INCOME UNDER THE HEAD "SALARIES" AND COMPUTATION

INCOME UNDER THE HEAD” SALARIES” AND ITS COMPUTATION.

         The relationship between payer and payee should be of an employer and employee. In other words, the amount received by an individual shall be treated as salary only if the relationship between payer and payee is of an employer and employee or master and servant. Employer may be an individual, firm , association of persons, company , corporation, central Government, State Government , public body or a local authority. Likewise , employer may be operating in India or abroad. The employee may be a full time employee or part time employee.

         The important point is that payment received by an individual from a person other than his employer cannot be termed as salary and , consequently ,such payment is not chargeable to tax under the head “Salaries”. Such payment may be chargeable under the head “ Profits and Gains of business or profession” or under the head “Income from other sources”. For instance, commission received by a director from a company is salary if the director is an employee of the company. If, however ,the director is not an employee of the company, commission cannot be termed as salary and consequently, it will be taxable under the head “ Profits and gains of business or profession” or  “ Income from other sources”. Similarly emoluments received by a college lecturers from his college is salary, irrespective of the fact whether it is received for academic or non academic work.  When , however, the same lecturer is paid for setting question paper by another university, the remuneration is not salary, as it is not received from the employer and is taxable under the head “Income from other sources”. The main point is that what is not received from employer cannot be termed as salary.

Salary under section 17(1):- Under section 17(1), salary is defined to include the following :

a.     Wages

b.     Any annuity or pension

c.      Any gratuity

d.     Any fees, commission, perquisites or profits in lieu of or in a addition to any salary or wages

e.     Any advance of salary

f.       Any payment received by an employer in respect of any period of leave not availed by him.

g.     The portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund to the extent it is taxable.

h.     Transferred balance in a recognised provident fund to the extent it is taxable

i.        The contribution made by the central government of any other employer to the account of an employee under a notified pension scheme referred to in section 80CCD.

  What is basis of charge of salary income?

  Basis of charge as per section 15 , salary consists of  :

a.     Any salary due from an employer ( or a former employer ) to an assessee in the previous year whether actually paid or not.

b.     Any salary paid or allowed to him in the previous year by or on behalf of an employer ( or a former employer ) though not due  or before it became due.

c.      Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer ( or a former employer ), if not charged to income tax for any earlier previous year.

Salary is taxable on “due” or “receipt” basis whichever is earlier- Basis of charge in respect of salary income is fixed by section 15. Salary is chargeable to tax either on “due” basis or on “receipt” basis, whichever matures earlier.

Different forms of salary.

1 Advance Salary :- Advance salary is taxable on receipt basis in the assessment year relevant to the previous year in which it is received , irrespective of incidence of tax in the hands of the employee. The recipient can, however, claim relief in terms of section 89. A loan taken from employer is not taxable as advance salary.

2. Arrear salary:- It is taxable on receipt basis, if the same has not been subjected to tax earlier on due basis. In this case also recipient can claim relief under section 89.

3. Leave Salary:- As per service rules, an employee gets different leaves. An employee has to earn leave in the first instance and only when he has leave to his credit, he can apply for leave. If a leave (standing to his credit ) is not taken within a year, as per the service rules, it may lapse or it may be encashed or it may be accumulated. The accumulated leaves standing to the credit of an employee may be availed by the employee during his service time or subject to service rules, such leaves may be encashed at the time of retirement or leaving the job, service rules, such leaves may be encashed at the time of retirement or leaving he job. Encashment of leave by surrendering leave standing to one’s credit is known as “leave salary”.

        In the case of Central / State Government employee , any amount received as cash equivalent of leave salary in respect of period of earned leave at his credit at the time of his retirement ( whether on superannuation or otherwise ), is exempt from tax.

      In the case of a non-Government employee including an employee of a local authority or public sector undertaking, leave salary is exempt from tax on the basis of least of the following :

a.     Period of earned leave ( in number of months ) to the credit of the employee at the time of his retirement or leaving the job X Average monthly salary.

b.     10 X Average monthly salary.

c.      The amount specified by the Government ( i.e. Rs  3 Lac applicable from 1^st April 1998; for earlier period this amount was different.

d.     Leave encashment actually received at the time of retirement.

Different forms of Allowances – How taxed?

Allowance is generally defined as a fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the services rendered by the employee or as compensation for unusual conditions of that service. It is fixed, pre-determined and given irrespective of actual expenditure. Under the Act, it is taxable under section 15 on “due” or “receipt” basis, whichever comes earlier, irrespective of the fact that it is paid in addition to or in lieu of salary. Tax treatment of different allowances is given below :

1.     City compensatory allowance: It is always taxable.

2.     House Rent Allowances ( Sect 10(13A) and rule (2A ) – Exemption in respect of House rent allowance is regulated by rule 2A. It is based on :

a.     An amount equal to 50 percent of salary, where residential house is situated at Bombay, Calcutta, Delhi, or Madras and an amount equal to 40 percent of salary where residential house is situated at any other place.

b.     House Rent Allowance received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year.

c.      The excess of rent paid over 10 percent of salary.

     3. Entertainment Allowance ( Sec 16(ii) ) :- Entertainment allowance is first included in salary            income under the head “ Salaries “ and thereafter a deduction is given on the basis enumerated in the followings : 

i)           In the case of Government employee ( i.e. a Central Government or a State Government employee ), the least of the following is deductible :a) Rs 5000

 b) 20 percent of basic salary or

 c) amount of entertainment granted during the previous year.

In order to determine amount of entertainment allowance deductible from salary, the following points need consideration 1) For the purpose “salary” excludes any allowance, benefit or other perquisites. 2) Amount actually expended towards entertainment (out of entertainment allowance received) is not taken into consideration.

ii)          In the case of a non – Government employee (including employees of statutory corporation and local authority) , entertainment allowance is not deductible.