Salary

Every payment made by an employer to his employee for service rendered would be chargeable to tax as salaries. Before an income can become chargeable under the head ‘salaries’, it is vital that there should exist between the payer and the payee, the relationship of an employer and an employee.

 

Once the relationship of employer and employee exists, the income is to be charged under the head “salaries”. It does not matter whether the employee is a full-time employee or a part-time one.

 

‘Salary’ includes the following:

  • wages,
  • any annuity or pension,

  • any gratuity,

  • any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages,

  • any advance of salary,

  • any payment received in respect of any period of leave not availed by him i.e. leave salary or leave encashment

  • Provident Fund:
    • the portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund to the extent it is taxable and

    • transferred balance in recognized provident fund to the extent it is taxable,

  • 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 80CCD.

Standard Deduction on Salary:

All employees are eligible for standard deduction on Salary income of INR 50,000. This deduction is irrespective of any expenditure actually incurred.

 

Allowances:

House Rent Allowance:

House Rent Allowance (HRA) granted to an employee is exempt to the extent of least of the following:

  • HRA actually received

  • Rent paid (-) 10% of salary for the relevant period

  • 50%/ 40%* of salary for the relevant period

  • *50% in case of Metro Cities (Delhi, Mumbai, Kolkata, Chennai), 40% other cities

Special Allowances [Rule 2BB]:

  • any allowance granted to meet the cost of travel on tour or on transfer (Travelling Allowance);
    Explanation – “allowance granted to meet the cost of travel on transfer” includes any sum paid in connection with the transfer, packing and transportation of personal effects on such transfer.

  • any allowance, whether granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty (Daily allowance/Per-diem allowance);

  • any allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office or employment of profit (Conveyance Allowance);
    Such allowance would be exempt only if free conveyance is not provided by the employer.

  • any allowance granted to meet the expenditure incurred on a helper where such helper is engaged in the performance of the duties of an office or employment of profit (Helper Allowance);

  • any allowance granted for encouraging the academic research and training pursuits in educational and research institutions (Research allowance);

  • any allowance granted to meet the expenditure on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit (Uniform Allowance).

  • Children Education Allowance – Exempt upto INR 100 per month per child upto a maximum of two children

  • Any allowance granted to an employee to meet the hostel expenditure on his child – Exempt upto INR 300 per month per child upto a maximum of two children

Practical Consideration: In our experience, we have seen that most employers pay employees only Transport allowance and Medical reimbursement. These are erstwhile exemptions that have now been replaced by the standard deduction mentioned above. We highly recommend our clients to discuss the allowances with their company to efficiently plan and minimize their tax outflow.

*Salary based on average salary for last 10 months of service

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