Income Under Head Salary in India, Meaning and Computation

Income under the head salary includes all remuneration received by an employee, including wages, allowances, and benefits. Explore our blog for more details.

Income under the head of salary is an important component of a person's taxable income in India, which is governed by the Income Tax Act 1961. This includes all types of remuneration received by an employer from an employee, including basic wages, bonuses, and commissions, as well as non-monetary benefits such as demerits. 

Understanding the complications of salary income, including its components, tax capacity, and permissible deductions, is important for effective tax planning and compliance. This complete blog post examines various aspects of salary income that help taxpayers navigate the complications of tax rules and optimize their tax strategies.

What is the salary?

The salary involves the remuneration received by a person for services provided as an employee. It has monetary payments such as basic wages, bonuses, and commissions, as well as non-monetary benefits. According to Section 17(1) of the Income Tax Act, the definition of salary is inclusive of wages, annuities, pensions, gratuity, fees, commissions, illegal profits, profits instead of salary, advance salary, leave (except encashment), contributions to pensions, and pensions. This broad definition ensures that the head is occupied under the head "salary" for all types of remuneration.

Basis of Charges (Under Section 15)

The basis of charge for salary income is mentioned in Section 15 of the Income Tax Act. The salary is charged for tax either on a "fixed" basis or on a "receipt" basis. Whichever is earlier. This means that even when it is received from the employer, the salary is still taxable, whether it is received or when it is not, even if it is not yet. On receiving the advance, it is taxed, while the dues of the salary are taxed when the tax is not paid first on a fixed basis. This section also makes it clear that if any salary paid in advance is already included in the total income, it will not be taxed again when it is payable.

Elements of Salary 

Salary includes various components, with each having specific tax implications. Primary components include 

  • Basic salary: The main component of a person's salary structure. 
  • Fees, commissions, and bonuses: additional payments for services or performance provided are completely taxable. 
  • Allowance: Financial benefits provided to meet specific requirements, which can be fully taxable, partially taxable, or fully exempt. 
  • Anulabh: Non-modern benefits such as housing, a car, or stock options are taxable under specific rules. 
  • Retirement Benefits: Include each gratuity, provident fund contribution, and pension with your tax treatment. 

Allowance and Its Tax Implications

In India, there are additional monetary benefits provided by employers above and above the basic salary to meet salary allowances in India. These salary allowances are classified into three types, as discussed below:

  • Taxable allowances include dearness allowance (DA), city compensatory allowance, entertainment allowance, overtime allowance, tiffin allowance, and others, which are all fully taxable. 
  • Partly taxable allowances include the House Rent Allowance (HRA), Leave Travel Allowance (LTA), convenience allowance, medical reimbursement, education allowance, and hostel allowance, as well as specific discounts available under sections such as 10 (13A). 
  • The services outside India include a fully exempt allowance for Supreme Court or High Court judges and United Nations Organization (UNO) employees.

Perquisites and Their Tax Implications 

Perquisites, commonly known as perks, are non-monetary benefits provided to employees. These may include housing, a company car, stock options, and more. The followers are taxable, and their evaluation is determined based on specific rules. Major accessories include.

  • Rent-free housing: Tax based on specified rates or actual lease fare paid by the employer. 
  • Concession in fares: Tax based on the value of the concession provided by the employer. 
  • Equity shares of specified securities and sweat: Tax based on the value of shares transferred to allocated or concessional rates on a tax basis.
  • Employer's contribution in funds: Some thresholds are set beyond the thresholds on recognized future funds, superannuation funds, etc.

Dedication to Salary 

Salary reduces taxable income, which reduces tax liability. The Income Tax Act provides several deductions to employees: 

  • Standard deduction (Section 16): A flat cut of 50,000 or the amount of salary, whichever is lower, is available to all salaried persons. 
  • Entertainment allowance: only available cuts available to government employees, of basic salary, 5,000 or one-fifth part, whichever is lower. 
  • Professional Tax: Professional tax imposed by the state is completely deducted when paid by the employee. If reimbursement is done by the employer, it is first included in the salary and then allowed as a cut.

Relaxation Under Section 89

Section 89 provides relief to taxpayers who receive a salary in arrears or advance. This relief helps reduce the tax burden by allowing income to spread over relevant years. Ensuring that taxpayers do not face undue difficulty due to income in a single year. Relief is also available for the arrears of the family pension.

