Question 5: What are the income chargeable to income tax under the head ‘Salaries’ and what are the items included in ‘Perquisites’?(वेतन शीर्षक में कर योग्य आयें कौन सी हैं तथा बताइए कि कौन से मद ‘अनुलाभ’ में कर योग्य हैं?)

1. Meaning of ‘Income under the Head Salaries’

Under the Income Tax Act, 1961, income under the head “Salaries” refers to all monetary and non-monetary benefits received by an employee from his employer for rendering services.

👉 In simple words:
If you are working under someone (an employer) and receive any kind of payment — whether in cash, kind, or as a facility — it will generally be taxed as salary income.

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2. Conditions for Taxability under ‘Salaries’

To be taxed under this head, the following conditions must be satisfied:

1. There must be an employer–employee relationship.
2. Payment must be made by the employer to the employee.
3. The payment must be in the nature of salary, not business income.

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3. Components of Income under the Head ‘Salaries’ (Section 15–17)

According to Section 15 to 17 of the Income Tax Act, the following are taxable as salary income:

(A) Basic Salary

• The fixed amount paid by the employer.
• Example: ₹50,000 per month as basic pay.

(B) Allowances

Allowances are extra amounts paid to meet specific expenses.
Common examples:

1. Dearness Allowance (DA) – To meet cost of living.
2. House Rent Allowance (HRA) – For rent payment (partially exempt).
3. Travel Allowance / Conveyance Allowance – For travel to work.
4. Medical Allowance – Fully taxable.
5. Special Allowances – Taxable unless exempted.

(C) Perquisites (Anulabh / Fringe Benefits)

Non-cash benefits or facilities provided by the employer.
👉 Explained in detail below.

(D) Bonus and Commission

• Incentives, performance bonuses, or sales commissions are fully taxable.

(E) Retirement Benefits

1. Pension – Regular payment after retirement (taxable except commuted pension in some cases).
2. Gratuity – Exempt up to certain limit under Sec. 10(10).
3. Leave Encashment – Partly exempt under Sec. 10(10AA).
4. Provident Fund – Exempt subject to conditions.

4. Meaning and Examples of ‘Perquisites’ (Section 17(2))

💡 Meaning:

Perquisites are benefits or amenities given by the employer to the employee in addition to salary or wages.
They may be in cash or kind, and are taxable as part of salary income.

👉 In simple words:
“Perquisites” means extra facilities or advantages provided to an employee that increase their personal benefit.

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5. Types of Perquisites (with Examples)

(A) Taxable for All Employees:

1. Rent-free accommodation provided by employer.
2. Concession in rent (if employee pays lower rent than market rate).
3. Use of motor car for personal purposes.
4. Employer’s payment of employee’s personal bills (like electricity, water).
5. Free domestic servants, watchman, gardener etc.
6. Employer’s contribution to Superannuation Fund beyond ₹1,50,000.

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(B) Taxable Only for Specified Employees

(Specified employees = director, or person with substantial interest, or income > ₹50,000 from salary)
Examples:

1. Use of company-owned movable assets.
2. Free or concessional education for children.
3. Interest-free or concessional loans.
4. Free club memberships or holiday trips.

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(C) Tax-Free (Exempt) Perquisites:

1. Free medical facility in government hospital.
2. Use of laptop or computer for official purpose.
3. Refreshments during office hours.
4. Free telephone/mobile connection (official use).
5. Employer’s contribution to recognized provident fund (up to prescribed limit).

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6. Legal References (for LLB Students)

Section	Description
Sec. 15	Income chargeable under ‘Salaries’
Sec. 16	Deductions from salary (e.g., standard deduction ₹50,000)
Sec. 17(1)	Meaning of Salary
Sec. 17(2)	Meaning of Perquisites
Sec. 17(3)	Meaning of Profits in lieu of salary

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⚖️ 7. Deductions from Salary (Section 16)

1. Standard Deduction – ₹50,000 for all salaried taxpayers.
2. Entertainment Allowance (for Govt. employees) – Least of ₹5,000 or 20% of basic salary.
3. Professional Tax – Deductible if paid by employee.

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  8. Summary (For Exam Writing)

Component	Description	Tax Treatment
Basic Salary	Fixed pay	Fully taxable
Allowances	Extra payment for expenses	Fully/partially taxable
Perquisites	Benefits in kind	Taxable or exempt depending on type
Bonus/Commission	Performance-based pay	Fully taxable
Retirement Benefits	Gratuity, pension, PF etc.	Partially exempt
Deductions	Standard deduction, professional tax	Allowed

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✍️ 9. Model Answer Conclusion (for Exam)

Income under the head ‘Salaries’ includes all monetary and non-monetary payments received by an employee from his employer due to an existing or past employment. It covers basic pay, allowances, perquisites, bonuses, and retirement benefits.

‘Perquisites’ are additional facilities or benefits provided by the employer, such as rent-free accommodation, concessional loans, or free car usage. Some perquisites are fully taxable, some are partially taxable, and others are exempt depending on their nature and conditions under Section 17(2) of the Income Tax Act, 1961.

 

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⚖️ Detailed Case Law Analysis on “Income under the Head Salaries” and “Perquisites”

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1. Emil Webber v. CIT (1993) 200 ITR 483 (SC)

🧩 Facts:

• The assessee, a foreign national working in India, received salary and perquisites from his foreign employer outside India.
• The question arose: “Can salary received abroad for services rendered in India be taxable in India?”

