Q. What is Salaries as per Income Tax Act 1961?
Ans. As per Income Tax Act 1961, The provisions pertaining to Income under the head “Salaries” are contained in section 15, 16 and 17 in the following
manner:
- Chargeability under section 15 - Salary due, Salary paid or allowed through not due and Arrear of salary.
- Deduction under section 16 - Standard deduction, Entertainment allowances and Professional tax**
- Meaning of Salary under section 17 - Salary, Perquisites and Profits in lieu in salary.
**Deduction for Entertainment allowance
for Government employees
and Professional tax are
allowable only under the optional
tax regime i.e.,
if the employee exercises the option
of shifting out of the default tax regime provided under section 115BAC(1A).
The same are not allowable
under the default
tax regime under section 115BAC.
Important concepts relating to Salaries:
a) Employer-employee relationship: Any payment from an employer to an employee for work done is subject to tax as salaries. For income to be taxable as 'salaries', there must be an employer-employee relationship between the payer and the payee.
b) Full-time or part-time employment: When there is an employer-employee relationship, the earnings are categorized as "salaries". Whether the employee works full-time or part-time is irrelevant. If an employee works for multiple employers, the salaries from all employers must be combined and reported for the applicable tax years.
c) Forgoing of salary: When the salary is earned, if the employee later decides to waive it, they are still responsible for paying income tax on that amount. This waiver is considered as income and is taxable.
d) Surrender of salary: If an employee decides to give up their salary for the greater good by surrendering it to the Central Government under section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the surrendered salary would not be included when calculating their taxable income.
e) Salary paid tax-free: Basically, this implies that the employer is responsible for paying the tax on the employee's salary. So, the employee's income will include both their salary and the tax amount paid by the employer. On the other hand, according to section 10(10CC), any income-tax paid by the employer for non-monetary benefits given to the employee will be tax-exempt for the employee.
f) Place of accrual of salary: According to section 9(1)(ii), any salary earned in India is considered to have been earned in India, even if it is paid outside the country or after the employment contract in India has ended. If an individual receives pension from abroad for services provided in India, it will also be considered as earned in India. The same goes for leave salary paid abroad for leave earned in India. Section 9(1)(iii) states that salaries paid by the Government to Indian citizens for services outside India will be deemed to have been earned in India. However, under section 10(7), any allowances or perquisites paid by the Government to Indian citizens for services outside India will be fully exempt. Non-Indian citizen individual taxpayers are eligible for certain exemptions under section 10(6) for the remuneration or salary they receive.
BASIS OF CHARGE [SECTION 15]
a) Section 15 deals with the basis of charge under
the head “Salaries”. Salary is chargeable to tax either on ‘due’ basis or on
‘receipt’ basis, whichever is earlier.b) 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.
c) If the salary paid in arrears has already been
assessed on due basis, the same cannot be taxed again when it is paid.
Meaning of Salary as per [Section 17]:
The definition of the word 'salary' in relation to income tax is broader than its usual meaning. In the Income-tax Act of 1961, 'salary' encompasses both monetary payments (such as basic salary, bonus, commission, allowances, etc.) and non-monetary benefits (like housing accommodation, medical facility, interest-free loans, etc.). Section 17(1) provides an inclusive definition of the term "Salary" that covers both types of items.
Salary under section
17(1), includes the following:
1) Wages
2) Any annuity or pension
3) Any fees, commission,
perquisites or profits in lieu of or in addition to any salary or wages,
4) Any advance of salary
5) Any payment received in respect of any period of
leave not availed by him i.e., leave salary or leave encashment.
6)Provident Fund: - 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 recognized provident fund to the extent it is taxable.
7)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.
8) The contribution made
by the Central Government in the previous year, to the Agniveer
Corpus Fund account
of an individual enrolled
in the Agnipath Scheme referred to in section 80CCH.
Advance Salary : Advance salary is taxable when it is received by the employee
irrespective of the fact whether it is due or not. The
rule behind this is the basis of taxability of salary i.e., salary is taxed on due or receipt basis,
whichever is earlier.
(Note: Loan is different from salary. When an employee
takes a loan from his employer, which is repayable in certain specified
installments, the loan amount cannot be brought to tax as salary of the
employee)
Arrear of Salary : Normally speaking, salary arrears must be charged
on due basis. However, there are circumstances when it may not be
possible to bring the same to charge on due basis.
The End.
