LAW OF

TAXATION

CONCEPT OF SALARY UNDER

INCOME TAX ACT, 1961

FROM: SUBMITTED TO:

CHIRAG MADAN DR.ANUPAM KURLWAL
7th SEM (BA.LLB)
R.NO – 1524
 SYNOPSIS

1. Introduction
2. General definition of Salary
3. Heads of Income
4. Salary
5. Different meaning of Salary for different purposes
6. Meaning and scope of salary
7. Deductions from salary
8. Relief when salary is paid in advance or arrears etc.
9. Case laws
10. Some important questions that may arise
 INTRODUCTION
1
The government of India imposes an income tax on taxable income of
individuals, Hindu Undivided Families (HUFs), companies, firms, co-operative societies
and trusts (identified as body of individuals and association of persons) and any other
artificial person. Levy of tax is separate on each of the persons. The levy is governed by
the Indian Income Tax Act, 1961. The Indian Income Tax Department is governed by
the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue
under the Ministry of Finance, Govt. of India. There were 33 million income taxpayers in
2008.

The CBDT is a part of Department of Revenue in the Ministry of Finance. On one hand,
CBDT provides essential inputs for policy and planning of direct taxes in India, at the
same time it is also responsible for administration of direct tax laws through the Income
Tax Department. The Central Board of Direct Taxes is a statutory authority functioning
under the Central Board of Revenue Act, 1963. The officials of the Board in their ex-
officio capacity also function as a Division of the Ministry dealing with matters relating
to levy and collection of direct taxes. The Central Board of Revenue as the Department
apex body charged with the administration of taxes came into existence as a result of the
Central Board of Revenue Act, 1924. Initially the Board was in charge of both direct and
indirect taxes. However, when the administration of taxes became too unwieldy for one
Board to handle, the Board was split up into two, namely the Central Board of Direct
Taxes and Central Board of Excise and Customs with effect from 1.1.1964. This
bifurcation was brought about by constitution of the two Boards u/s 3 of the Central
Boards of Revenue Act, 1963.

Organisational Structure of the Central Board of Direct Taxes: The CBDT is headed

by Chairman and also comprises of six members, all of whom are ex-officio Special
Secretary to Government of India.

Member (Income Tax) Member (Legislation and Computerisation) Member (Revenue)

Member (Personnel & Vigilance) Member (Investigation) Member (Audit & Judicial)

The Chairman and Members of CBDT are selected from Indian Revenue Service (IRS), a
premier civil service of India, whose members constitute the top management of Income
Tax Department.

1
http://en.wikipedia.org/wiki/Income_tax_in_India
Responsibilities of Chairman and Members, Central Board of Direct Taxes

Various functions and responsibilities of CBDT are distributed amongst Chairman and
six Members, with only fundamental issues reserved for collective decision by CBDT. In
addition, the Chairman and every Member of CBDT are responsible for exercising
supervisory control over definite areas of field offices of Income Tax Department, known
as Zones.
GENRAL DEFINATION
OF SALARY:
1
Salary is a fixed amount of money or compensation paid to an employee by an employer
in return for work performed. Salary is paid, most frequently, in a bi-weekly paycheck to
an exempt or professional employee. In most years, an employee’s salary is paid in 26
even paychecks over the course of the year.
An employee who is paid a salary is expected to complete a whole job in return for the
salary. This is different from a non-exempt employee who is paid an hourly rate or by the
piece produced. This employee is generally eligible to collect overtime.
The salaried employee or employee who is paid by salary does not track hours worked
and is not paid for overtime. (Some public sector, often union represented, employees
expect to account for hours and collect compensatory time off. This is not the norm in the
private sector.)
Because of Fair Labor Standards Act (FLSA) rules about overtime payment, employers
are required to closely track the hours and partial hours worked by non-exempt or hourly
employees.
Salary is determined by market pay rates for people doing similar work in similar
industries in the same region. Salary is also determined by the pay rates and salary ranges
established by an individual employer. Salary is also affected by the number of people
available to perform the specific job in the employer’s employment locale.
Many companies participate in salary market surveys to create a trustworthy resource for
salary research. More and more salary research is occurring online using salary
calculators.

1
http://humanresources.about.com/od/glossarys/g/salary.htm
 HEADS OF INCOME
(Section 14)
1
Section 14 provides that save as otherwise provided by this Act, all income shall , for the
purpose of charge of income-tax and computation of total income , be classified under the
following heads of income :

A) Salaries.

B) Income from house property.

C) Profits and gains of business or profession.

D) Capital Gains.

