prpri Taxability of salary income & ITR Filing for Salaried Individuals Taxability of salary income & ITR Filing for Salaried Individuals

All about taxability of salary income and Income Tax Return (ITR) Filing for Salaried Individuals:

What is Salary and its Components:

The provisions pertaining to salary are contained in sections 15, 16 and 17 of the Income Tax Act, 1961.

Salary income refers to the compensation received by an employee from a current or former employer for the execution of services in connection with employment. Thus, income is taxable as salary under Section 15 only if an employer-employee relationship exists between the payer and payee.

The salary for the purpose of calculation of income from salary includes:

  • Wages;
  • Pension;
  • Annuity;
  • Gratuity;
  • Advance Salary paid;
  • Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages;
  • Annual accretion to the balance of Recognized Provident Fund;
  • Leave Encashment;
  • Transferred balance in Recognized Provident Fund;
  • Contribution by Central Govt. or any other employer to Employees Pension A/c as referred in Sec. 80CCD.

The term salary includes various allowances and perquisites provided by the employer which are taxable at normal Income Tax Rates. However various exemptions u/s 10 of the Income Tax Act, 1961 are provided while taxing these allowances and perquisites which are further discussed in detail:

Difference between allowances and perquisites:

Allowances Perquisites
Allowances are fixed amounts, apart from salary, which are paid by an employer for the purpose of meeting some particular requirements of the employee. There are generally three types of allowances for the purpose of income tax- taxable, fully exempted and partially exempted. Perquisites are those payments which are received by an employee from the employer over and above the salary.

A) Allowances:

Fully Taxable Allowances:

  • Dearness Allowance: The allowance is paid to the employees to cope with inflation.
  • Overtime Allowance: Overtime allowance is the allowance which is paid to the employees for working above the regular work hours.
  • City Compensatory Allowance: This allowance is paid to those employees who move to urban cities.
  • Project Allowance: When an employer provides an allowance to the employees to meet the project expenses.
  • Tiffin/Meals Allowance: Employees may be provided with meal allowances in some cases.
  • Cash Allowance: Employer may also provide cash allowance in some cases like for marriage or holiday purposes.

Partly Taxable Allowances:

The exemptions and deductions pertaining to such allowances are covered under the provisions of section 10(13A) and section 10(14) of the Income Tax Act, 1961 which is further elaborated vide Rule 2A and Rule 2BB of the Income Tax Rules. Various allowances covered under this part are:

1. House Rent Allowance:

It is the allowance that an employer pays to his employee for accommodation.

Exemption: The lower of the following is allowed as exemption:

i) Actual Amount Received or

ii) the amount by which the expenditure actually incurred by the assessee in payment of rent in respect of residential accommodation occupied by him exceeds one-tenth of the amount of salary due to the assessee in respect of the relevant period; or

iii) an amount equal to—

  • where such accommodation is situate at Bombay, Calcutta, Delhi or Madras, one-half of the amount of salary due to the assessee in respect of the relevant period; and
  • where such accommodation is situate at any other place, two-fifth of the amount of salary due to the assessee in respect of the relevant period

2. Entertainment Allowance:

This is an allowance that is provided to the employees to reimburse the expenses which are incurred on the hospitality.

Deduction: a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less;

3. Children Education and Hostel Allowance:

This is the allowance that is provided to the employees to meet the expenses pertaining to education of children and hostel expenditure.

Exemption: Rs. 100 per month per child maximum for two children in respect of children education and Rs. 300 per month per child maximum for two children in respect of hostel expenditure.

Also there are various kind of special allowances which are covered in table below:

Any special allowance in the nature of counter-insurgency allowance granted to the members of armed forces operating in areas away from their permanent locations Rs 3900 per month
Transport allowance granted to an employee, who is blind [or deaf and dumb] or orthopedically handicapped with disability of lower extremities, to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty Rs 3200 per month
Underground Allowance granted to an employee who is working in uncongenial, unnatural climate in underground mines Rs 800 per month
Any special allowance granted to the members of the armed forces in the nature of special compensatory highly active field area allowance Rs 4200 per month

Non Taxable allowances:

  • Allowances that is paid to the Govt. servants abroad:When the government employee of India are paid allowances when they are serving abroad.
  • Sumptuary allowances: Sumptuary allowances which are paid to the judges of HC and SC are not taxed.
  • Allowance paid by UNO:Allowances which is received by the employees of UNO are fully exempt from tax.
  • Compensatory allowance paid to judges: When a judge receives a compensatory allowance, it is also not taxable.

B) Perquisites:

i. Perquisites that are taxable for all the employees:

  • Rent free accommodation
  • Club fee payments
  • Movable assets
  • Concession in accommodation rent
  • Interest-free loans
  • Educational expenses
  • Insurance premium paid on behalf of employees.

ii. Perquisites that are exempt from tax:

  • Medical benefits
  • Health Insurance Premium
  • Leave travel concession
  • Staff Welfare Scheme
  • Car, laptop etc. for personal use.

Who all are required to file ITR :

In accordance with the provisions of Section 139(1) every person whose total income exceeds the maximum amount chargeable to tax i.e. Rs. 2,50,000 or Rs. 3,00,000 or Rs. 5,00,000 whichever applicable is required to furnish its return of Income.

Various Forms for filing of ITR for salaried individuals:

  • ITR-1 OR SAHAJ

This Return Form is for a resident individual whose total income for the AY 2021-22 includes:

    • Income from Salary/ Pension; or
    • Income from One House Property (excluding cases where loss is brought forward from previous years); or
    • Income from Other Sources (excluding Winning from Lottery and Income from Race Horses)
    • Agricultural income up to Rs.5000.
    • Total Income of the assessee should not exceed Rs 50Lakhs
  • ITR 2

ITR 2 is for the use of an individual or a Hindu Undivided Family (HUF) whose total income for the AY 2021-22 includes:

    • Income from Salary/Pension; or
    • Income from House Property; or
    • Income from Other Sources (including Winnings from Lottery and Income from Race Horses).
    • Income from Capital Gains
    • Total Income Exceeds Rs. 50 Lakhs
  • ITR 4

The current ITR 4 applies to individuals and HUFs, Partnership firms (other than LLPs), which are residents and whose total income include:

    • Business income according to the presumptive income scheme under section 44AD or 44AE
    • Professional income according to presumptive income scheme under section 44ADA
    • Income from salary or pension up to Rs.50 lakh
    • Income from one house property, not more than Rs.50 lakh (excluding the amount of brought forward loss or loss to be carried forward)
    • Income from other sources having income not more than Rs 50 Lakh

The return can be filed through new offline utility (ITD e filing) or online through new income tax website i.e. http://www.incometax.gov.in.

Author Bio

Qualification: CA in Practice
Company: Jatin Bansal And Associates
Location: Delhi, Delhi, India
Member Since: 27 Apr 2020 | Total Posts: 2

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