income from salary

Salary’, the following three deductions are allowed under Section 16 of the Act to
arrive at the figure of Net Salary:
1. Standard deduction - Section 16 (i)
2. Deduction for entertainment allowance – Section 16 (ii)
3. Deduction on account of any sum paid towards tax on employment –
Section 16(iii).

All employees are entitled to a basic salary which is fixed as per their respective
terms of employment either as a fixed amount or at a graded system of salary.
Under this graded system, apart from the basic salary at which the employee will
start, annual increments to be given to the employee are pre fixed in the grade.
For example, if a person is employed on 1st May, 2004 in the grade of 12000 –
300 – 15000, this means that he will start at a basic salary of Rs.12000 from 1st
May, 2004. He will get an annual increment of Rs.300 w.e.f. 1st May, 2005 and
onwards every year on the same date till his basic salary reaches Rs.15, 000. No
further increment is given thereafter till he is promoted and placed in other grade.
Advance Salary, if received in previous year for next year is taxable on receipt
basis in the same previous year.
Illustration 4.1:
X joins service in the grade of Rs.12000 – 300 – 13800 – 400 – 17800 on 1st June,
1999. Compute his basic salary for the previous year 2005-06.
Solution:
For the previous year 2005-06, basic salary of X will be calculated as follows:
1st June 1999 – 31st May 2000 12000 1st June 2003 – 31st May 2004 13200
1st June 2000 – 31st May 2001 12300 1st June 2004 – 31st May 2005 13500

1st June 2001 – 31st May 2002 12600 1st June 2005 – 31st May 2006 13800
1st June 2002 – 31st May 2003 12900
Basic Salary for April and May 2005 (Rs.13500 x 2) 27,000
Basic Salary for June 2005 – March 2006 (Rs.13800 x 10) 1, 38,000
Basic Salary for previous year 1, 65,000

4.4.2 FEES, COMMISSION AND BONUS
Any fees or commission paid or payable to an employee is fully taxable and is
included in salary. Commission payable may be at a fixed amount or a fixed
percentage of turnovers. In both the cases, it is taxable as salary only when it is
paid or payable by the employer to the employee. When commission is based on
fixed percentage of turnover achieved by employee, it is included in basic salary
for the purpose of grant of retirement benefits and for computing certain
exemptions that we will discuss later on.
4.4.3 TAXABLE VALUE OF ALLOWANCES
Allowance is a fixed monetary amount paid by the employer to the employee
(over and above basic salary) for meeting certain expenses, whether personal or
for the performance of his duties. These allowances are generally taxable and are
to be included in gross salary unless specific exemption is provided in respect of
such allowance. For the purpose of tax treatment, we divide these allowances into
3 categories:
I. Fully taxable cash allowances
II. Partially exempt cash allowances
III. Fully exempt cash allowances

