1

Principles of taxation
project
TOPIC deduction from salary under
the head salaries
PROJECT SUBMITTED TO
BY

Mr. Rana Navneet Roy

BHARGAV

PROJECT SUBMITTED

RISHABH
SEMESTER - V
ROLL NO 129
SEC - A

DATE OF SUBMISSION 16.08.2016

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HIDAYATULLAH NATIONAL LAW

UNIVERSITY
TABLE OF CONTENTS

Acknowledgments................................................3
Introduction...........................................................4
Objective.................................................................5
Research Methodology.........................................5

Meaning and characteristics of salary6

Definition of salary under income tax act
1961......7
Essential norms of salary income...8
Income forming part of salary...10
Deduction from salary income (section16)..14
Deduction from gross total income (section 80)

Conclusion.................................................................20
Bibliography...............................................................21

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ACKNOWLEDGEMENTS
I have made this project work, and on the way of completing it, I have learned a lot of
things for which I am thankful to Mr. Rana Navneet Roy, Assistant professor, HNLU,
Raipur, and my guide, who gave me the opportunity to do this project work and guided me
all the way. I would also like to thank my friends, and colleagues, for their opinions,
suggestions and critical analysis, which has helped me to improve this project. I also thank
the HNLU library and the people working there. Their silent work is the reason behind the
completion of this project.
I thank God, He has been very generous on me, to have kept me in good health and make
the conditions favourable for me to complete this work in time.
Lastly, I thank my parents. Without their continuous support and belief in me, I would
never have been able to make this project.

- rishabh bhargav

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INTRODUCTION

A salary is a form of periodic payment from an employer to an employee, which may be

specified in an employment contract. It is contrasted with piece wages, where each job, hour
or other unit is paid separately, rather than on a periodic basis. From the point of view of
running a business, salary can also be viewed as the cost of acquiring and retaining human
resources for running operations, and is then termed personnel expense or salary expense. In
accounting, salaries are recorded in payroll accounts.

Salary is a fixed amount of money or compensation paid to an employee by an employer in

return for work performed. Salary is commonly paid in fixed intervals, for example, monthly
payments of one-twelfth of the annual salary.

Salary is typically determined by comparing market pay rates for people performing similar
work in similar industries in the same region. Salary is also determined by levelling the pay
rates and salary ranges established by an individual employer. Salary is also affected by the
number of people available to perform the specific job in the employer's employment locale.

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OBJECTIVES

The objectives of this project work are as

follows:

1. To study the meaning and characteristics of salary.

2. To discuss the incomes forming part of salary.
3. To analyse the deduction from salary income.

RESEARCH METHODOLOGY
The research is based on secondary sources. Literature Books from the universitys library
have been used. Articles and reports from different websites have been used in order to get
comprehensive data on the subject Footnotes have been provided wherever needed, to
acknowledge the source.

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SCOPE OF STUDY

My scope of study revolves around salary income and its deductions from head salary

MEANING AND CHARACTERISTICS OF

SALARY
Salary, in simple words, means remuneration of a person, which he has received from his
employer for rendering services to him. But receipts for all kinds of services rendered cannot
be taxed as salary. The remuneration received by professionals like doctors, architects,
lawyers etc. cannot be covered under salary since it is not received from their employers but
from their clients. So, it is taxed under business or profession head. In order to understand
what is included in salary, let us discuss few characteristics of salary.

Characteristics of Salary:
1. The relationship of payer and payee must be of employer and employee for an income
to be categorized as salary income. For example: Salary income of a Member of
Parliament cannot be specified as salary, since it is received from Government of
India which is not his employer.
2. The Act makes

no distinction between salary and wages, though generally

salary is paid for non-manual work and wages are paid for manual work.
3. Salary received

from employer, whether one or more than one is included

in this head.
4. Salary is taxable either

on due basis or receipt basis which ever matures

earlier.
i) Due basis - when it is earned even if it is not received in the previous
year.
ii) Receipt basis - when it is received even if it is not earned in the previous
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year.
iii) Arrears of salary- which were not due and received earlier are taxable when due or
received, whichever is earlier.
5. Compulsory deduction

from salary such as employees contribution to provident

fund, deduction on account of medical scheme or staff welfare scheme etc. are examples of
instances of application of income. In these cases, for computing total income, these
deductions have to be added back.

