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1. Income from salary & pension

Income from salary is the income or remuneration received by an individual against provide services rendering or a contract undertaken by him.

Any remuneration paid by an employer to their employee in consideration of his/her service is called Salary. It includes monetary value of those benefits and facilities provided by the employer which must be taxable.

Any salary, bonus, commission or remuneration paid or received by a partner of a firm shall not be regarded as salary for the purpose of this section. The same shall be taxable under the head Profits and gains of business and profession as per section 28 of Income Tax Act,1961

The Income under the head of salary must be follow the below criteria.

  • a) If any income taxable under head Salaries is earned in India, it is deemed to arise in India.
  • b) If a person employed in India & leave outside the country, draws salary for the leave period there, the leave salary shall be deemed to have been earned in India.

ALLLOWANCES:

Employer paid to their employees usually at regular intervals, other than salary are known as allowances. In other words, it is defined as a fixed quantity of money given regularly in addition to salary for specific requirements of the employees. In Income Tax point of view, there are 3 types of allowances which are as follows.

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A)Taxable Allowance

A) Taxable Allowance – The allowances which are fully taxable under Income tax act, 1961. While calculated taxable salary total amount is added into the salary. Following are the allowances which are fully taxable. Dearness Allowance, Fixed medical allowance, Non-practicing allowance, Tiffin allowance, Servant allowance, Hill allowance, Warden/ Proctor allowance, Deputation allowance, Overtime allowance, City Compensatory allowance, Telephone allowance, Holiday allowance etc.

Description about allowances:

  • 1. Dearness Allowance - This allowance is given by employer to the employees on account of prices rise. Dearness Allowance is an allowance granted to the employees to compensate for the cost of inflation. In some case certain portion of the Dearness Allowance is converted into Dearness Pay, then the allowance would get calculated on Basic Pay + Dearness Pay. Normally Dearness Allowance is calculated as certain percentage of Basic Pay. In some cases where there is Dearness Pay, then the Dearness Allowance would get calculated on (Basic Pay + Dearness Pay). To that extent the employee should get surplus amount in absolute terms. Such DP is also taken into account at the time of arriving at the pension benefits etc

  • 2. Non Practicing Allowance - It is generally given to the medical doctors who are in government service but they should not involve any private practice. This allowance is given to them to compensate this ban.

  • 3. Deputation allowance - When an employee is transferred from his permanent place of service to some other place, institution or organization on deputation for a temporary period, this allowance is given to them, which should be taxable.

  • 4. City Compensatory Allowance - The allowance is paid to those employees those are worked in metro cities/big cities. The idea is to compensate the high cost of living in cities like Delhi, Mumbai, Chennai, Bangalore,Kolkatta and other metropolitan cities. However, it is a fully taxable allowance. i.e. the amount of this allowance will be taxed with the salary received.

B) Allowance exempted up to certain limit

i) House Rent Allowance - HRA is given to meet towards rented house taken by the employee. The Income Tax Act allows for deduction in respect of the HRA paid to employees. The exemption on HRA is covered under Section 10(13A) of the Income Tax Act and Rule 2A of Income Tax Rules. HRA is exempt to the extent of the minimum meet of following three criteria.

  • Actual Amount Received.

  • Excess of Rent paid by the employee over 10 % of salary.

  • 50% of the salary for metro cities i.e Delhi, Mumbai, Kolkata, Chennai, Bangalore and 40% of the salary for non-metro cities.


ii) Entertainment Allowance - It is an allowance given by an employer to employee. It should be included in income from salary under section 15 and then deduction is allowed for govt. employee under sec 16(ii).

Deduction under entertainment allowance:

  • Amount Actual received by Govt. employee or
  • 20% of salary or
  • Rs. 5,000/- .
which ever is lower on the above should be deducted.

There are two types of special allowances which should be partly taxable as.

a) Allowances for performance of official duties – These allowances are exempt to the extent of actual amount received or the amount spent for the purpose of official duties, whichever is less. i.e. Travelling allowance, Daily allowance, Helper allowance etc.


b) Allowances to meet personal expenses - Many allowances covered under this category but some allowances which are as follows.

  • Children Education Allowance - Exempt up to actual amount received per child or Rs.100 p.m. per child up to a maximum of 2 children, whichever is less.
  • Hostel Expenditure Allowance – Exempt up to actual amount received per child or Rs.300 p.m. per child up to a maximum of 2 children, whichever is less.
  • Tribal Area Allowance – Exempt up to actual amount received or Rs. 200 per month, whichever is less.
  • Transport Allowance – It is exempt up to Rs.1600 p.m. but in case of blind or orthopedically handicapped, it is exempt up to Rs. 3200 p.m.
  • Allowance for transport employees –Fixed Allowance given by employer to his employee working in any transport system, to meet his personal expenditure during his performance of duty and amount of exemption shall be 70% of such allowance or Rs.10,000 p.m. whichever is less.

C) Fully exempted

C)Fully Exempted allowance- There are certain allowances which are fully exempt under Income Tax Act,1961. Such as Foreign Allowance paid by the government to an Indian citizen outside India for rendering services in abroad. It is fully exempted. There may be several types of foreign allowances e.g. overseas allowance, Children Education allowance, etc.

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