I. FULLY TAXABLE ALLOWANCES
This category includes all the allowances, which are fully taxable. So, if an
allowance is not partially exempt or fully exempt, it gets included in this category.
The main allowances under this category are enumerated below:
(i) Dearness Allowance and Dearness Pay
As is clear by its name, this allowance is paid to compensate the employee against
the rise in price level in the economy. Although it is a compensatory allowance
against high prices, the whole of it is taxable. When a part of Dearness
Allowance is converted into Dearness Pay, it becomes part of basic salary for the
grant of retirement benefits and is assumed to be given under the terms of
employment.
(ii) City Compensatory Allowance
This allowance is paid to employees who are posted in big cities. The purpose is
to compensate the high cost of living in cities like Delhi, Mumbai etc. However,
it is fully taxable.
(iii) Tiffin / Lunch Allowance
It is fully taxable. It is given for lunch to the employees.
(iv) Non practicing Allowance
This is normally given to those professionals (like medical doctors, chartered
accountants etc.) who are in government service and are banned from doing
private practice. It is to compensate them for this ban. It is fully taxable.
(v) Warden or Proctor Allowance
These allowances are given in educational institutions for working as a Warden of
the hostel or as a Proctor in the institution. They are fully taxable.
(vi) Deputation Allowance
When an employee is sent from his permanent place of service to some place or
institute on deputation for a temporary period, he is given this allowance. It is
fully taxable.
(vii) Overtime Allowance
When an employee works for extra hours over and above his normal hours of
duty, he is given overtime allowance as extra wages. It is fully taxable.
(viii) Fixed Medical Allowance
Medical allowance is fully taxable even if some expenditure has actually been
incurred for medical treatment of employee or family.
(ix) Servant Allowance
It is fully taxable whether or not servants have been employed by the employee.
(x) Other allowances
There may be several other allowances like family allowance, project allowance,
marriage allowance, education allowance, and holiday allowance etc. which are
not covered under specifically exempt category, so are fully taxable.
II. PARTIALLY EXEMPT ALLOWANCES
This category includes allowances which are exempt upto certain limit. For
certain allowances, exemption is dependent on amount of allowance spent for the
purpose for which it was received and for other allowances, there is a fixed limit
of exemption.
(i) House Rent Allowance (H.R.A.)
An allowance granted to a person by his employer to meet expenditure incurred
on payment of rent in respect of residential accommodation occupied by him is
exempt from tax to the extent of least of the following three amounts:
a) House Rent Allowance actually received by the assessee
b) Excess of rent paid by the assessee over 10% of salary due to him
c) An amount equal to 50% of salary due to assessee (If accommodation is
situated in Mumbai, Kolkata, Delhi, Chennai)
‘Or’ an amount equal to 40% of salary (if accommodation is situated in
any other place).
Salary for this purpose includes Basic Salary, Dearness Allowance (if it forms
part of salary for the purpose of retirement benefits), Commission based on fixed
percentage of turnover achieved by the employee.
The exemption of HRA depends upon the following factors:
(1) Basic Salary (3) Rent paid
(2) Place of residence (4) HRA received
If an employee is living in his own house and receiving HRA, it will be fully
taxable.
(ii) Entertainment Allowance
This allowance is first included in gross salary under allowances and then
deduction is given to only central and state government employees under Section
16 (ii).
(iii) Special Allowances for meeting official expenditure
38
Certain allowances are given to the employees to meet expenses incurred
exclusively in performance of official duties and hence are exempt to the extent
actually incurred for the purpose for which it is given. These include travelling
allowance, daily allowance, conveyance allowance, helper allowance, research
allowance and uniform allowance.
(iv) Special Allowances to meet personal expenses
There are certain allowances given to the employees for specific personal
purposes and the amount of exemption is fixed i.e. not dependent on actual
expenditure incurred in this regard. These allowances include:
a) Children Education Allowance
This allowance is exempt to the extent of Rs.100 per month per child for
maximum of 2 children (grand children are not considered).
b) Children Hostel Allowance
Any allowance granted to an employee to meet the hostel expenditure on his child
is exempt to the extent of Rs.300 per month per child for maximum of 2 children.
c) Transport Allowance
This allowance is generally given to government employees to compensate the
cost incurred in commuting between place of residence and place of work. An
amount uptoRs.800 per month paid is exempt. However, in case of blind and
orthopaedically handicapped persons, it is exempt up to Rs. 1600p.m.
d) Out of station allowance
An allowance granted to an employee working in a transport system to meet his
personal expenses in performance of his duty in the course of running of such
transport from one place to another is exempt upto 70% of such allowance or
Rs.6000 per month, whichever is less.
III. FULLY EXEMPT ALLOWANCES
(i) Foreign allowance
This allowance is usually paid by the government to its employees being
Indian citizen posted out of India for rendering services abroad. It is
fully exempt from tax.
(ii) Allowance to High Court and Supreme Court Judges of whatever
nature are exempt from tax.
(iii) Allowances from UNO organisation to its employees are fully exempt
from tax.
Classify these allowances into the following three categories:
Project allowance, Out of station allowance, Dearness allowance, Servant
allowance, Hostel allowance, Uniform allowance, Dress allowance, Marriage
allowance, Foreign allowance, overtime allowance:
1. Fully taxable allowances _______________________________________
___________________________________________________________
2. Partially exempt allowances ____________________________________
___________________________________________________________
3. Fully exempt allowances _______________________________________
___________________________________________
Match the exemption in the following cases:
Name of Allowance Exemption
1. Children Education Allowance Rs.300 per month per child for
maximum 2 children
2. Transport Allowance Rs.100 per month per child for
maximum 2 children
3. Hostel Allowance 70% of allowance subject to
maximum of Rs.6, 000 per month.
4. Out of station allowance Rs.800 per month