Salary (Section. 15-17)

26/10/2020 2 By indiafreenotes

Salary means remuneration of a person, which he has received from his employer for rendering services to him. The relationship between payer and payee is of employer and employee. Salary and Wages for Income Tax are conceptually indifferent. Salary may arise from more than one source.

Salary U/S 17(1): Under sec. 17(1) salary is defined to include the following

  1. Wages
  2. Any annuity or pension
  3. Any gratuity
  4. Any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages
  5. Any advance salary
  6. Any payment received by an employee in respect of any period of leave not availed to him
  7. The portion of the annual accretion in the previous year of the balance at the credit of an employee participating in a recognised provident fund to extent it is taxable
  8. Transferred balance in a recognised provident fund to the extent it is taxable
  9. The contribution made by the central government or any other employer to the account of an employee under a notified pension scheme referred to in section 80CCD.

Basis of Charge of Salary Income [Sec. 15]

Salary is taxable on “due” or “receipt” basis whichever is earlier. This includes

  1. Any salary due from a employer actually paid or not
  2. Any salary paid or allowed though not due or before it became due
  3. Arrears of salary paid or allowed, if not charged to tax in earlier previous years

Different forms of Salary: How taxed

  1. Advance Salary [Sec. 17(1)(v)]: Advance Salary is taxable on receipt basis. The recipient can however claim relief u/s 89.
  2. Arrear Salary – Arrear Salary is taxable on receipt basis. The recipient can however claim relief u/s 89.
  3. Leave Salary – As per service rule employees gets leaves. If a leave is not taken within a year, as per the service rules, it may lapse or it may be encashed or it may be accumulated. Payment recd. On encashment of leave is known as Leave Salary. The tax treatment for Leave Salary is as following
Nature of Leave Salary Status of employee Whether it is taxable
Leave Encashment during continuity of employment  Government / Non-government employee Chargeable to tax
Leave Encashment at the time of retirement / leaving the job Government Fully exempt u/s 10(10AA)(i)
 Leave Encashment at the time of retirement / leaving the job  Non-government employee Fully or partly exempt u/s 10(10AA)(ii)Subject to minimum of

  1. Period of earned leaves (up to 30daysfor each completed year of service) X Av. Monthly salary
  2. 10 X Av. Monthly salary
  3. Rs. 300000
  4. Actual Leave encashment
  1. Salary in lieu of notice period: Taxable on receipt basis
  2. Salary to a partner: not chargeable under the head salaries. It is chargeable in the head of income from business and profession
  3. Bonus: Taxable on receipt basis
  4. Gratuity [Sec.10 (10)]: It is a retirement benefit paid on cessation of employment. It is taxed as following
Status of employee Whether it is taxable
Government Fully exempt u/s 10(10AA)(i)
Non-government employee covered by payment of gratuity Act, 1972 Fully or partly exempt u/s 10(10AA)(ii)Subject to minimum of

  1. 15/26 days salary for years of service rounding off fraction of years(1.5 as 1 and 1.51 as 2)
  2. Rs. 350000
  3. Actual amount recd.
Non-government employee not covered by payment of gratuity Act, 1972 Fully or partly exempt u/s 10(10AA)(ii)Subject to minimum of

  1. Half months salary for each completed year of service
  2. Rs. 350000
  3. Actual amount recd.
  1. Pension [Sec. 17(1)(ii)] – Pension is in 2 parts (a) commuted pension – It is a lump sum payment in lieu of periodical payment of pension and (b) Uncommuted Pension – It is periodical payment of pension. It is taxed as following
Pension Status of employees Whether it is taxable
Uncommuted Pension Government/ Non- Government Employee It is chargeable to tax
Commuted Pension Government Employee Fully exempt u/s 10(10AA)(i)
Commuted Pension Non- Government Employees Fully or partly exempt u/s 10(10AA)(ii)Subject to following conditions

  1. If gratuity is recd. 1/3 is exempt
  2. If gratuity is not recd. ½ is exempt

 Retrenchment compensation [Sec. 10(10B)] – Retrenchment compensation is exempt from tax to the extent of the lower of the following

