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Income from Salaries – Charging Section and Allowances

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Income from Salaries – Charging Section and Allowances, Income from Salaries at a glance. Find Complete details regarding Tax on Salary, What is Salary Income, Basis of Charge (Sec.15), What is included in Salary (Sec.17?), House Rent Allowance [Sec. 10 (13A)], Entertainment Allowance, Other exemptions. Recently we provide complete details regarding Types of stamps and some concepts of stamp duty. Now you can scroll down below and check more details for “Income from Salaries – Charging Section and Allowances”

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).

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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:-

  1. Salary proper
  2. Allowances
  3. Perquisites
  4. Profit in lieu of salary

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ACCORDING TO SECTION 17(1) SALARY INCLUDES:

  • Wages
  • Any annuity or pension:
  • Any gratuity
  • Any fees, commissions, perquisites or profit in lieu of salary.
  • Any advance salary
  • Encashment 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.

Allowance Conditions for exemption
Travelling allowance/Transferred allowance To meet the cost of travel on tour or on transfer of duty
Daily allowance during travel To meet ordinary daily charges incurred on account of absence from his normal place of duty
Conveyance allowance To meet the expenses of conveyance in performance of official duties
Helper allowance Helper is engaged for official work
Academic and research allowance For encouraging academic research pursuits
Uniform allowance On the purchase and maintenance of uniform for official purpose

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The following allowances are exempt to the extent of the limit specified i.e. exemption does not depend on expenditure.

Allowance Extent of exemption
Children Education allowance Rs.100/- per month per child upto a maximum of two children
Hostel Expenditure allowances Rs.300/- per month per child up to a maximum of two children.
Tribal Area Allowance Rs.200 p.m. exempt
Transport allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty It is exempt up to Rs.800 per month (Rs.1,600 per month in the case of an employee who is blind or orthopedically handicapped
Allowance for transport employees to meet personal expenditure during his duty, provided he is not in receipt of daily allowance Lower of :-

(a)    70% of such allowance or

(b)   Rs.10,000 per month

House Rent Allowance [Sec. 10 (13A)]

Exempted from tax to the extent of the least of the following:

  1. 50% of salary in Delhi, Mumbai, Kolkata, Chennai or 40% of salary in other cases.
  2. House rent allowance; or
  3. The excess of rent paid over 10% of salary (rent paid less 10% of salary)

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Entertainment Allowance

In case of Government employees, least of the following is exempt from tax:

  • 5,000/-
  • 20% of Salary or
  • Entertainment 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

Nature of beneficial allowance perquisite Amount of exemption
(i) Compensation on voluntary retirement Actual amount or Rs.5,00,000 whichever is less
(ii) Travelling allowance, Daily allowance, Conveyance allowance, Helper allowance,  Academic allowance and Uniform allowance These allowances shall be exempt to the extent of minimum as following:

(1) Actual allowance received.

(2) Actual amount spent for the purposes of duties of other employment.

(iii) Children education allowance Rs.100 p.m. per child for a maximum of 2 children
(iv) Hostel expenditure allowance Rs.300 p.m. per child for a maximum of 2 children
(v) Special compensatory (Tribal area/Schedule area/Agency area) allowance Rs.200 p.m.
(vi) Special compensatory hilly areas allowance or high altitude allowance, etc. Exemption varies from Rs.300 p.m. to Rs.7,000 p.m.
(vii) Border area, remote area, disturbed area allowance etc. Exemption various from Rs.200 p.m. to Rs.1,300 p.m.
(viii) Compensatory field area allowance Rs.2,600 p.m.
(ix) Compensatory modified field area allowance Rs.1,000 p.m.
(x) Counter insurgency allowance Rs.3,900 p.m.
(xi) Transport allowance Rs.800 p.m. but for handicapped employees Rs.1600 p.m.
(xii) Allowance to transport employees 70% of the allowance, maximum Rs.10,000 p.m.
(xiii) Underground allowance Rs.800 p.m.
(xiv) Medical reimbursement Up to Rs.15,000, but if treatment is done in a Government Hospital or it treatment for specified ailment or disease in an approved hospital fully exempt
(xv) Medical facility in a hospital etc. maintained by employer Fully exempt for employee & family members.
(xvi) Medical treatment outside India Medical treatment and stay of patient with one attendant. Tax free to the extent of foreign exchange released by RBI. Travel of patient with one attendant tax free. If the gross total income excluding this benefit does not exceed Rs.2,00,000
(xvii)   L.T.C Maximum of 2 journeys in a block of 4 years by air/first class air conditioned travel by shortest distance
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About CA Ridhi Dhoot

The writer is a Chartered Accountant & a Licentiate Company Secretary. You can reach out to her at [email protected]

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