Under Sec. 15, the following incomes are chargeable to Income tax under the head “Salaries”:
a) Any salary due form an employer or a former employer to an assessee in the previous year whether paid or not;
b) Any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it becomes due to him;
c) Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer if not charged to income tax for any earlier previous year.
Characteristics of Salaries:
For any payment to be made taxable under the head “Salaries”, it must fulfill the following characteristics:
i) There must a relationship of an employer and employee between the payer and the payee.
ii) Any amount of salary received or due from one or more than one employer shall be taxable under this head.
iii) Salary from Present, Past or Prospective employer is taxable under this head.
iv) Any amount or benefits received from persons other than the employer, would not be taxable under this head even if such income arises by reason of his employment or while he was discharging his normal duties.
v) Salaries accrue at that where services are rendered.
vi) If salaries are received after certain deductions made by the employer on account of professional tax, contribution to PF, TDS etc., the salary will be Gross salary due to the employee.
vii) Payment received after cessation of employment from employer is also taxable under this head.
viii) Voluntary foregoing of salary is taxable whether it is paid or not but voluntary surrender of salaries is exempted from tax.
ix) Salary is taxable on due or receipt basis whichever is earlier.
Essentials for Taxability of an Income Under the head “Salary”
1. Employer and employee relationship
2. Place for accrual of Salary
3. Basis of Charge
1. Employer and employee relationship
An income can be taxed under the head "Salaries" only if there is a relationship of an employer and employee between the payer and the payee. An employer is one who not only directs what and when a thing is to be done but how it is to be done, and the employee is one who is bound to carry out the instruction given to him by such employer.
Exceptions:
i) Salary of a member of parliament - Taxable under the head other sources. However, salary of a Cabinet Minister or Chief Minister is taxable under the head salary.
ii) Salary of a partner in the same has been allowed to the firm - Taxable under the head PGBP
iii) Salary of a guest lecturer - Taxable under the head other sources
2. Place for accrual of Salary
Salary will be deemed to accrue or arise at a place where the services are rendered.
• Exception:
Salary receivable by a citizen of India who is a Government employee and who is posted outside India shall be deemed to accrue or arise in India although services are rendered outside India. However, overseas allowances and perquisites received outside India by him shall be exempt under section 10(7).
3. Basis of Charge [Section 15]
As per section 15, the following income shall be chargeable to income-tax under the head "Salaries":
i) any salary due from an employer or a former employer to an assessee in the previous year, whether paid in that previous year or not;
ii) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due in that previous year or before it became due to him;
iii) Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to Income-tax in any earlier previous year.
Meaning of Salary
"Salary" is the remuneration received by or accruing to an individual, periodically, for service rendered as a result of an express or implied contract. The actual receipt of salary in the previous year is not material as far as its taxability is concerned. The existence of employer-employee relationship is the sine-qua-non for taxing a particular receipt under the head “salaries.”
For the purpose of Income Tax, “Salary” includes [Sec. 17(1)]:
• Wages
• Annuity or pension
• Gratuity
• Fees, Commission, perquisites or profits in lieu of salary
• Advance of Salary
• Receipt from Provident Fund
• Contribution of employer to a Recognised Provident Fund in excess of the prescribed limit
• Leave Encashment
• Compensation as a result of variation in Service contract etc.
Rules Regarding Salary:
• Relation between Payer and Payee:
The relation between payer and payee should be that of employer and employee. In other words for an income to be taxed under head salaries the relation between payer and payee should be of employer and employee. Employer may be an Individual, firm, AOP etc and an employee may be full time or part time employee. If the relation between payer and payee is not that of employer and employee income received cannot be charged under head Salaries it would be charged under other heads.
• Salary and wages:
Income tax does not differentiate between salary and wages.
• Salary from more than one source:
If an Individual receives salary from more than one employer during same previous year, salary from each source is taxable under the head Salaries.
• Overtime payment:
Any over time payment received by an employee is added to Gross Salary.
• Basis of Charge: As per section 15
i. Any salary due from an employer, or former employer in the previous year, whether paid or not
ii. Any salary paid or allowed to an employee in the previous year by or on behalf of an employer though not due or before it becomes due to him
Hence salary is taxable on due or receipt basis whichever is earlier.
• Fee and Commission:
Any fee or commission paid by employer to his employee on Net profit or Turnover is added to Gross Salary.
• Grade system:
Under this system the normal annual increments to be given to the employee is already fixed. Annual increment is given on the same date on which employee joins the employment.
• Employer employee relation: Income can be charged under head Salaries only if relation between receiver and giver of payment is of employee and employer. Employer may be individual, firm, company, AOP, BOI, Govt., etc.
• Income by way of examinership fees received by a professorfrom the same university in which he is employed would not be chargeable to tax under this head but must be taxed as Income from other sources under Section 56.
• Income by way of remuneration received by a managing directorwould be taxable as his salaryincome whereas the income received by him as director‘s feesin his capacity as director for attending the meetings of the Board would be assessable under the head Income from other sources.
• An official liquidator appointed by the Court or by the Central Government would also become an employee of the Central Government under Section 448 of the Companies Act, 1956 and consequently the remuneration due to him would also be assessable under the head Salaries.
• Remuneration received by a manager of a company even if he is wrongly designated as a director or by any other name would be chargeable to tax under this head regardless of the fact that the amount is payable to him monthly or is calculated at a certain percentage of the company‘s profits.
• Any money from his employer as part of the terms of employment for not carrying on any profession, such income must be taxed as salary income.
• Any salary, commission, bonus etc received by partner of a firm will be charged under head PGBP.
• Salary received by Member of Parliament is to be charged under head Other sources and not under head Salary.
Note: i) Only receipts from employer are taxable under this head, others excluded. ii) If salary forgone under legal obligations it is exempted, but if foregone voluntarily, it is taxable. iii) Salary received after cessation of employment is taxable. iv) Salary in lieu of notice is taxable. v) Salary is always shown on gross basis i.e. after adding amount of contribution already deducted with salary. |