4

Income under the

head “Salaries” and its
CHAPTER computation
n n n n WHAT DO YOU UNDERSTAND BY EXPRESSION “SALARY”
39. In order to understand the meaning of expression “salary”, one has to keep in mind the following norms :
39.1 Relationship between payer and payee - 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.
A Member of Parliament or of State Legislature is not treated as an employee of the Government. Salary and
allowances received by him are, therefore, not chargeable to tax under the head “Salaries” but are chargeable
to tax under section 56 under the head “Income from other sources”.
39.2 Salary and wages - Conceptually not different - Remuneration received by an individual is taxable
under the head “Salaries” whether the remuneration is termed as salary or wages.
39.3 Salary from more than one source - If an individual receives salary from more than one employer
during the same previous year (maybe due to change of employment or due to employment with more than
one employer simultaneously), salary from each source is taxable under the head “Salaries”.
39.4 Salary from former employer, present employers or prospective employer - Remuneration received
(or due) during the previous year is chargeable to tax under the head “Salaries” irrespective of the fact whether
it is received from a former, present or prospective employer.
39.5 Foregoing of salary - Section 15 taxes salary on “due” basis even if it is not received. If, therefore, an
employee foregoes his salary, it does not mean that salary so foregone is not taxable. Once salary has accrued
to an employee its subsequent waiver does not make it exempt from tax liability. Such voluntary waiver or
foregoing by an employee of salary due to him is merely an application of income and is nonetheless
chargeable to tax.
39.6 Salary paid tax-free - If salary is paid tax-free by the employer, the employee has to include in his
taxable income not only salary received but also amount of tax paid by the employer. It does not make any
difference whether tax is paid under terms of contract by the employer or voluntarily.

56
57 WHAT IS BASIS OF CHARGE OF SALARY INCOME n Para 40

39.7 Voluntary payments - Salary, perquisite or allowance may be given as a gift to an employee, yet it would
be taxable. The Act does not make any distinction between gratuitous payment and contractual payment.
39.8 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 addition to any salary or wages ;
e. any advance of salary ;
f. any payment received by an employee 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; and
i. the contribution made by the Central Government or any other employer to the account of an employee
under a notified pension scheme referred to in section 80CCD.

n n n n WHAT IS BASIS OF CHARGE OF SALARY INCOME

40. The basis of charge is explained in the following paras—
u Basis of charge as per section 15 - 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. Moreover, any
amount received as arrears of salary is taxable in the year of receipt, if it was not taxed earlier.
For instance, if salary of 2018-19 is received in advance in 2017-18, it is included in the total income of the
previous year 2017-18 on “receipt” basis (as tax incidence matures earlier on “receipt” basis, “due” basis is not
relevant in this case; therefore, salary will not be included in total income of the previous year 2018-19). On the
other hand, if salary which has become due in 2016-17 and received in 2017-18, is included in total income of
the previous year 2016-17 on “due” basis (as incidence of tax matures earlier on “due” basis, “receipt” basis is
inapplicable; salary will, therefore, not be included in total income of the previous year 2017-18).
u Accounting method of the employee not relevant - It is worthwhile to mention that salary is chargeable to tax on
“due” or “receipt” basis (whichever matures earlier) regardless of the fact whether books of account, in respect
of salary income, are maintained by the assessee on mercantile basis or cash basis. Method of accounting
cannot, therefore, vary the basis of charge fixed by section 15.

nnnn Problems
40-P1 X joins a company on June 1, 2017 on monthly salary of Rs. 30,000 (he was not in employment prior to June 1, 2017).
As per the terms of employment, salary becomes due on the first day of the next month and is paid on the seventh day of the next
month. Determine the amount of salary chargeable to tax for the assessment year 2018-19.
Solution : The period from June 1, 2017 to March 31, 2018 is the previous year for the assessment year 2018-19.
Salary of the previous year shall be calculated as under—
Different months of the previous year Due date of salary Date of payment
June 2017 July 1, 2017 July 7, 2017
July 2017 August 1, 2017 August 7, 2017
August 2017 September 1, 2017 September 7, 2017
September 2017 October 1, 2017 October 7, 2017
October 2017 November 1, 2017 November 7, 2017
November 2017 December 1, 2017 December 7, 2017
December 2017 January 1, 2018 January 7, 2018
January 2018 February 1, 2018 February 7, 2018
February 2018 March 1, 2018 March 7, 2018
March 2018 April 1, 2018 April 7, 2018
Salary is taxable either on “due” basis or on “receipt” basis whichever is earlier. As the earlier date is the “due” date
of salary in the above case, salary will be taxable on due basis. The previous year ends on March 31, 2018.
Consequently, salary of March 2018 (which becomes “due” after March 31, 2018) is not taxable as the income of
the previous year ending March 31, 2018. Therefore, the salary taxable for the assessment year 2018-19 will be
Rs. 2,70,000 (Rs. 30,000 per month for 9 months).
Para 40.1 n INCOME UNDER HEAD "SALARIES" AND ITS COMPUTATION 58

40-P2 X joins a company on December 1, 2014 in the pay scale of Rs. 10,000 – Rs. 1,000 – Rs. 25,000 (salary at the time of
joining is fixed at Rs. 12,000). As per the terms of employment salary becomes “due” on the first day of the next month, and it
is generally paid on the fifth day of the next month. Find out the salary taxable for the assessment year 2018-19.
Solution : In this case, X, gets an annual increment of Rs. 1,000. The amount of salary for different years will be as
follows —
Rs.
December 2014 to November 2015 12,000
December 2015 to November 2016 13,000
December 2016 to November 2017 14,000
December 2017 to November 2018 15,000
Thus, Rs. 1,000 will be added to the salary every year till he reaches at the maximum point of Rs. 25,000. For the
previous year 2017-18, salary will be taxable as follows—

