Category: Salary

1. Deduction from Salaries [Section 16]

The following shall be deducted from the Gross Salary to arrive at the Taxable Salary on which the tax has to be paid

1. Standard deduction [Section 16(ia)]
   • A standard deduction of Rs 40,000 is allowed for the FY 2018-19(AY 2019-20).
   • This standard deduction has replaced the existing transport allowance of Rs 19,200, and medical reimbursement of Rs 15,000.
2. Entertainment allowance [Section 16(ii)] –Least of the following is allowable as deduction for a government Employee:
   1. 5,000
   2. 1/5^th of the basic salary
   3. Actual entertainment allowance received
3. Professional tax [Section 16(iii)]
   • The professional tax or taxes on employment actually paid by the employee is allowed as a deduction.

Note: If professional tax is reimbursed or directly paid by the employer on behalf of the employee, the amount so paid is first included as salary income and then allowed as a deduction.

2. Taxability of Leave Travel Concession [LTC] [Section 10(5)]

What is Leave Travel Concession?

Leave Travel Concession is an allowance/assistance received by the employee from his employer to cover his travel expenses for travelling in India with or without family, when he is on leave from work. LTC is exempt from tax u/s 10(5) of Income Tax Act, 1961.

Conditions for claiming Leave Travel Allowance

1. Actual journey is a must to claim the exemption.
2. Only domestic travel is considered for exemptions i.e., travel within India. Therefore, no international travel is covered under LTC.
3. Exemption is available for travel of an employee alone or with his family where ‘family’ includes employee’s spouse, children and wholly or mainly dependent parents, brothers and sisters of employee. Tax exemption on LTC cannot be claimed for more than 2 children of employee. This restriction is not applicable if the children are born before 1^st October, 1998 i.e. Exemption can be claimed for more than 2 children if all of the children are born before 1^st October, 1998.

What is Exempt?

Exemption is available only on the actual travel costs i.e., air, rail or bus fare incurred by the employee. No expenses such as local conveyance, sightseeing, hotel accommodation, food etc. are eligible for exemption. Exemption is also limited to LTC provided by the employer.

Example – If LTC granted by employer is Rs 30,000 and actual eligible travel cost incurred by employee is Rs 20,000, exemption is available only to the extent of Rs 20,000 and balance Rs 10,000 would be included in taxable salary income.

How many times can we claim Leave Travel Allowance?

Travel Allowance is available for 2 journeys in a block of 4 years. The blocks are decided by government. The current block is from 2018 to 2021.

Monetary limits:

SL.No.	Journey performed by	Limit
1	Air	Amount not exceeding the air economy fare of the National Carrier by the shortest route to the place of destination
2	Any other mode:
(i)	Where rail service is available	Amount not exceeding the air- conditioned first class rail fare by the shortest route to the place of destination
(ii)	Where rail service is not available :
	(a) A recognized public transport system exists	amount not exceeding the 1st class or deluxe class fare, as the case may be, on such transport by the shortest route to the place of destination
	(b) No recognized public transport system exists	amount equivalent to the air- conditioned first class rail fare, for the distance of the journey by the shortest route, as if the journey had been performed by rail

Carry Forward

If an employee has not availed of LTC for one or two permitted journeys in a particular block of 4 years then he is entitled to carry one journey over to the next block. In such a situation, the exemption will be available for 3 journeys in the next block.

3. Remuneration received by an individual who is not a citizen of India [Section 10(6)]

What is covered under this section?              

• Remuneration received by an ambassador or other officials of the Embassy, Received by consular officer of a foreign State in India, Received by a trade commissioner
• Remuneration received by him as an employee of foreign enterprise for service rendered by him during his stay in India.                                                                                                    
• Remuneration received for employment on a foreign ship provided his stay in India does not exceed 90 days.
• Remuneration received by an employee of foreign govt. during his stay in India for his training in India – Such remuneration is fully exempt in cases of Institution owned by Govt, a company wholly owned by Central or State govt. or partly owned by Central and partly by State Govt and their subsidiaries or any corporation established by or under Central or State Act.

Conditions for exemption under section 10(6):

• The foreign enterprise is not engaged in any trade or business in India.
• His stay in India does not exceed in the aggregate a period of 90 days in such previous year.
• Such remuneration is not liable to be deducted from the income of the employer.

