Taxable Income From Salary

Understanding the head of Income from salary, its components, features, the charging section, computation of salary income, allowances and perquisites.

 

Indian tax system is divided into mainly two parts, direct tax and indirect tax. Income Tax Act 1961 applies the direct tax laws relating to salary earned. It is a broad concept which includes every kind of payment made by an employer to employee, i.e., monetary as well as non-monetary facilities.

 

Components of Salary: Salary u/s 17(1) of Income Tax Act comprises of the following:

  1. Compensation,
  2. Pension or annuity
  3. Gratuity
  4. Commission, fees, benefits or profits in addition to salary,
  5. Advance salary
  6. Leave salary,
  7. Taxable portion of transfer to recognised provident fund, and
  8. The contribution made in pension scheme u/s 80CCD by the Central Government or the employer to the account of the employee in the previous year.

Features of Income from Salary

  1. It is most important that an employer-employee relationship exists between the people involved to charge any payment under the head salary.
  2. The employment can be full-time or part-time. Salary earned from multiple employers can be clubbed together.
  3. Once the employee accrues the salary, the liability to pay tax can’t be exempted by any means.
  4. The surrendered salary of the employees is exempt from the tax.
  5. In the case of tax-free salary, the pay income along with the tax will be a part of the revenue from the pay of the employee.

Charging Section of Salary

Section 15 of the Income Tax Act states that salary can be taxed on due or receipt basis, whichever is earlier.

 

Computation of Income from Salary:

 

Particulars Amount
Basic Wage 25000
Allowances received 3400
Perquisites 5000
Profits in lieu of Salary 2500
Benefits for retirement 1500
Gross Salary 37400
Less: Deductions  
u/s 16(ii) Entertainment Allowance* Nil
u/s 16(iii) Professional Tax** (2500)
Income under the Head Salary 34900

 

Note:

 

*Entertainment Allowance: This is only allowed for Government Employees.

 

**Professional Tax: Directly reduce if paid by the employee. In case employer pays it, then it is first added to salary and then deducted.

 

Allowances: The income from salary includes various benefits that are received by the employee. The allowances that are exempt to a certain level include House Rent Allowance (HRA), Leave Travel Allowance, etc.

 

Perquisites: The employees enjoy many perks in addition to the salary received which forms a part of the computation of income from salary. The employees also enjoy exemption concerning these perquisites.