Income from Salaries (ss.15–17); Perquisites; Deductions — Law of Taxation Notes

Income from Salaries (ss.15–17); Perquisites; Deductions

An employee received a “uniform allowance” and asked: is this taxable? The recurring exam answer teaches the whole head — some pay is fully taxed, some is a perquisite, and some allowances are exempt only to the extent actually spent. “Salary” in tax law is far more than basic pay.

The scheme of the head “Salaries”

Salary is taxed under ss.15–17. The essential condition is an employer-employee relationship (a master-servant relationship). Fees a professional earns from clients are business income, not salary; a director’s sitting fees may be other sources — salary needs employment.

Section 15 — the charge. Salary is taxable on a due or receipt basis, whichever is earlier (so salary “due” but not yet paid is taxed; advance salary is taxed when received).

Section 17 — what “salary” includes (s.17(1)): wages, any annuity or pension, gratuity, any fees, commission, perquisites or profits in lieu of salary, advance of salary, leave encashment, and the employer’s contribution to a recognised provident fund beyond limits.

Perquisites (s.17(2)) — benefits in addition to salary, in cash or kind: rent-free or concessional accommodation, a company car for personal use, free education, interest-free loans, ESOPs, club fees, etc. Some are taxable for all employees; some only for specified employees (directors, those with substantial interest, or above an income threshold).

Profits in lieu of salary (s.17(3)) — compensation on termination, and payments from an employer in connection with employment (e.g. a lump sum on ceasing employment).

Allowances — three treatments:

1. Fully taxable — dearness allowance, city compensatory allowance, medical allowance, servant allowance.
2. Exempt up to a limit — HRA (s.10(13A)), children education/hostel allowance, transport for the disabled.
3. Exempt to the extent actually spent (s.10(14)) — allowances given to meet duties, e.g. uniform allowance, travelling/conveyance allowance for official duty (exempt only to the extent actually incurred).

Deductions from salary (s.16):

1. Standard deduction (s.16(ia)) — a flat deduction (e.g. ₹50,000 for the relevant AY) available to every salaried person, without proof of expense.
2. Entertainment allowance (s.16(ii)) — a limited deduction, only for government employees.
3. Professional/employment tax (s.16(iii)) — tax on profession paid to the State is deductible.

The computation format (learn this line-by-line — the exam literally asks you to “draw the format”):

The Format (pro-forma)

Learn this skeleton first, then see it applied below. XXXX stands for a figure; amounts in brackets (XXXX) are subtracted.

Format — Computation of Income under the head “Salaries” (ss.15–17)

🧩 WORKED EXAMPLE — Computing income under the head Salaries

Facts. Basic salary ₹6,00,000; dearness allowance ₹1,00,000; HRA received ₹1,20,000 (exempt portion ₹80,000); uniform allowance ₹20,000 (fully spent on uniforms); professional tax paid ₹2,500. Standard deduction ₹50,000.

Rule. Gross salary = all s.17 receipts; then subtract the exempt portions of allowances (s.10) and the s.16 deductions.

Apply.

• Basic 6,00,000 + DA 1,00,000 = 7,00,000
• Add HRA 1,20,000, less exempt 80,000 = +40,000 taxable
• Uniform allowance 20,000, exempt to extent spent 20,000 = +0 taxable
• Gross taxable salary = 7,40,000
• Less s.16(ia) standard deduction 50,000
• Less s.16(iii) professional tax 2,500

Conclusion. Income from Salaries = ₹6,87,500. The uniform allowance is exempt because fully spent (s.10(14)); DA is fully taxable; only part of HRA is exempt.

Section 17(1) (extract): “‘salary’ includes— (i) wages; (ii) any annuity or pension; (iii) any gratuity; (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages …”

In Simple Terms: Salary is taxed only if you are an employee (ss.15–17). “Salary” covers basic pay, pension, gratuity, commission, perquisites (car, house, loans) and profits in lieu of salary. Some allowances are fully taxed (DA), some exempt to a limit (HRA), some exempt to the extent spent (uniform). Then subtract the standard deduction and professional tax (s.16).

flowchart TD
    ROOT["Income from Salaries ss.15-17"]:::root
    ROOT --> A["Charge s.15<br/>due or receipt, whichever earlier"]:::leaf
    ROOT --> B["Includes s.17(1)<br/>pay, pension, gratuity, commission"]:::leaf
    ROOT --> C["Perquisites s.17(2)<br/>house, car, loans, ESOP"]:::leaf
    ROOT --> D["Profits in lieu s.17(3)"]:::leaf
    ROOT --> E["Less deductions s.16<br/>standard + entertainment (govt) + prof tax"]:::leaf
    classDef root fill:#FFF8DC,stroke:#000,stroke-width:1px,color:#000;
    classDef leaf fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

Case Laws

• Gestetner Duplicators (P) Ltd. v CIT (1979) — commission paid to a servant under a contract of employment is “salary”.
• CIT v L.W. Russel (1964) — an employer’s contribution creating a vested right in the employee can be a taxable perquisite.

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