E) Income from other sources

In order to be chargeable to income- tax , an income must be brought under anyone of the
heads , stated above . The words “save as otherwise provided under this Act” refer only
to the exemptions granted under this Act.

1
Section 14,Income- tax Act,1961
SALARY (Sections 15 to
17)

1. Income Chargeable to Income-tax

under the head “Salaries” (Section 15)

According to Section 15, the following income shall be chargeable to income – tax 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;

(b) Any salary paid or allowed to him in the previous year by or on behalf of the
employer or a former employer, though not due or before it became due to him;

(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 charged to income-tax for any earlier previous
years.

For the removal of doubts, an explanation to Section 15 declares that where any salary
paid in advance is included in the total income of any person for any previous year, it
shall not be included again in the total income of the person when the salary becomes
due.1

1
Taxation laws, ninth edition,2007,Kailash Rai , pg 47
1
Some Important Points Regarding salary

1) Salaries – Every kind of remuneration of every kind of servant, public or private, and
however highly or lowly placed he may be , is covered under the scope of this term used
in the Income – tax Act , there is no difference between the wages of labourer or high
officials.

2) Relationship of employer and employee – It is very essential for the payment to fall
under the heads of “salaries” that the relationship of the employer and employee must
exist between the payer and the payee. Every servant is an employee; but an agent may or
may not be an employee. It is very essential that an distinction is drawn between income
from employment which is taxable under this section , and income from an office not
amounting to employment which is taxable under head “ Income from other sources” or
as “ Profit and Gains from Business or Profession”.

If an employee does any work for his employer which is not connected with its service;
then the remuneration for such work shall not be treated as salary. For example,
examiner’s remuneration received by a University teacher from his University.

3) Salaries and Professional income - Every profession involves the making of

successive engagement and successive contracts. If the employment is merely incidental
to the profession the gains from such employment would be professional earning under
section 28 and not under section 15. For instance, a professional lawyer may be engaged
in a case. His earning from this engagement will be taxable as professional earning under
section 28; but if he is employed by a mill company as its legal adviser and also to work
as standing counsel for the company, the remuneration received by him would be taxable
under the head “Salaries”. In fact, whether, an engagement is merely incidental to the
profession amounts to employment depends upon the duration of the employment and the
other circumstances of the case. When a person occupies a regular post or office
amounting to the service, it is an employment as distinct from mere engagement in the
course of the profession.

1
Income-tax. law and accounts,1983 edition ,Dr. H.C . Mehotra, pg 54
(4) Receipts from persons other than the employer – Perquisites or profits or any
remuneration received from person other than the employer would be taxable under the
head “Income from other Sources “ even if they accure to the employee by reason of his
employment . For example, remuneration received by a professor of a college for acting
as a examiner in a University or Board.

(5) Payment made after cessation of employment – Payment made by an employer to

his employee after the cessation of his employment is also taxable under the head
“Salaries”. It is taxable under this head because it represents remuneration for services
rendered in the past.

(6) Payment in commutation of pension – A lump- sum received in commutation of

pension by a government is excluded from his salary income. If it is received by a non-
government employee besides receiving a gratuity it is excluded from his salary income
to the extent of the commuted value of one – third of the pension which he is normally
entitled to receive. If a non- government employee doesn’t get a gratuity then the
commuted value of one half of such pension is excluded from his salary income .

(7) Application of salary – Voluntary foregoing. The voluntary foregoing by an

employee of the salary due to him is normally mere application of the income and the
salary is none the less taxable. It would be taxable on the further ground that salary is
taxable if it is due, whether paid or not. But in reality there is no agreement to pay any
salary, the apparent foregoing of a fictional salary would not attract tax.

(8) Tax free salary – When a salary is paid tax free , the employee has to include the
total income , the gross salary i.e. the aggregate of the net salary received plus the amount
of tax paid on his behalf by employer , except under provisions of sub clauses (vii) and
(ix) of Section 10(6)

(9) Deductions by employer - Compulsory deduction from salary are also instances of
mere application of income. The fact that a portion of salary has to be devoted
 compulsorily to some purpose under contractual obligation does not prevent it from
being assessable as income under the head “salary” , for it is a case of application of
income . For example, an assessee was engaged on a fixed salary upon the obligatory
condition that the employer should provide him with board, lodging etc. for which he
should pay an amount which is deducted from his gross salary before payment . Held, the
tax was chargeable on the gross salary without any allowance for compulsory deduction
made by the employer.

(10) Salary of a Member of Parliament – This is not chargeable under the head
“salaries” as a Member of Parliament is not a government employee. The relation
between him and the government is not of a servant and master. It is taxable under the
head “Income from other Sources “.

