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Income from Salaries

Taxation of Individuals


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


"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.

  • 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.
  • Gift-in-kind up to Rs.5,000 in a year.

  • Employer's contribution to staff group insurance scheme.


"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.


Other Categories

Taxation of Individuals
Who is liable to pay income tax
Sources of Income
Income from Salaries
Income from Capital Gains
Income from House property
Income from Profits & gains of business or profession
Income from other sources
Taxation of Partnerships
Customs Duties (Import Duty and Export Tax)
Wealth Tax
Taxation of Corporates
Taxation of Agents
Excise Duty
Permanent Account Number (PAN)
Taxation of other forms of business entities
Taxation of Trusts
Taxation of Small Scale Industries
Joint Venture Companies
Cooperative Societies
Taxation of Representative offices
Service Tax
Value Added Tax (VAT)


India has a well developed tax structure. The power to levy taxes and duties is distributed among the three
tiers of Government, in accordance with the provisions of the Indian Constitution. The main taxes/duties that
the Union Government is empowered to levy are:- Income Tax (except tax on agricultural income,
which the State Governments can levy), Customs duties, Central Excise and Sales Tax and Service Tax. The principal taxes levied by the State Governments are:- Sales Tax (tax on intra-State sale of goods), Stamp Duty (duty on transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue (levy on land used for agricultural/non-agricultural purposes), Duty on Entertainment and Tax on Professions & Callings. The Local Bodies are empowered to levy tax on properties (buildings, etc.), Octroi (tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc.

In the wake of economic reforms, the tax system in India has under gone a radical change, in line with the
liberal policy. Some of the changes include:- rationalization of tax structure; progressive reduction in peak
rates of customs duty; reduction in corporate tax rate; customs duties to be aligned with ASEAN levels;
introduction of value added tax; widening of the tax base; tax laws have been simplified to ensure better compliance. Tax policy in India provides tax holidays in the form of concessions for various types of investments. These include incentives to priority sectors and to industries located in special area/ regions. Tax incentives are available also for those engaged in development of infrastructure.