Salary chapter-4 Best CS Executive Income Tax

Taxability of Income under the head “Salaries” (Section 15 to 17)

Meaning of Salary

The term ‘salary’ is defined under Section 17(1). This is an inclusive definition. It includes nine items. You can read the definition of salary at the end of this chapter.
In general, salary means

  • any income/benefit
    • from or on behalf of employer
      • to employee
        • due to employer-employee relationship.

Such income may be

  • in cash, or
  • in kind (any article), or
  • in any other form like fulfilling the obligations of employee by employer.

Such income may be

  • fixed or
  • floating (completely or to some extent)

Such income may be due to

  • part time employment or
  • full time employment.

Such income may be on

  • monthly basis,
  • quarterly basis or
  • yearly basis.

Such income may be related to

  • past period (arrears), or
  • present period or
  • future period (advanced salary)

Such income may be

  • directly from the employer or
  • indirectly by some other person on behalf of the employer.

Thus an income can be taxed under the head salary only if

  •  there exist a relation of employer and employee between the payer and the payee and
  • such income or right to such income comes into existence due to such relation.

 

Employer-Employee Relationship

Basically a person may be considered as an employee of another person, when the later one determines (for the first person):

  • what to do and how to do

It means there shall be a master-servant relation between the concerned persons.

Examples of income not considered as income taxable under the head salaries

  • Income by way of examiner fees received by a professor even from the same university in which he is in employment (if such fee is not the part of professor’s job agreement)
    Explanation: Setting and checking question papers is not the part of professor’s job agreement. Therefore, income from such work cannot be considered as income arising due to employer-employee relations.   
  • Income received by a non-executive director for attending board meeting
    Explanation: Non-executive director is not the employee of the company.
  • Gift given by employer to his employee on account of personal regard, love or affection
    Explanation: Not due to employer-employee relations but due to personal regard, love or affection
  • Remuneration to a MLAs/MPs
    Explanation: MLAs/MPs are not the employee of government. They are elected by people not appointed by government.
  • Leave salary paid to the legal heirs of the deceased employee
    Explanation: There exist no employer-employee relations between the employer and family members of employee.  
  • Payment made to employee on his transfer to compensate him for loss suffered on the sale of his house
    Explanation: Not due to employer-employee relations but due to personal regard, love or affection
  • Payment or gift in appreciation of personal qualities of employee
    Explanation: Not due to employer-employee relations but due to personal regard, love or affection
  • A grant to retiring executive director as a personal gift
    Explanation: Not due to employer-employee relations but due to personal regard, love or affection
  • Salary received by partners from the firm
    Explanation: Partners are not employees of the firm

Examples of income considered as income taxable under the head salary

  • Remuneration of the official liquidator appointed by court or CG
  • Allowance received by a doctor from his employer for not carrying on his/her personal practice
  • Gratuity, bonus, fee, commission etc. payable by employer under the terms of employment
  • Overtime payments
  • Salary in lieu of notice period (payment at the time of termination of contract of services before time)
  • Any payment received by an employee from his prospective employer for joining job.

Which salary is taxable under the head "Salaries"? (Section 15)

According to Section 15, the following salaries shall be chargeable to income-tax under the head “Salaries”—

  • any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not in that previous year;
  • any salary paid or allowed to an assessee in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;
  • any arrears of salary paid or allowed to an assessee in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year on due basis.

In short according to Section 15, following income shall be chargeable to income tax under the head salary:

  • Salary due, whether received or not
  • Salary received, whether due or not
  • Arrears of salary, if not taxed previously on due basis

Note:

  • Due means “legal right to demand”.
  • Income once taxed on the receipt basis cannot be taxed again on the due basis.
  • Similarly, income once taxed on the due basis cannot be taxed again on the receipt basis, otherwise it will lead to double taxation.

Important Points on the basis of Section 15

Taxability of advance salary
According to Section 15, advance salary is taxable in the P.Y. in which such salary is received.

Example:
Mr. Aallu works in Deepgyan.com. His salary is Rs. 30,000 p.m. He receives his monthly salary on the 10th of next month (like salary of Jan on 10th Feb). He takes salary of April 2022 and May 2022 in advance in March 2022.  Now according to Section 15, advance salary of April 2022 and May 2022 is taxable in previous year 2021-22 on receipt basis. (Here assessment year is 2022-23).

Loan/advance on salary
Loan/advance on salary is different from advance salary. Loan/advance on salary is simply a kind of loan where employee gives authority to employer to deduct the loan installments from the salary in future. Thus loan/advance on salary is not considered as income and therefore it is not taxable.