    1. 15 days average pay, for every completed year of service or any part thereof in excess of six months
    2. 50000
    3. Actual amount received
  1. Salary received from a UNO is not taxable in India
  2. Compensation received at the time of voluntary retirement [Sec. 10(10)] – Compensation recd. At the time of voluntary retirement is exempt from tax if the following conditions are satisfied
    1. Compensation is recd at the time of Voluntary retirement
    2. Compensation is recd by an employee of the following
      1. An authority estd. Under central, state or provisional act
      2. Local authority
      3. University, IIT or any other notified institute
      4. State or central Govt.
      5. PSU
      6. Any company or cooperative society
    3. Compensation recd in accordance to scheme of voluntary retirement
    4. Maximum amount of exemption Rs. 500000
  3. Contribution to PF
Type of Provident Fund Chargeable in Gross Salary Exemption under 80C Interest
Recognised Fund Amount in excess of 12% is taxable Available Exempt
Statutory Fund Exempt from tax Available Exempt
Unrecognised Fund Taxable Not Available Exempt if rate does not exceeds notified rate
Public Provident Fund N.A. Available Exempt


Allowance is a fixed monetary amount paid by the employer to the employee (over and above basic salary) for meeting certain expenses, whether personal or for the performance of his duties. These allowances are generally taxable and are to be included in gross salary unless specific exemption is provided in respect of such allowance. For the purpose of tax treatment, we divide these allowances into 3 categories:

  1. Fully taxable cash allowances
  2. Partially exempt cash allowances
  3. Fully exempt cash allowances


This category includes all the allowances, which are fully taxable. So, if an allowance is not partially exempt or fully exempt, it gets included in this category.

The main allowances under this category are enumerated below:

(i) Dearness Allowance and Dearness Pay: As is clear by its name, this allowance is paid to compensate the employee against the rise in price level in the economy. Although it is a compensatory allowance against high prices, the whole of it is taxable. When a part of Dearness Allowance is converted into Dearness Pay, it becomes part of basic salary for the grant of retirement benefits and is assumed to be given under the terms of employment.

(ii) City Compensatory Allowance: This allowance is paid to employees who are posted in big cities. The purpose is to compensate the high cost of living in cities like Delhi, Mumbai etc. However, it is fully taxable.

(iii) Tiffin / Lunch Allowance: It is fully taxable. It is given for lunch to the employees.

(iv) Non practicing Allowance: This is normally given to those professionals (like medical doctors, chartered accountants etc.) who are in government service and are banned from doing private practice. It is to compensate them for this ban. It is fully taxable.

(v) Warden or Proctor Allowance: These allowances are given in educational institutions for working as a Warden of the hostel or as a Proctor in the institution. They are fully taxable.

(vi) Deputation Allowance: When an employee is sent from his permanent place of service to some place or institute on deputation for a temporary period, he is given this allowance. It is fully taxable.

(vii) Overtime Allowance: When an employee works for extra hours over and above his normal hours of duty, he is given overtime allowance as extra wages. It is fully taxable.

(viii) Fixed Medical Allowance: Medical allowance is fully taxable even if some expenditure has actually been incurred for medical treatment of employee or family.

  1. Servant Allowance: It is fully taxable whether or not servants have been employed by the employee.
  2. Other allowances: There may be several other allowances like family allowance, project allowance, marriage allowance, education allowance, and holiday allowance etc. which are not covered under specifically exempt category, so are fully taxable.


This category includes allowances which are exempt upto certain limit. For certain allowances, exemption is dependent on amount of allowance spent for the purpose for which it was received and for other allowances, there is a fixed limit of exemption.

(i) House Rent Allowance (H.R.A.): An allowance granted to a person by his employer to meet expenditure incurred on payment of rent in respect of residential accommodation occupied by him is exempt from tax to the extent of least of the following three amounts:

a) House Rent Allowance actually received by the assessee

b) Excess of rent paid by the assessee over 10% of salary due to him

c) An amount equal to 50% of salary due to assessee (If accommodation is situated in Mumbai, Kolkata, Delhi, Chennai) ‘Or’ an amount equal to 40% of salary (if accommodation is situated in any other place).

