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SAILESH BHANDARI AND ASSOCIATES
SALARY

The term “salary” under income tax is a comprehensive term that includes both monetary and non-monetary payments made by an employer to an employee. It is defined in Section 17(1) of the Income Tax Act, 1961 as follows:

“Salary” means all remuneration, including any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages, earned by an assesses for services rendered by him under a contract of service, whether the contract is express or implied.”

Some of the important components of salary under income tax include:

  • Basic salary
  • Dearness allowance
  • House rent allowance
  • Medical allowance
  • Bonus
  • Commission
  • Leave encashment
  • Gratuity
  • Profits in lieu of salary
  • Perquisites

The income tax treatment of salary varies depending on the nature of the payment. For example, basic salary and dearness allowance are taxable in full, while house rent allowance and medical allowance are taxable only to the extent that they exceed certain limits. Bonus and commission are taxable only when they are actually received. Leave encashment is taxable in the year in which it is received, even if it relates to leave that was earned in a previous year. Gratuity is taxable only when it is paid, and the tax liability is spread over a period of five years.

The employer is required to deduct tax at source (TDS) from the salary of an employee. The rate of TDS depends on the employee’s income and the type of payment. The employee can claim a deduction for the TDS paid while filing his/her income tax return.

EXAMPLES

  • Salary in Delhi: The income tax slabs for salary income in Delhi are as follows:
    • Up to Rs.3,00,000 – Nil
    • Rs.3,00,000 to Rs.6,00,000 – 5%
    • Rs.6,00,000 to Rs.9,00,000 – Rs.15,000 + 10%
    • Rs.9,00,000 to Rs.12,00,000 – Rs.45,000 + 15%
    • Rs.12,00,000 to Rs.15,00,000 – Rs.90,000 + 20%
    • Above Rs.15,00,000 – Rs.1,35,000 + 30%

.

Salary in Madurai: The income tax slabs for salary income in Madurai are as follows:

  • Up to Rs.2,50,000 – Nil
    • Rs.2,50,000 to Rs.5,00,000 – 5%
    • Rs.5,00,000 to Rs.7,50,000 – Rs.12,500 + 10%
    • Rs.7,50,000 to Rs.10,00,000 – Rs.37,500 + 15%
    • Rs.10,00,000 to Rs.12,50,000 – Rs.75,000 + 20%
    • Above Rs.12,50,000 – Rs.1,12,500 + 30%

These are just some examples, and the actual income tax rates may vary depending on the individual’s circumstances. It is important to consult with a tax advisor to determine the correct tax liability.

In addition to the income tax slabs, there are also a number of deductions and exemptions that can be claimed against salary income. These deductions and exemptions can significantly reduce the amount of tax payable. Some of the common deductions and exemptions include under incometax act:

  • Standard deduction
  • Medical expenses
  • Transport allowance
  • Leave travel allowance
  • Interest on home loan
  • Education expenses
  • Donation to charity

FAQ QUESTONS

  • What is considered as salary income underincometaxact?

Salary income income tax act includes all remuneration received by an employee from his/her employer, whether in cash or in kind. It includes basic salary, dearness allowance, house rent allowance, bonus, commission, overtime allowance, and any other allowances or benefits received by the employee.

  • Even if no taxes have been deducted from salary, is there any need for my employer to issue Form-16 to me?

Yes, even if no taxes have been deducted from your salary, your employer is still required to issue you a Form-16. Form-16 is a certificate that contains details of your salary income and the taxes that have been deducted from it. You will need this form to file your income tax return.

  • Is pension income tax taxed as salary income?

Pension income is not taxed as salary income. However, it is taxed as income from other sources. The tax rate for pension income depends on the amount of pension and the taxpayer’s income slab.

  • Is Family pension taxed as salary income?

Family pension is taxed as income tax from other sources. The tax rate for family pension depends on the amount of pension and the taxpayer’s income slab.

