Allowance (CCA): Extra pay for employees working in urban areas to cover higher living costs.

4. House Rent Allowance (HRA) [Section 10(13A)]: An allowance for employees to meet the cost of renting a home.

5. Medical Allowance: Given to cover medical expenses.

6. Bonus: Extra payment for good performance or during festivals.

7. Children Education Allowance: An allowance to cover the education expenses of employees’ children.

8. Transport Allowance: Provided to cover the cost of travel between home and workplace.

 

 B. Perquisites [Section 17(2)]

 

Perquisites are benefits received by an employee in addition to their regular salary. They can be taxable or taxfree.

 

 a) Valuation of RentFree Accommodation

 

1. For Central and State Government Employees: The value of rentfree accommodation provided to these employees is based on the rules set by the government.

2. For Private Sector Employees: The valuation of rentfree accommodation is determined as per Rule 3(1) of the Income Tax Rules.

    Unfurnished Accommodation: Valuation is based on a percentage of the salary.

    Furnished Accommodation: Valuation includes the value of the unfurnished accommodation plus the value of furniture and appliances provided.

 

 b) Valuation of Specific Perquisites

 

1. Free Education to Employee’s Children: If the employer provides free education to the employee's children in their institution, the value is the cost of education or the expenditure incurred by the employer.

2. Payment of School Fees by the Employer: The actual amount paid by the employer is considered a perquisite.

3. Education Facility in Employee’s Institute: The valuation depends on the expenditure incurred by the employer for providing education.

 

 c) Very Common Examples of TaxFree Perquisites

 

1. Medical Facilities: Medical facilities provided to employees and their families in the employer’s own hospital or a government hospital.

2. Telephone/Mobile Reimbursement: Reimbursement of telephone or mobile expenses.

3. Scholarships: Scholarships provided to the children of employees.

4. Food Coupons: Food coupons provided by the employer up to a certain limit.

 

 d) Deduction for Professional Tax or Tax on Employment [Section 16(iii)]

 

Professional tax or employment tax paid by an employee is allowed as a deduction from their gross salary.

 

 Conclusion

 

Understanding the components of salary income, various allowances, perquisites, and applicable deductions is crucial for accurate tax computation and compliance. This chapter provides a comprehensive overview with simple explanations relevant to India.

 

 References

 

1. Income Tax Act, 1961: The primary legislation governing income tax in India.

2. Income Tax Rules, 1962: Detailed rules for various provisions of the Income Tax Act.

3. Official Website of the Income Tax Department, Government of India: For updates and detailed guidelines.

4. Books on Indian Taxation:

    Singhania, V.K. (2020). Direct Taxes Law & Practice. Taxmann Publications.

    Ahuja, G., & Gupta, R. (2021). Simplified Approach to Income Tax. Wolters Kluwer.