SALARY and its components

"Salary" is the remuneration received by or accruing to an individual, periodically, for service rendered as a result of an express or implied contract. The actual receipt of salary in the previous year is not material as far as its taxability is concerned. The existence of employer-employee relationship is the sine-qua-non for taxing a particular receipt under the head “salaries.” Accordingly:

  1. The Pension received by an assessee from his former employer is taxable as “Salaries” whereas pension received on death of an employee by members of his/her family as Family Pension is taxed as “Income from Other Sources”.

  2. The salary received by a partner from his partnership firm carrying on a business is not chargeable as “ Salaries” but as “Profits & Gains from Business & Profession”.

For the purpose of Income Tax, “Salary” includes

  1. Wages
  2. Annuity or pension
  3. Gratuity
  4. Fees, Commission, perquisites or profits in lieu of salary
  5. Advance of Salary
  6. Receipt from Provident Fund
  7. Contribution of employer to a Recognised Provident Fund in excess of the prescribed limit
  8. Leave Encashment
  9. Compensation as a result of variation in Service contract etc.

Deductions from Salary:

The income chargeable under the head Salaries shall be computed after making the following deductions:
  1. A deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee who is in receipt of salary from the Government, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less;
  2. A deduction of any sum paid by the assessee on account of a tax on employment within the meaning of clause (2) of article 276 of the Constitution, leviable by or under any law.

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