Introduction

The Income Tax Act of 1961 provides the legal framework for levying income tax on various entities, categorizing their income into five distinct heads. One of these heads is “Salaries,” which encompasses payments made by an employer to an employee for services rendered under a contract of employment.

Sections 15-21 of the Income Tax Act pertain to income taxed under the Salary head. Section 15 establishes the basis of charge, encompassing salary due from or paid by an employer to an employee in the previous year, including arrears not previously taxed.

Allowances, fixed monetary amounts for work-related expenses, are included in salary and taxed. However, specific exemptions apply to certain allowances, such as Conveyance Allowance, House Rent Allowance (HRA), Leave Travel Allowance (LTA), and Medical Allowance.

Perquisites, or additional benefits provided by an employer beyond normal salary, are covered under Section 17. Examples include rent-free accommodation and car loans. Some perquisites are taxable for all employees, while others depend on specific circumstances.

Heads of Income: –

For the calculation of income tax, the govt. has classified the source of income under separate heads and then the income tax is computed accordingly.

According to S. 14 of the Income Tax Act, 1961, there are five main heads of income.

(ⅰ) Salaries

(ii) Income from house property

(iii) Profits and gains of business or profession

(iv) Capital gains

(v) Income from other sources.

Salary as a Head of Income –

Any payment made by an employer to an employee the services rendered by him is chargeable to tax on as “Salary” and envisages a ‘contract of employment’. The employer-employee relationship or master-servant relationship is an essential ingredient of a ‘contract of employment’.

Sections 15-21 relates to income charged under the Salary head.

Charging Section: Section 15- / Basis of Charge-

As per section 15, the following income shall be chargeable to income-tax under the head “salaries”-

(1) any salary due from an employer (or a former employer) to an assessee in the previous year

(2) any salary paid or allowed to him in the previous year by an employer (or a former employer)

(3) any arrears salary paid or allowed to him in the previous year by an employer (or a former employer), if not charged to income-tax for any earlier previous year. 

Allowances: – An allowance is a fixed monetary amount paid by the employer to the employee for expenses related to office work. They are included in the salary and taxed.

Exemptions: – Specific tax exemptions on allowances are-

• Conveyance Allowance- Up to Rs.800 per month is exempted from tax.
• House Rent Allowance (HRA) – This can be partially or completely exempted from taxes.
• Leave Travel Allowance (LTA) – while this is paid to the assessee, it is tax-free twice in a block of 4 years.
• Medical Allowance – Medical expenses to the extent of Rs.15000 per annum are tax free.

Perquisites: Section 17 defines “salary,” “perquisite,” and “profits in lieu of salary.” It includes wages, annuities or pensions, gratuities, fees, commissions, bonuses, perquisites, profits in addition to salary, advance salary, and more.

Section 17. ‘Salary’, ‘Perquisite’ and ‘profits in lieu of salary” defined: –

For the purposes of S.15 and 16 and of this section “salary” includes- 

(ⅰ) Wages: Any amount received by a person for work done or Job rendered is called wages. It is fully taxable under S.15 if received during the relevant previous year.

(ii) Any annuity or pension: Any amount received by employee from past employer after attaining the age of retirement or superannuation is fully taxable.

(iii) Any Gratuity: Any sum received by employee from his past employer as a token of gratitude for services rendered in part. 

It is exempted up to certain limits given u/s 10(10).

(iv) (a) Any fees: any amount received from employer under the name of fee is also fully taxable.

(b) any commission: any commissions given by employer to employee is fully taxable.

(c) Bonus: Bonus is fully taxable under the head salaries on receipt basis.

In case arrears of bonus are received in a previous year, these are fully taxable.

(d) any perquisite – Ayn benefit or amenity allowed by employer to employee.

(e) any profit in lieu of or in addition to salary:  Any cash payment receive by employee from employer is called profit in lieu of salary.

(v) Any advance Salary: In case an assessee receives some salary in advance in a previous year and which was actually due in that year shall be taxable in the year of receipt.

It does not include any loan or advance taken from employer.

(v (a)) Any Salary in lieu of leave received during service is fully taxable.

(vi) 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 Fourth Schedule.

(vii) The aggregate of all sums that are comprised in the transferred balance as referred to in fourth Schedule, Part A, Rule 11 (2), to the extent to which it is chargeable to tax under Subrule (4) thereof.

(viii) The contribution made by the Central Govt. or any other employer in the previous year, to the account of employee under a pension scheme referred to in Section 80CCD.

Deductions from Salary: –

Deductions from salary are allowed under Section 16, including a standard deduction of Rs. 50,000 or the amount of salary, whichever is less, and deductions for entertainment allowance and tax on employment.

Overall, the provisions regarding salary under the Income Tax Act ensure that income earned through employment is appropriately taxed while providing for certain exemptions and deductions to promote fairness and efficiency in the taxation system.