Income from Salaries – Charging Section and Allowances
What is Salary
The meaning of the term ‘salary’ for purposes of income tax is much wider than what is normally understood. Every payment made by an employer to his employee for service rendered would be chargeable to tax as income from salaries. 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).
Basis of Charge (Sec.15)
Income from salary chargeable to tax on due basis or receipt basis whichever occurs earlier. In other words salary due in a financial year is taxable, even if it is not received and salary received in a financial year is taxable, even if it not due.There should be existence of employee relationship and nexus between payment and employment.
What is included in Salary (Sec.17?)
There are four components of salary income:-
ACCORDING TO SECTION 17(1) SALARY INCLUDES:
Wages Any annuity or pension:Any gratuityAny fees, commissions, perquisites or profit in lieu of salary.Any advance salaryEncashment of leave
The following allowances are exempt to the extent they are spent for the specified purpose. If they are not spent for the specified purpose, then the unspent amount will be taxable. The following allowances are exempt to the extent of the limit specified i.e. exemption does not depend on expenditure.
House Rent Allowance [Sec. 10 (13A)]
Exempted from tax to the extent of the least of the following: (a) 70% of such allowance or (b) Rs.10,000 per month
Entertainment Allowance
In case of Government employees, least of the following is exempt from tax:
5,000/-20% of Salary orEntertainment allowance actually received
For entertainment allowance, salary means basic salary; it excludes all benefits and allowances. From AY 2002 -03, for non – government employees, entertainment allowance deduction will not be available.
Other exemptions
(1) Actual allowance received. (2) Actual amount spent for the purposes of duties of other employment.
