Taxation Law and Practice
DIFFERENT FORMS OF SALARY
The different forms of salary are: (a) Basic Salary and Wages (b) Bonus (c) Fees and
Commission (d) Allowances (e) Perquisites (f) Profit in Lieu of Salary (g) Pension
and (h) Advance & Arrears of Salary.
(a) Basic Salary: Both basic salary and wages means a payment or compensation for
work done or services rendered except that ordinarily salary is paid in respect of
non-manual work and wages, for manual work. Basic salary of wages is exclusive
of any allowance, perquisites or profit, whether paid or allowed to an employee.
(b) Bonus: Bonus is included in gross salary. It is taxable on receipt basis. While
‘contractual basis’ bonus is regarded as salary, ‘gratuitous bonus’ taxable as
perquisite. If bonus is received in arrears, the assessee can claim relief in terms of
Section 89(1).
(c) Fees and Commission: Fees and commission are taxable as salary irrespective of
the fact that they are paid in addition to or in lieu of salary. However commission
paid to a director (not being an employee) for his giving guarantee for repayment
of loans, etc. is taxable under the head ‘Income from other sources’.
(d) Allowances: All monetary payments made by an employer to his employee, other
than salary, are termed as allowances. It is fixed, pre-determined and given
regularly in addition to salary in connection with the services rendered by the
employee.
(e) Perquisites: Perquisites are the benefits or amenities in cash or in kind, or in money
or money’s worth and also amenities which are not convertible into money,
provided by the employer to the employee whether free of cost or at a concessional
rate. These are taxable under the head ‘salary’.
(f) Profit in Lieu of Salary: Any payment made or due in addition to the salary or
wages by the employer to the employee is called profit in lieu of salary u/s 17(3).
This includes compensation paid towards termination or resignation of
employment, provident fund contributions and interest there on, key man insurance
policy claim amount, etc.
(g) Pension: Pension is a retirement benefit. Since this is payable to an employee or to
his dependents by virtue of past employment, this is taxed under the head ‘salary’
Dr.S.N.Selvaraj, M.B.A., M.Phil., Ph.D., Professor, Dr. N.G.P. Arts and Science College Page 1
Taxation Law and Practice
in the hands of the employee. Tax is deductible on pension income u/s192 on
payment. However, family pension received by the dependents of the employee
will be taxed under the head ‘income from other sources as there is no employer-
employee relationship between the payer and payee.
(h) Advance and Arrears of Salary: If any portion of the salary in arrears or in advance
and if any amount received as family pension in arrears are subject to some tax
relief u/s 89(1).
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Dr.S.N.Selvaraj, M.B.A., M.Phil., Ph.D., Professor, Dr. N.G.P. Arts and Science College Page 2