DIFFERENT MEANING OF SALARY

FOR DIFFERENT PURPOSES
For computation of Concession House rent Qualifying Entertainment Standard Gratuity Gas , Determination
taxable income under in rent or rent allowance amount of allowance deduction electric of salary
head salaries – free home contribution under energy regarding
to R.P.F* section or water perquisites
16(1) under sec. 17
(2)(iii) (c)

1.Basic salary 1.Basic 1.Basic Same as for Basic salary Basic Same as Basic Basic salary,
salary salary house rent exclusive of salary-fees , for house salary dearness
2.Advance salary
allowance any Commission rent exclusive allowance, all
2.Allowances 2.Dearness
3.Arrears of salary
as per allowance, , allowance of all other
allowance if
3.Bonus
4.Pension preceding benefit or any Perquisite , extras allowances,
the terms of
4.Commision column. other Advance commission
5.Gratuity employment
(excluding perquisite. salary . etc and all
so provide
6.Fee.Commision.Bonus
dearness Profit in lieu other
i.e. it is
7.Allowances allowance of salary , monetary
taken into
including ,Dearness not entering Excess payrnents.
account for
allowance into contribution
retirement
retirement by employer
8.Profits in lieu of benefits ,
benefits of to R.P.F*
Salary (excluding
the employee over 10% of
all
9.Perquisites
,employers salary
allowances
10.Excess contribution contribution Interest
bonus,
to R.P.F * by employer to R.P.F.* credited to
commission
over 10% salary allowances R.P.F in
etc)
exempt from excess of
11. Excess interest
tax ,deductab 9% rate,
received from R.P.F*
le amount of taxable
12.Taxable transferred
entertainmen transferred
balance to R.P.F*
t allowance balance to
and R.P.F*
perquisites)

* R.P.F – Recognised Provident Fund.

MEANING AND SCOPE OF SALARY
(SECTION 17)

The term “salary” has been defined under section 17(1). According to this section,
“Salary” includes the following:

1. Wages – The term “salary” includes wages. “Wages” means “pay given for labour,
usually manual or mechanical, at short stated intervals, as distinguished from salaries or
fees. “

2. Annuity or pension – The term “salary” includes any annuity or pension. Thus,
annuity and pension paid by the employer are taxable under he head “salary” whether
they are paid voluntarily or under a contractual obligation. If annuity or pension is paid
by the employer , it is taxable under the head “salary”, but if it is paid by a person other
than the employer , e.g., annuities paid under an insurance policy or under a deed or will,
it is taxable as under “ income from other sources “ and not a “ salary “. In a simple
language an “annuity “ is a sum of money payable yearly or at any rate periodically ,
from a source which is exclusively or at any rate primarily personal estate .Thus, in a
legal parlance ,”annuity “ means a fixed sum payable yearly or periodically. Pension is a
periodical allowance or a stipend granted on account of past services. Pension is taxable
under the head salary but payment in communication of pension falling under section 10
(10-A) is exempted from income-tax.

3. Gratuity – “Salary” also include gratuity. A gratuity may be understood as a payment

made by the employer to the employee for the services rendered by him to the employer.
Certain gratuities are exempted under section 10 (10). It is to be noted that gratuity paid
by the employer is taxed under the head “salary” but if paid by a person other than the
employer, it will be table as “Income from other sources “and not as “salary”.
4. Fees, commission, Perquisites or Profits in lieu of or in addition to salary or
wages:

(A) Fee.- Fees may be understood to mean “reward or compensation for services
rendered or to be rendered : especially payment for professional services , optional
amount, or fixed by custom or laws , charge ; pay . “

(B) Commission – Commission means “ the percentage or allowance made to a factor or

agent for transacting business for another .For this purpose , there is no difference
between the commission which is wholly dependent upon the work done and fixed salary
on a monthly basis. Thus, fees, commissions, perquisites or profits may be in lieu of or
addition to regular remuneration and include honorarium or purely voluntary payments.
They are all as much taxable as regular salary or wages.

(C) Perquisites -Perquisites mean any casual emoluments, fees or profit attached to an
office in addition to salary and wages. In simple words, it’s a personal advantage. It does
not cover a mere reimbursement of any expenditure incidental to the employment. Like if
an employee is provided with a watchman for official use there is no personal advantage
to the employee, hence there is no perquisites. If the watchman is provided for personal

as well as official use, the value of the perquisites only relating to personal use is
taxable. Similarly if the traveling bills for official duties are reimbursed to the employee,
there is no advantage to the assesse, so it is not a perquisite. The perquisites may be in

cash or in kind or in the money or money’s worth and also in amenities which are not
convertible to the money

All cash allowance is included in the ordinary meaning of perquisites: - all cash
allowance is included and hence taxable under section 17(2) of income tax act. City
compensatory allowance, bad climate allowance, shift allowance and incentive bonus are
included as perquisites under section 17(2) of income tax act.

