State the income chargeable under the head “Salary”. Explain in detail the concept of Perquisites and their tax treatment under the Income-tax Act, 1961. (More detailed analysis)
Q. 4 – State the income chargeable under the head “Salary”. Explain in detail the concept of Perquisites and their tax treatment under the Income-tax Act, 1961. (More detailed analysis)
⭐ A. Meaning of Salary (Section 17(1))
The term Salary under the Income-tax Act is very wide.
It includes every amount — whether monetary or non-monetary — received by an employee from an employer for services.
Salary includes 3 main things:
- Salary actually received
- Salary due, whether received or not
- Arrears of salary
✔ Even advance salary is taxable.
✔ Even if salary is forfeited, it remains taxable once due.
✔ Salary must arise from employment relationship.
⭐ B. Income Chargeable Under the Head “Salary” (Section 15)
Section 15 lays down the following:
1. Salary Due (Whether Paid or Not)
If salary becomes due in a particular year, it is taxable even if not received.
Example:
Salary for March due on 31 March, paid in April →
Taxable in March year.
2. Salary Received in Advance (Not Yet Due)
Advance salary received is also taxable.
Example:
Employer pays 6 months’ advance salary →
Taxable immediately.
3. Arrears of Salary
If arrears are received later due to:
- Pay revision
- Court order
- Increment
→ taxable in the year of receipt, with relief u/s 89(1).
⭐ C. Components of Salary under Section 17(1)
The Income-tax Act lists several items:
(1) Basic Salary
The core component. Fully taxable.
(2) Wages
For workers/employees — taxable.
(3) Annuity
Fixed annual payment by employer — taxable.
(4) Gratuity
Taxable except exemption u/s 10(10).
(5) Pension
- Uncommuted pension → fully taxable
- Commuted pension → partly or fully exempt depending on employee type
(6) Fees, Commission & Bonus
All fully taxable.
(7) Leave Encashment
- During service → fully taxable
- On retirement → partly exempt
(8) Allowances
Most allowances are fully taxable, such as:
- Dearness Allowance
- Overtime allowance
- Special allowance
Partially exempt allowances under Section 10:
- HRA (10(13A))
- Transport allowance
- Children education allowance
(9) Retirement Benefits
Includes:
- Employer contribution to PF
- Leave encashment
- VRS compensation
⭐ D. Meaning of Perquisites (Section 17(2))
Perquisite = any benefit, facility, or advantage provided by the employer to employee in addition to salary.
These benefits are taxable because they improve the financial position of the employee.
Perquisites may be:
- Monetary benefits (e.g., salary to domestic workers paid by employer)
- Non-monetary benefits (e.g., rent-free house, car)
- Reimbursements (e.g., electricity bill, phone bill)
⭐ E. Types of Perquisites — Very Detailed
Below is the detailed list as per Section 17(2) and Rule 3.
1. Rent-free Accommodation (RFA)
Most commonly tested item.
Taxability:
- If provided by government employer → value fixed by Govt
- If non-govt employer owns the house → % of salary
- If house is rented → actual rent paid or % of salary, whichever is lower
Salary for RFA =
Basic + DA (forming part of retirement benefits) + Bonus + Commission
2. House Rent Paid by Employer (Concessional Accommodation)
Taxable to the extent:
Fair rental value – rent recovered from employee
3. Motor Car Facility
If used only for official work → Fully exempt.
If used for personal use → taxable.
Valuation depends on:
- Cubic capacity of car
- Driver provided
- Fuel expenses
4. Gas, Electricity, Water Bills
If employer pays → taxable perquisite
Except when:
- Provided at employer-owned facilities
5. Free Domestic Servants
Salary paid to:
- Cook
- Gardner
- Watchman
- Driver
→ taxable perquisite.
6. Free or Subsidised Education
If:
- Provided to employee’s children
- In employer school
Exempt up to ₹1,000 per month per child.
7. Medical Facilities
Taxable except:
- Govt hospital treatment
- Employer’s hospital
- Insurance premium paid by employer
- Reimbursement up to specified limits
- Treatment abroad subject to conditions
8. Interest-Free or Concessional Loans
Taxable =
Difference between SBI lending rate – interest charged by employer.
Exemptions:
- Loan ≤ ₹20,000
- Loans for medical treatment of specified diseases
9. Club Expenditure
Membership, monthly fee, food bills paid by employer → taxable
Except:
When club is used for official meetings only.
10. Gift or Voucher
If value of gift > ₹5,000 per year → taxable.
11. ESOPs (Employee Stock Options)
Taxable as perquisite:
FMV – Amount paid by employee
⭐ F. Perquisites provided only to “Specified Employees”
Some perquisites are taxable only if employee is a “specified employee”.
Specified employee means:
- Director of the company
- Employee having salary > ₹50,000
- Employee with substantial interest in company (≥20% equity)
Perquisites taxable only for them:
- Free education
- Domestic servants
- Free utilities
- Free personal use vehicles
⭐ G. Tax-free Perquisites (Not Taxable at All)
- Mobile phone
- Laptop/computer
- Refreshments during office hours
- Employer contribution to PF up to 12%
- Medical insurance premium
- Free tea/snacks
- Uniforms
- Work-from-home allowances up to limits
⭐ H. Important Case Laws (More Detailed)
1. CIT v. L.W. Russel (1964) – Supreme Court
Key Point:
To be a perquisite, the benefit must:
- Be provided by employer
- Have monetary value
- Arise due to employment
This is the leading judgment on perquisites.
2. Emil Webber v. CIT (1993)
Principle:
Reimbursement of personal expenses by employer is taxable.
3. Justice Deoki Nandan Agarwal v. UOI (1991)
Principle:
Perquisite = personal advantage or non-cash benefit provided by employer.
4. CIT v. Shanker Krishnan (2013)
Principle:
Employer-provided accommodation = perquisite unless exempt.
5. CIT v. Infosys Technologies (2008)
Principle:
ESOPs and sweat equity shares taxable as perquisites.
6. Tata Sons Ltd. v. CIT (2019)
Principle:
Club membership used by employee personally → taxable.
7. Gestetner Duplicators v. CIT (1979)
Principle:
Commission paid to employee for performance is part of salary.
8. Karamchari Union v. UOI (2000)
Principle:
Even benefits with no direct cash payment can still be perquisites.
⭐ I. Conclusion
- Salary under the Act includes everything received because of employment.
- Under Section 17(2), perquisites include all benefits, facilities, and allowances provided by an employer.
- Perquisites may be taxable, partly exempt, or fully exempt depending on:
- Nature of perquisite
- Category of employee
- Valuation rules (Rule 3)
- Exemptions under Section 10
The law ensures that an employee’s total economic gain, whether in money or in-kind, is brought under tax.
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