Meaning of Salary

Wages, Annuity, Pension, Gratuity, Fees, Commission, Perquisites

The term “Salary” under the Income Tax Act is a comprehensive term and includes various types of payments made by an employer to an employee. The income under this head is chargeable to tax on “due or receipt basis, whichever is earlier”.

Components Included Under Salary:

1. Wages: Payment made for the service of labour, typically to skilled or unskilled workers.

2. Annuity: A fixed sum of money paid to someone each year, typically for the rest of their life, arising from employment.

3. Pension: Payment made regularly to a person after retirement from service. It may be uncommuted (regularly received) or commuted (lump sum).

4. Gratuity: A lump sum amount paid by the employer as a token of appreciation for long and meritorious service.

5. Fees and Commission: Additional remuneration paid for specific services.

6. Perquisites: Benefits or amenities provided by the employer in addition to salary and wages, such as rent-free accommodation, car facility etc.

Relevant Sections:

Section 15: Deals with the scope of income under the head “Salaries”.

Section 17(1): Defines salary and its various components.

Allowances (Fully taxable, partly taxable, fully exempt)

Definition of Allowance

An allowance is a fixed monetary amount paid by the employer to the employee to meet specific requirements. It may be fully taxable, partly taxable or fully exempt depending on its nature.

Types of Allowances

1. Fully Taxable Allowances:

These are always included in gross salary and taxed accordingly.

• Dearness Allowance (DA)
• City Compensatory Allowance (CCA)
• Overtime Allowance
• Lunch / Tiffin Allowance

2. Partly Exempt Allowances:

These allowances are exempt to a certain limit specified under the law and the rest is taxable.

• House Rent Allowance (HRA) – Exemption under Section 10(13A) read with Rule 2A
• Entertainment Allowance – Exemption available only to government employees
• Special Allowance under Section 10(14)

3. Fully Exempt Allowances:

These allowances are not taxable under specific provisions.

• Foreign Allowance – For government employees posted outside India
• Allowances paid to High Court and Supreme Court Judges
• UN Allowance – For employees of the UNO

HRA Exemption Formula (Rule 2A):

Exempted amount is the least of the following:

• Actual HRA received
• Rent paid minus 10% of salary
• 50% of salary (if living in metro cities) or 40% (for non-metro)

Perquisites and Profits in Lieu of Salary

Perquisites (Section 17(2))

Perquisites are additional benefits or amenities provided by the employer to the employee either in cash or in kind, in addition to salary or wages.

Types of Perquisites

1. Taxable Perquisites: Rent-free accommodation, company car, interest-free loans etc.

2. Tax-free Perquisites: Medical facility in government hospitals, laptops provided for work etc.

Valuation of Perquisites:

Valuation is done as per Income Tax Rules, particularly Rule 3.

Profits in Lieu of Salary (Section 17(3))

These are payments received by an employee in connection with termination of employment or modification of terms of employment.

Examples:

• Compensation for loss of employment
• Golden handshake payments
• Payments from unrecognized provident fund

Standard Deduction

Overview

Standard deduction is a flat deduction allowed to salaried individuals to reduce their taxable salary income.

Provision under the Act

As per Section 16(ia) of the Income Tax Act:

₹50,000 is allowed as a standard deduction from the gross salary income (as of AY 2024-25).

Conditions:

• Available to all salaried individuals and pensioners.
• Flat deduction – no proof of expenditure required.
• Allowed irrespective of the actual expenses incurred by the employee.

Answer:

Meaning of House Property

Under the Income Tax Act, the term “House Property” refers to any building or land appurtenant thereto that is owned by the assessee and is not used for the purpose of their own business or profession.

Key Points:

• Income from house property is taxable under Sections 22 to 27.
• Ownership may be legal or deemed (e.g., transferred without consideration).
• Land appurtenant includes a compound, garden, parking space, etc., forming part of the property.

Conditions for Taxability under this Head:

• There must be a building or land appurtenant thereto.
• The assessee must be the owner.
• The property should not be used for the assessee’s own business or profession.

Annual Value

Deemed rent

Let out property vs. Self-occupied property

Definition:

Annual Value is the amount for which the property might reasonably be expected to be let out year after year. It is computed as per Section 23 of the Income Tax Act.

Computation of Annual Value:

For a Let Out Property:

Annual Value is the higher of:

• Expected Rent (based on Municipal Value or Fair Rent, subject to Standard Rent)
• Actual Rent received or receivable

Formula: $AV = \max(\text{Expected Rent}, \text{Actual Rent})$

For a Self-Occupied Property:

Annual Value = ₹0 (if only one property is treated as self-occupied)

For more than one self-occupied property, only one can be treated as self-occupied; others are deemed to be let out.

