Income under the Head ‘Salaries’: An Overview

In Taxation, all income, for purposes of charge of Income tax and computation of tax are classified under various heads, which are Salary, House property, Profits and gains of Business and Profession, Capital gains and Other sources.

Income taxable under head salaries: Overview

In this post, we will learn about Income under the head Salaries. Learning about Salary is really vast and hence I will be covering it into 3 parts. In this part, we will learn about the basics of Income under the head Salaries.

I had already written one post about Allowances and Perquisites of Salary. I will attach the quick learning chart with this post as well.

But for reference, I will advise you to must view this post(link is attached).

Introduction

Income under the head salary is covered from Section 15 to 17 of the Income Tax Act. The basis of a charge of salary is given in Section 15.

The basis of Charge:

The following income shall be chargeable to income-tax under the head salaries:

  1. Any salary due from an employer or a former employer to an assessee in the previous year, whether paid in that previous year or not;
  2. Salary paid or allowed to him in the previous year by or on behalf of an employer or former employer though not due in that previous year or before it became due to him;
  3. Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or former employer if not charged in the Income-tax earlier.

Important points you should note:

  • Where any salary paid in advance is included in the total income of any person, it shall not be included again in total income when it becomes due.
  • Any salary, commision or remuneration due or received by a partner of the firm from the firm shall not be regarded as Income taxable under head salary.
  • If the salary is payable on a monthly basis, it normally becomes due at the end of the month and normally paid in the next month. Then it will be taxable on due basis.

However, in some cases, the salary becomes due on the 1st day of the next month.

In this case, we shall tax the salary from March to February because the salary of March of the current year will be due only in the next financial year and salary of March of previous year becomes due only on 1st April of the current year.

Meaning of Salary

Section 17(1) gives an inclusive of the definition of Salary:

Salary includes-

  1. Wages;
  2. Any annuity or pension;
  3. Gratuity;
  4. Fees, commissions, perquisites or profit in lieu of or addition to any salary or wages;
  5. Any advance of salary;
  6. Any payment received by an employee in respect of any period of leave not availed by him;
  7. Employer’s contribution to Recognized Provident Fund(RPF) in excess of 12% of employee’s salary and interest credited to recognized provided fund in excess of 9.5% p.a.;
  8. The aggregate of all sums that are comprised in the transferred balance of an employee participating in a recognised provident fund to the extent to which it is chargeable to tax;
  9. The contribution made by the Central Government or any other employer in the previous year to the account of an employee under a notified pension scheme referred to in Section 80CCD.

Although the above incomes are included in the salary, but there are certain incomes mentioned above, which are either tax-free or fully exempt or exempt up to a certain limit.

These incomes are first included in Gross Salary, then following deductions are allowed as per Section 16:

  1. Deduction for entertainment allowance[Section 16(ii)] and
  2. Deduction on account of any sum paid towards tax on employment [Section 16(iii)].

Treatment of various incomes to be included in gross salary

  1. Wages: Wages are treated just like salary and are taxable on the same basis as salary.
  2. Annuity: When an annuity is payable by a present employer, it is taxable as salary. If it received from a former employer, then it is taxed as profit in lieu of salary. A deferred annuity will not be taxable until the right to receive the same arises.
  3. Bonus: Bonus is taxable on receipt basis. It will be included in the gross salary only in the year in which the bonus is received.
  4. Salary in lieu of notice period: This is taxable in the previous year in which it is received.
  5. Fees and Commission: Any fees or commission paid/payable by the employee shall be fully taxable and would be included in gross salary.
  6. Over time Payments: Any payment made by the employer to employees for working beyond the office hours is taxable and included in gross salary.

Get the quick learning chart of Allowances and Perquisites:

I had written the post about allowances and perquisites earlier. I would advise you to visit that post. But I will provide the quick learning chart allowances and perquisite in this post. So must download this pdf file and learn well!


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