Tax Treatment of Income from Salary in Brief

Each income has different source of earning and so the provisions for its taxability. Income-tax Act provides for five heads of incomes for computation of taxable income, viz., Salary, Income from House Property, Income from Business or Profession, Capital Gain and Residual Income. Provisions contained under each head of income for computation of taxable income have been discussed in this document.

Treatment of Income from Different Sources

1. Income under the head Salaries

1.1 Salary is defined to include:

e) Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages

f) Advance of Salary

g) Leave Encashment

h) Annual accretion to the balance of Recognized Provident Fund

i) Transferred balance in Recognized Provident Fund

j) Contribution by Central Government or any other employer to Employees Pension Account as referred in 80CCD

1.2 Points to consider:

a) Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is earlier.

b) Existence of relationship of employer and employee is must between the payer and payee to tax the income under this head.

c) Income from salary taxable during the year shall consists of following:

i. Salary due from employer (including former employer) to taxpayer during the previous year, whether paid or not;

ii. Salary paid by employer (including former employer) to taxpayer during the previous year before it became due;

iii. Arrear of salary paid by the employer (including former employer) to taxpayer during the previous year, if not charged to tax in any earlier year;

Exceptions – Remuneration, bonus or commission received by a partner from the firm is not taxable under the head Salaries rather it would be taxable under the head business or profession.

1.3 Place of accrual of salary:

a) Salary accrues where the services are rendered even if it is paid outside India;

b) Salary paid by the Foreign Government to his employee serving in India is taxable under the head Salaries;

c) Leave salary paid abroad in respect of leave earned in India shall be deemed to accrue or arise in India.

Exceptions – If a Citizen of India render services outside India, and receives salary from Government of India, it would be taxable as salary deemed to have accrued in India.

1.4 Taxability of various components of salary:

a) Actual HRA Received

b) 40% of Salary (50%, if house situated in Mumbai, Calcutta, Delhi or Chennai)

c) Rent paid minus 10% of salary

* Salary = Basic + DA (if part of retirement benefit) + Turnover based Commission

i. Fully taxable, if HRA is received by an employee who is living in his own house or if he does not pay any rent

a) 70% of such allowance; or

a) Value of rent free official residence

b) Value of conveyance facilities including transport allowance

c) Sumptuary allowance

*Family includes spouse, children and dependent brother/sister/parents. However, family doesn’t include more than 2 children of an Individual born on or after 01-10-1998.

• Where journey is performed by Air – Exemption up to Air fare of economy class in the National Carrier by the shortest route

• Where journey is performed by Rail – Exemption up to air-conditioned first class rail fare by the shortest route

• If places of origin of journey and destination are connected by rail but the journey is performed by any other mode of transport – Exemption up to air-conditioned first class rail fare by the shortest route.

• Where the places of origin of journey and destination are not connected by rail:

* Where a recognized public transport system exists – Exemption up to first Class or deluxe class fare by the shortest route

* Where no recognized public transport system exists – Exemption up to air conditioned first class rail fare by shortest route.

Notes:

i. Two journeys in a block of 4 calendar years is exempt

➢ Manufacturing cost per unit incurred by the employer., if provided from resources owned by the employer;

➢ Amount paid by the employer, if purchased by the employer from outside agency

1. Any amount recovered from the employee shall be deducted from the taxable value of perquisite.

Fair Market Value shall be determined as follows:

a) In case of listed Shares: Average of opening and closing price as on date of exercise of option (Subject to certain conditions and circumstances)

b) In case of unlisted shares/ security other than equity shares: Value determined by a Merchant Banker as on date of exercise of option or an earlier date, not being a date which is more than 180 days earlier than the date of exercise of the option.

Note:

The Finance Act, 2020 has deferred the taxation of perquisite in case of start-ups from date of allotment to the earliest of the following three dates:

1. Expiry of 48 months from the end of the relevant assessment year;

2. Sale of such shares by the employees;

3. Date on which employee ceases to be employee of the start-up.

The eligible start-up shall accordingly, be required to deposit tax with the government within 14 days of the happening of any of the above events (whichever is earlier).

