35. Characteristics of salary

Salary is a form of periodic compensation paid by an employer to an employee for services rendered under a contract of employment. In India, salary encompasses various components beyond just the basic pay. These include allowances (such as House Rent Allowance, Dearness Allowance), perquisites (benefits like a company car or rent-free accommodation), bonuses, commissions, and retirement benefits like gratuity and pension. For tax purposes, these are collectively treated under the head “Income from Salary” as per Indian Income Tax laws. The nature of salary is such that it establishes a clear employer-employee relationship, and only such a relationship qualifies income to be taxed under this head.

As per the Income Tax Act, 1961, salary is defined and taxed under Section 15 to Section 17. According to Section 15, salary is chargeable to tax either on due basis or receipt basis, whichever is earlier. Section 16 provides deductions from salary income like Standard Deduction (currently ₹50,000) and deductions for professional tax. Section 17 defines the various components of salary including perquisites and profits in lieu of salary. For example, Section 17(2) defines perquisites, which are benefits provided by the employer that have a monetary value, and Section 17(3) covers compensation received on termination of employment. This framework ensures clarity in what qualifies as taxable salary.

Salary taxation in India also considers exemptions under various provisions. For instance, House Rent Allowance (HRA) exemption under Section 10(13A), Leave Travel Allowance (LTA), and Gratuity under Section 10(10) are some common exemptions. However, these exemptions come with specific conditions and limits, and if not adhered to, the entire component becomes taxable. Additionally, retirement benefits like the Provident Fund are partly or fully exempt depending on the type of fund and years of service. These nuances make understanding salary components essential for tax planning and compliance.

Mnemonic to Remember – “BAP-PERKS-BAG”
Use this easy mnemonic: BAP-PERKS-BAG, where

• B stands for Basic Pay,
• A for Allowances,
• P for Perquisites,
• PERKS is a reminder that perks like rent-free accommodation are taxable,
• BAG stands for Bonus, Arrears, Gratuity – all of which are taxed or exempted based on specific provisions.
  This mnemonic helps recall the key salary components and their tax treatment under Indian law.