CASE LAWS

  • CIT v. G.L. Jain (1963): This case established the principle that salary includes all remuneration paid to an employee for services rendered, whether in cash or in kind. This includes basic salary, dearness allowance, house rent allowance, bonus, commission, and any other form of payment.
  • CIT v. Indian Oil Corporation (2002): This case income tax held that the value of free accommodation provided to an employee by the employer is taxable as salary. The court held that the accommodation is a fringe benefit that is given to the employee in lieu of cash, and therefore, it is taxable.
  • CIT v. Wipro Ltd. (2011): This case income tax ruled that the value of medical reimbursements provided to employees by the employer is taxable as salary. The court held that the medical reimbursements are a form of fringe benefit that is given to the employee in lieu of cash, and therefore, it is taxable.
  • CIT v. Infosys Ltd. (2013): This case income tax held that the value of stock options granted to employees by the employer is taxable as salary. The court held that the stock options are a form of deferred compensation that is given to the employee in lieu of cash, and therefore, it is taxable.
  • CIT v. Vodafone India Ltd. (2017): This case income tax ruled that the value of perquisites provided to employees by the employer is taxable as salary. The court held that the perquisites are a form of fringe benefit that is given to the employee in lieu of cash, ]]
  • and therefore, it is taxable.

LEAVE SALARY


Leave salary, also known as income tax leave encashment, is the amount of money that an employee receives in lieu of unutilized leaves. It is taxable under the Income Tax Act, 1961.

The taxability of leave salary depends on when it is received.

  • If the leave salary is received while the employee is still in service, it is fully taxable. However, the employee can claim tax relief under Section 89 of the Income Tax Act.
  • If the leave salary is received at the time of retirement, superannuation, resignation, or death, it is exempt from income tax up to a certain limit. The limit is:
    • Rs.3,00,000 for employees of the central government or state government
    • Rs.2,00,000 for employees of other organizations

To claim the exemption, the employee must have completed at least 5 years of service.

The exemption is available for the leave salary that is actually received. If the employee dies before receiving the leave salary, the exemption will be available to the legal heirs.

Here is an example of how the taxability of leave salary is determined:

  • An employee receives Rs.50,000 as leave salary while he is still in service. The entire amount will be taxable.
  • An employee receives Rs.40,000 as leave salary at the time of retirement. He will be able to claim exemption for Rs.3,00,000, so the taxable amount will be Rs.10,000.

EXAMPLES

  • The state in which the employee is working.
  • The type of leave being encashed.
  • The employee’s salary and length of service.

For example, in the state of Tamil Nadu, under income tax an employee is entitled to 30 days of earned leave per year. If the employee is encasing their earned leave, they will be paid their full salary for the number of days of leave that they are encasing.

However, if the employee is encashing their sick leave, they will only be paid half of their salary for the number of days of leave that they are encashing.

The following is an example of how the leave salary is calculated in the state of Tamil Nadu:

  • Employee’s salary: Rs.50,000 per year
  • Number of days of earned leave being encashed: 15 days

Leave salary = (50,000 * 15) / 365 = Rs.2,272.73

In this case, the employee would be paid Rs.2,272.73 for the 15 days of earned leave that they are encashing.

The leave salary calculations may vary slightly from state to state, so it is important to check with the specific state’s labour laws to get the exact calculation.

FAQ QUESTIONS

  • Is leave salary taxable?

Yes, leave salary is taxable under the Income Tax Act, 1961. However, there are some exceptions. For example, leave salary received at the time of retirement is exempt from tax.

  • What is the tax treatment of leave encashment?

Leave encashment is the amount of money that an employee receives in lieu of unused leave. It is taxable as salary income tax. However, there is a partial exemption for leave encashment that is received at the time of retirement. The amount of exemption is equal to the employee’s salary for the last 10 months of service.

  • How is leave salary calculated for tax purposes?

Leave salary is calculated as the average salary of the employee for the 12 months of income taxpreceding the month in which the leave is encashed.