A perquisite is taxable as salary only when it is provided by the employer during the
continuance of employment: - any perquisites allowed by a person other than employer is
taxable as income from other sources. For example tips received by hotel waiters from
customers are taxable as income from other sources

Non user of the perquisites by an assesse is of no consequences unless the right to

perquisites is foregone before it accrues to him: - there may be circumstances under
which the employee may not make use of the perquisites provided by the employer.
Where the income is accrued or received but it is subsequently given up, it remain the
income of the recipient [CIT vs. Shoorji Vallabhdas and co. (1962) 46 ITR 144 (SC)].
The voluntary forgoing by the employee of the salary due to him is normally a mere
application of income and the salary is nonetheless taxable. Unless the assesse forgoes his
right of the provision of such perquisites before the income accrues, the notional income
has to be brought to charge as perquisites equitant to the value of rent free
accommodation [CIT vs. Bawa Singh Chauhan (1984) ITR 8].

Wide scope of the inclusive definition of perquisites: - the definition of the perquisites is
inclusive but not limited to them only. The scope of an inclusive definition cannot be
restricted only to those words which accrue in definition, but with extend to many other
things not mentioned in it. Therefore, any other item not listed in the definition of
perquisites will have to be evaluated in accordance with the general and commercial
meaning of the word perquisites1.
2
The following propositions should also be kept in view:

•Personal benefit-“Perquisite” denotes something that benefits a man by going into his
own pocket; it does not, however, cover a mere reimbursement of necessary expenses
incurred by him.

•Cash or kind- It may be provided in cash or in kind.

•Should be provided by employer- Perquisites are included in salary income only if they
are received by an employee from his employer (maybe former, present or prospective).
Perquisites, received from a person other than employer, are taxable under the head
“Profits and gains of business or profession” or “Income from other sources”

. • Enforceable right- A benefit or advantage would be taxable asperquisite only if it has a

legal origin. As an authorized advantage taken by an employee without his employer’s
authority would create a legal obligation to restore such advantage, it would not amount
to” perquisite” taxable under the Act On the other hand, if the benefit has been conferred
1
http://www.taxalertindia.com/2011/08/salary-perquisites-section-17-2.html#axzz1aB1NDwkx

2
http://www.scribd.com/doc/18595665/Perquisites-Sec-172
unilaterally without the aid of an agreement between the parties, the employee can be
taxed under perquisite. It is not necessary that the benefit should have been received
under an enforceable right.

•Personal accident policy- Premium paid by employer towards personal accident policy
of employee is not taxable as perquisite.

•Pensionary deferred annuity benefits- Payments made by an employer to provide

deferred annuity benefits to his employees are taxable as perquisites only when a vested
interest accrues to the employee.

• Personal advantage during employment- Perquisites are taxable under the head
“Salaries” only if they are:

(a) Allowed by an employer to his employee,

(b) allowed during the continuance of employment,

(c) Directly dependent upon services,

(d) Resulting in the nature of personal advantage to the employee, and

(e) Derived by virtue to employer’s authority.

It is not necessary that recurring and regular receipt alone is a Perquisite. Even a casual
and non-recurring receipt can be perquisite if The aforesaid conditions are satisfied.

According to (Sec 17 (2)) 'perquisite' includes the following:

A. The value of rent-free accommodation provided to the assessee by his employer;
B. The value of any concession in the matter of rent with respect to any
accommodation provided to the assessee by his employer;
C. The value of any benefit or amenity granted or provided free of cost or at
concessional rate in any of the following cases:
D. Any benefit given by a company to an employee, who is a director thereof;
E. Any benefit given by a company to an employee, being a person who has a
substantial interest in the company;
F. Any benefit given by any employer (including a company) to an employee to
whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and
 whose income under the head "Salaries" (whether due from, or paid or allowed
by, one or more employer/s), exclusive of the value of all benefits or amenities,
not provided for by way of monetary payment, exceeds Rs 50,000. However,
nothing in this sub-clause shall apply to the value of any benefit provided by a
company free of cost or at a concessional rate to its employees by way of
allotment of shares, debentures or warrants, directly or indirectly under any
Employees' Stock Option Plan or Scheme of the company offered to such
employees in accordance with the guidelines, issued in this behalf by the Central
Government. The use of any vehicle, provided by a company or an employer for
journey by the assessee from his residence to his office or other place of work, or
from such office or place to his residence, shall not be regarded as a benefit or
amenity granted or provided to him free of cost or at concessional rate for the
purposes of this sub-clause.
G. Any sum, paid by the employer in respect of any obligation which, but for such
payment, would have been payable by the assessee;
H. Any sum, payable by the employer, whether directly or through a fund, other than
a recognized provident fund or an approved superannuation fund or a Deposit-
linked Insurance Fund, established under section 3G of the Coal Mines Provident
Fund and Miscellaneous Provisions Act, 1948 (46 of 1948), or, as the case may
be, section 6C of the Employees' Provident Funds and Miscellaneous Provisions
Act, 1952 (19 of 1952)], to effect an assurance on the life of the assessee or to
effect a contract for an annuity; and
I. The value of any other fringe benefit or amenity as may be prescribed.

