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Salary Income – Answer to Common issues

In this article we will explain what is Salary Income? What are allowance? What is TDS on Salary, Taxability of Reimbursement of Expenses? What is Form 12BB? When relief under Income Tax Act- section 89 is available, standard deduction on Salary, effective date of enhancement of limit of gratuity from INR 10 lacs – INR 20 lacs for purpose of tax exemption computation u/s 10(10)(ii) etc.

A salary is a kind of periodic payment from an employer to an employee. Through point of view of running a business, salary can also be showed as the cost of acquiring and retaining human resources for running operations, and is then termed personnel expense/ salary expense.

Here we have considered some of the FAQ on Taxability of Salary Income under the IT Act, 1961

 What is considered as salary income?

In the Income-tax Act- Section 17​​ defines the term ‘salary’. Generally whatever payment is received by an employee from an employer is considered as salary.

What are allowances?

​​Allowances are fixed periodic amounts, apart from salary, which are paid by an employer for the purpose of meeting employee’s particular requirements.  E.g., transport allowance, uniform allowance, etc. There are generally 3 types of allowances for the purpose of the Income-tax Act – taxable allowances, fully exempted & partially exempted allowances.​

If an employer reimburses expenses on grocery and children’s education. Would these be considered as employee’s income?

Yes, these will be considered as employee’s income?

During the year if an individual had worked with3 different employers and none of them deducted any tax from salary paid to him/her. If all these amounts are clubbed together, his/her income will exceed the basic exemption limit. Do they have to pay taxes on my own?

​​​ Yes, they will have to pay self-assessment tax & file the ITR.​

If there is no taxes have been deducted from salary, is there any need to employer to issue Form-16 to employee?

​​Form-16 is a certificate of TDS. In your case it will not apply. Your employer can issue a salary statement too.​

Is pension income taxed as salary income?

Yes. However, pension received from the UNO i.e. United Nations Organization is exempt.​​

Is Family pension taxed as salary income?

​​​No, but it is taxable as income from other sources.​

If an individual receive their pension through a bank who will issue Form-16 or pension statement to him/her- the bank or their former employer?

​​​​ The bank.

Are retirement benefits like provident fund & Gratuity taxable?

​​​​Government employee’s Gratuity & PF receipts on retirement are exempt from tax. In case of non-Government employee, gratuity is exempt subject to the limits described in this regard and PF receipts are exempt from tax, if the same are received from a recognized PF after rendering continuous service of not less than 5 years.​ No exemption will be available for the interest income accrued during the previous year in the recognized and statutory provident fund to the extent it relates to the contribution made by the employees over INR 2.5 lacs in the previous year. However, if an employee is contributing to the fund but there is no contribution to such fund by the employer, then the interest income accrued during the previous year will be taxable to the extent it relates to the contribution made by the employee to that fund in excess of INR 5 lacs in FY. The CBDT vide notification no 95/2021, dated 31 August 2021, has notified Rule 9D for calculation of taxable interest relating to contribution in a PF or recognized provided fund, exceeding above specified limit.

​​Can employer consider relief u/s 89 for the purposes of calculating the TDS from salary?

​​​​​Yes, if you are a Government employee/PSU employee or company or co-operative society or local authority or university or institution or association or body. In such a case you need to bring Form No. ​10E to your employer.

Is leave encashment taxable as salary?

​​​It is taxable if received while in service. Leave encashment received at the time of retirement is exempt for Government employee. For non-Government employee leave encashment will be exempt subject to the limit prescribed in this behalf under the IT Law.​

Are receipts from life insurance policies along with bonus on maturity taxable?

According to the section 10(10D), any amount received under a life insurance policy, including bonus is exempt from tax. Some receipts would be subject to tax:

1. Any sum received under section 80DD- sub-section (3); or

2. Any sum received under Keyman insurance policy; or

3. Any sum received in respect of policies issued on or after 1st April 2003, in respect of which the amount of premium paid on such policy in any financial year exceeds 20% (10% in respect of policy taken on or after 1st April 2012) of the actual capital sum assured; or

4. Any sum received for insurance on life of *specified person (issued on or after 1st April 2013) in respect of which the amount of premium exceeds 15% of the actual capital sum assured.

* Any person who is –

i)  With disability or severe disability specified u/s 80U; or

ii) Suffering from disease or ailment as specified in the rule made under section 80DDB.

These points need to be noted:

  • Exemption is available only in respect of amount received from life insurance policy.
  • Exemption under section 10(10D)​is unconditionally available in respect of sum received for a policy which is issued on or before 31 March 2003.
  • Amount received on person’s death will continue to be exempt without any condition.​

Where is HRA to be reflected while filing ITR?

​​​The amount of House Rent allowance is required to be disclosed in the income tax return under the column allowances to the extent exempt u/s 10. Section 10(3A) is the relevant section under which the amount of exempt HRA to be shown.

What is the taxability of HRA?

​​​ Following are exempt (Not taxable/deducted from total House Rent allowance received)

(a) Actual amount of HRA received

(b) Rent paid Less 10% of salary

(c) 50% of salary if house taken on rent is situated in Kolkata, Chennai, Mumbai & Delhi​

or 40 % of salary if the house is taken on rent is NOT situated in Kolkata, Chennai, Mumbai & Delhi.

What is the taxability of Fixed Medical allowance?

​​​Medical allowance is fixed allowance paid to the employees on a monthly basis, irrespective of whether they submit the bills to accomplish the expenditure or not. It is fully taxable in the hands of employee.

What is the taxability of Conveyance allowance?

Read sec. 10(14)​​ read with Rule 2BB Conveyance allowance is exempt to the extent of amount received whichever is less. For e.g., If amount received INR 100 and amount spent is INR 80, then only INR 20 is taxable. However, if amount actually spent is INR 100; then nothing is taxable.

Is standard deduction applicable to all the salaried employee whether he/she is an employee of Central/State Government?

The standard deduction is allowed while computing income chargeable under the head salaries. It is available to all employees irrespective of the nature of employer. Standard Deduction is also available to pensioners. Amount of Standard Deduction is INR 50 thousand or amount of salary/pension, whichever is lower. Note: The standard deduction u/s 16(ia) is available only for Pension Chargeable under the head “Income under the head Salaries” and not for Pension chargeable under “Income from Other Sources”.