Deemed Rent:

If a property is vacant or not actually let out but could have been rented out, notional rent is considered as deemed rent, particularly for deemed let-out properties.

Answer:

Deductions allowable

Repairs, Property Tax, Interest on borrowed capital

Deductions under Section 24

Two major deductions are allowed from the Net Annual Value (NAV):

• Standard Deduction – Section 24(a): 30% of NAV is allowed as deduction irrespective of actual expenditure.
• Interest on Borrowed Capital – Section 24(b): Interest payable on loans taken for acquisition, construction, repair, renewal or reconstruction of the house property.

Interest on Borrowed Capital Limits:

Note:

Property Tax paid by the owner is deductible only if actually paid during the year and before calculating the Net Annual Value.

Answer:

Meaning of Business and Profession

Section 28 to 44DB of the Income Tax Act deals with taxation of income from business or profession.

Business [Section 2(13)]:

Business includes any trade, commerce, manufacturing, or any adventure or concern in the nature of trade. It encompasses both regular business activities and occasional profit-making transactions.

Profession [Section 2(36)]:

Profession refers to an occupation requiring intellectual or manual skill, typically governed by specialized knowledge. Examples include doctors, lawyers, architects, chartered accountants, etc.

Key Characteristics:

• Profit motive
• Continuity of activity (not mandatory for profession)
• Involvement of capital and labour

Chargeability:

Any profits and gains arising from the carrying on of a business or profession during the previous year are chargeable to tax under this head.

Profits and Gains Chargeable under this Head

General deductions allowable

Specific deductions and disallowances

Incomes Chargeable to Tax [Section 28]:

• Profits from any business or profession carried on by the assessee
• Compensation received on termination or modification of business contracts
• Income from trade or professional associations
• Value of any benefit or perquisite arising from business or profession

Allowable Deductions [Section 30 to 37]:

• Section 30: Rent, rates, taxes, repairs and insurance of buildings
• Section 31: Repairs and insurance of machinery, plant, or furniture
• Section 32: Depreciation on tangible and intangible assets
• Section 35: Expenditure on scientific research
• Section 36: Other specific expenses (e.g., insurance premium, bonus, interest on capital, employer's contribution to provident fund, etc.)
• Section 37: General expenses not covered in above sections but incurred wholly and exclusively for business

Disallowances:

• Section 40: Disallowances relating to payments made to partners, tax payments, etc.
• Section 40A(2): Disallowance of unreasonable payments to related parties
• Section 40A(3): Disallowance of cash payments exceeding ₹10,000 (₹35,000 for transporters)
• Section 43B: Certain payments allowed only on actual payment basis (e.g., GST, PF, gratuity)

Answer:

Presumptive Taxation (Sections 44AD, 44ADA, 44AE)

Purpose of Presumptive Taxation:

To provide relief to small taxpayers from maintaining detailed books of accounts and audit. Under presumptive schemes, income is computed on a percentage basis of turnover or fixed sum.

Section 44AD – For Small Businesses:

• Applicable to: Resident individuals, HUFs, and partnership firms (excluding LLPs)
• Eligible Turnover: Upto ₹2 crore
• Deemed income:
  • 8% of turnover (non-digital)
  • 6% of turnover (digital receipts)

No further deductions allowed under Sections 30 to 38.

Section 44ADA – For Professionals:

• Applicable to: Individuals or partnership firms engaged in specified professions (legal, medical, engineering, accountancy, etc.)
• Gross Receipts Limit: ₹50 lakhs
• Deemed income: 50% of gross receipts

Section 44AE – For Transporters:

• Applicable to: Individuals, HUFs, firms owning not more than 10 goods carriages
• Presumptive income:
  • ₹1,000 per ton per month (for heavy goods vehicles)
  • ₹7,500 per vehicle per month (for others)

Answer:

Meaning of Capital Asset

Capital Asset as per Section 2(14) of the Income Tax Act includes:

• Any kind of property held by an assessee, whether connected with business or not.
• Securities held by Foreign Institutional Investors (FIIs).
• Any rights in or in relation to an Indian company, including rights of management or control.

Exclusions:

The following are not treated as capital assets:

• Stock-in-trade, consumable stores or raw materials held for business/profession.
• Personal movable items (excluding jewellery, paintings, etc.).
• Agricultural land in rural areas of India.

