salary tax
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CHAPTER III
INCOME FROM SALARY
Meaning 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”. or instance, the salary received
by a partner from his partnership firm carrying on a business is not chargeable as
“Salaries” but as “!rofits " #ains from $usiness or !rofession”. Similarly, salary
received by a person as M! or M%& is taxable as “ 'ncome from other sources”, but if a
person received salary as Minister of State( )entral #overnment, the same shall be
charged to tax under the head “Salaries”. !ension received by an assessee from his
former employer is taxable as “Salaries” *hereas pension received on his death by
members of his family +amily !ension is taxed as “'ncome from other sources”.
$asic elements of salary
!ayer and payee must have employer and employee relationship.
&ny payment received by an individual from a person other than his employer
cannot be termed as salary.
$asis of charge
Salary is chargeable to tax on due or on receipt basis *hichever is earlier
Salary received in advance is taxable in the year of receipt. Such salary not be
included again in the total income *hen it become due
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utstanding salary is taxable on due basis i.e. salary is taxable in the year in
*hich it falls due.
&rrear salary is taxable on receipt basis.
Definition of salary
&s per section 17 1! of the 'ncome Tax, Salary includes/
i *ages.
+ii &ny annuity or pension
+iii &ny gratuity
+iv &ny fees, commissions, perquisites or profits in lieu of or in addition to any
salary or *ages.
+v &ny advance of salary
+vi &ny payment received by an employee in respect of any period of leave not
availed of by him
+vi The annual accretion to the balance at the credit of an employee participating in arecogni0ed provident fund, to the extent to *hich it is chargeable to tax under rule 1 of
!art & of the ourth Schedule and
+vii The aggregate of all sums that are comprised in the transferred balance as referred
to in sub-rule +2 of rule 33 of !art & of the ourth Schedule of an employee
participating in a recogni0ed provident fund, to the extent to *hich it is chargeable to
tax under sub-rule +4 thereof
+viii The contribution made by the )entral #overnment 5or any other employer6 in the
previous year, to the account of an employee under a pension scheme referred to in
section 78))9
The follo*ing deductions from salary income are admissible as per Section 31 of the
'ncome-tax &ct.
+i !rofessional(:mployment tax levied by the State #ovt.
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+ii :ntertainment &llo*ance- 9eduction in respect of this is available to a
government employee to the extent of ;s.
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Salary may be received from not Bust the present employer but also a
prospective employer and in some cases even from a former employer for example
pension received from a former employer.
;eal intention to pay/
Salary income must be real and not fictitious. There must exist an intention(
obligation to pay and Creceive salary.
Subsequent Surrender of Salary not tax-free/
Salary is taxed on due basis. & subsequent surrender of the salary *ill not be
tax-free except *here an employee surrenders his salary to the central government, and
then the salary so surrendered *ill not be treated as taxable income of the employee.
Tax- ree salary/
Salary paid tax free is also taxable in the hands of the employee, though
contractually income tax on such is borne not by the employee but by the employer.
Time of taxability/
Salary is taxable in the year of receipt or in the year of earning or accrual of the
salary income, *hichever is earlier. 'n other *ords advance salary *ill be taxed *hen
received and unpaid salary *ill be taxed on accrual i.e. if the salary has been received
first, then it *ill be taxable in the year of receipt. 'f it has been earned first but not yet
received then it *ill be taxable in the year of earning. >o*ever, salary once taxed shall
not be subBected to tax again .&ccordingly accounting method employed by the
employee is not relevant to determine the taxability of salary.
Salary received by individuals only/
Salary is a compensation for personali0ed services, *hich can obviously be
rendered by a normal human being and not a body corporate. Salary income is taxable
in the hands of individuals only. Ao other type of person such as a firm or >D,
companies can earn salary income.
Eoluntary payments taxable as salary/
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Eoluntary payments li?e gift etc also form the part of taxable salary.
Salary in respect of services rendered in 'ndia/
Salary, leave salary and pension even if paid outside 'ndia are deemed u(s F toaccrue and arise in 'ndia and are taxable in 'ndia. urther, Salary paid to 'ndian
diplomats by the #overnment of 'ndia is deemed to accrue and arise in 'ndia although
the same is exempted e u(s 38.
#ross salary Taxable/
)ompulsory deductions from salary such as employees@ contribution to
provident fund, deduction on account of medical scheme or staff *elfare scheme etc.
are examples of instances of application of income. 'n these cases, for computing total
income, these deductions have to be added bac?.
Per"#isites$ Section 17 %!
!erquisite is additional benefit received by an employee over " above his basic
salary but it is different from allo*ance. !erquisite may be paid voluntarily or by virtue
of service contract.
!erquisites taxable in case of all employees.
!erquisites taxable only in case of specified employees li?e directors etc.
!erquisites not taxable at all
Per"#isites Ta&a'le in case of All E()loyees*
Dnder Section 3G +2 !erquisites includes/-
The follo*ing perquisites are taxable in case of every employee, *hether
specified or not/
3. ;ent free house provided by employer
2. >ouse provided at concessional rate
H. &ny obligation of employee discharged by employer e.g. payment of club or
hotel bills of employee, salary to domestic servants engaged by employee,
payment of school fees of employees@ children etc.
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4. &ny sum paid by employer in respect of insurance premia on the life of
employee
+, Aotified fringe benefits +on *hich fringe benefit tax is not applicable I it
includes interest free or concessional loans to employees, use of movable
assets, transfer of moveable assets.
Per"#isites ta&a'le only for s)ecifie- e()loyees*
3. Services of a s*eeper, a gardener, a *atchman or a personal attendant provided
by an employer to an employee *ithout charge or *ith nominal charge if
domestic servant is engaged by employer and salary is paid by employer.
2. Supply of gas, electric energy or *ater for household consumption of employee
*ithout any charge or *ith nominal charge if connection is in the name of
employer and bills are paid by employer H. :ducation facility to any household members of the employee *ithout any
charge or *ith nominal charge if bills are issued in the name of " paid by
employer.
4. &ny medical facility in 'ndia provided to an employee or any member of his
family if bills are in the name of employer and paid or reimbursed by employer
in excess of C 3
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ealth insurance premium of the employee or any member of his household
paid by the employer
1. &ny other medical facility in 'ndia provided to an employee or any member of
his family
G. $ills are in the name of employer and paid or reimbursed by employer up to C
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Salary/ or the purpose of valuation of perquisites in respect of rent free
accommodation, salary includes
• $asic Salary
• 9&
• $onus
• )ommission
• ees
Lea3e Tra3el Concession 4S,15+!6
't is exempted to the follo*ing extent/
• 'n case of an individual,
• The value of any travel concession or assistance received by or due to him,
• rom his employer for himself " his family, in connection *ith his proceeding
on leave to any place in 'ndia.
• r, from his employer or former employer for himself and his family, for
proceeding to any place in 'ndia after retirement from service or after the
termination of his service,
• SubBect to the conditions prescribed as to the number of Bourneys and the
amount exempt per head.
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