DIRECT TAXES INCOME TAX ACT,1961

SECTION 15 TO 17

What Is Salary?
Salary means the remuneration or the income of a person, which he receives from his employer for rendering services to him. The relationship between the two should be that of a master and a servant i.e. Employer and Employee and not that of Principal and Agent or Principal and Principal. The term Salary includes: Wages Any Annuity or Pension Any Gratuity Any Fees, Commission, Perquisites or Profit in lieu of or in addition to any salary or wages, Any advance of salary Any leave salary

The term Salary includes:

(Contd..)

Annual Accretion to the balance at the credit in recognized provident fund to the extent taxable as income deemed to be received under section-7. Transferred Balance of an employee participating in the recognized provident fund, to the extent taxable as income deemed to be received under section-7 Contribution made by the Central Government in the previous year to the account of an employee under a pension scheme referred to in section 80CCD.

Incomes Taxable Under The Head Salaries

a) Any salary due, from an employer or a former employer, to an assessee in the previous year, whether paid or not (i.e. On accrual or due basis). b) Any salary paid or allowed to him in the previous year by or on behalf of an employer or a previous employer, whether due or not (i.e. On receipt basis). c) Any arrears of salary paid or allowed to him in the previous year, by or on behalf of an employer or a former employer, if not taxed already.

Main Characteristics Of Income Charged Under The Head Salaries:

1. Relationship of employer and employee or master-servant relationship is absolutely necessary between the giver and the receiver of the sum so chargeable. 2. In income tax, there is no distinction between salary paid to a managing director and wages paid to an ordinary worker. 3. Salary is taxable on accrual basis as well as on receipt basis. However, the same income amount cannot be taxed twice under both the basis. 4. During one year, salary may have been received from more than one employer. In such cases, salaries received from all such employers will be taxed under the head Salaries.

5. The remuneration as an employee may have been received from the Government, a Local Authority, A Company, Firm, an Individual, or Hindu Undivided Family, but all are taxed as salaries. Only an individual can receive or earn salary. The employer may be an individual or he may be any other person. It is quite possible that the employer may not be a person e.g. when the employer is the Central Government or a State Government.
6. Any salary, bonus, commission or remuneration by whatever name called, due to or received by a partner of a firm from the firm is however, not regarded as Salaries.

What Is Perquisites?
Perquisites mean any casual emolument, fee or profit attached to an office or position, in addition to salary or wages. It is an additional benefit received by an employee from employer. Perquisites means money or goods given or regarded as a right in addition to ones pay.

Illustrations of Perquisites:
Provision of a motorcar or free use of a car or other conveyance. Free services of servants at home. Free educational facilities for children of the employee. Free transport provided to an employee and his family. Income tax due on salary paid by the employer. There are certain benefits or amenities granted by the employer to an employee, which are technically and legally taxable, but are not taxed as perquisites due to departmental instructions.

Illustrations of Exempt Perquisites:

1) Conveyance allowance for commuting to/for residence and office is exempt up to Rs.800/- per month. 2) Reimbursement of any expenses incurred entirely for office purpose e.g. Reimbursement of travelling, entertainment, expenses,etc.

Following are specifically not regarded as Perquisites:

Expenditure on medical treatment provided to an employee or any of his family members in any hospital maintained by the employer.

Any sum reimbursed by the employer in respect of expenditure incurred by the employee on his medical treatment or of any member of his family: i. In any government hospital or ii. In any other approved hospital for certain prescribed diseases or ailments.

What Is Profit In Lieu Of Salary?

A Profit in lieu of salary is not a regular payment received by the employee from the employer. It is something which the employee receives instead of or in place of salary.

Deductions Allowable In Computation Of Income From Salaries:

Various deductions are allowable, in practice are on account of various expenses incurred to earn an income either on actual basis (i.e. the actual amount of the expenses incurred) or on the notional basis (i.e. irrespective of whether the expenses is incurred or not) or partly on one basis and partly on the other. Section 18 lays down following deductions which are allowable while computing the income under the head Salaries: i. Entertainment Allowance & ii. Profession Tax

Entertainment Allowance:
The deduction is in respect of any entertainment allowance specifically granted to the assessee by his employer. This deduction is available only to government employees and is subject to certain limits. The allowance is as follows: i. A sum equal to 1/5th of his basic salary or ii. Rs.5,000 or iii. Actual sum received as entertainment allowance during the year, whichever is the least. This should be noted that only basic salary has to be considered for the purpose of calculating 1/5th.

Profession Tax
This deduction is on account of any sum paid by the assessee on account of tax on employment which is popularly known as Profession Tax. Where an employer pays the profession tax on behalf of the employee the same is first treated as Perquisite and added to gross salary.

Name of Assessee PAN: Status: Individual Asst. year 2012-13 Previous year ended 31-3-2012 Resident and ordinarily Resident Computation of Income from Salaries

Name & Address of the employer Salary Basic salary/ Wages Arrears of salaries Advance salaries Bonus Leave salary Commission Pension Gratuity (to the extent not exempt u/s 10) Commuted value of pensions (to the extent not exempt u/s 10) Allowances (to the extent not exempt u/s 10) Entertainment allowance Dearness allowance City compensatory allowance House rent allowance Other allowances (to the extent not spent)

Rs.

Rs.

Make up Allowance Conveyance allowance Perquisites (to the extent taxable) For personal use of car Servants salary paid by employer Free Furnished Accommodation Profits in lieu of salary Gross salary Less: Deductions u/s 16 i. Entertainment allowances (u/s 16 (ii)) ii. Profession tax paid (u/s 16(iii))

Net Salary Chargeable To Tax

Rs.

Some Other Adjustments/Rules:

1. Loans taken from employer is not advanced salary since loan has to be repaid. 2. No deduction is allowable for any expenses incurred on books and membership fees. 3. For e.g. Taxi fare for the purpose of going to office, when car was under repairs. 4. Payment of Medical insurance premium by employer is not a taxable perquisite. 5. For e.g. Directors meeting fees 6. Reimbursement of medical expenses is not a perquisite.

Some Other Adjustments/Rules:

7. Use of car for personal use is not a perquisite if he/she has paid a reasonable rate for the personal use of the car. 8. Free lunch is not taxable as a perquisite under executive instructions. 9. In terms of section 17(2), contribution to an approved superannuation fund in excess of Rs.1,00,000 is treated as taxable perquisite.