Income from Salary under Income Tax Act, 1961

To understand Income from Salary and its taxability, one need to understand the definition of Salary: 

If the following amount received by an employee from his employer the amount so received is defined as Salary and taxable under the head income from salary under the Income tax act, 1961: includes the following amounts received by an employee from his employer, during the previous year

  1. Wages;

  2. any annuity or pension; (Family pension received by heirs of an employee is taxable under income from other sources);

  3. gratuity;

  4. fees, commission, perquisites or profits in lieu of or in addition to any salary or wages;

  5. advance of salary;

  6. payment received by an employee in respect of any period of leave not availed of by him; (Leave encashment or salary in lieu of leave);

  7. the annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under Rule 6 of part A of the Fourth Schedule; and

  8. Contribution by Central Government or any other employer to Employees Pension Account as referred in Sec. 80CCD

  9. the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme, referred to in Section 8OCCD.

Allowances under the head Salary and their taxability:

  • Allowances from salary fully exempt in the hands of employees:

Allowance under SalaryConditions to claim full exemption
1.Travelling AllowanceShould be provided by the employer and spent by the employee to meet the cost of the official tour or transfer expenses.The cost of travel or transfer includes payments for transfer, packing, and transportation of personal effects.
2.Daily AllowanceShould be spent by the employee for meeting the daily charges incurred on a tour or transfer.
3.Conveyance allowanceShould be used by the employee to meet the expenditure on conveyance in performance of official duties.
4.Helper allowanceShould be used by an employee to meet the expenditure on a helper who assists him in the performance of official duties
5.Academic allowanceShould be used by the employee for his academic research and training pursuits
6.Uniform allowance Should be spent by the employee for purchasing/maintaining office uniform for official duties.
7.Allowances and perks paid by Government of India to an Indian citizen outside India Fully Exempt
  • Allowances for which exemptions are available subject to limitations:

  1. House Rent Allowances (HRA)
  2. Other Allowances
1. Basic Salary 9. Fees
2. Dearness Allowance10. Lunch/Tiffin Allowance
3. Advance Salary11. Overtime Allowance
4. Arrears of Salary12. Servant Allowance
5. City Compensatory Allowance13. Warden Allowance
6. Bonus14. Non-practicing Allowance
7. Commission as a percentage on turnover15. Family Allowance
8. Fixed Medical Allowance16. Leave encashment during service
  • LEAVE TRAVEL ASSISTANCE (LTA) U/S 10(5) Rule 2B

Conditions for claiming the benefit

  • Gratuity:

1. Government Employee: Fully exempted from tax u/s 10(10)(i).

2. Non-Govt.Employee:

  • PENSION:

Taxability of commuted pension and uncommuted pension

  • RETRENCHMENT COMPENSATION under the head salary:

 Taxability of Retrenchment Compensation under salary

  •  Deduction against Salary:

After calculating gross salary there are below deduction that an assessee can claim:

1. Entertainment Allowance under the head salary:

Applicable only for Government Employees [Sec.16(ii)]

2. Professional Tax [Sec.16(iii)]

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