INDIAN INCOME TAX ACT 2 -- INCOME FROM SALARIES

Income from salaries

All income received as salary under employer-employee relationship is taxed under this head, on due or receipt basis, whichever arises earlier. Employers must withhold tax compulsorily (subject to Section 192), if income exceeds minimum exemption limit, as Tax Deducted at Source (TDS), and provide their employees with a Form 16 which shows the tax deductions and net paid income. The Act contains exemptions including (the list isn't exhaustive):-

Particulars	Relevant section for computing exemption
Leave travel concession	10(5)
Death-cum-Retirement Gratuity	10(10)
Commuted value of Pension (not taxable for specified Government employees)	10(10A)
Leave encashment	10(10AA)
Retrenchment Compensation	10(10B)
Compensation received at time of Voluntary Retirement	10(10C)
Tax on perquisite paid by employer	10(10CC)
Amount received from Superannuation Fund to legal heirs of employee	10(13)
House Rent Allowance	10(13A)
Some Special Allowances	10(14)

The Act contains list of perquisites which are always taxable in all cases and a list of perquisites which are exempt in all cases (List I). All other perquisites are to be calculated according to specified provision and rules for each. Only two deductions are allowed under Section 16, viz. Professional Tax and Entertainment Allowance (the latter only available for specified government employees).

• 15 days' salary for each year of service or part thereof exceeding six months(i.e., 15/26  of  last drawn salary of  completed year of service or part thereof exceeding 6 months), or
• 1 million, or
• Gratuity actually received

 In case of non-government employee not covered by Payment of Gratuity Act, 1972 it is exempt from tax up to the least of the following:-

• 1 million, or
• Half month's salary for each completed year of service(i.e.,15/30 of  Average salary of completed year of service), or
• Gratuity actually received

Average salary for above purpose is average salary drawn during 10 months immediately preceding the month in which the employee retired or ceased to exist.

Computation of exemption of House Rent Allowance(HRA) [Section 10(13A)]

The least of the following is exempt:-

• HRA received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year; or
• 50%/40% of salary where residential house is situated in metro/non metro city respectively.
• Excess of rent paid over 10% of salary.

Salary for this purpose means basic plus dearness allowance (if terms of employment so provide) plus fixed percent commission on turnover.

Computation of exemption for pension [Section 10(10A)]

Uncommuted pension is taxable in all cases. Commuted pension is exempt for specified Government employees. In any other case, commuted pension is exempt to the extent given below:-

1/3 of normal pension is exempt if the employee is in receipt of gratuity

1/2 of normal pension is exempt if the employee is not in receipt of gratuity

Computation of exemption for Leave encashment [Section 10(10AA)]

It is fully exempt in case of specified Government employees

In other case, it is exempt from tax to the extent of least of the following:-

• Amount actually received at the time of retirement
• Rs. 300,000
• 10 months average salary
• Cash equivalent of leave salary in respect of the period of earned leave at the credit of the employee at the time of retirement, but it cannot exceed 30 days of average salary for every completed year of service

Average salary for the above purpose means average salary drawn during 10 months immediately preceding retirement

Computation of exemption for Retrenchment compensation [Section 10(10B)]

It is exempt to the extent of least of the following:-

• Rs. 500,000, or
• Amount calculated under section 25F(b) of the Industrial Disputes Act

Computation of exemption for Voluntary Retirement Scheme [Section 10(10C)]

Least of the following three amounts is exempt in case of approved/recognized scheme:-

• Actual received
• Rs500,000,
• Last drawn salary of 3 Completed years of service, or, last drawn salary of remaining months of service; whichever is lower

Disclaimer

In this note, we have attempted to summarise some of the significant aspects to be kept in mind by readers to ensure compliance of Income tax laws and regulations. Readers should ensure to verify specific provisions as applicable to each case before taking any business decisions. It would be pertinent to note that some changes are being made to the Income tax laws and rules and regulations on a continuous basis by way of notifications, clarifications etc issued by the department based on their practical experience in implementing the legislation.

It may be noted that nothing contained in this note should be regarded as our opinion.  Professional advice should be sought for applicability of legal provisions based on specific facts. Though reasonable efforts have been taken to avoid errors or omissions in this note we are not responsible for any liability arising to readers directly or indirectly due to any mis-statements or error contained in this note. It must be noted that the views expressed in the note are based on our understanding of the law and regulations as published by the Government authorities and we may or may not agree or subscribe to such views/ interpretations.