COMPLETE MODULE II – INCOME FROM SALARY NOTES
Introduction to Salary Income
Income from Salary is one of the most important heads of income under the Income
Tax Act, 1961. Salary means remuneration received by an employee from employer
for services rendered. For salary income to arise, employer-employee relationship
must exist.
Salary includes:
• Basic salary
• Dearness allowance
• Bonus
• Commission
• Pension
• Gratuity
• Allowances
• Perquisites
Basis of Charge of Salary
Salary is taxable:
1. When due whether received or not.
2. When received whether due or not.
3. Arrears received during the year.
Advance salary is taxable in year of receipt.
Arrears are taxable in year of receipt.
Relief under Section 89 may be available.
Employer Employee Relationship
Salary income exists only when employer-employee relationship exists.
Example:
Salary received by manager from company is salary income.
Fees received by lawyer from client is professional income.
Components of Salary
1. Basic Salary – fixed amount paid to employee.
2. Dearness Allowance – allowance to reduce inflation effect.
3. Bonus – extra payment by employer.
4. Commission – payment based on sales.
5. Pension – payment after retirement.
6. Gratuity – retirement benefit.
7. Leave Encashment – payment for unused leave.
Pension
Types of Pension:
1. Uncommuted Pension
Regular monthly pension and fully taxable.
2. Commuted Pension
Lump sum pension amount and partly exempt.
Allowances
Allowances are fixed monetary amounts paid in addition to salary.
Types of Allowances:
1. Fully taxable allowances
2. Partly exempt allowances
3. Fully exempt allowances
Examples:
• Dearness allowance
• Overtime allowance
• HRA
• Foreign allowance
House Rent Allowance
HRA exemption available under Section 10(13A).
Least of following is exempt:
1. Actual HRA received
2. Rent paid minus 10% of salary
3. 50% of salary for metro cities or 40% for non-metro cities
Perquisites
Perquisites are benefits provided by employer in addition to salary.
Examples:
1. Rent-free accommodation
2. Motor car facility
3. Free education facility
4. Medical facility
5. Interest-free loan
Provident Fund
Provident fund is retirement savings scheme.
Types:
1. Statutory Provident Fund
2. Recognized Provident Fund
3. Unrecognized Provident Fund
4. Public Provident Fund
Retirement Benefits
1. Pension
2. Gratuity
3. Provident Fund
4. Leave Encashment
5. Retrenchment Compensation
Valuation of Perquisites
Valuation depends on rules prescribed under Income Tax Act.
Rent-free accommodation valuation depends on:
1. Population of city
2. Salary amount
3. Government or private employer
Motor car valuation depends on official and personal use.
Computation of Salary
Step 1 – Calculate Gross Salary
Step 2 – Deduct exempt allowances
Step 3 – Deduct deductions under Section 16
Formula:
Income from Salary = Gross Salary – Exemptions – Deductions
Deductions under Section 16
1. Standard Deduction
2. Entertainment Allowance
3. Professional Tax
Example of Salary Computation
Basic Salary = ₹5,00,000
DA = ₹50,000
Bonus = ₹20,000
HRA = ₹1,00,000
Gross Salary = ₹6,70,000
Less HRA Exemption = ₹40,000
Taxable Salary = ₹6,30,000
Less Standard Deduction = ₹50,000
Income from Salary = ₹5,80,000
Difference Between Advance Salary and Arrears
Advance Salary:
• Received before due date
• Future salary
• Taxable in year of receipt
Arrears:
• Received after due date
• Past salary
• Taxable in year of receipt
Important Exam Questions
1. Define salary.
2. Explain basis of charge of salary.
3. Explain allowances and perquisites.
4. Explain provident fund.
5. Explain retirement benefits.
6. Explain deductions under Section 16.
7. Explain computation of salary income.
Quick Revision Points
• Employer-employee relationship compulsory.
• Salary taxable on due or receipt basis.
• DA fully taxable.
• HRA partly exempt.
• Standard deduction available.
• Pension may be commuted or uncommuted.
• Provident fund gives retirement security.
Conclusion
Income from salary includes basic salary, allowances, perquisites and retirement
benefits. Proper understanding of salary taxation helps employees compute tax
correctly and claim legal exemptions and deductions.