Taxability of salary due but not received
According to Section 15 of Income Tax Act, 1961, salary due in any P.Y whether received or not is taxable in that P.Y.

 Example:
Mr. Aallu works in Deepgyan.com. His salary is Rs. 30,000 p.m. His salary becomes due on the last day of every month (like salary of March becomes due on 31st March). But he receives his salary on the 10th of next month (like salary of Jan on 10th Feb).

Suppose Mr. Aallu received his salary of March 2021 on 10th April 2022.  Now according to Section 15, salary of March 2022 is taxable in previous year 2021-22 on due basis although the salary is received in the previous year 2022-23 (April 2022).

Tax treatment of salary not recovered from the employer
According to Section 15, salary may be taxed on due basis or receipt basis, whichever is earlier. Actual receipt of salary is not an essence for taxability of salary. Thus salary is taxable on due basis even if the money is not recovered from the employer. Further, the expenses, if any, incurred by the employee to take any legal action against his employer for recovery of the un-recovered salary would not be allowed as a deduction from the income.

Taxability of Arrears of Salary (unreceived salary related to past period)
According to Section 15 of Income Tax Act, 1961, arrears of salary are taxable in the P.Y in which they are received, if they are not taxed on the due basis previously.

Example:
Mr. Aallu joined Deepgyan.com in 2010 at a basic salary of Rs. 30,000 p.m. Since April, 2020 talks were going on between Mr. Aallu and Deepgyan.com for increment in the basic salary. Talks settled in Dec, 2021, according to which basic salary of Mr. Aallu was increased to Rs. 35,000 with effect from 1st April, 2020.

It means, along with the salary, in previous year 2021-22, Mr. Aallu received following:
Arrear of Rs. 5000 p.m. for financial year 2020-21 = 5000 X 12 = 60,000

This arrear was not taxed in the previous year 2020-21 on due basis as it never came into existence that time. The right to claim this arrear came into existence in Dec, 2021 when talks were finally settled. Therefore, this amount of Rs. 60,000 is taxable in previous year 2021-22 on receipt basis.  

Treatment of Tax Free Salary
Tax free salary is also taxable. Here, employer pays taxes on the salary on behalf of employee. From tax point of view, such tax is considered as benefits in the hands of employee during the employment. Thus, for the purpose of Income Tax, the total salary of employee is considered as the sum of “salary received from employer” and “taxes paid by the employer on behalf of employee”.

Total Salary of employee

Salary received from employer
+
Taxes paid by employer on behalf of employee

Example:
Mr. Aallu works in Deepgyan.com at a salary of Rs.50,000 p.m. According to the terms and conditions of job, the salary of Mr. Aallu is tax free. It means Deepgyan.com pays taxes to the government on behalf of Mr. Aallu.  Suppose, for previous year 2021-22, income tax paid by Deepgyan.com on the salary of Mr. Aallu is Rs. 5,000.

Under, Income Tax Laws, such amount of Rs. 5,000 is considered as income of Mr. Aallu. Therefore, total salary of Mr. Aallu shall be the sum of “salary received from employer” and “taxes paid by the employer on behalf of Mr. Aallu” that is 50,000 X 12 + 5000 => Rs. 6,05,000.

Tax payable on Rs. 6,05,000:
On 1st 2.5 Lakhs => NIL
On next Rs. 2,50,000 => 5%                                                          => Rs. 12,500
On next Rs. 1,05,000 => 20%                                                       => Rs. 21,000
Tax paid by Deepgyan.com on behalf of Mr. Aallu             => Rs. 5000
Tax which is required to be deposited                                    => Rs. 28,500 

 Taxability of salary received from more than 1 employer
Under Income Tax Laws, to find out the total taxable salary of an employee, we have to club all the salaries received by him/her in the P.Y from all the employers (past and present).So, from Income Tax point of view, it is immaterial

  • whether the salary is received from past employer or present employer, or
  • whether the salary is received from one employer or many employers

The provisions of income tax laws (like exemptions/deductions etc.) are applicable on the total salary received by an employee in the P.Y. from all employers.

