Income Chargeable Under The Head ‘Salaries’

 

Introduction:

The term "salary" has not been defined under the Income Tax Act, made by an employer under a contract of employment to an employee. It is one of the five major heads of income stated under the Income Tax Act in India.

Here, we will discuss which sources of income fall within the meaning of salary and related deductions and exclusions to arrive at the correct income chargeable under the head ‘Salaries’.

 

 

1. Meaning Of Salary:

Any amount earned by a person from their employer under a contract of employment is covered under this head. It includes wages, commission, gratuity, pension, etc. The amount classified under ‘salary’ should be received in accordance with the contract of employment. A person may receive any amount from their employer outside the office and not in the nature of employment; such an amount shall not be covered under this head.

 

 

2. Inclusions In Salary: Gross salary includes the following:

 

    > Specific Inclusions: 

The word ‘salary’ may not have been defined per se in the Income Tax Act, but it has been defined to include the following:

 

* Wages

* Annuity or pension

* Gratuity

* Fees, commissions, and profits in    addition to salary

* Advance of salary

* Leave encashment

* PF balance to the extent taxable

* Contribution to pension scheme on behalf of the employee

* Contribution by the Government to the Agni veer corpus fund on behalf of the employee.

 

 

     > Allowances:

There are a number of allowances provided by the employers as part of the pay structure which form part of gross salary. These may be fully or partially taxable and may be exempt in some cases. These include:

 

* HRA for accommodation expenses

* Dearness allowance to address inflation

* LTA for covering travel expenses during vacation

* Relocation allowance for relocation expenses

* Mobile reimbursement for telecom expenses

* Children education allowance

* Hostel allowance

There are many other allowances, each with varied taxability. To read  more on allowances, refer to Allowances under salary.

 

 

      > Perquisites:

Perquisites have been defined to include the following:

 

* Rent-free accommodation provided by the employer

* Concession in rent on accommodation provided by the employer

* Benefits or amenities provided free of cost or at a    concessional rate to specific employees

* Any obligation of the employee if paid by the employer on their behalf

* Life insurance premium paid on behalf of the employee

* Annuity payments on behalf of the employee

* Sweat equity shares transferred free of cost or at a concessional rate

* Contribution by the employer to the employee’s PF, superannuation fund, or NPS beyond 7.5 lakhs annually and interest/dividend earned on it

* Any other fringe benefit provided by the employer

* To read more on the taxability of perquisites, refer to Perquisites under salary.

 

     > Profits In Lieu Of Salary:

This includes:

 

* Amount paid as a result of the termination of employment, i.e., termination compensation

* Amount paid as a result of a change in terms and conditions of employment, i.e., terms modification compensation

 

      > Salary From Other Employers:

There may be instances where an employee receives salary from more than one employer. Salary received from all employers during a financial year shall be covered under this head. These cases include situations where an employee is working multiple part-time jobs or in case of a change of jobs. In the latter case, an employee is required to submit Form 12B to the new employer so that the salary received from the previous employer can be offered for tax.

 

 

 3. Exclusions From Salary

 

    > Payments to partners of a firm:

The amounts paid by a partnership firm to its partner in the form of salary, bonus, commission, or remuneration shall not be classified under the salary head of income for the partner. Instead, this income is taxable under the head "profits from business/profession."

 

    > Family pension:

The pension received by a person after their retirement forms part of the salary, as specified in the inclusions above. However, this does not hold true for the pension received on the death of a family member. Pension received by a family member of the deceased is classified under "income from other sources."

 

      > Commuted pension:

Instead of receiving regular pension, employees may be provided an option to withdraw a certain portion of pension in a lump sum, while the remaining may be received as regular pension. Commuted pension is fully exempt for government employees and is not included in the salary head. For private employees, the exempt portion is one-third of the commuted pension.

 

 

4. Deductions From Salary: There are some deductions allowed to compute income under the head "salaries." These are:

 

        > Standard deduction:

A standard deduction of Rs. 50,000 is allowed to compute income under the head "salaries." This deduction is applicable under both the old and new regimes of income tax. It is a flat-rate deduction granted to provide relief to those with salaried income.

 

     > Professional tax:

The applicability, rate, and amount of professional tax differ from state to state in India. However, it cannot exceed Rs. 2,500. The amount of professional tax deducted from the salary is allowed as a deduction to arrive at taxable income.

 

      > Deduction from entertainment allowance:

Though in the nature of an exemption allowed from the allowance, it has been permitted as a deduction under the Income Tax Act. It is allowed only to government employees who receive entertainment allowance, and the amount is limited to the least of the following:

 

* Entertainment allowance received

* 20% of salary excluding allowance, benefits, or perquisites

* Rs. 5,000

 

 

5. Other Benefits: The exemptions and allowances covered above are deducted from gross salary to arrive at the "income chargeable under the head salary." Income from the other four heads of income in addition to salary is added to arrive at total income. There are deductions that may not reduce income from salary but are allowed from total income, benefiting salaried individuals. These include:

 

        > Interest on Housing Loan:

Interest paid on a housing loan is a deduction allowed from income from house property. However, in cases of vacant house property, where such deduction results in a loss under this head of income, this loss can be reduced from income chargeable under the salary head to arrive at total income.

To read more on this deduction, refer to Income from house property.

 

    > Deductions under Chapter VI-A:

These include a wide range of deductions like life insurance premium paid, payment of tuition fees for children, Mediclaim insurance premium, tax saver FD, interest on loans taken for higher education, etc.

To read more on these deductions, refer to Deductions under Chapter VI-A.

 

      > Rebate from Income Tax:

A rebate is also allowed from income tax, rendering the tax liability nil if the total income is below a certain limit. There is a difference in this rebate between the old regime and the new regime. In the old regime, the rebate renders the tax liability nil if income is up to 5L. For the new regime, no tax is required to be paid if income is up to 7L.

To read more on this rebate allowed, refer to Rebate u/s 87a.

You can connect with the expert team of InvestMyFunds for a better understanding of the subject or for filing Income Tax Returns.

 

 

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