Salaries | Commerce & Accountancy Optional Notes for UPSC PDF Download

Meaning of Salary

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: 

1. Any salary due from an employer, or former employer in the previous year, whether paid or not. 
2. Any salary paid or allowed to an employee in the previous year by or on behalf of any employer though not due or before it becomes due to him. 
3. Any arrear of salary paid or allowed to him in previous year by or on behalf of employer or a former employer, if not charged to tax for any earlier previous year.
4. Any wages paid from current or former employer in previous year. 
5. Any pension received by employer in previous year. 

Definition 

According to Section 17 (1) of the Income Tax Act, the term ‘salary’ includes: 

• Basic salary or Wages 
• Bonus 
• Commission, fee and interim relief 
• Over time payments 
• Annuity 
• Advance salary and arrears of salary 
• Annual accretion in employee’s recognized provident fund 
• Taxable part of transferred balance 
• Contribution made by Central Government in previous year under notified pension scheme in employees’ account referred to in section 80CCD 
• Encashment of earned leave 
• Gratuity 
• Pension 
• Compensation on retrenchment 
• Amount received on voluntary retirement

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: 

• For Government and semi-government employee, the salary is due on first date of next month i.e., salary for February is due on 1st March. For this purpose, previous year’s salary will be from 1st March to 28th February of next year. 
• For bank employees and non-government organizations, the salary is due on last date of same month i.e., salary for February is due on 28th February. For this purpose, previous year salary will be from 1st April to 31st March of next year.

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: 

1. Computation of taxable income under the head salaries. 
2. Calculating the exempted amount of House rent allowance under Section 10(13A). 
3. Calculating the value of rent-free accommodation or accommodation provided at a concessional rate.
4. Calculating qualifying amount of provident fund contributions. 
5. Calculating the entertainment allowance. 
6. Calculating exempted gratuity, exempted portion of encashment of earned leave etc. 
7. Calculating perquisite value of gas, electricity, or water. 
8. Determination of salary of Rs. 50,000 regarding taxability of perquisites under Section 17(2) (iii)(c) (specified employees). 
9. Compensation on retrenchment under Section 10(10B) 

Chart will help to know the meaning of ‘salary’ for different purposes at a glance