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Types of Income for Salaried Person


Types of Income for Salaried Person

The purpose of this article is to discuss the different types of receipts obtained by a taxpayer, which would be taxable under the head ‘Income from Salary’. This article provides a brief overview of the tax-treatment of different types of income earned by a salaried person.

Components of Salary

The following incomes earned by a taxpayer during a financial year are regarded as salary, and hence taxable under the head ‘Income from Salary’:

  • Wages
  • Annuity
  • Pension
  • Gratuity
  • Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages
  • Advance of Salary
  • Leave Encashment
  • Bonus
  • Salary in lieu of Notice Period
  • Fee and Commission
  • Overtime Payments


Wages are similar to salaries. A wage is considered a monetary compensation paid by an employer to an employee in exchange for work done. Hence, wages are treated just like salary and are taxable on the same basis of salary.


An Annuity is an annual grant provided by the employer that gets categorized under the head of salaries. This is a voluntary payment made by the employer on a contractual basis. The annuity is treated as follows:

  • When the present employer pays the annuity, it is taxable as salary.
  • If it is received from a former employer, it is taxed as profits instead of salary.
  • If an annuity is granted by an insurance company, it is then considered as “Income from Other Sources”


A pension is a payment made by the employer after the retirement/death of the employee as a reward for the past service. The payment of pension is done on a periodical basis or even as a lump, based on the agreement between the employer and the employee. This process is called ‘Commutation of Pension’. There are two different categories under which the pensions are treated. They are:

Un-Commuted Pension

This is otherwise known as ‘periodical pension’ and it is fully taxable in the hands of the employees irrespective of the source – Governmental or Non-Governmental.

Commuted Pension

In the case of government employees, employees of local authority and employees of corporations it is fully tax-exempt.


A bonus is defined as, “A sum of money added to a person’s wages as a reward for good performance”.  Bonus is taxable based on the following:

  • The bonus is taxable on receipt basis.
  • It will be included in the gross salary in the year the bonus was received.

Salary in Lieu of Notice Period

The notice period is the time period between the receipt of the letter of dismissal and the end of the last working day. This time period has to be given to an employee by their employer before their employment ends. This salary is completely taxable.

Fee and Commission

A fee is a payment made to a professional person or to a professional or public body in exchange for advice or services. The commission is the payment of commission as remuneration for services rendered or products sold is a common way to reward salespeople.

  • All fee and commission payable to an employee are fully taxable.
  • It will be included in gross salary.
  • Irrespective of the fixed amount or a fixed percentage, a commission is fully taxable.

Overtime Payment

This payment is given to the employee as a reward for working extra time in the office beyond the stipulated time. Any payment made as ‘overtime payment’ is completely taxable in the hands of the employee. This is also included in the gross salary.