Salary for this purpose includes Basic Salary, Dearness Allowance (if it forms part of salary for the purpose of retirement benefits), Commission based on fixed percentage of turnover achieved by the employee.
If an employee is living in his own house and receiving HRA, it will be fully taxable.

(ii) Entertainment Allowance: This allowance is first included in gross salary under allowances and then deduction is given to only central and state government employees u/s 16 (ii) as least of the following

  1. 5000
  2. 20% of basic salary
  3. Amount of allowance granted

(iii) Special Allowances for meeting official expenditure – Certain allowances are given to the employees to meet expenses incurred exclusively in performance of official duties and hence are exempt to the extent actually incurred for the purpose for which it is given. These include travelling allowance, daily allowance, conveyance allowance, helper allowance, research allowance and uniform allowance.

(iv) Special Allowances to meet personal expenses: There are certain allowances given to the employees for specific personal purposes and the amount of exemption is fixed i.e. not dependent on actual expenditure incurred in this regard. These allowances include:

  1. a) Children Education Allowance: This allowance is exempt to the extent of Rs.100 per month per child for maximum of 2 children (grand children are not considered).
  2. b) Children Hostel Allowance: Any allowance granted to an employee to meet the hostel expenditure on his child is exempt to the extent of Rs.300 per month per child for maximum of 2 children.
  3. c) Transport Allowance: This allowance is generally given to government employees to compensate the cost incurred in commuting between place of residence and place of work. An amount upto Rs.800 per month paid is exempt. However, in case of blind and orthopaedic ally handicapped persons, it is exempt up to Rs. 1600p.m.
  4. d) Out of station allowance: An allowance granted to an employee working in a transport system to meet his personal expenses in performance of his duty in the course of running of such transport from one place to another is exempt upto 70% of such allowance or Rs.6000 per month, whichever is less.


(i) Foreign allowance – This allowance is usually paid by the government to its employees being Indian citizen posted out of India for rendering services abroad. It is fully exempt from tax.

(ii) Allowance to High Court and Supreme Court Judges of whatever nature are exempt from tax.

(iii) Allowances from UNO organisation to its employees are fully exempt from tax.


Perquisites are defined as any casual emolument or benefit attached to an office or position in addition to salary or wages. It denotes some thing that benefits a man by going into his pocket; it does not cover mere reimbursement of necessary disbursements. Such benefits are normally given in kind but should be capable of being measurable in money terms. Perquisites are taxable and included in gross salary only if they are (i) allowed by an employer to an employee, (ii) Allowed during the continuation of employment, (iii) directly dependent on service, (iv) resulting in the nature of personal advantage to the employee and (v) derived by virtue of employers authority.

As per Section 17 (2) of the Act, perquisites include:

  1. Value of rent free accommodation provided to the employee by the employer.
  2. Value of concession in the matter of rent in respect of accommodation provided to the employee by his employer.
  3. Value of any benefit or amenity granted free of cost or at a concessional rate in any of the following cases:
  4. a) by a company to an employee who is a director thereof
  5. b) by a company to an employee who has substantial interest in the company
  6. c) by any employer to an employee who is neither a director, nor has substantial interest in the company, but his monetary emoluments under the head ‘Salaries’ exceeds Rs.50, 000.
  7. Any sum paid by the employer towards any obligation of the employee.
  8. Any sum payable by employer to effect an assurance on the life of assessee.
  9. The value of any other fringe benefit given to the employee as may be prescribed.

For tax purposes, perquisites specified under Section 17 (2) of the Act may be classified as follows:

(1) Perquisites that are taxable in case of every employee, whether specified or not

(2) Perquisites that are taxable in case of specified employees only.

