Every payment made by an employer to his employee for the services rendered will be chargeable under the head income from salary. In other words, Income can be charged as salaries only if there is an employer-employee relationship between the payer and payee. Income treated as salaries includes full-time employment as well as part-time employment.
What is Salary?
Salary includes basic salary or wages, any annuity, gratuity, advance of salary, leave encashment, commission, perquisites in lieu of or in addition to salary and retirement benefits. The aggregate of the above incomes, after exemptions are available, is known as Gross Salary, and this is charged under the head income from salary.
What is Wages?
Wages means fixed, regular payments earned by the employee for rendering his services. Wages, salary, and bonuses are fully taxable payments.
What are Allowances?
An allowance is a fixed monetary amount paid by the employer to the employee for expenses related to office work.
These monetary benefits, such as house rent allowance and conveyance allowance, are partially taxable in certain cases.
Fully-taxable allowances
Let us discuss the taxability part of allowances in brief
City compensatory allowance :
These are normally provided with the intention of compensating the employees for the higher cost of living in cities.
Entertainment allowance :
This allowance is provided to employees to meet hospitality expenses. It is exempt for government employees only.
Transport allowance :
This allowance Is provided to compensate the employee’s commutation expenses; it is fully taxable. However, in case of blind or deaf exemption, up to Rs.3200/-PER Month is provided for this allowance
Other allowances which are fully taxable are below
- Dearness allowance
- Overtime allowance
- Fixed medical allowance
- Interim allowance
- servant allowance
- Project allowance
- Lunch allowance
- Any other cash allowance
- Warden allowance
- Non-practicing allowance
Partially exempt allowances
House Rent Allowance
This allowance is specifically allowed to employees to meet the rent or residence expenses. This allowance is partially exempt as per section 10(13A)
Special allowance
This allowance is not in the nature of perquisite but specifically provided to meet the expenses incurred wholly for the performance of his official duties; this allowance is exempted partially based on the amount spent for the performance of his official duties.
Fully exempt allowances
- Allowances to High Court judges
- Allowances paid by the United Nations Organization
- Compensatory allowance received by a judge
- Sumptuary allowance granted to High Court or Supreme Court judges
- Allowances granted to Government Employees Outside India
Perquisites:
Perquisites are payments received by employees over their salaries. They are not reimbursed for expenses. Some perquisites are taxable for all employees they are:
- Rent free accommodation
- Concession in accommodation rent
- Interest-free loans
- Movable assets
- Club fee payments
- Educational expenses
- Insurance premiums paid on behalf of employees
Some are taxable only to specific employees like directors or those who have a substantial interest in the organisation; they are taxed for:
- Free gas, electricity, etc., for domestic purposes
- Concessional educational expenses
- Concessional transport facility
- Payment was made to the gardener, sweeper, and attendant.
Some perquisites are exempt from tax. The fringe benefits that are exempt from tax are:
- Medical benefits
- Leave travel concession
- Health Insurance Premium
- Car, laptop, etc., for personal use.
- Staff Welfare Scheme
Deductions eligible against salary income
- Standard Deduction
- Entertainment allowance( for government employees only)
- Professional tax paid
Standard Deduction:
A standard deduction of up to Rs 50,000 in lieu of the earlier conveyance allowance and medical reimbursement of Rs 19,200 and Rs 15,000, respectively.
Procedure for the calculation of taxable income on salary
- Gross income is gathered from salary slips along with Form 16 for the current financial year (i.e. summing up of every emolument such as basic salary, other reimbursements and allowances that are mentioned in Form 16 (Part B) and salary slips.
- The bonus received during the financial year is added to the income that is being calculated.
- The total is gross salary, from which deduction relating to the exempted portion of House Rent Allowance, and standard deduction are made. This will be the net salary income chargeable to tax.
- The rate of tax is as per the slab rates announced for the financial year in the respective year budget announced by the government.
However, in addition to the tax slabs mentioned above, the Finance Minister of India, Nirmala Sitharaman, has announced a new optional tax slab for individuals. The new income tax slab is an alternative and can be used instead of the existing system.
If an individual decides to file his or her taxes according to the new income tax regime, the following things are to be kept in mind:
- There are no exemptions under the new income tax regime
- There are no deductions under the new income tax regime
That said, the calculation of the taxable income as per the new income tax regime will be calculated as a direct percentage of the income earned by an individual.
Other points worth noting
- Foregoing of salary – Once salary accrues, the subsequent waiver by the employee does not let him/her be free from liability for taxation.
- Surrender of salary – If an employee surrenders his/her salary to the Central government voluntarily, then such salary would be exempt.
- Salary paid tax-free – If an employer pays tax on behalf of the employee on salary income, then the employee’s income from salary will consist of his /her salary income plus tax paid by the employer. However, tax paid on non-monetary perquisites on behalf of the employee by the employer then would be exempt in the hands of the employee as per section 10(10CC)
- Advance salary – This is taxable as and when received, irrespective of whether it is due or not.
- Arrears salary – Normally, this salary is charged to tax on a due basis; in certain cases, it is charged to tax on a payment basis also.