DEFINITION OF SALARY UNDER INCOME TAX ACT

1961
Under section 17(1), salary is defined to include the following:
a. wages;
b. any annuity or pension;
c. any gratuity;
d. any fees, commission, perquisite or profits in lieu of or in addition to any salary or
wages;
e. any advance of salary;
f. Any payment received in respect of any period of leave not availed by him;
g. The portion of the annual accretion in any previous year to the balance at the credit of an
employee participating in Recognized Provident Fund to the extent it is taxable;
h. Transferred balance in a Recognized Provident Fund to the extent it is taxable; and
I. The contribution made by the Central Government in the previous year, to the account of
an employee under a pension scheme referred to in section 80CCD (applicable from the
assessment year 2004-05).

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Essential norms of salary income

In order to understand the meaning of expression salary", one has to keep in mind the
following norms:
1. Relationship between payer and payee - Income under the head "Salaries* covers
all remuneration due/paid to a person in respect of services rendered by him under
an express or implied contract of employment. Charge under this head of income
presumes the relationship of an employer and an employee between the payer and
payee in contrast to that of a principal and an agent. The distinction between the
two types of relationship is vital because income earned by an employee from his
employer is chargeable under the head Salaries, whereas income earned by an
agent is chargeable either under the head Profits and gains of business or
profession or under the head Income from other sourcesCowan v. Seymour1.

2. Salary and wages - Conceptually not different - Conceptually, there is no

1[ 1920] 1 KB 500 (CA).
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difference between salary and wages. Both are compensation for work done or
services rendered, though ordinarily salary is paid in connection with services of
non-manual type of work, while wages are paid in connection with manual services
Gestetner Duplicators (P.) Ltd. v. CIT2

3. Salary from more than one source - If an individual receives salary from
more than one employer during the same previous year (maybe due to change of
employment or due to employment with more than one employer simultaneously),
salary from each source is taxable under the head Salaries. For instance, if a clerk
works with two employers on part-time basis, salary from both the employers will be
chargeable to tax under the head "Salaries".
4. Salary from former employer, present employer or prospective

employer - Remuneration received (or due) during the previous year is chargeable
to tax under the head Salaries irrespective of whether it is received from a former,
present or prospective employer.
5. Salary income must be real and not fictitious - Amount taxable under the
head Salaries is real salary and not fictitious salary. There should be an intention to
pay and receive salary. Where, for example, there was, merely in order to comply
with the requirement of the Board of Education Rules, an agreement between the
assessee (a school teacher) and the governing body of the school granting a certain
salary to the assessee and simultaneously there was another agreement by which an
identical sum was to be returned by the assessee to the governing body as donation,
it was held that there was in reality no agreement to pay and receive salaryReadex.
Brearley3. Likewise, if there is no intention to render any service and agreement is
made to make payment on paper in order to claim the same as business deduction,
the amount received by the so-called employee is not chargeable as salary.

6.

Surrender of salary - If an employee opts to surrender his salary to the Central

Government under section 2 of the Voluntary Surrender of Salaries (Exemption from
Taxation) Act, 1961, the salary so surrendered would be excluded while computing

2 [1979] 117ITR 1 (SC).

3 [ 1933] 17 TC 687
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his taxable income. Thus, tax is not payable in respect of salary surrendered, which
can be basic salary as well as different allowances. Benefit of tax exemption in
respect of salary surrendered is available to all employees whether they are employed
in private sector or public sector. In CITv. Raghunath Murti, the assessee-managing
director revised return because he had to refund certain sum to his employer-company
as the same was found in excess of limits prescribed in the Companies Act, 1956. The
Delhi High Court held that as the said refund was neither voluntary nor was it for any
extraneous consideration, the same could not be held to be the assessees income and,
therefore, was not assessable.
7. Voluntary payments - Salary, perquisite or allowance may come as a gift to an
employee and yet it would be taxable. The Act does not make any distinction between
gratuitous payment and contractual payment

INCOMES FORMING PART OF SALARY

Section 17 of the Act gives an inclusive definition of salary. Broadly, it includes:

1. Basic salary
2. Fees, Commission and Bonus
3. Taxable value of cash allowances
4. Taxable value of perquisites
5. Retirement Benefits

1. BASIC SALARY
All employees are entitled to a basic salary which is fixed as per their respective terms of
employment either as a fixed amount or at a graded system of salary. Under this graded
system, apart from the basic salary at which the employee will start, annual increments to
be given to the employee are pre fixed in the grade. For example, if a person is employed
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on 1st May, 2004 in the grade of 12000 - 300 - 15000, this means that he will start at a
basic salary of Rs.12000 from 1st May, 2004. He will get an annual increment of Rs.300
w.e.f. 1st May, 2005 and onwards every year on the same date till his basic salary reaches
Rs.15, 000. No further increment is given thereafter till he is promoted and placed in other
grade.