(3) Perquisites that are exempt from tax for all employees

 (1) Perquisites Taxable in case of All Employees

The following perquisites are taxable in case of every employee, whether specified or not:

  1. Rent free house provided by employer
  2. House provided at concessional rate
  3. Any obligation of employee discharged by employer e.g. payment of club or hotel bills of employee, salary to domestic servants engaged by employee, payment of school fees of employees’ children etc.
  4. Any sum paid by employer in respect of insurance premia on the life of employee
  5. Notified fringe benefits (on which fringe benefit tax is not applicable) – it includes interest free or concessional loans to employees, use of movable assets, transfer of moveable assets.

(2) Perquisites taxable in case of Specified Employees only

The following perquisites are taxable in case of such employees:

  1. Free supply of gas, electricity or water supply for household consumption
  2. Free or concessional educational facilities to the members of employees household
  3. Free or concessional transport facilities
  4. Sweeper, watchman, gardener and personal attendant
  5. Any other benefit or amenity

Specified employee is an employee who is either a director or has substantial interest in the company where he is employed or is drawing monetary salary of more than Rs.50, 000 during the previous year.

(3) Perquisites which are tax free for all the employees

This category includes perquisites which are tax free for the employees and also other perquisites on which employer has to pay a tax (called Fringe Benefit Tax) if they are given to the employees and so are not taxable for them.

  1. Medical benefits (provided within or out of India) subject to limits.
  2. Value of Leave Travel Concession in India.
  3. Free meals provided to the employees during working hours.
  4. Amount spent by the employer as its contribution to staff welfare schemes.
  5. Laptops and computers provided for personal use.
  6. Rent free official accommodation provided to a Judge of High Court or Supreme Court or an official of Parliament including Minister and Leader of Opposition in Parliament.
  7. Health Insurance Premium of employee or member of household paid by the employer.
  8. All such facilities (like motor car, lunch refreshments, travelling, touring, gift, credit cards, club etc.) provided by employer on which employer has to pay Fringe Benefit Tax.

With effect from Assessment Year 2006-07, a Fringe Benefit Tax has been introduced, where companies giving certain fringe benefits to its employees are required to pay Fringe Benefit Tax on the expenditure incurred for the same. Hence, these benefits are tax free for the employees. 


The perquisites which are taxable in the hands of employees are valued in accordance with the provisions laid down under the Income Tax Rule 3. These benefits can be provided to the employee or member of his household.

Member of household shall include:

(1) Spouse (2) Children and their spouses (3) Parents (4) Servants and dependents

(i) Valuation of rent free accommodation

For the purpose of valuation of house, employees are divided into 2 categories:

a) Central and State Government employees: If accommodation is provided by the State or Central Government to their employees, the value of such

accommodation is simply the amount fixed by the government (called the licence fees) in this regard. In a case of government employee, the value of rent free accommodation is Rs.8,

400 (Rs.700 x 12) i.e. the licence fees fixed by the government.

b) Other Employees

The valuation of accommodation for this category of non government employees depends upon whether the accommodation given to the employee is owned by the employer or taken on lease.

  1. Accommodation owned by employer

The value of accommodation is:

(i) 20% of salary in cities having population exceeding four lakhs as per 2001 census.

(ii) 15% of salary in other cities in respect of the period for which the accommodation was occupied by the employee during the previous year.

  1.  Accommodation is taken on lease / rent by the employer

The value of such accommodation is actual amount of lease rental paid or payable by the employer or 20% of salary, whichever is lower.

Definition of salary for rent free accommodation: Basic Salary + Taxable cash allowances + Bonus or Commission + any other monetary payment.

(It does not include dearness allowance if it is not forming part of basic salary for retirement benefit, allowances which are exempt from tax, value of perquisites specified under Section 17(2), employer’s contribution to provident fund account of employees).

(ii) Valuation of furnished accommodation where the accommodation is furnished, 10% per annum of the original cost of furniture given to the employee shall be added to the value of unfurnished accommodation. If the furniture is taken on rent by employer, then actual hire charges are to be added to the value.

