Income Tax Rules-Income included under the Head Salaries

Income Tax Rules-Income Included under the Head Salaries. It is important to know  what is the income that is chargeable under the head Salaries while computation of Income Tax. We will discuss the Definition of Salary, Perquisite and Profit in Lieu of Salary as per Section 17. DEFINITION OF “SALARY”, “PERQUISITE” AND “PROFIT IN LIEU OF SALARY” (SECTION 17):

Rule.5.1 Income Chargeable under the Head  "SALARIES"

(1) The following income shall be chargeable to income-tax under the head "Salaries" :
  • (a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;
  • (b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him.
  • (c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.
(2) For the removal of doubts, it is clarified that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due. Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as "Salary".

Rule.5.2 Definition of Salary, Perquisite and Profit in Lieu of Salary (Section 17)

5.2.1 "Salary" includes:-

i. wages, fees, commissions, perquisites, profits in lieu of, or, in addition to salary, advance of salary, annuity or pension, gratuity, payments in respect of encashment of leave etc.
ii. the portion of the annual accretion to the balance at the credit of the employee participating in a recognized provident fund as consists of {Rule 6 of Part A of the Fourth Schedule of the Act}:

  • a) contributions made by the employer to the account of the employee in a recognized provident fund in excess of 12% of the salary of the employee, and 
  • b) interest credited on the balance to the credit of the employee in so far as it is allowed at a rate exceeding such rate as may be fixed by Central Government. [w.e.f. 01-09-2010 rate is fixed at 9.5% - Notification No SO 1046(E) dated 13-05-2011] 
  • iii. the contribution made by the Central Government or any other employer to the account of the employee under the New Pension Scheme as notified vide Notification F.N. 5/7/2003- ECB&PR dated 22.12.2003 (enclosed as Annexure VII) referred to in section 80CCD (para 5.5.3 of this Circular). 
  • It may be noted that, since salary includes pension, tax at source would have to be deducted from pension also, unless otherwise so required. However, no tax is required to be deducted from the commuted portion of pension to the extent exempt under section 10 (10A).
Family Pension is chargeable to tax under head “Income from other sources” and not under the head “Salaries”. Therefore, provisions of section 192 of the Act are not applicable. Hence, DDOs are not required to deduct TDS on family pension paid to person.

5.2.2 Perquisite includes:
A perquisite is an incidental profit, privilege, or fringe benefit derived from one's employment or office. In this sense, it is almost universally shortened to perk. The word also means anything claimed or held as an exclusive right. Perquisite usually means ‘an extra allowance or privilege’: For Instance: "he had all the perquisites of a movie star, including a stand-in"

  • I. The value of rent free accommodation provided to the employee by his employer;
  • II. The value of any concession in the matter of rent in respect of any accommodation provided to the employee by his employer;
  • III. The value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:
  • i) By a company to an employee who is a director of such company;
  • ii) By a company to an employee who has a substantial interest in the company;
  • iii) By an employer (including a company)to an employee, who is not covered by (i) or (ii) above and whose income under the head “Salaries” (whether due from or paid or allowed by one or more employers), exclusive of the value of all benefits and amenities not provided by way of monetary payment, exceeds Rs.50,000/-.
  • [What constitutes concession in the matter of rent have been prescribed in Explanations 1 to 4 below section 17(2)(ii) of the Act] IV. Any sum paid by the employer in respect of any obligation which would otherwise have been payable by the assessee.
  • V. Any sum payable by the employer, whether directly or through a fund, other than a recognized provident fund or an approved superannuation fund or other specified funds u/s 17, to effect an assurance on the life of an assessee or to effect a contract for an annuity.
  • VI. The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the employee and for this purpose, .
  • (a) “specified security” means the securities as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956 and, where employees’ stock option has been granted under any plan or scheme therefor, includes the securities offered under such plan or scheme;
  • (b)“sweat equity shares” means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called;
  • (c) the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from the assessee in respect of such security or shares;
  • (d)“fair market value” means the value determined in accordance with the method as may be prescribed (refer Rule 3(9) of the IT Rules);
  • (e) “option” means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price;
  • VII. The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees; and
  • VIII The value of any other fringe benefit or amenity as prescribed in Rule 3.

Some More Useful references in terms of Salary
Interest free or concessional loans [Rule 3(7)(i)]: 
            It is common practice, particularly in financial institutions, to provide interest free or concessional loans to employees or any member of his household. The value of perquisite arising from such loans would be the excess of interest payable at prescribed interest rate over interest, if any, actually paid by the employee or any member of his household. The prescribed interest rate would now be the rate charged per annum by the State Bank of India as on the 1st day of the relevant financial year in respect of loans of same type and for the same purpose advanced by it to the general public. Perquisite value would be calculated on the basis of the maximum outstanding monthly balance method. For valuing perquisites under this rule, any other method of calculation and adjustment otherwise adopted by the employer shall not be relevant. However, small loans up to Rs. 20,000/- in the aggregate are exempt.

Loans for medical treatment of diseases specified in Rule 3A are also exempt, provided the amount of loan for medical reimbursement is not reimbursed under any medical insurance scheme. Where any medical insurance reimbursement is received, the perquisite value at the prescribed rate shall be charged from the date of reimbursement on the amount reimbursed, but not repaid against the outstanding loan taken specifically for this purpose.

Exemptions:    It is pertinent to mention that benefits specifically exempt u/s 10(13A) (Deals with HRA) , 10(5) (This Section deals with LTC) , 10(14) (Deals with Transfer Grant Allowance), 17 (Deals with Medical Reimbursement) etc.of the Act would continue to be exempt. These include benefits like house rent allowance,leave travel concession, travel on tour and transfer, daily allowance to meet tour expenses asprescribed, medical facilities subject to conditions.
5.2.3 'Profits in lieu of salary' shall include
  1. I. the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto;
  2. II. any payment (other than any payment referred to in clauses (10), (10A), (10B), (11), (12) (13) or (13A) of section 10 due to or received by an assessee from an employer or a former employer or from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
  3. "Keyman insurance policy" shall have the same meaning as assigned to it in section 10(10D);
  4. III. any amount due to or received, whether in lump sum or otherwise, by any assessee from any person—
  5. (A) before his joining any employment with that person; or
  6. (B) after cessation of his employment with that person.

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