According to the Income Tax Act1, the following types of income will be considered salary:
- Any salary due from an employer (or former employer,) whether paid or not.
- Any salary paid or allowance made by the employer (or former employer or somebody on their behalf) though not due or before it was due to the taxpayer. For example, a salary paid in advance for a project.
- Arrears on salary
Components of Salary
Further, the income tax law2 clarifies that the term ‘salary’ includes:
- Any annuity or pension
- Fees, commissions, profits
- Any advance of salary
- Provident Fund amount (on yearly basis)
Following are the basic components of an employee’s salary:
- Basic income: It is the base remuneration which exists before any deduction or increment is made and is a fixed amount.
- Allowances: Above the basic income, an employee may be given monetary benefit to meet expenses in the form of allowances. These may be:
- Housing rent allowance
- Dearness allowance
- Medical or conveyance allowance.
- Provident Fund (PF): This is in the form of pension, where equal contributions from the employer and employee are collected in a PF fund throughout the latter’s service tenure. Currently, the Government of India makes the contribution on behalf of the employer for the first 3 years of service of a new employee, to boost employment in India.
- Gratuity: This is also a retirement benefit payable to those who have been employed by a company for at least 5 years. This is also deducted from the employee’s salary throughout their service tenure.
- Professional Tax: This tax is payable to the State Government for practising a certain profession. It is levied on the monthly salary.
The gross salary of an employee is the total of their basic salary and allowances, before any deductions are made. The Cost to Company (CTC) or ‘package’ offered to an employee includes this gross salary and the PF and gratuity. The in-hand income or salary is therefore always lesser than CTC.
- Section 15, Income Tax Act, 1961
- Section 17, Income Tax Act, 1961