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INCOME TAX LAW & PRACTICE
-INCOME FROM SALARY
Prepared by,
Dr.Sangeetha R
Assistant Professor
Hindusthan College of Arts and Science, Coimbatore
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INTRODUCTION TO INCOME
Tax is charged on the total income of an assessee as per Income Tax Act 1961.
Section 5 provides the basis for Computation of total income.
Total income is based upon the residential status of an assessee in the relevant
previous year.
Total income comprises five heads of income.
The first and foremost head of income chargeable to tax for an assessee is
“Income from Salary”.
Section 15, 16 and 17 of the Act deals with Salary income.
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U/S 17(1) – HOW SALARY IS DEFINED ?
The term “Salary” includes
1. Wages
2. Any annuity or pensions
3. Any gratuity
4. Any fees, commission, perquisites or profit in lieu of salary or in addition to
salary or wages
5. Any advance salary
6. Any payment received by an employee in respect of leave not availed by him
during service.
7. The total sum accredited to the credit of employees recognized provident fund to
the extent chargeable to tax.
8. Transferred balance in a recognized provident Fund to the extent it is taxable.
9. Amount contributed by the Central Government or any employer to an employee
under notified pension scheme as mentioned in 80CCD.
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CHARACTERISTICS / FEATURES OF “SALARY”
1. Employer and Employee Relationship (Master and Servant Relationship)
2. No Difference Between Salary and Wages
3. Salary from More than One Employer
4. Real Salary and Fictitious salary
5. Salary Foregoing / Voluntary Foregoing
6. Salary Surrender
7. Tax-free Salary
8. Salary Received by Member of Parliament [includes MLA and MLC]
9. Foreign Salary and Pension
10. Payments paid to Legal Heirs or widow
11. Family Pension
12. Salary of a Partner.
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1. Employer and Employee Relationship (Master and Servant
Relationship)
Any income to be taxed under the head “Salaries”, should have employer and
employee relationship, i.e., Payer and Payee relationship should exist between
the employer and employee.
Employer may be individual, firm, Company, AOP, Corporation, Central / State
Government or local authority.
Employer may be in India or Outside India.
The employee may be full-time or part-time employee.
Any remuneration payable to an employee of a foreign government falls under
this provision.
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2. No Difference Between Salary and Wages
Salary as well as wages is a compensation for the work done.
Therefore there is no much difference between these two terms.
Hence these terms are treated as synonymous for tax purposes.
The only way by which distinction can be made is that “Salary” is paid for
administrative type of work [high officials] where as “wages” is paid for manual
type of work [labourers].
3. Salary from More than One Employer
If a person receives salary from more than one employer in any particular
previous year, then all amount received as salary will be taxed put together.
This is possible in case where an employee resigns and joins another job in a
particular previous year of if a person is working under more than one
employer in a particular previous year.
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4. Real Salary and Fictitious Salary
Intention of paying and receiving is essential for an income to be taxed under
the head “Salaries”.
For Example, mere paper agreement for payment and receipt will not constitute
salary.
All amount thus received should be real and not fictitious.
5. Salary Foregoing / Voluntary Foregoing
If an employee foregoes any salary he cannot escape from tax, because his
foregone salary will be considered as salary on “due basis”.
Thus foregoing of salary is a mere application of income that will be taxed in the
hands of the employee.
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6. Salary Surrender
Any amount surrendered under the Voluntary Surrender of Salaries [exemption
from Taxation] Act, 1961, will not constitute “Salary” and hence it will not be
included in the scope of “Salary”.
This exemption is available to both public sector as well as private sector
employees [i.e., exemption available for all employees].
7. Tax-free Salary
It refers to the Salary the employees gets, for which the employer pays tax to the
department.
Under these circumstances, the salary of the employee is calculated by
computing the amount received by the employee plus the tax paid by the
employer
[i.e., Salary = Salary Received by the Employee + Tax paid by the Employer].
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8. Salary Received by Member of Parliament [includes MLA and MLC]
A Member of Parliament is not an employee of Government and therefore, the
Salary received by him as an M.P. is not chargeable to tax under the head
“Salaries”.
On the other hand it will be taxed under the head “Income from other sources”.
9. Foreign Salary and Pension
Any Salary or Pension received in India from foreign employer, for service
rendered in India is taxable as salary under the head “Income from Salary”.
10. Payments paid to Legal Heirs or Widow
As per Circular No.573, dated 21.08.1990, any lump-sum payment made
gratuitously or by way of compensation or otherwise to the widow or legal heirs
of an employee who dies while in service is not taxable as income.
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11. Family Pension
Any family pension received by the widow or legal heirs of a deceased employee
is not taxed under the head salaries but is taxable under the head “Other
sources”.
12. Salary of a Partner
Any salary received by a partner from the firm in which he is a partner is not
chargeable to tax under the head “Salaries”, where as it is chargeable to tax
under the head “Business or Profession”.
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BASIS OF CHARGEABILITY [SECTION 15]
The following incomes are chargeable to Income tax under the head “Salaries”.
1. Salary due from the present or former employer in the previous year, whether
paid or not.
2. Salary paid or allowed in the previous year on behalf of the present or former
employer, due or paid in advance.
3. Arrears of salary paid or allowed in the previous year by or on behalf of the
present or former employer, if not charged to income tax in any earlier
previous year.
As per the provisions of Section 15 the amount of Salary due, advance Salary
and arrear Salary received in the previous year from the present or former
employer is considered while calculating income from Salary.
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Any Salary, bonus, commission or remuneration, by whatever name called due
to or received by a partner of a firm from the firm shall not be regarded as
Salary for the purpose of this section.
Note :
o Salary is taxable on due or receipt basis.
o But it should be taxed only once.
o For example, if an amount is taxed at the time when it is due, it will not be
taxed at the time when it is received and vice versa.
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COMPUTATION OF SALARY INCOME
Salary income is to be computed in accordance with the provisions contained in
Sections 15, 16 and 17.
Section 15 provides scope of the head ‘Salary’.
Section 16 contains provisions relating to deductions allowed out of gross salary
income.
Section 17 defines various items of salary.
The provisions of sections 15 to 17 relating to salary income are shown in the chart
- PTO…
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Head Salary
Sections 15, 16, 17
Salary
17(1)
+
Allowances
17(3) (ii) +
Perquisites
17(2)
Perquisites
17(2)+
Less Deductions
Entertainment
Allowances
16 (ii)
Professional
Tax
16 (iii)
Standard deduction
u/s 16 (1a)
Net Salary Income
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Computation of Taxable Salary
Basic Salary Xxx
Bonus Xxx
Commission Xxx
Cash Allowances Xxx
Perquisites Xxx
Profit in lieu of salary Xxx
Arrears of Salary Xxx
Advance of Salary Xxx
Retirement benefits : Gratuity, Leave encashment pension,
Commuted pension Xxx
Gross Salary Xxx
Deductions u/s 16 : Standard deduction u/s 16(1a) Xxx
1. Entertainment allowance 16(ii) Xxx
2. Employment / Professional Tax 16 (iii) Xxx
Chargeable Salary xxx
Less :