1
Nothing in this clause shall apply to the following:
1. The value of any medical treatment provided to an employee or any member of
his family in any hospital maintained by the employer;
2. Any sum, paid by the employer in respect of any expenditure, actually incurred by
the employee on his medical treatment or treatment of any member of his family-
(a) In any hospital, maintained by the Government or any local authority or any other
hospital approved by the Government for the purposes of medical treatment of its
employees;
(b) In respect of the prescribed diseases or ailments, in any hospital approved by the
Chief Commissioner, having regard to the prescribed guidelines. In such a case, the
employee shall attach, with his return of income, a certificate from the hospit al
specifying the disease or ailment for which medical treatment was required and the
receipt for the amount paid to the hospital.
3. Any portion of the premium, paid by an employer in relation to an employee, to
effect or to keep in force an insurance on the health of such employee under any
1
http://finance.indiamart.com/taxation/income_tax/tax_advance_salary_perquisites.html
scheme approved by the Central Government for the purposes of clause (ib) of sub-
section (1) of section 36;
4. Any sum, paid by the employer in respect of any premium paid by the employee to
effect or to keep in force an insurance on his health or the health of any member of
his family under any scheme, approved by the Central Government for the purposes
of section 80D;
5. Any sum paid by the employer in respect of any expenditure actually incurred by
the employee on his medical treatment or treatment of any member of his family
other than the treatment referred to in clauses (i) and (ii); so, however, that such sum
does not exceed Rs 15,000 in the previous year;
6 .Any expenditure incurred by the employer on the following:
7. Medical treatment of the employee, or any member of the family of such
employee, outside India;
8. Travel and stay abroad of the employee or any member of the family of such
employee for medical treatment;
9. Travel and stay abroad of one attendant who accompanies the patient in connection
with such treatment, subject to the following conditions:
10. The expenditure on medical treatment and stay abroad shall be ex cluded from
perquisite only to the extent permitted by the Reserve Bank of India; and
11. The expenditure on travel shall be excluded from perquisite only in the case of an
employee whose gross total income, as computed before including therein the said
expenditure, does not exceed two lakh rupees;
12. Any sum, paid by the employer in respect of any expenditure actually incurred by
the employee for any of the purposes specified in clause (vi) subject to the conditions
specified in or under that clause:
For the assessment year beginning on the 1st day of April, 2002, nothing contained
in this clause shall apply to any employee whose income under the head "Salaries"
(whether due from, or paid or allowed by, one or more employers) exclusive of the
value of all perquisites, not provided for by way of monetary payment, does not
exceed Rs. 1,00,000. 

Explanation 

For the purposes of clause (2), 

i. 'Hospital' includes a dispensary or a clinic or a nursing home; 

ii. 'Family', in relation to an individual, shall have the same meaning as in clause (5)
of section 10; and 
 'Gross total income' shall have the same meaning as in clause (5) of section 80B;

D. Profits in lieu of or in addition to any salary or wages.

According to section 17(3), profits in lieu of salary includes :

(1) The amount of any compensation due to or received by an assessee from his employer
or former employer at or in connection with the termination of his employment or the
modification of the terms and conditions relating thereto;

(2) Any payment (other than any payment referred to in clause (10) clause (10A)clause
(10B, clause (11), clause (12), clause (13) or clause (13A) of section 10), due to or
received by an assessee from an employer or a former employer or from a provident
or other fund, to the extent to which it does not consist of contributions by the
assessee or interest on such contributions or any sum, received under a Keyman
insurance policy, including the sum allocated by way of bonus on such policy. The
expression "Keyman Insurance policy" shall have the meaning assigned to it in clause
(10D) of section 10;

(3) Any amount, due to or received, whether in lump sum or otherwise, by any assessee
from any person in the following cases:

(a) Before his joining any employment with that person; or

(b) After cessation of his employment with that person.

