Any remuneration paid by an employer to an employee for the services rendered by him is called salary. Salary for income tax purpose not only includes the cash received but also includes the value of facilities and benefits provided to the employee.
The income taxable under the head salaries includes:
Definition
According to Section 17 (1) of the Income Tax Act, the term ‘salary’ includes:
Some Important Points Regarding Salary
There are some points related to salary, which are to be kept in mind. The understanding of these points is very important as it will help in computing the taxable salary of an individual. They are as follows
i) Salaries and Wages: The Income Tax Act makes no distinction between the salaries i.e., remuneration received by executive and wages i.e., remuneration received by workers. Salaries and wages both are taken under the head salaries.
ii) Relationship of employee and employer: Any payment will fall under the head ‘salaries’ only when there exists a relationship between employer and employee as the payer and the payee. A person may hold an office and still may not be an employee, for example, a director of a company.
iii) Salaries and Professional Income: A profession involves the making of successive employment. If such employment is incidental to the exercise of profession, the remuneration received thereby will be taxed under Section 28. For example, if a Chartered Accountant is appointed to audit the accounts for a particular year, the income from such a contract is professional income and if he is employed to investigate the accounts of the company regularly, the income so received will be salaried income.
iv) Payment made after cessation of employment: When the employee leaves the organization, the employer pays him certain sum like gratuity etc. Any such payment though received after the employee leaves the organization is taxable under the head salaries as it is received for service rendered in past.
v) Tax-free salary: Sometimes, the employer deducts the tax at source and pays net salary to the employee. In such cases, the individual has to show the aggregate salary i.e., net salary plus tax paid in his gross total income.
vi) Deductions by employer: There are certain compulsory deductions from salary like contribution to provident fund or charges for providing accommodation which are deducted by the employer and the net salary is given to the employee. Even though the amount has been deducted, it is included in the salary income. The reason is that it is only the application of income.
vii) Dearness Pay: It is a part of basic salary and is assumed to be given under the terms of employment. For the valuation of rent free house, house rent allowance, gratuity (other than gratuity under the Payment of Gratuity Act), leave salary, recognized provident fund, and perquisite of gas, electricity, water, it shall be treated as part of basic salary only when it enters into the computation of superannuating or retirement benefits of the assessee concerned.
viii) Due date of salary: The rules are as follows:
ix) Dearness allowance: Dearness allowance is deemed to be under the terms of employment in the following two cases: a) When it is included in ‘salary’ for the purpose of computation of annual contribution in the recognized provided fund. b) When it is included in ‘salary’ for the purpose of computation of retirement benefits payable to an employee.
x) Voluntary payments: Every payment, in cash or in kind, made by an employer to his employee in consideration of his service under a contract of service or voluntarily, is taxed under the head ‘salaries’. Thus, salary, perquisite or allowance may come as a gift to an employee, yet it would be taxable. Any payment made by employer to his employee will not be excluded from his salary income merely because the employer made it voluntarily.
xi) Salary foregoing or surrendering: Section 15 of the Income Tax Act, 1961, charges salary on due basis. Tax liability is created at the time the salary becomes due. If an employee foregoes or surrenders his salary, he cannot escape from his tax liability.
xii) Deduction from salary: Deductions made by the employee out of the salary due to an employee are regarded as application of income. These deductions may be compulsory or optional or under a contract or voluntarily. In every case, deductions from salary are regarded as application of income.
xiii) Place of accrual of salary: According to Section 9 of the Act, salary is deemed to accrue at the place where the service for which it is paid, is rendered. Salary accrued in India is deemed to accrue or arise in India though it has been paid outside India.
Definition of Salary for Different Purposes
The definition of ‘salary’ differs for different purpose. The purpose for which the definition of salary would differ is as follows:
Chart will help to know the meaning of ‘salary’ for different purposes at a glance
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