Every payment made by an employer to his employee for service rendered would be chargeable to tax as income from salaries. The term ‘salary’ for the purpose of Income-tax Act, 1961 will include both monetary payments (example: basic salary, bonus, commission, allowances, etc) as well as non-monetary facilities (example: housing accommodation, medical facility, interest-free loans etc).
Definition of Salary
The term ‘salary’ has been defined differently for the different purposes in the Act. The definition as to what constitutes salary very wide.
‘Salary’ under section 17(1), includes the following:
- any annuity or pension,
- any gratuity,
- any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages,
- any advance of salary,
- any payment received in respect of any period of leave not availed by him i.e. leave salary or leave encashment.
- the portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund to the extent it is taxable and
- transferred balance in the recognised provident fund to the extent it is taxable,
- the contribution made by the Central Government or any other employer in the previous year to the account of an employee under a pension scheme referred to in section 80CCD.
Basis of Charge
- Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier.
- However, where any salary, paid in advance, is assessed in the year of payment, it cannot be subsequently brought to tax in the year in which it becomes due.
- If the salary paid in arrears has already been assessed on the due basis, the same cannot be taxed again when it is paid.
Place of Accrual Salary
Under section 9(1)(ii), salary earned in India is deemed to accrue or arise in India even if it is paid outside India or it is paid or payable after the contract of employment in India comes to an end.
Allowances are fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the service rendered by the employee. Under the Income-Tax Act, 1961, allowance is taxable on due or receipt basis, whichever is earlier.
|Fully Taxable||Party Taxable||Fully Exempt|
|1. Entertainment Allowance|
2. Dearness Allowance
3. Overtime Allowance
4. Fixed Medical Allowance
5. City Compensatory Allowance
6. Interim Allowance
7. Servant Allowance
8. Project Allowance
9. Tiffin/Lunch/Dinner Allowance
10. Any other cash allowance
11. Warden Allowance
12. Non- Practising Allownace
| 1. House Rent Allowance|
Least of the following is exempt.
a. HRA Received
b.Excess of house rent paid minus 10% of salary.
c. 50% of salary if staying in a metro city and 40% in a non- metro city.
2. Special Allowance
1. Allowance granted to Government employees outside India.
2. Sumptuary allowance granted to High Court or Supreme Court Judges.
3. Allowance paid by the United Nations Organization.
4. Compensatory Allowance received by a Judge.
‘Perquisite may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages.
Perquisite is defined in section 17 (2) of the Income Tax Act as including:
- The value of rent-free/concessional rent accommodation provided by the employer.
- Any sum paid by the employer in respect of an obligation which was payable by the assessee.
- The value of any benefit/amenity granted free or at a concessional rate to specified employees etc.
- The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, free of cost or at concessional rate to the assessee.
- The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees.
- The value of any other fringe benefit or amenity as may be prescribed.
Profits in Lieu of Salary [Section 17(3)]
It includes the following:
- The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment.
- The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the modification of the terms and conditions of employment.
- Any payment due to or received by an assessee from his employer or former employer from a provident or other funds to the extent to which it does not consist of employee’s contributions or interest on such contributions.
- Any sum received by an assessee under a Keyman Insurance policy including the sum allocated by way of bonus on such policy.
- Any amount, whether in the lump sum or otherwise, due to the assessee or received by him, from any person before joining employment with that person or after cessation of his employment with that person.
- Any other sum received by the employee from the employer.
Advance salary is taxable when it is received by the employee irrespective of the fact whether it is due or not. It may so happen that when advance salary is included and changed in a particular previous year, the rate of tax at which the employee is assessed may be higher than the normal rate of tax to which he would have been assessed.
Loan or Advance against Salary
The loan is different from salary. When an employee takes a loan from his employer, which is repayable in certain specified instalments, the loan amount cannot be brought to tax as the salary of the employee.
Similarly, advance against salary is different from advance salary. It is an advance taken by the employee from his employer. This advance is generally adjusted with his salary over a specified time period. It cannot be taxed as salary.
Arrears of Salary
Normally, salary arrears must be charged on the basis. However, there are circumstances when it may not be possible to bring the same to charge on due basis. For example, if the Pay Commission is appointed by the Central Government and it recommends revision of salaries of employees, the arrears received in that connection will be charged on receipt basis.
An annuity is a sum payable in respect of a particular year. Annuity received from a present employer is to be taxed as salary. It does not matter whether it is paid in pursuance of a contractual obligation or voluntarily. Annuity received from a past employer is taxable as profit in lieu of salary. Annuity received from a person other than an employer is taxable as ‘income from other sources’.
Gratuity is a voluntary payment made by an employer in appreciation of services rendered by the employee and is exempt to a certain limit.
Provident fund is a scheme intended to give substantial benefits to an employee at the time of his retirement. Under this scheme, a specified sum is deducted from the salary of the employee as his contribution towards the fund. The employer also contributes the same amount to the fund. The contribution of the employee and the employer are invested in approved securities. Interest earned thereon is also credited to the account of the employee.
|Particulars||Statutory PF||Recognized PF||Unrecognized PF||Public PF|
|Employer’s Contribution||Fully exempt||Amount in excess of 12% of salary is taxable.||Not taxable yearly||N.A|
|Employee’s Contribution||Eligible for deduction u/s 80C||Eligible for deduction u/s 80C||Not eligible for deduction||Eligible for deduction u/s 80C|
|Interest credited||Fully exempt||Amount in excess of 9.5% p.a is taxable.||Not taxable yearly||Fully exempt|
|Amount received on retirement, etc||Fully exempt u/s 10(11).||Fully exempt (who has service for 5 years or more.||Taxable except employee’s contribution||Fully exempt u/s 10(11).|
Salary for this purpose means basic salary and dearness allowance- if provided in the terms of employment for retirement benefits and commission as a percentage of turnover.
Deductions from Salary
The income chargeable under the head ‘Salaries’ is computed after making the following deductions
Entertainment Allowance [Section 16(ii)] – This deduction is available only for the government employees. The deduction is either the 1/5 of the basic salary or ₹5,000.00 or entertainment allowance received, whichever is less. The non-government employees cannot avail this deduction.
Professional Tax on Employment [Section 16 (iii)] – Professional tax on employment levied by a State under Article 276 of the Constitution is allowed as deduction only when it is actually paid by the employee during the financial year. If professional tax is reimbursed or directly paid by the employer on behalf of the employee, the amount so paid first included as salary income and then allowed as a deduction under section 16.