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The term "Salaries" includes remuneration in any form for personal service, under an expressed or implied contract of employment or service. Section 17 of Income Tax Act defines salary to include:- # Wages # Pensions or Annuities # Gratuities # Advance of Salary # Any cess, commission, perquisites or profits in lieu of or in addition to salary or wages. # Any encashment of leave salary. # Any amount of credit to provident fund of employee to the extent it is taxable.

Therefore "salary" includes basic salary, encashment of leave salary, advance of salary, arrears of salary, various allowances such as dearness allowance, entertainment allowance, house rent allowance, conveyance allowance and also includes perquisites by way of free housing, free car, free schooling for children of employees, etc. The following are the essential conditions for income to be treated as salary income:-

# There must be relation of employer and employee between the payer of income and receiver of income. # Salary may be from more than one employer. #Salary may be received from not just the present employer but also a prospective employer and in some cases even from a former employer for example pension received from a former employer. # Salary income must be real and not fictitious there must an intention to pay and receive salary. # Forgoing of salary ie if an employee surrenders his salary to the central government, then the salary so surrendered will not be treated as taxable income of the employee. # Salary paid tax free - Tax free salary means the salary on which income tax is borne not by the employee but by the employer. Tax free salary is also taxable in the hands of the employee.

Salary is taxable in the year of receipt or in the year of earning of the salary income, whichever is earlier. i.e. if the salary has been received first, then it will be taxable in the year of receipt. If it has been earned first but not yet received then it will be taxable in the year of earning. Salary income is taxable in the hands of individuals only. No other type of person such as a firm or HUF, companies can earn salary income.

# Allowances # Leave Encashment # Perquisites of Tax

Allowances .............................................................. House Allowances The exemption of House Rent Allowance (HRA) received is exempt to the least of the following: HRA received the period during which the rental accommodation is occupied by the employee in the previous year. Excess of rent paid over 10 percent of salary. 50% of the salary, if the rented accommodation is situated at Mumbai, Calcutta, Delhi or Chennai and 40% of salary in other cities. The salary is taken for the period during which the rental accommodation is occupied by the employee in the previous year.

Salary: Includes basic salary and dearness allowance if terms of employment so provide but does not include any other allowance. However, any commission payable at a fixed percentage of turnover achieved by the employee is included.

Entertainment Allowances Any amount received by the employee, as entertainment allowance is taxable as salary. However, deduction is available to the employee if he has been:

In continuous service with the present employer from a date before April 1, 1955, and Receiving Entertainment Allowance from his present employer continuously from a date before April 1, 1955 till the year for which the income is to be taxed.

The amount of deduction available is restricted to least of the following: # In case of government employees: Rs. 5,000; 20% of salary; or amount of entertainment allowance granted during the previous year. # In case of non-Government employees: Rs. 7,500; 20% of salary; amount of entertainment allowance granted during the previous year, or # Amount of entertainment allowance received during the financial year 1954-55. Salary means basic salary and excludes all allowances, benefits or perquisites.

Transport Allowances Transport allowance provided to an employee for commuting between his residence and the place of his duty shall be exempt up to Rs. 800 per month. However, in case blind or orthopaedically handicapped employee's, a sum of Rs. 1,600 per month is exempt from tax.

Education Allowances Education allowance of Rs. 50 per month per child for up to 2 children of the employee is exempted. In case the children are in hostel, the exemption available is Rs.150 per month per child for up to 2 children.

Special Allowances The following allowances are exempt from tax: Expenses incurred on conveyance in the performance of duties of office; Cost of travel on tour or on transfer; Daily ordinary charges incurred by the employee on account of absence from his normal place of duty during a tour; Expenditure on a helper where such helper is engaged for the performance of the duties of office; Allowances granted for encouraging the academic research and training pursuits in educational and research institutions; or Expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of office.

Leave Travel Assistance LTA is paid for meeting travelling expenses incurred by an individual as also family members (this includes only the spouse, two children and dependent parents, brothers and sisters) while on holiday in India. The amount of exemption depends upon the mode of journey. This exemption is available in respect of 2 journeys undertaken in a block of four calendar years.

Medical Allowances This exemption is available in respect of : Reimbursement upto Rs.15,000 for medical treatment of the employee and family members. Reimbursement of expenditure incurred by an employee and family members in approved hospitals, dispensaries etc. Group medical insurance for an employee and family members or reimbursement of premium paid by an employee for medical insurance. For medical treatment abroad, the actual expenditure incurred, including on travel and stay abroad of the patient and one attendant (if permitted by the RBI). The ceiling for the gross total income excluding the amount to be reimbursed is Rs.2 lakhs.

Lunch and Refreshment Refreshment at free or concessional rate is not taxable. Exemptions of medical expenses incurred by or on behalf of the employee # The following medical facilities provided to an employee are exempt from income tax: # Treatment of an employee or his family in any hospital maintained by the employer; # Reimbursement of any medical expenditure actually incurred by the employee for himself or his family : In any hospital maintained or approved by the Government, any local authority; or For prescribed diseases or ailments in any hospital approved by the Chief Commissioner, or

Up to Rs. 15,000, actually incurred by the employee on medical (other than the treatment referred to above); Premium paid by the employer towards medical insurance on the health of such employee

Reimbursement by the employer of premium paid by the employee towards insurance on his health or of that of his family . Expenditure incurred by the employer on Medical treatment of the employee whose family is outside India; Travel and stay abroad of the employee or his family including one attendant accompanying the patient for medical treatment.

The expenditure on medical treatment and stay abroad shall be excluded from perks : only to the extent permitted by the Reserve Bank of India; and the employee's gross total income, as computed before including the said expenditure, does not exceed Rs 2 lakhs.

"Family" in relation to an individual means: the spouse and children of the individual; and parents, brothers and sisters of the individual wholly or mainly dependent on the individual