SALARY and its components, Advance Salary, Arrears 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." Accordingly:
- The Pension received by an assessee from his former employer is taxable as "Salaries" whereas pension received on death of an employee by members of his/her family as Family Pension is taxed as "Income from Other Sources".
- The salary received by a partner from his partnership firm carrying on a business is not chargeable as "Salaries" but as "Profits & Gains from Business & Profession".
For the purpose of Income Tax, "Salary" includes
- Annuity or pension
- Fees, Commission, perquisites or profits in lieu of salary
Fees or commission received by the employee from the employer are charged to tax as salary income. Commission will be taxed as salary income, irrespective of the fact that it is received as fixed monthly amount or is received as percentage of turnover.
Any voluntarily gift received by the employee from the employer is charged to tax as salary income (perquisite). However, non-monetary gifts are exempt upto Rs. 5,000. If gift has no relation to the service rendered by the employee, then the same can be charged to tax under the head 'Income from other sources'.
- 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.
Compensation received from the employer in connection with modification of terms of employment, will be charged to tax as salary income
If an employee receives any payment in respect of extra work done by him then the same is charged to tax under the head 'Salaries'.
Place of accrual of salary:
- Salary is taxed on 'due basis' or 'receipt basis', whichever is earlier.
- Existence of relationship of employer and employee is must between the payer and payee to tax the income under this head.
- Income from salary taxable during the year consists of following:
- Salary due from employer (including former employer) to taxpayer during the previous year, whether paid or not;
- Salary paid by employer (including former employer) to taxpayer during the previous year before it became due;
- Arrear of salary paid by the employer (including former employer) to taxpayer during the previous year, if not charged to tax in any earlier year;
- Salary accrues where the services are rendered even if it is paid outside India;
- Salary paid by the Foreign Government to his employee serving in India is taxable under the head Salaries;
- Leave salary paid abroad in respect of leave earned in India shall be deemed to accrue or arise in India.
Deductions from Salary:
The income chargeable under the head Salaries shall be computed after making the following deductions:
- A deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee who is in receipt of salary from the Government, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less;
- A deduction of any sum paid by the assessee on account of a tax on employment within the meaning of clause (2) of article 276 of the Constitution, leviable by or under any law.
Taxability of Advance Salary
Advance salary received by an employee is taxed in the year of receipt. However, an employee can claim relief under section 89 in respect of advance salary.
Similarly, Bonus received by an employee is charged to tax in the year of receipt.
Taxability of Arrears of Salary
Arrears of salary received by an employee are taxed in the year of receipt if the same were not taxed earlier on due basis. However, an employee can claim relief under section 89 in respect of arrears of salary.
Tax treatment of salary received by an Indian citizen deputed outside India
Salary received by an Indian citizen deputed outside India by the Government is treated as income deemed to be accrued or arisen in India and will be taxed in India. However, in such a case allowance and perquisites will be exempt from tax.
Tax treatment of salary foregone by the employee
Salary is charged to tax on due or receipt basis whichever is earlier, hence, salary foregone by the employee is charged to tax on due basis, even though it is not received by him. In other words, salary foregone after its accrual is charged to tax, even though it is not received by the employee. However, if salary is surrendered to the Central Government under section 2 of the Voluntary Surrender of Salary (Exemption from Taxation) Act, 1961, then such surrendered salary is not charged to tax.
Tax treatment of amount received before joining the job
Any payment received by an employee from his present employer or former employer or prospective employer will be charged to tax under the head 'Salaries' (as profits in lieu of salary). Hence, amount received from prospective employer will also be charged to tax under the head 'Salaries'.
Relief under section 89 in respect of arrears of salary
Under section 89, read with Rule 21A(2), an employee can claim relief in respect of arrears of salary. Relief can be computed in the following manner:
- Calculate total tax liability on the total income, including the additional salary (Advance Salary or Arrears of Salary) of the year in which such salary is received.
- Calculate total tax liability on the total income, excluding the additional salary of the year in which such salary is received.
- Find the difference between tax computed at (1) and (2) above.
- Calculate total tax liability on the total income, including the additional salary (Advance Salary or Arrears of Salary) of the year(s) to which such salary relates to.
- Calculate total tax liability on the total income, excluding the additional salary of the year(s) to which such salary relates to.
- Find the difference between tax computed at (4) and (5) above.
Relief under section 89 is the excess of tax computed at 3 over tax computed at 6. No relief is available, if tax computed at 3 is less than tax computed at 6.
If the additional salary pertains to more than one previous year, then relief shall be computed in above manner by spreading such salary over the previous years to which such salary pertains to.
Frequently Asked Questions
What is considered as Salary income?
Whatever is received by an employee from an employer in cash, kind or as a facility (perquisite) is considered as Salary.
What is meant by an employer-employee relationship?
If a person has the right/power to hire and fire another, then he is an employer of the latter.
What are allowances? Are all allowances taxable?
Allowances are fixed amounts, apart from salary, which are paid by an employer for the purpose of meeting some particular requirements of the employee. There are generally three types of allowances for the purpose of income tax- taxable, fully exempted and partially exempted.
I am always on tour and my employer gives me substantial daily allowance, most of which is saved. Will this saving be treated as income?
My employer reimburses all my expenses on grocery and children's education. Would this be considered as income?
Yes. These are in the nature of perquisite.
During the year, I had worked with three different employers and none of them deducted any tax from salary paid to me. If all these amounts are clubbed, my income will exceed the minimum exemption limit. Do I have to pay taxes on my own?
Yes. You will have to pay self-assessment tax and file the return.
Even if no taxes have been deducted from salary, is there any need for my employer to issue Form-16 to me?
Form-16 is a certificate of TDS and in your case it will not apply. However your employer must issue a salary statement.
Is pension income considered as salary?
Yes. However pension received from the United Nation is exempt.
Is Family pension considered as salary?
No. It is taxable under 'other sources'.
If I am receiving my pension through a bank who will issue Form-16 or pension statement to me - the bank or my former employer?
Are retirement benefits such as PF and Gratuity taxable?
No. They are exempt subject to conditions and limits laid down in the Income Tax Act.
Are arrears of salary taxable?
Yes. However certain benefit of spread over of income to the years to which it relates can be availed for lower incidence of tax. This is called relief u/s 89(1) of Income-tax Act.
Can my employer consider relief u/s 89(1) for the purposes of calculating my tax liability?
My income from let out house property is negative. Can I ask my employer to consider this loss against my salary income while computing my tax liability?
Is leave encashment taxable as salary?
It is taxable if received while in service. However, when received as retirement benefit, it is exempt subject to certain conditions.
Is Life insurance amount received on maturity along with bonus taxable?
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