Rules for valuation of Rent free unfurnished Accommodation:

Nature of Accommodation Accommodation in a city with population > 4 lakhs Accommodation in a city with population > 4 lakhs
Where accommodation is owned by employer 20% of salary 15% of salary
Accommodation taken on lease / rent by employer Amount of lease or 20% of salary whichever is less Amount of lease or 20% of salary whichever is less

iii) Sweeper, gardener or watchman provided by the employer

The value of benefit of provision of services of sweeper, watchman, gardener or personal attendant to the employee or any member of his household shall be the actual cost to the employer. The actual cost in such a case is the total amount of salary paid or payable by the employer or any other person on his behalf for such services as reduced by any amount paid by the employee for such services.

If the above servants are engaged by the employer and facility of such servants are provided to the employees, it will be a perquisite for specified employees only. On the other hand, if these servants are employed by the employee and wages of such servants are paid / reimbursed by the employer, it will be taxable perquisite for all classes of employees.

(iv) Free Supply of Gas, Electricity or Water

The value of these benefits is taxable in the hands of specified employees, if the connection is taken in the name of the employer, and is determined according to the following rules:

a) If the employer provides the supply of gas, electricity, and water from its own sources, the manufacturing cost per unit incurred by the employer shall be the value of perquisite.

b) If the supply is from any other outside agency, the value of perquisite shall be the amount paid by the employer to the agency supplying these facilities.

c) Where the employee is paying any amount in respect of such services, the amount so paid shall be deducted from the value of perquisite calculated under (a) or (b).

d) Where the connection for gas, electricity, water supply is in the name of employee and the bills are paid or reimbursed by the employer, it is an obligation of the employee discharged by the employer. Such payment is taxable in case of all employees under Section 17 (2) (iv).

(v) Free Education

a) Cost of free education to any member of employees’ family provided in an educational institution owned and maintained by the employer shall be determined with reference to reasonable cost of such education in a similar institution in a near by locality. For education facilities provided to the children of employee (excluding any other member of house hold), the value shall be nil, if the cost of such education per child does not exceed Rs.1, 000 per month.

b) Where free education facilities are allowed to any member of employees family in any other educational institution by reason of his being in employment of that employer, the value of perquisite shall be determined as in (a).

c) In any other case: The value of benefit of providing free or concessional educational facilities for any member of the house hold (including children) of the employee shall be the amount of expenditure incurred by the employer.

d) While calculating the amount of perquisite in all in above cases, any amount paid or recovered from the employee in this connection, shall be deducted.

(vi) Free Transport

The value of any benefit provided by any undertaking engaged in the carriage of passengers or goods to any employee or to any member of his household for private journey free of cost or at concessional rate in any conveyance owned or leased by it shall be taken to be the value at which such benefit is offered by such undertaking to the public as reduced by the amount, if any, paid by or recovered from the employee for such benefit. In case of employees of the Railways and airlines, the value of transport facility shall be exempt.

(vii) Valuation of Medical Facilities

Medical facilities provided to employee are exempt from tax.

Medical benefits within India which are exempt from tax include the following:

a) Medical treatment provided to an employee or any member of his family in hospital maintained by the employer.

b) Any sum paid by the employer in respect of any expenditure incurred by the employee on medical treatment of himself and members of his family :

(i) in a hospital maintained by government or local authority or approved by the government for medical treatment of its employees.

(ii) In respect of the prescribed diseases or ailments in any hospital approved by the Chief Commissioner.

(iii) Premium paid by the employer on health insurance of the employee under an approved scheme.

c) Premium on insurance of health of an employee or his family members paid by employer.

Limited Exemption: If the ordinary medical treatment of the employee or any member of his family is done at any private hospital, nursing home or clinic, the exemption is restricted to Rs.15,000.

Medical Treatment outside India which is exempt from tax includes the following:

a) Any expenditure incurred by employer on the medical treatment of the employee or any member of his family outside India.

b) Any expenditure incurred by employer on travel and stay abroad of the patient (employee or member of his family) and one attendant who accompanies the patient in connection with such treatment, shall be exempt to the following extent :

(i) The expenditure on medical treatment and stay abroad shall be exempt to the extent permitted by the Reserve Bank of India.

(ii) The expenditure on travel shall be exempt in full provided the gross total income of the employee (including this expenditure) does not exceed Rs.2,00,000.