Income from Salaries

Basic Concepts that one must know:

1.      This income is chargeable under section 15, 16 and 17 of the income tax act.

Salary means any payment made at a regular intervals for the service rendered. The same need not be of a permanent nature. Even as employment if a temporary mature would still qualify for the chargeability under the income of salaries.

To charge any income under this head, the basic requirement is that there should be employer and employee relationship between the 2 parties

Are as follows :-

1)      The employer-employee relationship is essential. This is the most important condition for the income to be taxed  under the head salaries. If your boss gives you a gift in the occasion of your marriage then the same is not taxed as salaries

2)      The relationship must be real and not illusionary: It means there should be two different persons involved in giving salary and receiving it. In one famous school case the owner of the school paid the salary to himself in various capacities like peon, teacher, principal and accountant because he was the person who did all the jobs. This is not allowed in salary. It means that the employer and the employee are two different people and should not be one and the same person.

Salary may be received for the past and for the future services also

Salary is taxable on the receipt or accrual basis. Whichever occurs first.

Salary once taxed on the receipt basis (Advance salary) will not be taxed again on due basis. If it is taxed again on due basis them to will lead to double taxation.

Unlike accounts conceptually salary and wages are same for the purpose of income tax.

Accounts treats that wages are paid to the factory workers debited to trading accountant and salaries are paid to the office employees, which is debited to P & L account. But income tax makes no such difference.

Salary Donated is taxable as Salary

 Strange but true even if the employee has not received the same in his hands it would be taxable.

Similarly Salary forgone is also taxable.

Salary paid tax-free is also taxable.

Salary surrendered is also taxable, except one

It is still taxable. But if the same were surrendered under the section 2 of the voluntary surrender of salaries exemption from taxation act 1961 then the same would be exempted from tax.

Like all cases of direct taxed there are 2 authorities in salaries. The tax collecting authority i.e. Govt. of India and the tax paying body which is the assessee.

Full salary is not taxable.

If you are earning a salary of Rs. 5,000 per month then the full amount is not taxable. Some expenses that must have been incurred for earning the salary are allowed as deduction. Thus the concept is as follows:

“TAXABLE SALARY = GROSS SALARY–EXPENSES INCURRED FOR EARNING SALARY”

           

The income side of salary consists of 4 heads

1.      Salary: these are contractual payments that are agreed upon between the employer and the employee under the terms of employment. Theses are statutory in nature and would include the following items:

Salary, wages, advance salary, commission, arrears of salary, leave salary, annuity, gratuity, pension, bonus, ex-gratia payments etc.

2.      Allowance: these are the amount given by the employer to the employee for carrying out the job responsibilities in an efficient manner. E.g. an air-hostess is give a kit allowance and a wardrobe allowance so that she can carry out her duties properly and stay beautiful which is a requirement of her job. Similarly sales man is given traveling allowance because it is the requirement of the job that he should travel extensively for procuring business.

3.      Perquisites: there are the non-cash benefits, which an employee receives from his employer during the course of employment. The main important difference between the allowance and the perquisites is that the allowance are received by the employee in his hands and then they are spent, where as in the case of perquisite the money is not received, it is only the advantage that is received E.g. free car given to the employee does not receive any money but he gets non-monetary benefit of using the car.

4.      Profit In Lieu of Salary: These are the payments that are made by the employer to the employee on account of distribution of the profit, which he shares, with the employee. These may include the direct and the indirect benefits of profits that may accrue to the employee from the employment. E.g. ESOP or employee sweet option schemes are the best example of profits in lieu of salary (now included in salary so not taxable). It also includes any amount of any compensation due to or received by an assessee from is employer or former employer in connection with the termination of his employment. The amount of any compensation due to or received by as assessee from his employer or former employer ub connection with the modification of terms and conditions of the employment.