The word “profit” in the expression “profit in lieu of salary “ should be taken to mean
advantage or gain employee by receipt of any amount and such payment is not
required to be out of profits of the employer .

5. Any advance of salary – The term “salary “ includes any advance of salary.
5-A. payment in respect of leave not availed of – Any payment received by an
employee in respect of any period of leave not availed of by him shall be included
within the meaning of ‘salary’ chargeable to income – tax.

6. Annual accretion to provident fund.- That portion of the annual accretion in any
previous years to the balance at the credit of an employee participating in a
recoganised provident fund as consist of :-

(a) Contributions made by the employer in excess of 10% of the employee’s salary and

(b) Interest thereon which is in excess of one-third of the employee’s salary or in excess
of the amount calculated at the rate of 7.5% per annum, shall be deemed to have been
received by the employee in that previous year and shall be included in his total
income for the purpose of income- tax.

7. Sums in transferred balance - The amount transferred from an unrecoganised

provident fund to a recoganised provident fund account of the employee is included
in the employee’s total income under the head “salary”. Clause (vii) of sub-section (1)
of Section 17 provides that “salary” includes the aggregate of all sums that are
comprised in the transferred balance as referred to in sub- rule (2) of rule 11 of Part A
of the Fourth Schedule.

8. Contribution by the Central Government or any other employer to the account of

employee under pension scheme [Section 17 (1) (viii)]. – It provides that “salary”
shall include the contribution made by the Central Government or any other employer
in the previous year, to the account of an employee under a pension scheme referred
to in section 80CCD.

It is obvious that the above definition of salary under Section 17 (1) is inclusive and
not exhaustive. Consequently, the receipts not covered under the categories of
receipts stated under section 17 (1) may also be included in salary.
 DEDUCTIONS FROM SALARIES

Deduction under Section 16 :

The income chargeable under the head “salaries” shall be computed after making the
following deductions :

(i) Expenditure incidental to the employment (i.e. , standard deduction ) [Section 16

(i)].

The income chargeable under the head "Salaries" shall be computed after making the
following deductions, namely :-

(i) In the case of an assessee whose income from salary, before allowing a deduction
under the clause, -

(a) Does not exceed one lakh rupees, a deduction of a sum equal to thirty-three and one-
third per cent of the salary or twenty-five thousand rupees, whichever is less;

(b) Exceeds one lakh rupees but does not exceed five lakh rupees, a deduction of a sum of
twenty thousand rupees.

For the purposes of above clause, where salary is due from, or paid or allowed by,
more than one employer, the deduction under this clause shall be computed with
reference to the aggregate salary due, paid or allowed to the assessee and shall in no
case exceed the amount specified under this clause;

(ii) A deduction in respect of any allowance in the nature of an entertainment

allowance specifically granted to the assessee by his employer –
(a) In the case of an assessee who is in receipt of a salary from the Government, a sum
equal to one-fifth of his salary (exclusive of any allowance, benefit or other
perquisite) or five thousand rupees, whichever is less; and

(b) In the case of any other assessee who is in receipt of such entertainment allowance
and has been continuously in receipt of such entertainment allowance regularly from
his present employer from a date before the 1st day of April, 1955, the amount of
such entertainment allowance regularly received by the assessee from his present
employer in any previous year ending before the 1st day of April, 1955, or a sum
equal to one-fifth of his salary (exclusive of any allowance, benefit or other
perquisite) or seven thousand five hundred rupees, whichever is the least;

(iii) Deduction of any sum paid on account of a tax on employment [Section 16 (iii)].

In computing the income chargeable under the head ‘salary’, it allows a deduction of
any sum paid by the assessee on account of a tax on employment within the meaning
of clause (2) of Article 276 of the Constitution of India leviable by or under any law.

Deductions from Salary income

Certain deductions are available while determining the taxable salary income.
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STANDARD DEDUCTION

Income tax slabs 2009-2010 (for Men) in India:

Income Tax Slab (in
Tax
Rs.)
0 to 1,60,000 No Tax
1,60,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%

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Above 5,00,000 30%

Income tax slabs 2009-2010 (for Women) in India:

Income Tax Slab (in
Tax
Rs.)
0 to 1,90,000 No Tax
1,90,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%

Income tax slabs 2009-2010 (for Senior Citizens) in India:

Income Tax Slab (in
Tax
Rs.)
0 to 2,40,000 No Tax
2,40,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%

RELIEF WHEN SALARY, ETC., IS

PAID IN ARREARS OR IN ADVANCE.
(SECTION 89)