2. FEES, COMMISSION AND BONUS

Any fees or commission paid or payable to an employee is fully taxable and is included in
salary. Commission payable may be at a fixed amount or a fixed percentage of turnovers.
In both the cases, it is taxable as salary only when it is paid or payable by the employer to
the employee. When commission is based on fixed percentage of turnover achieved by
employee, it is included in basic salary for the purpose of grant of retirement benefits and
for computing certain exemptions that we will discuss later on.

3. TAXABLE VALUE OF ALLOWANCES

Allowance is a fixed monetary amount paid by the employer to the employee (over and
above basic salary) for meeting certain expenses, whether personal or for the performance
of his duties. These allowances are generally taxable and are to be included in gross salary
unless specific exemption is provided in respect of such allowance. For the purpose of tax
treatment, we divide these allowances into 3 categories:
I. Fully taxable cash allowances
II.Partially exempt cash allowances
III. Fully exempt cash allowances

I.

FULLY TAXABLE ALLOWANCES

This category includes all the allowances, which are fully taxable. So, if an allowance is not
partially exempt or fully exempt, it gets included in this category. The main allowances under
this category are enumerated below:
(i) Dearness Allowance and Dearness Pay

As is clear by its name, this allowance is paid to compensate the employee against the rise in
price level in the economy. Although it is a compensatory allowance against high prices, the
whole of it is taxable. When a part of Dearness Allowance is converted into Dearness Pay, it
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becomes part of basic salary for the grant of retirement benefits and is assumed to be given
under the terms of employment.
(ii) City Compensatory Allowance

This allowance is paid to employees who are posted in big cities. The purpose is to
compensate the high cost of living in cities like Delhi, Mumbai etc. However, it is fully
taxable.

(iii)Tiffin / Lunch Allowance

It is fully taxable. It is given for lunch to the employees.

(iv)Non practicing Allowance
This is normally given to those professionals (like medical doctors, chartered accountants

etc.) who are in government service and are banned from doing private practice. It is to
compensate them for this ban. It is fully taxable.
(v) Warden or Proctor Allowance

These allowances are given in educational institutions for working as a Warden of the hostel
or as a Proctor in the institution. They are fully taxable.
(vi)Overtime Allowance

When an employee works for extra hours over and above his normal hours of duty, he is
given overtime allowance as extra wages. It is fully taxable.
(vii)

Fixed Medical Allowance

Medical allowance is fully taxable even if some expenditure has actually been incurred for
medical treatment of employee or family.
(viii)
Other allowances
There may be several other allowances like family allowance, project allowance, marriage

allowance, education allowance, and holiday allowance etc. which are not covered under
specifically exempt category, so are fully taxable.

II.PARTIALLY EXEMPT ALLOWANCES

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This category includes allowances which are exempt upto certain limit. For certain
allowances, exemption is dependent on amount of allowance spent for the purpose for which
it was received and for other allowances, there is a fixed limit of exemption
(i) House Rent Allowance (H.R.A.)

An allowance granted to a person by his employer to meet expenditure incurred on payment

of rent in respect of residential accommodation occupied by him is exempt from tax to the
extent of least of the following three amounts:
a) House Rent Allowance actually received by the assessee
b) Excess of rent paid by the assessee over 10% of salary due to him
c) An amount equal to 50% of salary due to assessee (If accommodation is situated in
Mumbai, Kolkata, Delhi, Chennai)
Or an amount equal to 40% of salary (if accommodation is situated in any other
place).
If an employee is living in his own house and receiving HRA, it will be fully taxable.

(ii) Special Allowances for meeting official expenditure

Certain allowances are given to the employees to meet expenses incurred exclusively in
performance of official duties and hence are exempt to the extent actually incurred for the
purpose for which it is given. These include travelling allowance, daily allowance,
conveyance allowance, helper allowance, research allowance and uniform allowance.
(iii)Special Allowances to meet personal expenses

There are certain allowances given to the employees for specific personal purposes and the
amount of exemption is fixed i.e. not dependent on actual expenditure incurred in this regard.
These allowances include:
a) Children Education Allowance

This allowance is exempt to the extent of Rs.100 per month per child for maximum of 2
children (grand children are not considered).

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b) Transport Allowance

This allowance is generally given to government employees to compensate the cost incurred
in commuting between place of residence and place of work. An amount uptoRs.800 per
month paid is exempt. However, in case of blind and orthopedically handicapped persons, it
is exempt up to Rs. 1600p.m.

III.