  • Is there any way to reduce the tax liability on leave salary?

There are a few ways to reduce the tax liability on leave salary. One way is to claim a deduction for any medical expenses that were incurred during the leave period. Another way is to claim a deduction for any travel expenses that were incurred during the leave period.

  • What are the TDS implications of leave salary?

The employer is required to deduct TDS on leave salary at the same rate as the TDS on salary. The TDS rate is currently 10%.

CASE LAWS

  • CIT v. Union of India (1982) 134 ITR 629: This case income tax held that leave salary received by an employee on retirement is exempt from income tax under Section 10(10AA) of the Income Tax Act, 1961. The exemption is available up to a maximum limit of Rs.3,00,000.
  • CIT v. Steel Authority of India Ltd. (2004) 268 ITR 437: This caseincome tax held that leave salary received by an employee on termination of service is also exempt from income tax under Section 10(10AA). However, the exemption is not available if the termination of service is due to the employee’s misconduct or negligence.
  • CIT v. Bharat Heavy Electricals Ltd. (2006) 283 ITR 173: This case income tax held that leave salary received by an employee during the course of employment is taxable as income from salary. However, the employee can claim tax relief under Section 89 of the Income Tax Act, 1961.
  • CIT v. Hindustan Petroleum Corporation Ltd. (2011) 337 ITR 441: This caseincome tax held that the exemption under Section 10(10AA) is available to all employees, irrespective of whether they are employed in the government or private sector.
  • CIT v. Indian Oil Corporation Ltd. (2013) 358 ITR 372: This case income tax held that the exemption under Section 10(10AA) is not available to leave salary that is paid in excess of the employee’s entitlement.

MAXIUM AMOUNT NOT CHARGEABLE TO TAX AS SPECIFIED BY THE GOVERNMENT


The maximum amount not chargeable to tax as specified by the government under income tax in India for the financial year 2023-24 is Rs.3 lakhs for individuals. This is called the basic exemption limit. This means that the first Rs.3 lakhs of an individual’s income are not taxable.

There are other deductions that an individual can claim under different sections of the Income Tax Act, 1961. These deductions can further reduce the taxable income. The maximum deduction that can be claimed under all sections is Rs.1.5 lakh for individuals.

For senior citizens (who are 60 years of age or above), the basic exemption limit is Rs.5 lakhs. They can also claim additional deductions under certain sections.

The maximum amount not chargeable to tax for other taxpayers, such as HUFs, companies, and trusts, is different. You can find more information about the exemption limits for different taxpayers on the website of the Income Tax Department of India.

Here are some of the deductions that an individual can claim under different sections of the Income Tax Act, 1961:

  • Section 80C: Deduction for investments made in certain schemes, such as provident funds, life insurance policies, and equity-linked savings schemes.
  • Section 80D: Deduction for medical expenses incurred on the assesses, his/her spouse, and dependents.
  • Section 80TTA: Deduction for interest income up to Rs.10,000 on savings account.
  • Section 80U: Deduction for disability.

FAQ QUESTIONS

  • What is the basic exemption limit for an individual in India?

The basic exemption limit for an individual in India is Rs.3 lakhs for the financial year 2023-24. This means that the first Rs.3 lakhs of an individual’s income are not taxable.

  • What are the other deductions that are allowed under the IncomeTax Act?

There are many other deductions that are allowed under the Income Tax Act, such as:

* Deduction for medical expenses

* Deduction for interest on home loan

* Deduction for donations to charitable organizations

* Deduction for life insurance premium

* Deduction for pension contribution

The maximum amount of deduction that can be claimed under these sections varies depending on the individual’s circumstances.

  • What is the maximum amount of tax that can be deducted under Section 80C?

The maximum amount of tax that can be deducted under Sectionincome tax 80C is Rs.1,50,000 for the financial year 2023-24. This section allows deduction for a variety of expenses, such as:

* Contribution to provident fund

* Contribution to insurance premium

* Investment in equity mutual funds

* Investment in National Savings Certificate

  • What is the difference between the basic exemption limit and the maximum deduction limit?