4. Tax paid on behalf of foreign company deriving income by way of royalty or fees for technical services [Section 10(6A)]

Conditions for exemption under section 10(6A):

• Payment made to a foreign company by way of royalty or fees for services rendered to Indian Government or an Indian concern.
• Such income is liable to be taxed in India
• Tax paid will not be grossed up with the income of the foreign company

Example – A foreign company renders technical services to an Indian company and as per agreement, foreign company is to be paid fees of Rs.1, 00, 000. Tax of Rs.30, 000 on such fees is also paid by the Indian company. Tax paid by Indian company will be exempt and so it will not be grossed up with the income of the foreign company and such foreign company’s income will be only Rs.1,00,000

The exemption is not available, if the agreement is entered on or after 01.06.2002

5. Tax paid on behalf of foreign company or non-resident in respect of other income [Section 10(6B)]

Tax paid by Indian Government on behalf of a foreign company or non-resident in respect of any income (not being salary, royalty or fees for technical services) will be exempt from tax in the hands of such foreign company or non-resident if such income is related to any agreement entered into before June 1, 2002 by the Indian Government

6. Section 10(6BB) -Tax paid on income received by foreign government or a foreign enterprise on leasing aircraft

Any income received by a foreign government or a foreign enterprise from an Indian company, which is engaged in the operation of aircraft and such income is by way of consideration of acquiring an aircraft or an engine of aircraft (other than payment for providing spares or services in connection with the operation of leased aircraft) on lease under an agreement entered into after 31-3-1996 but before 1-4-2007 and approved by the Central Government in this behalf, and the tax on such income is payable by such Indian company under the terms of agreement, the tax so paid shall be fully exempted.

Conditions for exemption under section 10(6BB):

• The Indian company should be engaged in the business of operation of aircraft.
• Such agreement should be entered in the period March 1996 to April 2007
• The benefit shall be available only to that foreign enterprise which is non-resident.

Example:

Say an agreement has been entered on 1-4-2004. The payment made by Indian Company to foreign enterprise is Rs.2,00,000 and the tax borne by the Indian company is Rs.40, 000. Thus in the return of the foreign enterprise will be shown as Rs.2, 00,000 and the Rs.40, 000 tax paid by Indian company will be exempt.

7. Section 10(6C) Technical fees received by a notified foreign company

Any Income derived by a foreign company (so notified by Central govt.) by way of royalty or fees for technical services under an agreement for providing services in or outside India in projects connected with security of India shall be fully exempted.

8. Section 10(7) – Perquisites and Allowances paid by Government to its Employees serving outside India

Any allowances or perquisites paid or allowed outside India by the Government to a citizen of India, for rendering services outside India, are exempt.

Conditions for claiming exemption under section 10(7):

• Income should be chargeable under the head ‘Salaries’;
• The payer should be Government of India;
• The recipient should be an Indian citizen — whether Resident or Non-Resident;
• The services should be rendered outside India.

9. Section 10(45) – Exemption of Allowance or perquisite to chairman/member of UPSC

Any allowance or perquisite, as may be notified by the Central Government in the Official Gazette, in this behalf, paid to the chairman or a retired chairman or any other member or retired member of the Union Public Service Commission, shall be exempt.

Exemption Limit

• Following allowances and perquisites given to serving Chairman/Member of UPSC is exempt from tax:
  1. Value of rent free official residence
  2. Value of conveyance facilities including transport allowance
  3. Sumptuary allowance
  4. Leave travel concession
• Allowances to Retired Chairman/Members of UPSC – Exempt subject to maximum of Rs. 14,000 per month for providing the services of an orderly and for meeting secretarial expenses incurred on contract basis.

1.Interest-free or concessional loan [Sub-rule 7(i) of Rule 3]

Any loan given free of interest or concessional interest shall be a taxable perquisite and calculated as follows:

1. Find out the ‘maximum outstanding monthly balance’ (i.e. the aggregate outstanding balance for each loan as on the last day of each month);
2. Find out rate of interest charged by the SBI as on the first day of relevant previous year in respect of loan for the same purpose advanced by it;
3. Calculate interest for each month of the previous year on the outstanding amount (mentioned in Step 1 at the rate of interest given in Step 2)
4. From the total interest calculated for the entire previous year (step 3), deduct interest actually recovered, if any, from employee
5. The balance amount (Step 3-Step 4) is taxable value of perquisite.

Nothing is taxable if:

1. Loan in aggregate does not exceed ₹ 20,000; or
2. Loan is provided for treatment of specified diseases

2.Use of moveable assets [Sub-rule 7(vii) of Rule 3]

Value of perquisite is determined as under:

Asset given	Value of benefit
(a) Use of laptops and computers	Nil
(b) Movable assets, other than – (i) laptops and computers; and (ii) assets already specified	10% p.a. of the actual cost of such asset, or the amount of rent or charge paid, or payable by the employer, as the case may be (-) Amount paid by/recovered from an employee

Note: Where the employee is paying any amount in respect of such asset, the amount so paid shall be deducted from the value of perquisite determined above.

3.Transfer of moveable assets [Sub-rule 7(viii) of Rule 3]

Value of perquisite is determined as under:

Assets transferred	Value of perquisite
Computers and electronic items	Depreciated value [@50% on WDV] of the asset
Motor Cars	Depreciated value [@20% on WDV] of the asset
Any other asset	Depreciated value [@10% on SLM] of the asset

Note: Where the employee is paying any amount in respect of such asset, the amount so paid shall be deducted from the value of perquisite determined above.