1) Find out the “maximum outstanding monthly balance” (i.e. the aggregate outstanding balance for each loan as on the last day of each month);

2) Find out rate of interest charged by the SBI as on the first day of relevant previous year in respect of loan for the same purpose advanced by it;

3) Calculate interest for each month of the previous year on the outstanding amount (mentioned in Step 1) at the rate of interest given in Step 2

4) From the total interest calculated for the entire previous year (step 3), deduct interest actually recovered, if any, from employee

5) The balance amount (Step 3-Step 4) is taxable value of perquisite

Nothing is taxable if:

a) Loan in aggregate does not exceed Rs. 20,000; or

2) Exempt from tax: Following free meals shall be exempt from tax:

a) Food and non-alcoholic beverages provided during working hours in remote area or in an offshore installation;

b) Tea, Coffee or Non-Alcoholic beverages and Snacks during working hours are tax free perquisites;

b) Expenses incurred on club facilities for the official purposes are exempt from tax.

a) Use of Laptops and Computers: Nil

b) Movable asset other than Laptops, computers and Motor Car*: 10% of original cost of the asset (if asset is owned by the employer) or actual higher charges incurred by the employer (if asset is taken on rent) less amount recovered from employee.

a) Computers, Laptop and Electronics items: Actual cost of asset less depreciation at 50% (using reducing balance method) for each completed year of usage by employer less amount recovered from the employee

b) Motor Car: Actual cost of asset less depreciation at 20% (using reducing balance method) for each completed year of usage by employer less amount recovered from the employee

i. Hospital maintained by the employer.

ii. Hospital maintained by the Government or Local Authority or any other hospital approved by Central Government

iii. Hospital approved by the Chief Commissioner having regard to the prescribed guidelines for treatment of the prescribed diseases.

b) Medical insurance premium paid or reimbursed by the employer is not chargeable to tax.

a. Expenses on medical treatment – exempt to the extent permitted by RBI.

b. Expenses on stay abroad for patient and one attendant – exempt to the extent permitted by RBI.

b) 1/5th of salary (excluding any allowance, benefits or other perquisite)

a) Amount actually received

b) Unutilized earned leave* X Average monthly salary

c) 10 months Average Salary**

* While computing unutilized earned leave, earned leave entitlements cannot exceed 30 days for each completed year of service rendered to the current employer

** Average salary = Average Salary*** of last 10 months immediately preceding the retirement

a) Amount calculated as per section 25F(b)of the Industrial Disputes Act, 1947;

c) Amount actually received

i. Relief under Section 89(1) is available

1. (*15/26) X Last drawn salary** X completed year of service or part thereof in excess of 6 months.

3. Gratuity actually received.

*7 days in case of employee of seasonal establishment.

1. Half month’s Average Salary* X Completed years of service

3. Gratuity actually received.

*Average salary = Average Salary of last 10 months immediately preceding the month of retirement

1) Actual amount received as per the guidelines i.e. least of the following

a) 3 months salary for each completed year of services

b) Salary at the time of retirement X No. of months of services left for retirement; or

a) Foreign enterprise is not engaged in any trade or business in India

b) His stay in India does not exceed in aggregate a period of 90 days in such previous year

Notes:

1. Motor Car (taxable only in case of specified employees [See note 4] except when car owned by the employee is used by him or members of his household wholly for personal purposes and for which reimbursement is made by the employer)

2. Educational Facilities

Taxable only in the hands of specified employees [See note 4]

Value of perquisite

2.1 Other Educational Facilities

3. Employees Provident Fund

Tax treatment in respect of contributions made to and payment from various provident funds are summarized in the table given below:

* Salary = Basic Pay + Dearness Allowance (to the extent it forms part of retirement benefits) + turnover based commission

Payment from recognized provident fund shall be exempt in the hands of employees in following circumstances:

a) If employee has rendered continue service with his employer (including previous employer, when PF account is transferred to current employer) for a period of 5 years or more

b) If employee has been terminated because of certain reasons which are beyond his control (ill health, discontinuation of business of employer, etc.)

Note:

No exemption shall be available for the interest income accrued during the previous year in the recognised and statutory provident fund to the extent it relates to the contribution made by the employees over Rs. 2,50,000 in the previous year.

However, if an employee is contributing to the fund but there is no contribution to such fund by the employer, then the interest income accrued during the previous year shall be taxable to the extent it relates to the contribution made by the employee to that fund in excess of Rs. 5,00,000 in a financial year.

4. Specified Employee

The following employees are deemed as specified employees:

1) A director-employee

2) An employee who has substantial interest (i.e. beneficial owner of equity shares carrying 20% or more voting power) in the employer-company

3) An employee whose monetary income* under the salary exceeds Rs.50,000

*Monetary Income means Income chargeable under the salary but excluding perquisite value of all non-monetary perquisites

[As amended by Finance Act, 2024]

Also Read: