INCOME UNDER THE HEAD “SALARY”

INCOME UNDER THE HEAD ‘SALARIES AND ITS COMPUTATION

UNDERSTANDING INCOME FROM SALARIES
 Relationship between payer and payee
- employer- employee, master –servant. Employer can be of any Person.
- Member of Parliament is not an employee of the Government.
- what is not received from an employer cannot be termed as salary.
 Salary and wages- conceptually no difference (non manual and manual type of work)
 Salary from more than one source- more than one employer during the prev. yr is taxable under the head “salaries”.
 Salary from a former employer, present employer and prospective employer- Remuneration received during the
previous year is taxable irrespective of the fact of the employer.
 Foregoing of salary- voluntary waiver or foregoing salary by an employee is merely and application of income and
nonetheless chargeable to tax.
 Salary income must be real and non fictitious.- intention to pay and receive salary. Caselaw: Reade vs. Brearley
 Salary paid tax free.- employee has to show in account, the tax deducted by the employer irrespective of contract by
the employer or voluntary deduction
 Voluntary payments- salary, perquisites or allowance may be given as gift to the employee, yet taxable.
 SALARY DEFINED UNDER SECTION 17 (1) OF INCOME TAX ACT, 1961 INCLUDES
 Wages;
 Any annuity or pension;
 Any gratuity
 Any fees, commission, perquisites or profits in lieu of salary or wages
 Any fees, commission, perquisites or profits in addition to salary or wages
 Any advance of salary
 Any payment received by an employee in respect of any period of not availed by him.
 Any portion of the annual accretion in any previous year to the balance at he credit of an employee participating in
a recognized provident fund to the extent it is taxable.
 Transferred balance in a recognised provident fund to the extent it is taxable;
 The contribution made by the Central government or any other employer to the account of an employeeunder a
notified pension scheme referred to in /section 80 CCD.
 BASIS OF CHARGE OF SALARY INCOME

• Under Section 15 of the Income Tax Act, 1961 the basis of charge for computing salary income is fixed. Salary
is chargeable to tax either room “due” basis or “receipt” basis, whichever matures earlier. The Basis of charge of
income from salary are:
I. Any salary due from an employer (or a former employer ) to an assesse in the previous year whether
actually paid or not;
II. 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; and
III. Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer (or
former employer), if not charged to income tax for any earlier previous year.
• Explanation with examples:
(i) Salary becomes due during the previous year 2017- 2018 irrespective of being paid or not in the same year
is taxable as income of the previous year 2017- 2018.
(ii) Salary is received during the previous year 2017- 2018 (whether it becomes due in the subsequent year) is
taxable as income of the previous year 2017- 2018.
(iii) Arrears of salary received during the previous year 2017- 2018, (although it pertains to any one of the earlier
years) and the same is not taxed in any of those earlier years on the due basis-is taxable in the AY 2018- 2019 as
income of the previous year 2017- 2018.
(iv) Arrears of salary received during the previous year 2017- 2018, (although it pertains to any one of the earlier
years) and the same is taxed in the earlier years on the due basis- is not taxable for the AY 2018- 2019 as income of
the previous year 2017- 2018
• Salary is taxable either on “due” basis or “Receipt” basis:
• The salary will become due on a certain date and could be received on another date. That which matures earlier
will be taken as basis for taxing the income from salary.
• If salary for the year 2018- 2019 is received in advance in the year 2017- 2018, it is included in the previous year
2017- 2018 on the “receipt” basis (as incidence of tax matures earlier on “receipt “ basis and the due basis is not
relevant).
• On the other hand, if the salary become due in the year 2016 –2017 and is received in the year 2017- 2018, it is
included in the previous 2016- 2017 on the “due” basis (as incidence of tax matures earlier on due basis and the
receipt basis is not applicable. Therefore the salary will not be included in the total income for the year 2017-
2018.
ILLUSTRATION
 HE joins a company on July 5, 2016 on monthly salary of Rs.55, 000.(he was not in employment prior to July 5). As per the
terms of the agreement, the salary becomes due on the first day of the next month and is received in the 6 th day of the next
month. Determine the amount of salary chargeable to tax for the assessment year 2017- 2018.