Where by reason of any portion of an assessee's salary being paid in arrears or in advance
or by reason of his having received in any one financial year salary for more than twelve
months or a payment which under the provisions of clause (3) of section 17 is a profit in
lieu of salary, his income is assessed at a rate higher than that at which it would otherwise
have been assessed the Assessing Officer shall, on an application made to him in this
behalf, grant such relief as may be prescribed.
 CASE LAWS
In Major LHG conville of convillepur vs. CIT Punjab,NWF and Delhi province,
Lahore AIR 1935 Lah 978 “salary signifies a recompense given to any man for his pains
bestowed upon another man’s business “. Where a father and son are joint owners of
agricultural property and son gets certain allowances for managing the property besides
his share of the income from the property. Only the surplus allowance can be taxed as his
salary, his share of the income is to be treated as agricultural.

In Amar Dye Chemicals Ltd and another vs. Union of India and others AIR 1974 SC
636 Salary – Managing Director of Company whether servant or agent – Test – Assessee
appointed as Managing Director to manage business of company in terms of and within
powers prescribed in articles of association and under terms of agreement he could be
removed for not discharging work diligently or not acting in interest of company –
Assessee held was servant and not agent of company – Remuneration payable to
assessee would be salary.

In CIT, UP,CP and Berar, Lucknow vs. ID Varshani AIR 1954 All 58 in this the
assessee was called a Managing Agent but the powers conferred upon him under the
Articles were more in the nature of powers given to a servant and those powers could be
terminated , he was admitted to the benefits of the Company’s Provident Fund as being
an employee of the company and value of rent-free quarters occupied by him was added
as income under the head ‘salary’. It was held that the assessee was in fact the Chief
Manager of the Company and his remuneration was properly assessed as salary.
In Cit vs. Navnitlal Sakarlal AIR 2001 SC 235 , agreements between the company and
its Managing directors entitled them to remuneration but also empowered the Board of
Directors to resolve in respect of any year not to pay any remuneration to them. For the
previous rear relevant to AY 1973-74, the Board of Directors resolved that “the amount
of commission payable to each of the Managing directors” should be expended to
purchase single premium deferred annuity policies on their lives.
The said resolution neither referred to the provision in agreement for non-payment of
remuneration nor saying that the Managing Directors should not be paid any
remuneration or part thereof. In such circumstances, it was held that the amount of
commission did accrue to the Managing Directors and could not be said to have been
diverted. Therefore, it constituted part of their remuneration and was includible in their
hands as salaries.
1
Some important questions that may arise

Is the allowance paid outside India by the Government to the Indian citizens
taxable? 

Any allowance, paid outside India by the Government to an Indian citizen for rendering
services outside India, is fully exempt from tax u/s.10 (7) of the Income-tax Act. 

How is the tax determined on the salary received by ships crew? 

Under section 10(6)(viii), salary that is received by or due to a Non-resident foreign

national, who is a member of a ships crew, is exempt from tax, provided the total stay of
the crew member in India does not exceed 90 days in the previous year. 

If a person foregoes his salary for any reason, would it be taxable? 

Since the salary is taxable on due or receipt basis, whichever is earlier, foregoing of
salary would amount to giving up something, which is due to him. Hence, even if a
person foregoes salary, the same would still be taxable. 

In the case of a Hindu undivided family, how would you determine whether the
remuneration, received by an individual is the income of the individual or the
income of the Hindu undivided family? 

If the remuneration, received by the co-parcener, is compensation made for the services
rendered by the individual co-parcener, then it will be income of the individual co-
parcener. If the remuneration received by the individual co-parcener is because of
investments of the family funds, then it will be considered as the income of the Hindu
undivided family. If the income was essentially earned as a result of the funds invested,
then the fact that the co-parcener had rendered some service will not change the character
of the receipt. It will still be regarded as income of the Hindu undivided family. However,
on the other hand, if the co-parcener has received remuneration for services rendered by
him, even if his services were availed of because he was a member of the family which
had invested funds in that business or that he had obtained qualifying shares from out of
the family funds, the receipt would be the income of the individual. 

If an assessee is employed in a company where he is called Managing Agent but is in

fact, the Chief Manager of the company, under what head would the remuneration
that is paid to him be charged? 
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Though he may be called a Managing Agent, the remuneration earned by him will be
charged under the head of Salaries and not as Business Income. The fact that he is
actually the Chief Manager of the company will make the remuneration earned by him
chargeable to tax under the head Salaries. It is the true nature of the contract that will
determine the relationship between the assessee and the company. Once it is established
that the managing director functions, subject to the control and supervision of the Board
of Directors, the inevitable corollary is that an employer - employee relationship exists
and, that being so, his remuneration is assessable under the head "salary". 