Different months Due date of salary [due or receipt date Amount

whichever is earlier] Rs.
March 2017 April 1, 2017 14,000
April 2017 May 1, 2017 14,000
May 2017 June 1, 2017 14,000
June 2017 July 1, 2017 14,000
July 2017 August 1, 2017 14,000
August 2017 September 1, 2017 14,000
September 2017 October 1, 2017 14,000
October 2017 November 1, 2017 14,000
November 2017 December 1, 2017 14,000
December 2017 January 1, 2018 15,000
January 2018 February 1, 2018 15,000
February 2018 March 1, 2018 15,000
March 2018 April 1, 2018 See Note
Total 1,71,000
Note - Salary of March 2018 is taxable on due basis on April 1, 2018. April 1, 2018 falls in the next previous year
(i.e., 2018-19), it will be taxable for the assessment year 2019-20. However, salary of March 2017 (which becomes
“due” on April 1, 2017) is taxable for the previous year 2017-18 (i.e., the assessment year 2018-19).

40.1 Place of accrual of salary income [Sec. 9(1)] - Income under the head “Salaries” is deemed to accrue or
arise at the place where the service is rendered. Keeping in view the aforesaid general observation, the rules
are given below—
u If service is rendered in India, salary income is deemed to accrue or arise in India. Conversely, if service is
rendered outside India salary income cannot be deemed to be earned in India. However, this rule has an
exception. Salary received by an Indian citizen from the Government of India for rendering service outside
India, is deemed to accrue or arise in India. Such salary is taxable in the hands of concerned employee, even if
he is non-resident. However, allowances and perquisites received from the Government by an Indian citizen
for rendering service outside India, are exempt from tax.
u Pension paid abroad is deemed to accrue in India, if it is paid in respect of services rendered in India.
u Likewise, leave salary paid abroad in respect of leave earned in India is deemed to accrue or arise in India.
u The above provisions are summarized below (it is assumed that salary is paid at the place where service is
rendered)—
Who is employee Who is employer Where service Is it taxable in India
is rendered Salary Allowance/
perquisite
Case 1 Indian citizen Government Outside India Yes No
(resident or non-resident) of India
Case 2 Non-resident Any Outside India No No
(but not covered by case 1)
Case 3 Resident and ordinarily resident Any Anywhere Yes Yes
(but other than case 1)
59 DIFFERENT FORMS OF SALARY n Para 41

40.2 How to compute salary income - Salary income is calculated as under—

Rs. Rs.
Income from salary [see para 41] ..................
Income by way of allowances [see para 42] ..................
Taxable value of perquisites [see para 44] ..................
Gross salary * * * * *
Less : Deduction under section 16
Entertainment allowance [see para 42.2] ..................
Professional tax [see para 45.3] .................. * * * * *
Income from salaries * * * * *

n n n n DIFFERENT FORMS OF SALARY - HOW TAXED

41. The term “salary” signifies a recompense or consideration given to any person for pains bestowed upon
another person’s business
Tax treatment of different receipts is given below –
Different receipts Tax treatment
Basic salary Taxable.
Dearness allowance/pay Taxable.
Advance salary Taxable in the year of receipt.
Arrears of salary Taxable in the year of receipt, if not taxed on due basis earlier.
Leave encashment while in service Taxable
Leave encashment at the time of Exempt in the hands of a Government employee*. In the case of a
retirement or at the time of leaving job non-Government employee*, it is exempt in some cases [see para 41.1]
Salary in lieu of notice Taxable
Salary to partner Not chargeable under the head “Salaries” but taxable under the head
“Profits and gains of business or profession”.
Fees and commission Taxable.
Bonus Taxable on receipt basis if not taxed earlier on due basis.
Gratuity Exempt in the hands of a Government employee*. In the case of a
non-Government employee*, it is exempt in some cases [see para 41.2]
Monthly pension (i.e., uncommuted Taxable
pension)
Lump sum payment of pension (i.e., Exempt in the hands of a Government employee*. In the case of a
commuted pension) non-Government employee*, it is exempt in some cases [see para 41.3]
Pension under National Pension Scheme At the time of receipt of pension it is chargeable to tax. Tax conse-
(NPS) quences are discussed in para 41.4.
Annuity from employer Taxable as salary.
Annual accretion to the credit balance in 1. Excess of employer’s contribution over 12% of salary is taxable.
recognized provident fund 2. Excess of interest over notified interest is taxable (notified rate of
interest is 9.5 per cent).
Retrenchment compensation Exempt from tax to the extent of least† of the following:
a. Amount calculated** under section 25F(b) of the Industrial Dis-
putes Act; or
b. An amount specified by the Government (i.e., Rs. 5,00,000).
†When compensation is paid under any scheme approved by the Central Government, these limits are not applicable and the entire
amount is exempt.
*The following are treated as Government employees (Govt.) or non-Government employees (N Govt.) –
For the purpose of taxation Central/State Government Employees of local Employees of statutory Other
of different receipts employees authorities corporations employees
Leave encashment Govt. N Govt. N Govt. N Govt.
Gratuity Govt. Govt. N Govt. N Govt.
Commuted pension Govt. Govt. Govt. N Govt.
**Compensation is equivalent to 15 days’ “salary” for each year (or part thereof exceeding 6 months) of service. The mode of
computation of “salary” and length of service for this purpose and for the purpose of gratuity (covered under the Payment of
Gratuity Act) is same.