SOLUTION:
The period from April 1st 2016 to March 31st 2017 is the previous year for the Assessment year 2017- 2018. salary for the
previous year shall be calculated as under:
Different months of the previous Due date of salary (due basis) Payment date of salary (receipt Amount of salary chargeable to
year basis) tax. (in Rs)
July 2016 August 1, 2016 August 6th 2016 55,000
August 2016 September 1,2016 September 6, 2016 55,000
September 2016 October 1,2016 October 6, 2016 55,000
October 2016 November 1,2016 November 6, 2016 55,000
November 2016 December 1,2016 December 6, 2016 55,000
December 2016 January 1, 2017 January 6, 2017 55,000
January 2017 February 1, 2017 February 6, 2017 55,000
February 2017 March 1, 2017 March 6, 2017 55,000
March 2017 April 1, 2017 April 6, 2017 55,000
• Salary is taxable either in due basis or on the receipt basis whichever is earlier. In the given case, the salary will
become taxable on the due basis for the previous year ending March 31, 2017. consequently, the salary of March 2017
becomes due only on the 1st of April 2017.(previous year to be taken only till March 31). Therefore the salary of
March 2017 which becomes due on April 1st 2017(next financial year) will not be taxable during the Assessment year
2017- 2018. But the salary which is due on April 1st 2017 will be taxable during the Assessment year 2018- 2019.
SHE joins AV Ltd Company on December 1, 2010 in the pay scale of Rs.20,000- Rs. 2000- Rs.50,000. Salary at
the time of joining is fixed at 25,000. As per the terms of the terms of the employment salary becomes due on
the first day of next month, and is generally paid on the 4 th day of next month. Find out the salary taxable for
the Assessment Year 2015- 2016.
Solution: In the given case, SHE gets an annual increment of Rs. 2000. therefore the salary for the different years will be
as under: Rs.
December 1,2010- December 1, 2011 25,000
Dec 1, 2011 – Nov 30, 2012 27,000
Dec 1, 2012- Nov 30, 2013 29,000
Dec 1, 2013 – Nov 30, 2014 31,000
Dec 1, 2014 – Nov 30, 2015 33,000
Dec1, 2015- Nov 30, 2016 35,000
Salary taxable: Assessment Year is 2015- 2016. hence the Previous Year is April 1 2014- March 31, 2015.
Due date for the salary is 1st day of next month and the salary received on the 4th day of next month. Since the due
basis matures earlier, salary is taxable on the date of due.
Different months Due Date or receipt date Date of payment(in Rs)
whichever is earlier (in Rs)
March 2014 April 1,2014 31, 000
April 2014 May 1, 2014 31,000
May 2014 June 1, 2014 31,000
June 2014 July 1, 2014 31,000
July 2014 August 1, 2014 31,000
August 2014 September 1, 2014 31,000
September 2014 October 1, 2014 31,000
October 2014 November 1, 2014 31,000
November 2014 December 1, 2014 31,000
December 2014 January 1, 2015 33,000
January 2015 February 1, 2015 33,000
February 2015 March 1, 2015 33,000
March 2015 April 1, 2015 33,000
C joins a company for a salary of Rs. 12, 000 per month on January 2012. His pay scale was increased by
Rs.2000 per year after one year of service. It was agreed that the due date for salary is the first date of next
month and is received on the 3rd day of next month. On November 2nd, 2014, C Joins another company for a
fixed salary of Rs. 15,000 for first three months of joining after which his pay scale would increase by 1500 per
month. Salary would become due on the last day of the same month and received on the 1 st day of next
month .Determine the salary taxable for the Assessment Year 2016- 2017.
PLACE OF ACCRUAL OF SALARY INCOME [SECTION 9(1)]
Income under the head “Salary” is deemed to accrue or arise at the place where the service( in respect of which it
accrues) is rendered.
• Under Sec 9 (1)(ii_- Salary in respect of service rendered in India is deemed to accrue or arise in India,
Even if it is paid or payable after the contract of employment in India comes to and end.
• Pension paid abroad is deemed to accrue or arise in India, if it is paid in respect of services rendered in India.
• Salary paid abroad for the leave earned in India is deemed to accrue or arise in India.
• By virtue of Sction 9(1)(iii), salary paid by the Indian government to the India national even if service is
rendered outside India is deemed to accrue or arise in India.
This Section is applicatible only for the salary and not for the allowances and perquisites. It is as such
exempted under Section 10 (7)
 DIFFERENT FORMS OF SALARY
• Basic salary -Taxable.
• Dearness allowance -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.
• Lave encashment at he time of retirement or at he time of leaving a job- exempt in the hands of a Government
employee. In the hands of a non- government employee, it is taxable in some cases.
• Salary in lieu of notice -taxable
• Fees and commission -taxable.
• Salary to partner - taxable under the head “profits and gains of business or profession”
• Bonus -taxable on receipt basis if not taxed earlier on due basis.
• Gratuity - exempt in the hands of Government employee. In the hands of non- government employee, it is
exempt in some cases.
• Monthly Pension (uncommuted) -taxable
• Lump sum payment of pension(commuted pension) - exempted in the hands of a Government employee. In the
case of a non – government employee, it is exempt in some cases.
• Pension under National Pension Scheme - taxable at he time of receipt of the pension.
• Annuity from employer - taxable as salary.
• Annual accretion to the credit balance in recognized provident fund - taxable in excess of the notified
contribution by employer and on interest.
• Retrenchment compensation - Exempt from tax to the extent of specification(least among) under the
Industrial Dispute Act or the Government.
• Remuneration for extra duties - fully taxable.
• Profits in lieu of salary - taxable.
• Salary from U.N.O -not chargeable to tax.
• Compensation received under voluntary retirement scheme -Exempt in some cases
LEAVER SALARY
Encashment of leave- surrendering the leave standing to the credit .
-employee gets different leave.
-earn leave and apply for the encashment on the credit of leave.
-If leave( standing to the credit) is not taken- lapse or accumulate encashed.
-Accumulated leave shall be availed by an employee while at service or may be encashed at retirement acc. to the
Service Rules.
Nature of leave encashment Status of employee Whether it is taxable or not
Leave encashment during continuity of Government /Non government It is chargeable to tax.
employment employee
Leave encashment at he time of Government employee It is fully exempt from tax under
retirement/ leaving job Section 10 (10AA)
Leave encashment at the time of Non-government employee It is fully or partly exempt from tax in
retirement/ leaving the job some cases under Section 10 (10AA)(ii)