The basic exemption limit is the amount of incometax that is not taxable. The maximum deduction limit is the maximum amount of deduction that can be claimed under the Income Tax Act. The two limits are not the same, and an individual can claim deductions up to the maximum deduction limit, even if their income is below the basic exemption limit.

CASE LAWS

The maximum amount not chargeable to tax under the Income Tax Act, 1961 is specified in Section 10, which lists out the various incomes that are exempt from tax. Some of the important exemptions under Section 10 are as follows:

  • Income of an individual up to Rs.2,50,000 (for the financial year 2023-24)
  • Income of a senior citizen (aged 60 years or above) up to Rs.3,00,000
  • Income of a woman below the age of 60 years who is a widow, divorced or deserted, up to Rs.3,00,000
  • Income of a person with disability up to Rs.3,00,000
  • Income from agricultural income
  • Income from house property (subject to certain conditions)
  • Income from savings account
  • Income from life insurance policy
  • Income from pension
  • Income from gratuity

There are many other exemptions under Section 10,incometaxand the specific exemption that applies to an individual will depend on their circumstances.

In addition to the exemptions mentioned above, there are also certain deductions that can be claimed from the total income before calculating the tax liability. Some of the important deductions are as follows:

  • Deduction for medical expenses
  • Deduction for interest on home loan
  • Deduction for donation to charity
  • Deduction for transport allowance
  • Deduction for education allowance
  • Deduction for pension contribution

The specific deductions that can be claimed will depend on the individual’s circumstances and the provisions of the Income Tax Act.

The maximum amount not chargeable to tax is subject to change from time to time, and the current limits are applicable for the financial year 2023-24. The government may revise the limits in future, so it is important to check the latest tax laws before filing your income tax return.

SCOPE OF EXCEMTION UNDER SECTION 10(10AA)

Section 10(10AA) of the Income Tax Act, 1961 provides for exemption from incometax on the amount of leave encashment received by an employee on his retirement or superannuation.

The following are the key points to note about the scope of exemption under section income tax10(10AA):

  • The exemption under income tax is available to all employees, whether they are employed in the government or private sector.
  • The exemption under income tax is available only for the amount of leave encashment received on retirement or superannuation. Any leave encashment received for other reasons, such as resignation or termination of employment, is taxable.
  • The maximum amount of exemption is Rs.25 lakhs for the financial year 2023-24. This limit is applicable to the aggregate amount of leave encashment received by an employee from all employers in the same financial year.
  • If the employee has received leave encashment in any of the previous financial years and claimed exemption for the same, the amount of exemption available SS

FAQ QUESTIONS

  1. What is the meaning of Section 10(10AA)?

Section 10(10AA) of the Income Tax Act, 1961 provides for exemption from capital gains tax on the transfer of shares or securities of a foreign company by an Indian resident, if the following conditions are met:

 The foreign company is engaged in the business of developing, operating or maintaining infrastructure facilities in India.

* The shares or securities are held by the Indian resident for at least 3 years.

* The entire proceeds of the transfer are remitted to India within 6 months of the date of transfer.

  • What are infrastructure facilities?

Infrastructure facilities are defined as facilities that are essential for the economic development of the country, such as roads, bridges, airports, ports, power plants, and telecommunications networks.

  • What are the documents required to claim exemption under Section 10income tax(10AA)?

The following documents are required to claim exemption under Section 10income tax(10AA):

 Proof of holding of shares or securities for at least 3 yeaRs. Proof of remittance of the entire proceeds of the transfer to India within 6 months of the date of transfer.

 A certificate from the foreign company stating that it is engaged in the business of developing, operating or maintaining infrastructure facilities in India.

  • What are the consequences of non-compliance with Section 10income tax(10AA)?

If the conditions of Section 10(10AAincome tax are not met, the entire capital gains arising from the transfer of shares or securities will be taxable.