Is the salary, bonus, commission or remuneration, received by a partner of a firm

from the firm regarded as salary? 

No. The salary, bonus, commission or remuneration, by whatever name called, due to or
received by the partner of a firm from the firm shall not be regarded as salary for the
purpose of tax. It will be regarded as Business Income and taxable under the head 'profits
and gains from business or profession'. Accordingly, no standard deduction, which is
otherwise allowable from Salary Income, is available. 

Would the remuneration, received by a director be taxable under the head 'Income
from salaries'? 

The remuneration, received by a director is taxable as 'Income from salaries' or not,

would depend upon whether the director is an employee of the payer or not. This can be
determined from the nature of the relationship between the director and the payer. If the
relationship of a master and servant exists between the payer and payee, then the director
would be an employee and the remuneration that is received would be taxable under the
head 'salaries'. However, if such relationship does not exist, then the director will not be
considered an employee of the payer and the Income would be taxable as Professional
Income. 

If a person is following the cash system of accounting would he be liable to pay tax
in respect of salary which is due to him but which he has not received? 

Salary is taxable on due basis or receipt basis, whichever is earlier, irrespective of the
method of accounting that is followed by the assessee. Accordingly, advance salary is
taxable on receipt basis, though not due. Hence, the method of accounting followed by
the assessee is not of any consequence. 

Explain the taxability of salary of foreign employees. 

Under section 10(6)(vi), the remuneration received by An individual who is not a citizen
of India foreign national as an employee of a foreign enterprise for services, rendered by
him during his stay in India, would be exempt from tax, in the following cases:
1. The foreign enterprise is not engaged in any business or trade in India;
 2. The employee's stay in India does not exceed in the aggregate a period of 90 days
in the previous year; and
3. The remuneration, paid to him, is not liable to be deducted from the income of the
employer chargeable under the Act.
Is the salary of diplomatic personnel taxable?

Under section 10(6)(ii) of the Income-tax Act, any remuneration that is received by an
individual who is not a citizen of India as an official of the Embassy, High Commission,
Legation, Commission, Consulate or Trade representative of foreign State or, as a
member of the staff of any of those officials would be exempt from tax, if the
corresponding Indian officials in that foreign country enjoy similar exemption. 

Is there any significance to the place where the services are rendered for the
taxability of salaries? 

Salary is deemed to accrue or arise at the place where the service is rendered. Even if
salary is paid outside India, if the services are rendered in India, the said salary is taxable
in India. Leave salary, paid abroad, is also taxable in India as it is deemed to accrue or
arise out of services rendered in India. 

It may be noted that salary, paid by the Indian Government to an Indian national, is
deemed to accrue or arise in India even if the services are rendered outside India. Any
pension, payable outside India to a person residing outside India permanently, shall not
be taken as income deemed to accrue or arise in India, if the pension is payable to a
person, referred to in Article 314 of the Constitution or to a person, who has been
appointed as a Judge of the Federal Court or of the High Court, before the 15th of
August, 1947 and continues to serve as a Judge in India on or after the commencement of
the Constitution. 

Are there any special privileges that are enjoyed by the officials of the United
Nations Organization and other such international organizations? 

Under section 2 of the United Nations (Privileges and Immunities) Act, 1947, read with
section 18 of the Schedule, thereto, exemption is granted from Income tax in respect of
salaries and emoluments that are paid by the United Nations and other notified
international organizations to its officials. Pension is also covered under this provision
and no tax is payable. 

What is the taxability of the compensation, received by a person on voluntary

retirement? 

Under section 10(10C) of the Income-tax Act, compensation that is received at the time
of voluntary retirement is exempt if the person satisfies the following conditions:
 It is received at the time of voluntary retirement;
 It is received by an employee of a public sector company; or any other company;
or authority established under the Central, State or Provincial Act; or a local
 authority; or a co-operative society; or a University; or an Indian Institute of
Technology; or any State Government; or the Central Government; or an
institution having importance throughout India or in any other State(s); or a
notified institute of Management.
The compensation that is received should be in accordance with the scheme(s) of
voluntary retirement, or in the case of a public sector company, a scheme of voluntary
separation. Further, the schemes of the abovementioned companies and authorities
must be in accordance with such guidelines as may be prescribed. The maximum
amount of exemption, however, is restricted to Rs.5, 00,000/-. Once the employee has
claimed an exemption under the above provisions, he is not entitled to claim any
further exemption for any other assessment year.