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Deduction from Salary


Are you a Salaried Person?

If yes, now it’s time to know the deduction allowed by Salary. As the financial year 2017-18 is going to end on 31st March 2018 then the person is obliged to file Income Tax Return for the Financial year 2017-18 by end of 31st July, 2018, if tax audit is not applicable and subject to income, is above the amount of minimum amount not chargeable to tax as set by government of India. Generally, salaried people don’t have any Tax Audit hence the due date to file an income tax return is 31st July 2018. Before proceeding further it is pertinent to note the eligible deduction for salaried people so that we can file a correct return of income for the captioned year.

What is Salary?

Moving ahead it is necessary to know “salary” as defined in the Income Tax Act[1], 1961. Therefore definition of include wages, annuity, pension, gratuity, fees/commission/perquisites/profits in lieu of or in addition to salary or wages, advance of salary, leave encashment, annual accretion to the balance of recognized provident fund, transferred balance in recognized provident fund, contribution by central government or any other employer to employees’ pension account as referred in Sec 80CCD.

Sec 80CCD talks about the contribution to pension scheme of Central Government. Employee either government or non-government do contribution on the limit set by section for which employers are allowed to have deduction while computing the total taxable income however if the contribution is made by the employer for their respective employees then the same will form part of the income to the employee.

Point to be Consider:

  1. Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is earlier
  2. There must exist employer and employee relationship between the payer and payee.
  3. Income from salary taxable during the year shall consists of salary due, advance salary and arrear of salary from both existing and former employer subject to terms and condition laid down in the provision of Income Tax provided the same has effected on the previous
NOTE: Previous year means to the financial year. For the example financial year 2017-18 is a previous year in Income Tax for Assessment year 2018-19. The following year will be assessment year under Income Tax to assess the Income of person.

What is Place of Accrual of Salary?

Salary accrues on the place of the rendering of services irrespective of salary paid outside India. Further Salary paid by the Foreign Government to his employees serving in India is taxable under head Salaries. Leave Salary paid out of India in respect of leave earned in India shall be deemed to accrue or arise in India. However if a citizen of India render services outside India, and receives a salary from the Government of India, it would be taxable as Salary deemed to have accrued in India.

Let’s discuss one by one deduction allowed to salaried people under the provision of Income Tax Act, 1961.

Following two Points are Directly Deducted from Salary income to Determined actual Taxable Income of Salary:

1. Entertainment Allowance

Any allowance named entertainment for employee provided by Employer is taxable however the deduction is available to a government employee.

The amount of deduction will be least of a) Rs. 5000 [it is limit set by the provision of tax], b) 1/5th of  (excluding any allowance, benefit or another prerequisite), c) the actual amount received

2. Employment Tax/Professional Tax

Amount actually paid during the year is deductible from salary provided such tax should not be paid by the employer for the employee.

This two i.e. Entertainment Allowance and Employment/Professional tax is a direct deduction from before giving effect to deduction under Chapter VI-A. This chapter VI-A gives the full and final number of benefit to salaried people.

Also, Read: All About Salary Income, Perquisites, and Allowances under the Income Tax Act.

Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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