Types of Capital Assets:

• Short-Term Capital Asset (STCA): Held for ≤ 36 months (12 or 24 months for listed securities, units, etc.)
• Long-Term Capital Asset (LTCA): Held for > 36 months (or > 12/24 months as applicable)

Chargeability of Capital Gains

Short-Term Capital Gains (STCG) vs. Long-Term Capital Gains (LTCG)

Section 45:

Capital gain arises when a capital asset is transferred by the assessee during the previous year, and it results in profits or gains.

Short-Term Capital Gain (STCG):

• Arises from transfer of STCA
• Taxed as per normal slab rates (15% in case of STT paid equity shares or mutual funds)

Long-Term Capital Gain (LTCG):

• Arises from transfer of LTCA
• Taxed at 20% with indexation (10% without indexation on equity above ₹1 lakh)

Important Conditions:

• Transfer includes sale, exchange, relinquishment, compulsory acquisition, etc.
• Gains must arise during the previous year and be chargeable in the assessment year

Computation of Capital Gains

Cost of acquisition, improvement, and sale consideration

Indexation benefit

Formula for Capital Gain:

Capital Gain =
$ \text{Full Value of Consideration (FVC)} $
$ - \text{(Transfer Expenses + Cost of Acquisition + Cost of Improvement)} $

Indexed Cost of Acquisition (for LTCG):

$ \text{Indexed Cost} = \frac{\text{Cost of Acquisition} \times \text{CII of Year of Sale}}{\text{CII of Year of Purchase}} $

CII: Cost Inflation Index (as notified by CBDT)

Example of Indexation:

Answer:

Special Provisions:

• No indexation for equity shares/units sold after 31 Jan 2018 (with grandfathering clause)
• Cost of improvement includes capital expenditure incurred after acquisition

Exemptions from Capital Gains Tax (Section 54 series)**

Section 54 – Residential Property:

• Applicable when capital gain arises from sale of residential house
• Investment in another residential house (within 1 year before or 2 years after sale or construction within 3 years)
• Exemption = Amount invested or capital gain, whichever is lower

Section 54F – Asset other than Residential House:

• Applicable for LTCG from sale of assets other than house property
• Entire net sale consideration to be invested in one residential house
• Proportionate exemption if entire proceeds not invested

Section 54EC – Bonds:

• Exemption available if LTCG invested in NHAI/REC bonds within 6 months
• Maximum exemption limit: ₹50 lakh
• Lock-in period: 5 years

Other Exemptions:

• Section 54B: Sale of agricultural land used by assessee/family
• Section 54D: Compulsory acquisition of industrial undertakings

Answer:

Sources of Income Chargeable under this Head

Interest on securities

Interest earned on securities like government bonds, debentures, etc., is taxable under this head if not chargeable under “Profits and Gains from Business or Profession.”

Grossing up: If the interest is received net of tax, grossing up must be done before taxation.

Taxability: Taxable on due or receipt basis, whichever is earlier.

Dividends

Dividends received from domestic companies are fully taxable in the hands of the shareholder under this head (from AY 2021–22 onwards).

Deemed dividend under Section 2(22)(e): Loans/advances to shareholders having significant interest are treated as deemed dividend and taxed accordingly.

Winnings from lottery, crossword puzzles, etc.

Winnings from lottery, horse races, crossword puzzles, game shows, and other similar sources are taxable at flat rate of 30% under Section 115BB without any deduction for expenses.

Also includes winnings from gambling or betting of any form.

Income from undisclosed sources

Any unexplained cash credit, investment, or expenditure under Sections 68 to 69D, if not offered under any other head, shall be deemed as income under this head.

Taxed under Section 115BBE at 60% + surcharge + cess with no deductions allowed.

Gifts received

Gifts are taxable under Section 56(2)(x) if:

• Monetary gift > ₹50,000 received without consideration
• Immovable property received without/inadequate consideration
• Specified movable property (e.g., shares, jewellery) received without/inadequate consideration

Exemptions: Gifts received from relatives, on marriage, under will/inheritance, or in contemplation of death.

Answer:

Deductions allowable under this head

Section 57 – Deductions:

The following deductions are allowable from income chargeable under this head:

• Interest on securities: Any commission or remuneration for realising such interest.
• Dividend income: No deduction allowed from AY 2021–22 onwards.
• Family pension: Deduction of 1/3rd of such income or ₹15,000, whichever is less.
• Other income: Expenses incurred wholly and exclusively to earn such income are deductible.

No deductions allowed for:

• Winnings from lottery, crossword puzzles, betting, etc.
• Unexplained income under Sections 68–69D taxed under Section 115BBE

Answer: