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Wednesday, 24 February 2016


Heads of Income - Income from Salary

Income from Salary


"Salary" is the remuneration received by or accruing periodically to an individual for service rendered as a result of expressed or implied contract.

Compensation or remuneration even in the following circumstances is chargeable to Income-tax under the head 'Salaries': -

a) When due from the former employer or present employer in the previous year, whether paid or not.

b) When paid or allowed in the previous year, by or on behalf of a former employer or present employer, though not due or before it becomes due.

c) When arrears of salary are paid in the previous year by or on behalf of a former employer or present employer, if not charged to tax in the period to which it relates.

It is, therefore, clear that apart from current years salary, even advance salary and/or arrears of salary may be taxed in the year of receipt. More specifically and elaborately, the Income-tax Act has stipulated that salary includes :-

a) Salary, including advance/arrears of salary;

b) Wages;

c) Fees;

d) Commission;

e) Pension;

f) Annuity;

g) Perquisite;

Receipts from Provident Fund chargeable to tax; Profit in lieu of or in addition to salary or wages; Gratuity;

Contribution  of employer to  Recognised Provident Fund in excess of prescribed limit; Interest on credit balance of Recognised Provident Fund in excess of notified rates;

i) Encashment of leave.

definition of 'salary' is inclusive and not exclusive.


No, payment can be taxed under this section unless the relationship of employer and employee exists between the payer and payee. The employer and employee relationship is the relationship of a master and servant, and it distinctly differs from that existing between a principal and agent. Primarily, the degree of control of the employer over the employee would be a deciding factor, as the agent is generally not under the complete Control and supervision of his principal.

That is why even the emoluments received by an Member if Parliament/ M.L.A. are not taxable under the head "Salary" because of the absence of employer and employee relationship.


The golden rule is that it accrues where the service is rendered. Leave salary paid to a person employed in India on leave to a foreign country is treated to be the arisen in India. However, if a citizen of India service outside India and receives salary from the of India, it would be taxable as salary to have accrued in India.


Pensions are taxed under the head 'Salaries'. The of standard deduction is also available on them.


The I.T. Act contemplates tax on salary which is due, whether paid or not, tax is attracted at the latest possible point of time which is the date when the salary accrues or becomes due. However, where any salary paid in advance is assessed in the year of payment, it cannot be taxed again when it becomes due. Similarly, if arrears of salary have been assessed on the 'due' basis in the past, they are not liable to be taxed again when they are paid.


When the salary is paid 'tax-free' the employee has to return in his total income the gross salary, i.e. aggregate of the net-salary received plus the amount of tax paid on his behalf by the employer. It does not make any difference whether the tax is borne by the employer voluntarily or under a contractual obligation.


Yes. The salary paid for services rendered in India is regarded as income earned in India, so as to specifically provide that any salary payable for rest period or leave period which is both proceeded or succeeded by service in India forms part of the service contract of employment will also be regarded as income earned in India and so is to be taxed.



It is not true that every income received by an employee from his employer is taxable. Any income falling within any of the following paragraphs shall not be included in computing the income from salaries: -

(1) The value of any travel concession  or assistance received by or due to an employee from his employer or former employer for himself and his family, in connection with his proceeding

(a) on leave to any place in India or

(b) on retirement from service, or, after termination of service to any place in India is exempt under clause (5) of Section 10 subject, however, to the conditions prescribed in rule 2B of the I.T. Rules, 1962.

(2) Death-cum-retirement gratuity or any other gratuity which is exempt to the extent specified from inclusion in computing the total income.

(3) Any payment  in commutation of pension received under  the  Civil  Pension  (Commutation)   Rules  of the Central   Government   or   under   any   similar   scheme applicable to the members of the Civil/Defense services under the Union/State/Local Authority or a Corporation established   by   a   Central,   State   or   Provincial   Act. Payments in commutation of pension received under any scheme   of   any   other   employer,   exemption   will   be governed by the provisions of Section 10(10A) (ii).

(4) Any payment received by an employee of the Central /State   Government,   as   cash-equivalent   of  the   leave salary in respect of the period of earned leave at his credit at the time of his retirement on superannuation or otherwise, is exempt. In the case of other employees it is subject to a maximum of ten month's leave. This exemption has an overall max. limit of Rs. 2,40,000 [S.0.1015 (E) dated 27.11.97).

(5) Under Section 10(10B), the retrenchment compensation received by a workman is exempt from income-tax subject to certain limits.

(6) Under Section 10(10C), any payment received by an employee of the notified bodies at the time of his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in the case of public sector company, a scheme of voluntary separation, is exempted to the extent that such amount does not exceed five lakh rupees

(7) Any sum received under a Life Insurance Policy, including the sum allotted by way of bonus on such policy other than any sum received under sub-section (3) of Section 80DDA.

(8) Any payment from a Provident Fund to which the Provident Funds Act, 1925 (19 of 1925), applies.

(9) Under Section 10(13AJ of the Income-tax Act, 1961, any special allowance specifically granted to an assessee by his employer to meet expenditure incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee is exempt from Income-tax to the extent as may be prescribed.

(10) Under section 10(14) exemption of  notified allowances is provided. The CBDT has   prescribed guidelines for the purpose of classes (i) and (ii) of Section 10(14)  vide  Notification No.SO617(E)  dated 7th July/ 1995 (F.No.l42/9/95TPL)which has been amended vide Notification SO No.403(E) dated 24.4.2000 (F,No.l42/34/99-TPL).

11) Under Section 10(15)(iv)(i) of the Income-tax Act, interest payable by the Government on deposits made by an employee of the Central Government or a State Government or a public sector company from out of his retirement benefits, in a notified scheme, is exempt.

(12) Income   by   way   of  pension   received   by   an individual or family pension received by any member of the family of an individual who has been in the service of the Central Government or State Government and has been awarded 'Param Vir Chakra" or "Maha Vir Chakra" or "Vir Chakra"  or  such  notified  gallantry  award,  is exempt.

(13) Under Section 17 of the Act, exemption from tax will also be available, under prescribed conditions, in respect of any medical treatment provided to an employee or any member of his family or premium paid by the employer in respect of approved medical insurance  taken  for his employees or reimbursement of insurance premium to the   employees   for   such   medical   insurance   for   the employee or his family members.


A 'perquisite' is defined in the Oxford as 'any casual emolument, or profit attached to an office or position in addition to the salaries or wages'. In sunlit words, perquisites are the benefits in addition to normal salary to which the employee has a right to by virtue his employment. In simple language, 'perquisites 1 are benefits or amenities provided in kind by the employer free of cost or at a concessional rate.  Their value, to the extent these go to reduce expenditure that the employee normally would have otherwise incurred in obtaining these benefits and amenities, is regarded as part of taxable salary. As a golden rule, the taxable value of perquisites in the hands of the  employee,  is its cost to the employer.

However, there are specific rules for valuation of certain perquisites.

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