FULLY EXEMPT ALLOWANCES

(i) Foreign allowance

This allowance is usually paid by the government to its employees being Indian
citizen posted out of India for rendering services abroad. It is fully exempt from tax.
(ii) Allowance to High Court and Supreme Court Judges of whatever nature are
exempt from tax.
(iii)
Allowances from UNO organization to its employees are fully exempt
from tax.

DEDUCTION FROM SALARY INCOME

[SECTION. 16]

The income chargeable under the head Salaries" is computed after making the following
deductions:
a. standard deduction
b. entertainment allowance and
c. professional tax
1. Standard deduction [Sec. 16(i)] - Standard deduction is now not available.
2. Entertainment allowance [Sec. 16(ii)] - Entertainment allowance is first included in
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income under the head "Salaries and thereafter a deduction is given on the basis
enumerated in the following paragraph:
In the case of a Government employee (ie, a Central Government or a State
Government employee), the least of: (a) Rs. 5,000; (b) 20 per cent of salary; or (c)
amount of entertainment allowance granted during the previous year, is deductible.
In order to determine the amount of entertainment allowance, deductible from salary, the
following points need consideration:
1. For this purpose salary" excludes any allowance, benefit or other perquisites.
2. Amount actually expended towards entertainment out of entertainment allowance
received is not taken into consideration. Deduction is granted according to the
aforesaid rules, even if the amount received as entertainment allowance is not
proved to have been spentCIT v. Kamla Devi4
3. Professional tax or tax on employment [Sec. 16(iii)]-Professional tax or tax on
employment levied by a State under article 276 of the Constitution is allowed as deduction.
The following points should be kept in view:
1. Deduction is available only in the year in which professional tax is paid.
2. If the professional tax is paid by the employer on behalf of an employee, it is first
included in the salary of the employee as a "perquisite" (since it is an obligation of
the employee discharged by the employer, it is taxable) and then the same amount is
allowed as deduction on account of professional tax" from gross salary.
3. There is no monetary ceiling under the Income-tax Act (under article 276 of the
Constituting State government cannot impose more than Rs. 2,500 per annum as
professional tax). Under the Income-tax Act, whatever professional tax is paid
during the previous year is deductible. Suppose X, posted in Hyderabad, is
required to pay Rs. 2,000 every year as professional tax. On May 31, 2012, he pays
Rs. 4,000 on account of professional tax (ie. Rs. 2,000 for the year 2011 -12 and
Rs. 2,000 for the year 2012-13). In this case, Rs. 4,000 is deductible for the
previous year 2012-13 (it is incorrect to state that in such a case only Rs. 2,500 is
deductible).
(i)

4 [1971] 81ITR 773 (Delhi).

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DEDUCTIONS FROM GROSS TOTAL INCOME

[SECTION 80]
Indian tax laws contain certain provisions, which are intended to act as an incentive foe
achieving certain desirable socio-economic objectives. These provisions are contained in
chapter VIA and are in the form of deductions (80C TO 80U) from gross total income. By
reducing the chargeable income, these provisions reduce the tax liability, increase the posttax income and thus induce the tax payers to act in the desired manner. This unit is
intended to give a broad idea of deductions.
Following are the basic rules of deduction:
1. The aggregate amount of deductions under sections 80C to 80U cannot exceed gross
total income( gross total income after excluding long term capital gains, short term
capital gains under section 111A, winning from lottery, crossword puzzles etc.)
2. These deductions are to be allowed only if the assessee claims these and gives the
proof of such investments/ expenditure/ income.

Section 80C:
This section has been introduced by the Finance Act 2005. Broadly speaking, this section
provides

deduction

from

total

income

in

respect

of

various

investments/

expenditures/payments in respect of which tax rebate u/s 88 was earlier available. The total
deduction under this section (along with section 80CCC and 80CCD) is limited to Rs. 1 lakh
only (proposed to be increased to Rs. 1.50 lacs from 01.04.2014).

Life Insurance Premium For individual, policy must be in self or spouse's or any
child's name. For HUF, it may be on life of any member of HUF.

Sum paid under contract for deferred annuity For individual, on life of self, spouse or
any child.

Sum deducted from salary payable to Govt. Servant for securing deferred annuity for
self-spouse or child Payment limited to 20% of salary.

Contribution made under Employee's Provident Fund Scheme.

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Contribution to PPF For individual can be in the name of self/spouse, any child & for
HUF, it can be in the name of any member of the family.

Contribution by employee to a Recognised Provident Fund.

Sum deposited in 10 year/15 year account of Post Office Saving Bank

Subscription to any notified securities/notified deposits scheme. e.g. NSS

Subscription to any notified savings certificate, Unit Linked Savings certificates. e.g.
NSC VIII issue.

