Income Tax l Income under Head Salaries: Income Tax

Heads of Income

Section 14 of the Income Tax Act, 1961, has prescribed following 5 sources of income for tax purposes –

Salary Income
Income from House Property
Profits and gains of business or profession
Capital Gains
Income from Other sources

This Blog comprehensively discuss the Income from Salary.

Topics covered –

What is Salary?

Salary is the money paid by the employer to its employee in exchange of services rendered by him. There exists a Contract of Servicebetween them whereby the services rendered by the employee is the consideration for employer and the salary paid by the employer is the consideration for employee.

Essentials of Salary – Section 15 of the Income Tax Act, 1961

There must be an Employer-Employee Relationship

Income shall be treated as Salary only when the relationship between the payer and payee is either of master and servant or of Employer Employee.

There must be a Contract of Service

There shall be a Contract of Service between payer and payee to form an Employer and Employee Relationship.

Contract of service is a contract whereby the employee is bound to work for the employer in return of certain consideration.

3. Who can be an employer?

Employer can be any person that is –

Individual
Firm
Company
Body of Individuals
Association of persons
Corporation
Any Government
Public Body
Local Authority

4. Type of Employment

Employee can be either in Full-time employment or Part-time Employment.

Key Components of Salary Structure

Section 17(1) of the Income Tax Act, 1961

Basic pay or salary

There are different components of salary structure of any employee. The first important component is the basic salary. It is basically the base income of the employee in the form of fixed amount and it generally comprises up-to 35- 50% of the total salary although its % is determined by the employer on the basis of designation of the employee and the industry in which employee works. The employer has to pay this basic salary without making any deductions or increments.

The Basic Salary is fully taxable under the Income Tax Act, 1961.

Allowances

Allowances are the amount of money payable by employer to employees over and above their basic salary to meet a particular expenditure. There are various types of allowances prescribed under the Income Tax Act, 1961. There are many allowances which are fully taxable and similarly there are many allowances which are either partially taxable or absolutely free from tax liability.

Fully Taxable	Partially Taxable	Non-Taxable (Fully Exempted)
Overtime Allowance	House Rent Allowance (HRA) (if not exempted under section 10 of the Income Tax Act, 1961)	HRA up-to 40% of total basic salary and it is subjected to condition that the actual rent paid shall be more than the total HRA + 10 % of the basic salary
Dearness Allowance	Medical Allowance (if any fixed)	Any payments made to government employees posted without India
Cash Allowance	Special Allowances such as Education Allowance or Children Hostel Allowance	Any allowances made to United Nations Employees
Entertainment Allowance	Conveyance Allowance (allowed up-to Rs. 19,200 annually)	Conveyance Allowance up-to Rs.16,000 per month or Rs. 19,200 annually
Meal Allowance	Entertainment Allowance (allowed up-to either 1/5^th of the basic salary or Rs. 5000 whichever is less)	Compensatory Allowances (paid to judges of SC & HC)

Click Here to Seek Assistance with Taxability of Allowances

3. Gratuity Amount

Gratuity is basically a monetary amount paid by the employer to its employee as a token of appreciation or gratitude for the services rendered by him for the employer. It is governed by the Payment of Gratuity Act, 1972and as per the act it is calculated at 4.81% of the basic salary. It is payable only to those employees who have completed at least 5 years with the employer.

Following employees are eligible to receive Gratuity

Any employee who is eligible for Superannuation
Any employee retiring from work ‘
Any employee resigning from work after working for at least 5 years or more with the same employer
Any employee who is suffering from any disability or who has passed away due to certain accident or illness

Taxability of Gratuity

Taxability of Gratuity depends upon the type of employee who is receiving the gratuity amount. For example, the gratuity received by a government employee is fully tax exempted whereas private employees are liable to pay tax on gratuity if it exceeds the amount of Rs. 20 Lakhs subject to other prescribed conditions.

4. EPF: Employee Provident Fund

Employee Provident Fund is a benefit scheme for employees as it acts as a saving platform for employees because it helps them to save a portion of their salary monthly which can be withdrawn upon retirement or cessation of service. According to this scheme, both employer and employees deposit certain amount every month in this fund as investment. Both the employer and employee contribute 12% of the total of basic salary and dearness allowance payable to the employee in the EPF. Thereafter, the government pays a fixed interest on such amount.

Taxability of EPF Amount

According to Income Tax Act, the withdrawal of total amount contributed in the EPF along with the total amount of interest to be received on such deposit is absolutely tax free.

Click here to explore more on Employees’ Provident Fund

5. Professional Tax

As the name suggests, Professional tax is a tax levied on the income earned by professionals like Chartered Accountants, Advocates, and Doctors and so on. Since it is levied by the State Government thus, its rates vary from state to state. The maximum amount of professional tax per employee is Rs.2,500 per annum.

6. Perquisites – Section 17(2) of the Income Tax Act, 1961

Perquisites are the benefits or casual emoluments in addition to basic salary and allowances payable by the employer to employees for holding certain office or position. This is why it is referred as Fringe Benefits.

Few Examples of Perquisites –

Rent-free accommodation
Car for Personal use
Payment of premium of certain policies on behalf of employee

Taxability of Perquisites

The taxability of perquisites can be classified into three categories that are-

Taxable Perquisites payable by Employer	Taxable Perquisites payable by Employee	Fully Exempted
Rent-Free Accommodation	Car given by employer to employee for personal use	Travel Allowance for office purposes
Supply of Water, Gas & Electricity	Education facility for children	Laptops provided for office use

In case of taxable perquisites, the total monetary value of the perquisites is added to the total gross salary as per the Income Tax and then the tax is to be paid by the employee. Here the value of perquisites is basically the cost of such benefits to the employer.

Basis of Charge for Salary Income

According to Income Tax Act, 1961, there are two basis of charge of income that are Receipt Basis and Due Basis.

According to Receipt Basis, the Income shall be taxed in the year in which it is received whether it has accrued or not while Due Basis states that the income shall be taxed in the year in which it accrues or becomes due irrespective of the payment of income.

Now the question arises what is the basis of charge for salary income then Section 15 of the Income Tax Act, 1961 answers that Salary Income is chargeable to tax on RECEIPT OR DUE BASIS WHICHEVER MATURES EARLIER.