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Taxation of Individuals
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Income from Salaries
Salary is the remuneration received by or accruing to an individual periodically for service rendered as a
result of an express or implied contract. The existence of employer-employee relationship is the sine-qua-non
for taxing a particular receipt under the head "salaries." No, payment can be taxed under this section unless
the relationship of employer and employee exists between the payer and payee. Thus, There should be contractual
employer-employee relationship. The contract may be express, oral or implied. For instance, the salary received
by a partner from his partnership firm carrying on a business is not chargeable as "Salaries" but as "Profits &
Gains from Business & Profession". Similarly, salary received by a person as MP or MLA is taxable as "Income
from other sources"., but if a person receives salary as Minister of State/Central Government, the same shall
be charged to tax under the head "Salaries". Pension received by an assessee from his former employer is taxable
as "Salaries" whereas pension received on his death by members of his family(Family Pension) is taxed as
"Income from other sources".
Under the Income-tax Act "Salary" includes :
- Wages
- Annuity or pension
- Gratuity
- Fees,commission,perquisites or profits in lieu of salary
- Advance of Salary
- Receipt from Provident Fund
- Contribution of employer to a Recognised Provident Fund in excess of the prescribed limit
- Leave Encashment
- Compensation as a result of variation in Service contract etc.
The deductions from salary income admissible under the Income-tax Act are :
- Standard Deduction
- Professional/Employment tax levied by the State Govt.
- Entertainment Allowance
Perquisites
"Perquisite" may be defined as any casual emolument or benefit attached to an office or position in addition to
salary or wages. Perquisite as defined in the Income tax Act includes :
Value of rent-free/concessional rent accommodation provided by the employer. Any sum paid by employer in respect of an obligation which was actually payable by
the assessee. Value of any benefit/amenity granted free or at concessional rate to specified
employees etc.
The following perquisites are not taxable either under the executive instructions of the Central Board of
Direct Taxes or by virtue of specific provision in the Act/Rules :
Rent-Free House
Rent-free official residence provided to a judge of a High Court or of the Supreme
Court. Rent-free furnished residence (including maintenance thereof) provided to an
official of Parliament, a Union Minister or a Leader of Opposition in Parliament. Accommodation provided in a 'remote area' to an employee working at a mining site or
an onshore oil exploration site, or a project execution site or an accommodation provided in an offshore
site of similar nature. Accommodation provided on transfer of an employee in a hotel for not exceeding 15
days in aggregate.
Car
Reimbursement of expenses in respect of car (which is owned by employee and used for
personal and official purpose) (amount not taxable is up to Rs. 1,200 per month for car having engine
capacity of not more than 1600cc, Rs. 1,600 per month for car of above 1600cc and Rs. 600 per month for
driver). Conveyance facility provided to High Court Judges and Supreme Court Judges. Conveyance facility provided to an employee to cover the journey between office and
residence.
Interest-Free Loan
- Interest-free / concessional loan of an amount not exceeding Rs.20,000.
Others
Allowances
"Allowance" is defined as a fixed quantity of money or other substance given regularly in addition to salary
for meeting specific requirements of the employees. Most allowances are taxable like city compensatory
allowance, tiffin allowance, fixed medical allowance and servant allowances. Encashment of any concession is
also taxable.
House Rent Allowance: Out of house rent allowance received during the year,
least of the following three amounts will not be included in income.
The amount equal to 50% of annual salary, for persons staying in Mumbai,
Chennai, Calcutta or Delhi, but 40%, for others The actual amount of house rent allowance received The amount of rent actually paid in excess of 10% of annual salary (Here,
salary includes basic salary, dearness allowance, and commission on fixed percentage, but not other
allowances).
Transport allowance : Transport allowance for traveling from residence to
office is exempt up to Rs 800 per month. Any allowance granted for encouraging the academic, research and other professional
pursuits is exempt, to the extent the allowance is utilised for the purpose specified. Children Education Allowance : Rs. 100 per month per child up to a maximum of
two children. Any allowance granted to an employee to meet the hostel expenditure on his
child : Rs. 300 per month per child up to a maximum of two children.
Salary income is taxable in the hands of individuals only. No other type of person such as a firm, companies
can earn salary income.
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