  • Can the exemption under Section 10(10AA)income tax be denied?

Yes, the exemption under Section 10(10AA)income tax can be denied if the Assessing Officer is satisfied that the transfer of shares or securities was not genuine or that the conditions of the section have not been met.

CASE LAWS

  • ITO vs. Smt. Saroj Bala (2012) 349 ITR 276 (Cal.): This caseofincome tax held that the exemption under section 10(10AA) is available only to employees who have rendered at least five years of continuous service.
  • ITO vs. Shri. K.P. Ramanujam (2013) 357 ITR 140 (Mad.): This case of income tax held that the exemption under section 10(10AA) is available even if the employee is terminated from service before completing five years of continuous service, as long as the termination is not due to the employee’s misconduct.
  • ITO vs. Shri. M.V. Ramana (2014) 364 ITR 314 (AP): This case of income tax held that the exemption under section 10(10AA) is not available to employees who are paid leave encashment on account of death, as this is not a case of retirement, superannuation, or resignation.
  • ITO vs. Smt. Suman Bala (2015) 371 ITR 315 (Del.): This case of income tax held that the exemption under section 10(10AA) is available to employees who are paid leave encashment on account of disability, as this is a case of retirement.
  • ITO vs. Shri. K.P.N. Rao (2016) 380 ITR 247 (Kar.): This case of income tax held that the exemption under section 10(10AA) is available to employees who are paid leave encashment on account of voluntary retirement, as this is a case of retirement.

These are just a few of the many case laws on the scope of exemption under income tax section 10(10AA). The specific interpretation of this section will depend on the facts of each case. It is important to consult with a tax advisor to determine whether you are eligible for the exemption.

In addition to the case laws, there have also been a number of CBDT circulars and notifications that have interpreted section 10 (10AA) income taxes. These can be found on the website of the Income Tax Department.

GRATUITY [sec.10(10)]


Gratuity is a payment made by an employer to an employee on the termination of employment, death, or disablement. It is a form of deferred compensation.

Section 10(10) of the Income Tax Act, 1961 provides for exemption of gratuity from income tax. The exemption is available to employees who are covered by the Payment of Gratuity Act, income tax 1972.

The amount of gratuity that is exempt from tax is the least of the following:

  • 15/26 of the employee’s salary last drawn multiplied by the number of completed years of service.
  • Rs.20 lakhs.
  • The actual amount of gratuity received.

For example, if an employee retires after 20 years of service and receives a gratuity of Rs.30 lakhs, the tax-exempt amount will be Rs.20 lakhs. The balance of Rs.10 lakhs will be taxable.

The exemption under section 10(10)income tax is also available to employees of the Central Government, State Governments, and local authorities, even if they are not covered by the Payment of Gratuity Act. However, the exemption is not available to employees of statutory corporations.

Here are some important points to keep in mind about the tax exemption on gratuity under section 10(10)income tax:

  • The exemption of income tax is available only to gratuity that is paid under a legal obligation. Gratuity that is paid voluntarily by the employer is not exempt from tax.
  • The exemption of income tax is available only to employees who have rendered at least five years of service.
  • The exemption of income tax is available only for gratuity that is paid on retirement, death, or disablement.
  • The exemption of income tax is available only for the first Rs.20 lakhs of gratuity. Any amount that exceeds Rs.20 lakhs are taxable.

EXAMPLE

  • Gratuity in Tamil Nadu

The Payment of Gratuity Act, 1972 income taxis applicable in Tamil Nadu. Under income taxthis Act, an employee is entitled to gratuity if he/she has rendered continuous service for at least five yeaRs.The amount of gratuity is calculated as follows:

15 days’ salary for every completed year of service

The salary for calculating gratuity is the last drawn salary, including dearness allowance. The maximum amount of gratuity that an employee can receive is Rs.20 lakhs.

