Salaries

The head ‘Salaries’ is the most common head of income in India — it affects every salaried individual, every pensioner, and every employer who must compute TDS on salary. Despite its seeming simplicity (employer pays, employee receives), the salary computation is remarkably intricate. The interplay between basic salary, allowances, perquisites, exemptions, and deductions requires a step-by-step methodology that this chapter provides.

Five sections govern this head: Section 15 (the charging provision — what makes salary taxable), Section 16 (the inclusive definition of salary), Section 17 (perquisites), Section 18 (profits in lieu of salary), and Section 19 (deductions from salary). Rule 15 prescribes the methods for valuing perquisites. Together, these provisions form a self-contained code for salary taxation.

The fundamental distinction: The existence of an employer-employee relationship is the sine qua non of this head. Income from a contract for services (independent contractor) falls under ‘Business or Profession.’ Income from an employment contract (contract of service) falls under ‘Salaries.’ The test is not the label the parties give their arrangement but the substance: Does the employer have the right to control not just WHAT work is done but HOW it is done? If yes, it is employment; if no, it is an independent contract.

4A.2.1 The Due-or-Received Rule

The dual basis: Salary is taxable on the EARLIER of: (a) when it becomes due; or (b) when it is actually received. This is unlike business income (which is on accrual basis) or other sources income (which can be on receipt basis). The dual basis ensures that salary cannot escape tax by manipulation of payment timing.

4A.2.2 Exclusion of Partner’s Remuneration

S.15(4) is an absolute exclusion: Any salary, bonus, commission, or remuneration received by a partner from the firm is NOT salary — it is taxable as ‘Profits and Gains of Business or Profession’ in the partner’s hands, and is deductible (subject to limits under S.56) in the firm’s computation. This distinction matters because salary-head deductions (standard deduction, gratuity exemption) are NOT available on partner remuneration.

Section 16 provides a twelve-item inclusive definition. Every component flowing from an employer to an employee by reason of employment is ‘salary’ unless specifically excluded. The twelve items:

4A.4.1 The Nine Categories

Perquisites are non-cash benefits provided by the employer. Section 17(1) lists nine categories. The most important by revenue impact:

4A.4.2 Rent-Free Accommodation [S.17(1)(a) + Rule 15(2)]

Company-provided housing is one of the most valuable perquisites and one of the most complex to value. Rule 15 prescribes different methods depending on who provides the accommodation:

Furnished accommodation: Add 10% per annum of the cost of furniture (including TV, fridge, AC) to the unfurnished value. If furniture is rented by the employer: add actual hire charges. Then subtract any amount paid by the employee for the furniture.

Mining/remote site exemption [Rule 15(2)(b)]: Temporary accommodation at mining sites, oil exploration sites, project sites, dam sites, or power generation sites is exempt if: (a) plinth area does not exceed 1,000 sq ft; and (b) the site is at least 8 km from the nearest municipality/cantonment; or (c) the site is in a remote area. This exemption recognises the reality that field workers have no choice about their accommodation.

4A.4.3 ESOPs and Sweat Equity [S.17(1)(d)]

Employee Stock Options have become a major compensation component, especially in the technology sector. The tax treatment involves two stages:

4A.4.4 The Rs.7.5 Lakh Retirement Contribution Cap [S.17(1)(h)-(i)]

This provision targets high-income employees whose employers make very large contributions to retirement funds. The aggregate of employer contributions to EPF + NPS + superannuation fund in a tax year, to the extent it exceeds Rs.7,50,000, is a taxable perquisite. Additionally, the interest/accretion on the excess portion is also taxable under S.17(1)(i).

4A.4.5 Exempt Perquisites [S.17(2)]

Six categories of perquisites are specifically exempt:

(a) Medical treatment in employer-maintained hospital.

(b) Medical treatment in government/approved hospitals, and for prescribed diseases.

(c) Health insurance premium paid by employer under approved scheme.

(d) Reimbursement of employee’s health insurance premium.

(e) Employer’s expenditure on employee’s office commute (home to office and back).

(f) Medical treatment abroad: treatment cost (RBI-permitted extent), travel (if GTI < prescribed amount), and one attendant’s travel/stay.

This section captures amounts that are not regular salary but arise from the employment relationship. It prevents employers from converting salary into lump-sum payments to exploit different tax treatment:

4A.6.1 The Only Permitted Deductions

Unlike business income (where all revenue expenses are deductible), salary income allows only a limited set of deductions specified in S.19. No other expenses — commuting costs, work clothes, books, home internet for work — are deductible from salary.

4A.6.2 Gratuity — Detailed Analysis

Gratuity exemption is one of the most complex salary computations because it varies based on three categories of employees:

4A.6.3 Leave Encashment on Retirement [S.19(1) Sl.13-14]

Government employees get full exemption. For others, the exempt amount is the MINIMUM of four figures:

4A.6.4 VRS Compensation [S.19(1) Sl.12]

Voluntary Retirement Scheme compensation is exempt up to Rs.5,00,000. The scheme must conform to prescribed guidelines. Once the S.19 exemption is claimed for VRS in any year, no relief under S.157 (arrears relief) can be claimed for the same amount, and vice versa.

Let us now put together a complete salary computation bringing together all the provisions:

[End of Chapter IV-A (Salaries). Chapter IV-B: Income from House Property follows.]