*Note WDV is Written down value and SLM is Straight Line Method

Salary [section 17(1)]:

The meaning of the term ‘salary’ for purposes of income-tax is much wider than what is normally understood. The term ‘salary’ for the purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans etc.).

Salary under section 17(1) includes the following:

1. Wages,
2. Any annuity or pension, 
3. Any gratuity, 
4. Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages,
5. Any advance of salary
6. Leave salary or leave encashment, 
7. The contribution made by the Central Government or any other employer to Employee Pension Account referred to in Section 80CCD
8. Provident Fund:
   • Annual accumulation to the balance of a recognised provident fund.
   • Transferred balance in recognized provident fund.

Profits in lieu of salary [Section 17(3)]

Any Payments received or due in addition to your salary or wages from your employer is called profit in lieu of salary.

It includes the following:

•  Compensation on account of termination of his employment
• Compensation on account of modification of the terms and conditions of employment
• Payment from provident or other fund
• Keyman Insurance policy
• Any sum received before his joining any employment or after termination of his employment.

However, the following receipts will not be termed as “Profits in lieu of salary” to the extent they are exempt under section 10:

• Death-cum retirement Gratuity
• Commuted value of Pension
• Retrenchment compensation received by a workman
• Payment received from statutory provident fund
• Payment received from recognised provident fund
• Payment received from approved superannuation fund
• House Rent Allowance

Section 15 – Charging section of salaries

Section 15 of the Income Tax Act provided that any amount due to or received by an employee including arrears of salary from an employer or former employer.

The charging section can be broken down in order to understand the taxability of income under the head salaries:   

Employer-employee relationship

Before an amount received can be taxed under the head ‘salaries’, it is important that there should exist between the payer and the payee the relationship of an employer and employee.

For example:

Sujatha an actress is employed in Chopra films, where she is paid a monthly remuneration of Rs.2,00,000. She acts in various films produced by various producers. The remuneration for acting in such films is paid directly to Chopra films by the different producers.

In this case Rs.2,00,000 is taxed as salary income in the hands of Sujatha since the relationship of an employer and employee exists between Sujatha and Chopra films.

• In the above example,
  •  If Sujatha receives fees for acting in other films from the producers. In this case the fees so received would be taxed under the head income from profession and not under the head salaries as there is no employer employee relationship.
  • If a person is acting as an agent during the course of the business. There is no relationship between them as master and servant and therefore not taxable under the head income from salaries.

Contract OF service Vs. Contract FOR service

These words are generally used interchangeably. There is a wide difference in terms of income being chargeable under different heads of income.

In contract of service, employer-employee relationship is in existence and the employer can direct and control as to what is required to be done and how it is to be done by the employee. As an employer and employee relationship exists the income so derived would be taxed under the head income from salaries.

Under contract for service, the contractee can specify what is to be done and it is for the contractor to independently find out best ways to execute the same duty. As there is no employer and employee relationship it would not be taxed under the head income from salaries but would be taxed under the head income from business.

Other points

• In case of a director of the company, the employer-employee relationship cannot be assumed, the relationship is ascertained based on service agreement or articles of association of the company
• Salaries of MP’s and MLA’s are not chargeable under the head “Salaries” but it is chargeable under the head ‘income from other sources’ as there is no employer- employee relationship with the government.
  • The next question which arise is what is income received by chief ministers of state? It is income taxable under the head income from salaries as it is not a political post, but it is a constitutional post appointed by the governor.

• An advocate general is not an employee of the government. He is paid a retainership fee or he holds office during the period of the governor would not make him an employee. Hence the income earned by him is not taxable under the income from salaries.
• In case of any salary, bonus, commission, remuneration or by whatever name called, received as a partner of the firm. Such income would not be taxed as income from salary as there is no employer-employee relationship between the partner and the partnership firm.

Year of chargeability

After knowing that the income is chargeable to tax under the income from salaries it is important to understand when is such income chargeable to tax.

Salary is taxable on due basis or on receipt basis whichever is earlier. i.e. salary due in a PY is taxable whether or not received during the previous year. Where salary is received in advances is taxable even if it is not due during the previous year.

Loan taken from employer is however not taxable even if it is subsequently recovered from salary. Therefore, advance of salary is taxable but advance against salary is not taxable.

Place of accrual

The place of accrual of salary is the place where the service is rendered. Therefore, the salary paid outside India to a non-resident in respect of services rendered in India, it is deemed to have accrued or arisen in India.

Salary paid to an Indian citizen by the government of India is deemed to accrue or arise in India even though the service rendered outside India, subject to exemptions u/s 10 which are discussed in the article exemptions.

Surrender of salary

The salary received by an individual can be utilised based on the will and fancies of the person. An employee forgoes salary or requests the employer to contribute his salary to a charitable cause or any other purpose. This is a mere application of the income of the individual and therefore taxable. The only exception to the above rule is, surrender of salary under the relevant approval of Central Government. Section 2 of Voluntary Surrender of Salaries Act 1961, salary surrendered to the central government by any person will not be included in the computation of inco