Example of Tax Calculation on Salary

Consider a person named Raj, who has the following pay components in the financial year: 

  • Basic Salary: ₹ 8,00,000 
  • Home Fare Allowance (HRA): ₹ 2,00,000 
  • Message Allowance: ₹ 19,200 
  • Special allowance: ₹ 50,000 
  • Employer's contribution to Provident Fund: ₹ 1,20,000 
  • Raj paid a monthly rent of ₹ 15,000 and lives in a non-metro city.

Calculation of Exempt HRA

  • Real HRA received: ₹ 2,00,000 
  • 40% (basic salary + DA): 40% of 8,00,000 = ₹ 3,20,000. 
  • Actual Fare Payment - 10% (Basic Salary + DA): ₹ 1,80,000 - ₹ 80,000 = ₹ 1,00,000

The available exemption is the lowest of the above zodiac signs, which is ₹ 1,00,000. Therefore, taxable HRA = ₹ 2,00,000 - 00 1,00,000 = ₹ 1,00,000. Taxable salary calculation: 

  • Basic Salary: ₹ 8,00,000 
  • Taxable HRA: ₹ 1,00,000 
  • Message Allowance: ₹ 19,200 
  • Special allowance: ₹ 50,000 
  • Employer's contribution to Provident Fund: ₹ 1,20,000 
  • Gross salary = ₹ 10,89,200 deduction: 
  • Standard Cut: ₹ 50,000 
  • Professional Tax (if applied): ₹ 2,500 
  • Net taxable salary = ₹ 10,89,200 - ₹ 50,000 - 2,500 = ₹ 10,36,700

Income under major "pay" covers various components and allowances, with each having specific tax implications. It is important to understand these details for effective tax planning and compliance. 

By taking advantage of the available exemption, deduction, and relief provisions, individuals can optimize their tax liabilities and ensure compliance with tax laws. This blog offers taxpayers a comprehensive guide to navigate the complications of salary income and help inform financial decisions.

FAQs

What is the salary under the head of income?

Income under head salary includes all remuneration received by an employee, including wages, allowances, and benefits. This blog examines the pay income aspects to help taxpayers navigate tax rules and adapt their strategies.

What is income under the head?

Income under the head refers to the categorization of income for tax purposes. In India, income is classified into five heads: salaries, house property, business/profession, capital gains, and other sources, each with specific tax implications and calculation methods.

Which income comes under salary?

For the Income Tax Act, 1961, the word 'salary' will include both monetary payments (eg, basic salary, bonus, commission, allowances, etc.) as well as non-monetary facilities (such as housing, medical facilities, interest-free loans, etc.). Section 17(1) defines the word "salary."

What is allowance under the head salary?

An allowance is a predetermined amount that employers provide to their employees. The purpose is to cover specific expenses beyond the original salary.

What is a salary head?

The salary chief is a component of the salary structure of an employee. The chief is generally classified as earnings and deductions. Lenvika HRMS has another type of salary called 'Non-Paesalip.' Making the salary chief is the first step in salary configuration.

How to calculate income from salary?

Income from salary = basic salary + HRA + special allowance + transport allowance + any allowance. Some components of your salary are exempt from tax, such as telephone bill reimbursement and travel allowance.

What is the minimum salary to pay income tax in India?

In India, the minimum wage to pay income tax depends on the tax regime. For individuals below 60, the basic discount limit is 2.5 lakhs under the old regime, while the new regime provides tax benefits up to ₹ 7 lakhs without deduction.

What is the salary for sections 15 to 17?

Salary (Section 15-17) Salary is the remuneration obtained or received by an individual, on time -time, for service provided as a result of an express or implied contract.

What is the DA allowance?

Dearness allowance (DA) is a cost-of-living adjustment provided by the government to public sector employees and pensioners. Calculated as a percentage of basic salary, it helps reduce the effect of inflation, ensures financial stability, and maintains purchasing power against rising costs.

How much salary is taxable in India?

For salaried persons, the tax-free limit is Rs. 12.75 lakhs, Rs. Factoring in. 75,000 standard deduction. However, once a person's taxable income is Rs. 12 lakhs, tax applies to the complete taxable income based on the following revised rates: taxable income (Rs.).