Computation of salary in grade system

Suppose Mr. Aallu joined a bank on 1st June, 2021 at a grade of 15,700-800-20,500-1,000-30,500. It means that Mr. Aallu started job at a basic salary of Rs. 15,700. Every year, on 1st June, his salary shall increase by Rs. 800 till his salary reaches to Rs. 20,500. Thereafter, his salary shall increase by Rs. 1,000 every year till his salary reaches to Rs. 30,000. And there will be no increment in my salary beyond 30,500 in this grade. For further increment, he should be shifted to the next higher grade. Question 1 Mr. Kachallu joined a bank on 1st Jan, 2015 at a grade of 15,700-800-20,500-1,000-30,500. Calculate the gross total salary of Mr. Kachallu for previous year 2021-22. Solution: Date of joining the service:          1st Jan, 2015 Salary at the time of joining:       Rs. 15,700 As per the grade scale, every year on 1st Jan, Mr. Kachallu shall get increment of Rs. 800 till his salary will reach to Rs. 20,500 and thereafter he shall get increment of Rs. 1,000 till his salary will reach to Rs. 30,500.
Date of increments Salary after increments (Rs.)
1.1.2016 15,700 + 800 = 16, 500
1.1.2017 16,500 + 800 = 17, 300
1.1.2018 17,300 + 800 = 18, 100
1.1.2019 18,100 + 800 = 18, 900
1.1.2020 18,900 + 800 = 19, 700
1.1.2021 19,700 + 800 = 20, 500
1.1.2022 20,500 + 1000 = 21,500
 
Salary received by Mr. Kachallu in P.Y 2021-22
1st April, 2021 to 31st Dec, 2021 (Rs. 20,500 p.m.) 1st Jan, 2022 to 31st March, 2022 (Rs. 21,500 p.m.) Rs. 1,84,500 Rs. 64,500
Gross total salary for  P.Y 2021-22         Rs. 2,49,000

Foregoing or Surrender of salary

Forgoing of salary is considered as application (utilization) of salary income and therefore such salary is completely taxable on due basis.
Example:
Mr. Aallu joined Deepgyan.com on 1st April, 2021 at a salary of Rs. 30,000 p.m. He did not take his salary of April, 2021. Deepgyan.com generated his salary and showed that salary as donation to Deepgyan.com from Mr. Aallu.

Here, although Mr. Aallu had forgone his salary of April, 2021, but such salary is taxable in the hands of Mr. Aallu on due basis for Mr. Aallu got the legal as under income tax laws forgoing of salary is considered as application (utilization) of salary.    

Diversification of Salary
Forgoing of right to receive salary before it becomes due is known as diversification of income and such income not chargeable to tax.

Example:
Mr. Aallu joined Deepgyan.com with the condition that he would not take any salary for his services. Deepgyan.com generated his salary and showed that salary as donation to Deepgyan.com from Mr. Aallu.  

Surrender of salary to Central Government under the Voluntary Surrender of Salaries (Exemption from taxation) Act, 1961 – Exempted
If any salary is surrendered to Central Government under the Voluntary Surrender of Salaries (Exemption from taxation) Act, 1961, such salary is exempted from tax and therefore it is not included in the total income of the person.

Place of accrual of Salary

Generally, the salary is be deemed to accrue or arise at a place where services are rendered.

  1. Thus if services are rendered in India, salary will be taxable in India in every case (ROR/RNOR/NR) even if such salary is received outside India.
  2. Even the pension received for services rendered in India will be taxable in India even if such pension is received outside India.
  3. Further the salary of an Indian citizen who is government employee and who render his services outside India will be deemed to accrue or arise in India and therefore will be taxable in India
  4. Salary paid by foreign government/company to its employees for rendering services in India is taxable in India.
  5. Salary of an Indian Resident (ROR), shall always be taxable in India whether services are rendered in India or outside India, and whether salary is received in India or outside India.

Tax Treatment of various components of salary

Basic Salary/Wages100% taxable in all casesDue basis or receipt basis whichever is earlier
Overtime Salary100% taxable in all casesDue basis or receipt basis whichever is earlier
Bonus100% taxable in all casesReceipt basis
Amount/benefit received by a person for joining job100% taxable in all casesReceipt basis
Salary in lieu of notice period100% taxable in all casesReceipt basis
Fee or Commission100% taxable in all casesDue basis or receipt basis whichever is earlier

Deductions under the head “Salaries”

Deductions from salaries or statutory deductions under the head salaries (Section 16)

Under Section 16 of Income Tax Act, 1961 only 3 deductions are allowed from the gross salary namely:—

  • Standard deduction of Rs. 50,000 or the amount of salary, whichever is less (allowed in case of all employees)
  • Deduction in respect of entertainment allowance (allowed only in case of government employees)
  • Deduction in respect of tax on employment by State Government (allowed in case of all employees)

Deduction in respect of entertainment allowance [Section 16(ii)]
Entertainment allowance means an allowance given to the employee by the employer for compensating the expenses done by employee out of his/her pocket for entertaining the clients of employer (for example money spent for providing tea or coffee to the clients).

For the purpose of taxability of entertainment allowance, employees can be divided into 2 categories:

  1. Government Employees (who is in receipt of a salary from the Government) and
  2. Non-government

Tax treatment of Entertainment Allowance

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