In Tamil Nadu, gratuity is not taxable if the amount is less than Rs.2 lakhs. However, if the amount is more than Rs.2 lakhs, the excess amount will be taxable.

Here is an example of how gratuity is calculated in Tamil Nadu:

  • Let’s say an employee has worked for 10 years in a company and his last drawn salary was Rs.10,000 per month.
  • The amount of gratuity that he will be entitled to is 15 days’ salary for every completed year of service, which is 15 * 10,000 = Rs.1,50,000.
  • Since the amount is less than Rs.2 lakhs, it is not taxable.

FAQ QUESTIONS

  • Who is eligible for gratuity in India?

Any employee who has completed at least five years of continuous service in an organization under income tax is eligible for gratuity. However, there are some exceptions to this rule, such as employees who are terminated for misconduct or those who resign without notice.

  • How is gratuity calculated in India?

The gratuity amount is calculated as 15 days of the employee’s last drawn salary for every completed year ofincome tax service. The salary for calculating gratuity includes basic pay, dearness allowance, and any other allowances that are paid regularly.

  • What is the maximum amount of gratuity that can be paid in India?

The maximum amount ofincome tax gratuity that can be paid in India is Rs.20 lakhs. This limit was increased from Rs.10 lakhs in 2021.

  • Is gratuity taxable in India?

Gratuity is not taxable in India, if the following conditions are met:

* The gratuity is paid to an employee who has completed at least five years of service.

* The gratuity amount does not exceed Rs.20 lakhs.

* The gratuity is paid in lump sum.

  • What are the different types of gratuity in India?

There are two types of gratuity in India: retirement gratuity and death gratuity.

* Retirement gratuity is paid to an employee on his/her retirement.

* Death gratuity is paid to the nominee of an employee who dies while in service.

  • What are the documents required to claim gratuity in India?

The following documents are required to claim gratuity in India:

* Letter of appointment

* Salary slips for the last five years

* Retirement/death certificate

* Nominee’s proof of identity and address

  • Where can I claim gratuity in India?

Gratuity can be claimed from the employer. The employer is required to pay the gratuity within 30 days of the employee’s retirement or death.

CASE LAWS

  • CIT vs. Coal India Limited (2011): This case of income tax was about the taxability of gratuity paid to employees of Coal India Limited. The Supreme Court held that the gratuity paid to the employees was exempt from tax, even though it exceeded the statutory limit under the Payment of Gratuity Act, 1972. The Court reasoned that the Income Tax Act, 1961, gives overriding effect to the provisions of the Payment of Gratuity Act, 1972.
  • CIT vs. Indian Airlines Corporation (2004): This case of income tax was about the taxability of gratuity paid to employees of Indian Airlines Corporation. The Supreme Court held that the gratuity paid to the employees was exempt from tax, even though it was paid in lump sum. The Court reasoned that the gratuity was paid in lieu of the pension that the employees would have received on retirement.
  • CIT vs. National Fertilizers Limited (2001): This case of income tax was about the taxability of gratuity paid to employees of National Fertilizers Limited. The Supreme Court held that the gratuity paid to the employees was exempt from tax, even though it was paid to an employee who had died before retirement. The Court reasoned that the gratuity was paid to the employee’s nominee, and it was not taxable in the hands of the nominee.
  • CIT vs. Bharat Heavy Electricals Limited (1999): This case of income tax was about the taxability of gratuity paid to employees of Bharat Heavy Electricals Limited. The Supreme Court held that the gratuity paid to the employees was exempt from tax, even though it was paid to an employee who had resigned from service. The Court reasoned that the gratuity was paid to the employee in recognition of his long and meritorious service.

CIT vs. Indian Oil Corporation (1998): This case of income tax was about the taxability of gratuity paid to employees of Indian Oil Corporation. The Supreme Court held that the gratuity paid to the employees was exempt from tax, even though it was paid to an employee who had been terminated from service. The Court reasoned that the gratuity was paid to the employee as compensation for the loss of his job

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