"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:
For the purpose of Income Tax, "Salary" includes
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'.
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'.
Deductions from Salary: The income chargeable under the head Salaries shall be computed after making the following deductions:
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.
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.
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.
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.
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'.
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:
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.
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