Income from Salary
Salary Income as per Income Tax Act, 1961
Under the Income Tax Act, 1961, salary income is defined as the income received by an individual as compensation for providing services to an employer, typically in the form of wages, bonuses, allowances, or other forms of remuneration. It is an important category of income that forms part of Income from Salary under Section 15 to 17 of the Income Tax Act.
Components of Salary Income
The components of salary income can be classified into basic salary and other allowances and perquisites. The taxable salary includes all payments made by the employer to the employee for services rendered, whether in cash or kind.
1. Basic Salary
This is the fixed amount paid to the employee, usually paid on a monthly basis, before any allowances, bonuses, or deductions. Basic salary is the main component used for calculating other components like House Rent Allowance (HRA), Provident Fund (PF), Gratuity, etc.
2. Dearness Allowance (DA)
Dearness Allowance is an allowance paid to employees to offset the impact of inflation and maintain the purchasing power of the salary. It is a percentage of the basic salary and is fully taxable unless specified otherwise by the government.
Taxable: Yes, fully taxable under the head salary.
3. House Rent Allowance (HRA)
House Rent Allowance (HRA) is paid to employees to help them with accommodation expenses. HRA is partially exempt from tax under certain conditions.
Taxable/Exempt: The amount of HRA exempted from tax is based on the least of the following:
Actual HRA received
Rent paid minus 10% of basic salary
50% of basic salary (if living in a metro city) or 40% in non-metro cities
4. Special Allowance
Special allowances are given for specific purposes, like meeting the cost of travel, uniform, or other expenses incurred during the employment.
Taxable/Exempt: Special allowances are taxable, unless specifically exempted under Section 10 of the Income Tax Act.
Examples include:
Conveyance Allowance: For commuting between the office and home (partially or fully exempt).
Transport Allowance: For meeting transportation costs (partially exempt).
Child Education Allowance: A small portion is exempt from tax, up to a certain limit.
Uniform Allowance: When paid for maintaining uniforms required for work, subject to limits.
5. Bonus
Bonus is an additional payment made to employees, typically during festivals or as a percentage of profits. It can also include performance-based bonuses.
Taxable: Yes, fully taxable as part of salary income.
6. Commissions
Commission-based earnings can be a part of salary for employees working in sales, marketing, or other target-based roles.
Taxable: Yes, fully taxable as part of salary income.
7. Leave Travel Allowance (LTA)
Leave Travel Allowance (LTA) is given to employees to travel when they go on leave. It is exempt from tax under certain conditions.
Taxable/Exempt: LTA is exempt under Section 10(5) subject to conditions like:
LTA is provided for travel within India.
The exemption can be claimed twice in a block of 4 years.
The exemption covers travel expenses (fare only, not accommodation).
8. Retirement Benefits (Gratuity, Pension, and Provident Fund)
These are payments made to employees upon retirement or resignation, which are partially exempt from tax.
Gratuity: The gratuity received by employees is taxable under certain conditions, but there is an exemption limit:
Gratuity for government employees is fully exempt.
For non-government employees, the exemption is the least of:
Actual gratuity received
₹20 lakh (for employees of a private company) or the limits set by the government
Salary (last drawn salary) × 15 × years of service
Provident Fund (PF): Employee contributions to the Provident Fund are tax-deductible, and the interest earned is exempt from tax if the fund is maintained with the Employees' Provident Fund Organization (EPFO).
Pension: Pension income is taxable as salary under the head “Income from Salary.”
9. Perquisites (Perks)
Perquisites refer to any additional benefits provided by the employer to the employee, other than the salary. These can include items like accommodation, company car, stock options, and more.
Taxable Perks:
Company car (personal use): Taxable as a perquisite.
Rent-Free Accommodation (RFA): Taxable based on the value of the accommodation provided.
Stock Options (ESOPs): If granted to employees, the taxation depends on the conditions.
10. Salary Received in Kind
Sometimes employers provide certain benefits in kind, such as rent-free accommodation, free meals, or gifts. These are also considered part of the salary and are taxed according to the valuation rules specified by the Income Tax Act.
Examples of Salary in Kind:
Rent-free accommodation.
Free meals provided during office hours.
Employer-provided vehicles for personal use.