Salary [section 17(1)]:
The meaning of the term ‘salary’ for purposes of income-tax is much wider than what is normally understood. The term ‘salary’ for the purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans etc.).
Salary under section 17(1) includes the following:
- Wages,
- Any annuity or pension,
- Any gratuity,
- Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages,
- Any advance of salary
- Leave salary or leave encashment,
- The contribution made by the Central Government or any other employer to Employee Pension Account referred to in Section 80CCD
- Provident Fund:
- Annual accumulation to the balance of a recognised provident fund.
- Transferred balance in recognized provident fund.
Profits in lieu of salary [Section 17(3)]
Any Payments received or due in addition to your salary or wages from your employer is called profit in lieu of salary.
It includes the following:
- Compensation on account of termination of his employment
- Compensation on account of modification of the terms and conditions of employment
- Payment from provident or other fund
- Keyman Insurance policy
- Any sum received before his joining any employment or after termination of his employment.
However, the following receipts will not be termed as “Profits in lieu of salary” to the extent they are exempt under section 10:
- Death-cum retirement Gratuity
- Commuted value of Pension
- Retrenchment compensation received by a workman
- Payment received from statutory provident fund
- Payment received from recognised provident fund
- Payment received from approved superannuation fund
- House Rent Allowance
Section 15 – Charging section of salaries
Section 15 of the Income Tax Act provided that any amount due to or received by an employee including arrears of salary from an employer or former employer.
The charging section can be broken down in order to understand the taxability of income under the head salaries:
Employer-employee relationship
Before an amount received can be taxed under the head ‘salaries’, it is important that there should exist between the payer and the payee the relationship of an employer and employee.
For example:
Sujatha an actress is employed in Chopra films, where she is paid a monthly remuneration of Rs.2,00,000. She acts in various films produced by various producers. The remuneration for acting in such films is paid directly to Chopra films by the different producers.
In this case Rs.2,00,000 is taxed as salary income in the hands of Sujatha since the relationship of an employer and employee exists between Sujatha and Chopra films.
- In the above example,
- If Sujatha receives fees for acting in other films from the producers. In this case the fees so received would be taxed under the head income from profession and not under the head salaries as there is no employer employee relationship.
- If a person is acting as an agent during the course of the business. There is no relationship between them as master and servant and therefore not taxable under the head income from salaries.
Contract OF service Vs. Contract FOR service
These words are generally used interchangeably. There is a wide difference in terms of income being chargeable under different heads of income.
In contract of service, employer-employee relationship is in existence and the employer can direct and control as to what is required to be done and how it is to be done by the employee. As an employer and employee relationship exists the income so derived would be taxed under the head income from salaries.
Under contract for service, the contractee can specify what is to be done and it is for the contractor to independently find out best ways to execute the same duty. As there is no employer and employee relationship it would not be taxed under the head income from salaries but would be taxed under the head income from business.
Other points
- In case of a director of the company, the employer-employee relationship cannot be assumed, the relationship is ascertained based on service agreement or articles of association of the company
- Salaries of MP’s and MLA’s are not chargeable under the head “Salaries” but it is chargeable under the head ‘income from other sources’ as there is no employer- employee relationship with the government.
- The next question which arise is what is income received by chief ministers of state? It is income taxable under the head income from salaries as it is not a political post, but it is a constitutional post appointed by the governor.
- An advocate general is not an employee of the government. He is paid a retainership fee or he holds office during the period of the governor would not make him an employee. Hence the income earned by him is not taxable under the income from salaries.
- In case of any salary, bonus, commission, remuneration or by whatever name called, received as a partner of the firm. Such income would not be taxed as income from salary as there is no employer-employee relationship between the partner and the partnership firm.
Year of chargeability
After knowing that the income is chargeable to tax under the income from salaries it is important to understand when is such income chargeable to tax.
Salary is taxable on due basis or on receipt basis whichever is earlier. i.e. salary due in a PY is taxable whether or not received during the previous year. Where salary is received in advances is taxable even if it is not due during the previous year.
Loan taken from employer is however not taxable even if it is subsequently recovered from salary. Therefore, advance of salary is taxable but advance against salary is not taxable.
Place of accrual
The place of accrual of salary is the place where the service is rendered. Therefore, the salary paid outside India to a non-resident in respect of services rendered in India, it is deemed to have accrued or arisen in India.
Salary paid to an Indian citizen by the government of India is deemed to accrue or arise in India even though the service rendered outside India, subject to exemptions u/s 10 which are discussed in the article exemptions.
Surrender of salary
The salary received by an individual can be utilised based on the will and fancies of the person. An employee forgoes salary or requests the employer to contribute his salary to a charitable cause or any other purpose. This is a mere application of the income of the individual and therefore taxable. The only exception to the above rule is, surrender of salary under the relevant approval of Central Government. Section 2 of Voluntary Surrender of Salaries Act 1961, salary surrendered to the central government by any person will not be included in the computation of inco