Contribution to Unit Linked Insurance Plan of LIC Mutual Fund e.g. Dhanrakhsa
1989

Contribution to notified deposit scheme/Pension fund set up by the National Housing

Scheme.

Certain payment made by way of instalment or part payment of loan taken for
purchase/construction

of

residential

house

property.

Condition has been laid that in case the property is transferred before the expiry of 5 years
from the end of the financial year in which possession of such property is obtained by him,
the aggregate amount of deduction of income so allowed for various years shall be liable to
tax in that year.

Contribution to notified annuity Plan of LIC (e.g. Jeevan Dhara) or Units of

UTI/notified Mutual Fund. If in respect of such contribution, deduction u/s 80CCC has been
availed of rebate u/s 88 would not be allowable.

Subscription to units of a Mutual Fund notified u/s 10(23D).

Subscription to deposit scheme of a public sector, company engaged in providing

housing finance.

Subscription to equity shares/ debentures forming part of any approved eligible issue
of capital made by a public company or public financial institutions.

Tuition fees paid at the time of admission or otherwise to any school, college,
university or other educational institution situated within India for the purpose of full time
education of any two children. Available in respect of any two children

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Section 80CCC (pension)

A payment made to LIC or to any other approved insurer under an approved pension plan is
admissible for deduction under this section. Then pension plan policy should be for
individual himself out of his taxable income. The deduction is least of the amount paid or
1,00,000

Section 80CCD: Deduction in respect of Contribution to

Pension Account
Deductions to the extent of 10% of one's salary are available on deposits made by a Central
government servant in one's pension account.
If the Central Government makes any contribution to the pension account, deduction of such
contribution to the extent of 10% of salary shall be allowed. Further, in any year where any
amount is received from the pension account such amount shall be charged to tax as income
of that previous year.

Section 80DDB: Deduction in respect of Medical

Expenditure on Self or Dependent Relative
A deduction to the extent of Rs. 40,000/- or the amount actually paid, whichever is less is
available for expenditure actually incurred by resident assessee on himself or dependent
relative for medical treatment of specified disease or ailment. The diseases have been
specified in Rule 11DD. A certificate in form 10 I is to be furnished by the assessee from any
Registered Doctor.

Section 80E: Deduction in respect of Interest on Loan for

Higher Studies
Interest payment on education loan for education in India or abroad gets deduction under this
section. Education loan should be for self, spouse, child or the one whose legal guardian the
assessee.

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Section 80 TTA: Deduction from gross total income in

respect of any Income by way of Interest on Savings
account
Deduction from gross total income of an individual or HUF, upto a maximum of Rs. 10,000/-,
in respect of interest on deposits in savings account ( not time deposits ) with a bank, cooperative society or post office, is allowable.

Section 80U: Deduction in respect of Person suffering

from Physical Disability
Deduction of Rs. 50,000/- to an individual who suffers from a physical disability (including
blindness) or mental retardation. Further, if the individual is a person with severe disability,
deduction of Rs. 100,000/- shall be available u/s 80U. Certificate should be obtained from a
Govt. Doctor. The relevant rule is Rule 11D.

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CONCLUSION

Tax deductions are one of the few tax topics that generate some excitement. While nobody
likes to pay taxes, everybody loves to use deductions to lower their taxes. To put it plainly, a
tax deduction lowers your taxable income, which therefore lowers your tax liability. Some
people mistakenly think a tax deduction is a direct reduction of taxes owed. That is actually a
tax credit, which does directly reduce the amount of taxes owed instead of simply reducing
your taxable income.

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BIBLIOGRAPHY

BOOKS REFERRED
1. Ahuja Girish and Ravi Gupta (2006), Systematic Approach to Income Tax and Sales

Tax, Bharat Publication, Sahitya Bhawan, Agra

2. Chandra Mahesh and D.C. Shukla (2006), Income Tax Law and Practice, Pragati
Publication, New Delhi.
3. Mehrotra H.C. (2006), Income Tax Law and Accounts, Sahitya Bhawan, Agra.
4. Singhania V.K. and Monica Singhania (2006), Students Guide to Income Tax,
Taxmann Publications, New Delhi.

WEBSITES
1. http://en.wikipedia.org/wiki/Income_tax_in_India#Permissible_ded
uctions_from_Gross_Total_Income
2. http://www.slideshare.net/sanjaySDessai/permissible-deductionsfrom-gross-total-income-under-section-80-of-income-tax-act-1961
3. http://www.caclubindia.com/articles/section-80c-deduction-asper-income-tax-act-21161.asp#.U_7wKfmSwcY

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