⚖️ Judgment:

• The Supreme Court held that salary is taxable in India if the services are rendered in India, even if payment is made outside India.
• The place of employment (where work is done) decides the taxability, not the place of payment.

💡 Legal Principle:

Salary becomes taxable in India when services are rendered in India, irrespective of where or how the salary is paid.

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2. CIT v. L.W. Russel (1964) 53 ITR 91 (SC)

🧩 Facts:

• The employer had paid a premium on a life insurance policy for the benefit of an employee.
• The question was whether the premium paid by the employer constituted a “perquisite” taxable under salary income.

⚖️ Judgment:

• The Supreme Court held that since the benefit (insurance policy) did not result in a present or direct benefit to the employee, it could not be taxed as a perquisite until the employee actually received some benefit.

💡 Legal Principle:

Only those perquisites that confer a present, direct, and personal benefit to the employee are taxable.
Future or contingent benefits are not taxable immediately.

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3. CIT v. Karamchand Premchand Pvt. Ltd. (1960) 40 ITR 106 (SC)

🧩 Facts:

• An employee was provided rent-free accommodation by the employer.
• The question was whether the value of rent-free accommodation should be treated as a taxable perquisite.

⚖️ Judgment:

• The Supreme Court ruled that rent-free accommodation provided by the employer is a taxable perquisite because it gives a direct personal benefit to the employee.

💡 Legal Principle:

Any facility provided free of cost by the employer that substitutes for a personal expense of the employee (like house rent) is a taxable perquisite.

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4. Owen v. Pook (1970) AC 244 (House of Lords)

(Though a UK case, it is often cited in Indian tax law interpretation for “employment relationship”)

🧩 Facts:

• The question was whether a medical practitioner’s traveling allowance was taxable as “salary income.”

⚖️ Judgment:

• The Court held that only payments arising directly from the employment contract can be treated as salary or perquisites.
• Payments made independently or incidentally (not part of employment) cannot be taxed under “Salaries.”

💡 Legal Principle:

To tax any income under “Salaries,” the existence of a master–servant (employer–employee) relationship must be proved.

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5. CIT v. Lala Shri Dhar (1972) 84 ITR 192 (Delhi HC)

🧩 Facts:

• The assessee was provided rent-free accommodation by his employer.
• The question was about the method of valuation of such accommodation.

⚖️ Judgment:

• The Delhi High Court held that the value of rent-free accommodation should be calculated on a reasonable rental value basis (fair market rent).
• It cannot be arbitrary or hypothetical.

💡 Legal Principle:

Valuation of perquisites must be done reasonably and fairly, keeping in mind the actual benefit derived.

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6. CIT v. D.R. Phatak (1975) 99 ITR 14 (Bom HC)

🧩 Facts:

• The employer reimbursed the personal expenses of an employee (like club membership and entertainment).
• The issue: Were such reimbursements taxable as perquisites?

⚖️ Judgment:

• The Bombay High Court held that such reimbursements constitute perquisites because they represent personal benefits to the employee, paid on his behalf.

💡 Legal Principle:

Reimbursements by employer for employee’s personal expenses are taxable perquisites under Section 17(2).

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7. CIT v. Shankar Krishnan (2002) 258 ITR 160 (Mad HC)

🧩 Facts:

• The assessee was provided a company car for both official and personal use.
• The question was whether the value of personal use should be treated as a perquisite.

⚖️ Judgment:

• The Madras High Court held that the portion of car usage for personal purpose is a taxable perquisite, whereas official use is exempt.
• The valuation must be done as per Income Tax Rules (Rule 3).

💡 Legal Principle:

Mixed-use assets (official + personal) must be partially taxed for the personal portion as perquisite.

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8. CIT v. Arvind Mills Ltd. (1992) 193 ITR 255 (SC)

🧩 Facts:

• The employer had given concessional loans to employees at a rate lower than market interest.
• The issue: Is the interest difference taxable as a perquisite?

⚖️ Judgment:

• The Supreme Court held that the difference between market interest and concessional interest is a taxable perquisite since it gives a measurable monetary benefit.

💡 Legal Principle:

Concessional loans or interest-free loans provided by employer are taxable perquisites under Section 17(2)(vii).

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🏛️ Summary Table of Case Laws

Case Name	Year & Court	Main Issue	Key Principle
Emil Webber v. CIT	1993, SC	Salary received abroad	Taxable if services rendered in India
CIT v. L.W. Russel	1964, SC	Life insurance benefit	Only present benefits are taxable
CIT v. Karamchand Premchand Pvt. Ltd.	1960, SC	Rent-free house	Direct personal benefits taxable
Owen v. Pook	1970, UK HL	Nature of employment	Employment link must exist
CIT v. Lala Shri Dhar	1972, Del HC	Valuation of perquisite	Must be reasonable
CIT v. D.R. Phatak	1975, Bom HC	Reimbursement of expenses	Taxable as perquisite
CIT v. Shankar Krishnan	2002, Mad HC	Company car use	Personal portion taxable
CIT v. Arvind Mills Ltd.	1992, SC	Concessional loan	Interest difference taxable

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