Salaried individuals working in a public or private organization often come across queries like tax benefits, gratuity, leave policy, ESI and other such related terms. The following information mentions the different aspects of salary laws in India.

Salary as per Indian Tax Laws

  • For salary, there needs to be an employer – employee relationship, wherein the former will have the power to define the terms and conditions of employment and terminate the same.
  • As per the UOI (1999) 237 ITR 872 verdict of the Supreme Court, the more relevance is given to employment and not presence of employer. As long as an individual receives monetary reward for his or her services, it is termed as salary. The term “employer” refers to past, present and future employers and “advance monetary payment” is also regarded as salary.
  • Salary also includes commission / bonus received within the employment. If the due salary is not received within the assessable year, it will be calculated in the year of it receipt.
  • Salary received in India is taxable in this country only, in spite of being a leave salary.
  • In case of salaried individuals working in private companies, the tax exemption is restricted to ten months’ salary, which is dependent on the average salary of last ten months, which is again in turn restricted to the income of INR 300,000, immediately preceding the retirement date.
  • For a salaried individual working in a government organization, the gratuity received is fully exempted from tax. The limit of tax exemption is for a gratuity amount of INR 350,000. However, for amount exceeding this the exemption will depend upon and vary as per the payment covered by the Payment of Gratuity Act.
  • If there is an RPF, then that part of the transferred balance of PF will be taxable. Otherwise, the balance transferred in a provident fund would not be taxable.
  • Tax exemption for salaried individuals is applicable if medical reimbursement exceeds INR 15,000.
  • Tax exemption toward overseas travel expenses would be applicable to those salaried individuals whose gross income does not exceed INR 200,000.
  • For TDS exemption, only loss under house property would be considered.
  • As per the Payment of Gratuity Act of 1972, all employers need to pay gratuity to the employees, if the organization has a minimum of 10 employees. Gratuity is generally paid to the employee upon termination of the employment, when the employee has continually served for a minimum of five years. Gratuity is also paid at the time of resignation, retirement, disablement or death of an employee.
  • As per the Factories Act, 1948 employer running factories need to provide safety and health coverage for the employees. Under section 2(m), this is mandatory for all state government, central government and union territory industries. As per sections 11 to 20 of the Factories Act, the workplace needs to be clean, there should be enough provision for disposal of effluents and wastes, factory should have proper temperature maintenance and ventilation, there should be proper exhaustion of fume and dust, and such other related safety measures.
  • Leave policy includes CL (casual leave), EL (earned leave), and SL (sick leave), maternity leave, and so on. As per the employment laws in India, the three major leaves are SL, CL and EL and all others are subject to individual organization. An individual working for a minimum of 240 days in an organization becomes eligible for EL or privileged leave. As per the central government’s Maternity Benefit Act, 1961 this leave is for all types of organization. A female is entitled to take 3 months of maternity leave. As per section 918, a female employee may take a leave up to 6 weeks following a medical termination of pregnancy or miscarriage. However, on production on necessary evidence the leave can be extended up to 1 month. As per section 1320, the female employee can take up to 2 weeks following a tubectomy operation. A male employee can take paternity leave for 15 days, within six months or before the delivery of the child. Other than these, a salaried individual also enjoys quarantine leave, study leave, national holiday and festival leave, leave for election duty, leave not due, extraordinary leave and innovative leave.
  • Part time salaried individuals are entitled to ESI (Employee’s State Insurance) benefits. The amount paid toward ESI scheme cannot be associated with any other fund. All ESI beneficiaries are issued smart cards. ESI scheme does not apply to employees who work under a contractor. This scheme especially provides health coverage to unorganized class of workers.

Recent Changes related to salary and tax savings in India

The most recent change in respect to salary laws in India is DTC. Direct Tax Code or DTC, effective from 1st April, 2012 has brought several changes in investment and tax benefits options, for both salaried and self employed individuals. Some of which are mentioned below:

  • Under the new scheme, in order to get tax deduction, the insurance policy needs to have a life cover of at least 20 times the amount of yearly premium. Otherwise, there will be no tax deduction on the premium and the moreover, the income from the policy also becomes taxable. Henceforth an individual needs to go for an insurance policy with longer duration of 20 to 25 years. The more is the insurance cover; it would prove better for the insured.
  • DTC will have a strong positive impact on the pension fund. Most salaried individuals invest on annuity to get a regular income as a pensioner. Revised DTC has exempted the annuity income from taxation. So it has become a good tax saving option for salaried individuals.
  • In case, a private limited company fails to give salary to the individual, the limitation period is three years from the date when the salary becomes due. After this an employee can file a suit against the employer.