Income Tax: Salary, allowances, PF, arrears, leave encashment and gratuity - What's taxable and what's not Know what IT Department says

Salary is the amount of money you get paid for your work. If your salary fits into the income tax bracket, then you also have to pay taxes as per the rules.

Here is what the Income Tax Department has to say about your salary and taxes on it.

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What is considered as salary income?

As per the information provided by the Income Tax Department, section 17​​ of the Income-Tax Act defines the term ‘salary’. However, not going into the technical definition, generally whatever is received by an employee from an employer in cash, kind or as a facility [perquisite] is considered as salary.

What are allowances?

​​Allowances are fixed periodic amounts, apart from salary, which are paid by an employer for the purpose of meeting some particular requirements of the employee.  E.g., Tiffin allowance, transport allowance, uniform allowance, etc. There are generally three types of allowances for the purpose of Income-Tax Act - taxable allowances, fully exempted allowances and partially exempted allowances.​

Perquisites are benefits received by a person as a result of his/her official position and are over and above the salary or wages. These perquisites can be taxable or non-taxable depending upon their nature. Uniform allowance is exempt to the extent of expenditure incurred for official purposes u/s​ 10​(14).

Also, all the reimbursements of expenses on grocery and children’s education made by the employer to employee are considered as income as these are in the nature of perquisites and should be valued as per the rules prescribed in this behalf.​​

Are retirement benefits like PF and Gratuity taxable?

​​​​In the hands of a Government employee Gratuity and PF receipts on retirement are exempt from tax. In the hands of non-Government employee, gratuity is exempt subject to the limits prescribed in this regard and PF receipts are exempt from tax, if the same are received from a recognised PF after rendering continuous service of not less than 5 years.​

It can be noted that with effect from Assessment Year 2022-23, no exemption shall be available for the interest income accrued during the previous year in the recognised and statutory provident fund to the extent it relates to the contribution made by the employees over Rs 2,50,000 in the previous year.

However, if an employee is contributing to the fund but there is no contribution to such fund by the employer, then the interest income accrued during the previous year shall be taxable to the extent it relates to the contribution made by the employee to that fund in excess of Rs 5,00,000 in a financial year.

Are arrears of salary taxable?

​​​​​​​​Arrears of salary is taxable however, the benefit of spread over of income to the years to which it relates to can be availed for lower incidence of tax. This is called as relief ​ u/s 89​ of the Income-tax Act.​​

Is leave encashment taxable as salary?

​​​It is taxable if received while in service. Leave encashment received at the time of retirement is exempt in the hands of the Government employee. In the hands of non-Government employee leave encashment will be exempt subject to the limit prescribed in this behalf under the Income-tax Law.​

What is the taxability of House Rent allowance (HRA)?

​​​Least/minimum of the following is exempt (Not taxable/deducted from total HRA received)

(a)    Actual amount of HRA received

(b)   Rent paid Less 10% of salary

(c)    50% of salary if house taken on rent is situated in Kolkata, Chennai, Mumbai and Delhi

​or

40 % of salary if the house is taken on rent is NOT situated in Kolkata, Chennai, Mumbai and Delhi.

What is the taxability of Fixed Medical allowance and conveyance allowance?

​​​Medical allowance is a fixed allowance paid to the employees of a company on a monthly basis, irrespective of whether they submit the bills to substantiate the expenditure or not. It is fully taxable in the hands of employee.

​​​​​​As per sectio​n 10(14)​​ read with Rule 2BB Conveyance allowance is exempt to the extent of amount received or amount spent, whichever is less. For e.g., If amount received is Rs 100 and amount spent is Rs. 80, then only Rs. 20 is taxable. However, if amount actually spent is Rs 100; then nothing is taxable.