-Government employees getting leave encashment at the time of retirement.

Non- government employee getting leave encashment at the time of retirement:

LEAST OF THE BELOW FOUR IS EXEMPTED:

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

 10* Average monthly salary.

 The amount specified by the Government. (3,00,000)

 Leave encashment actually received at the time of retirement.

For example, an employee who has been earning Rs. 30, 000 as an average monthly salary is retiring after 30 years of service, with an earned
leave of 5 months to his credit and also with a leave encashment of Rs. 2,30,000.

- the amount of leave encashment which is allowed for tax exemption will be the least amount of the four conditions.

(i) 5 months * 30, 000 = Rs. 1,50,000

(ii) 10* 30, 000 =3, 00,000

(iii) 3, 00, 000

(iv) Rs. 2,30,000

The least of the four conditions is Rs. 1,50,000, which is exempted from tax. Hence (2,30,000 – 1,50,000) Rs.80,000 of the leave encashment is
taxable.
1st condition: Period of earned leave (in number of months) to the credit of the employee at the time of his
retirement or leaving the job * Average monthly salary.
How to find the period of earned leave to the credit of the employee??
(a)Find out the duration of service (in number of years)
Ignore the fraction of years
(b) Find out the rate of earned leave entitlement from the Service Rules.
No. of days leave credited to the employee for each year of service- which cannot exceed for 30 days according to
the Service Rules.
(c) Find out the earned leave actually taken or encashed during the service time (in number of days)
The computation shall be made as:
[ (a) * (b) – (c) / 30 ].
For example, duration of service is 12 years, rate of earned leave is 50 days and the lave actually taken is 60 days during the
service:
(12*30 – 60) / 30 = (360 days- 60days ) / 30 = ( 300 days / 30 ) =10 months.
FINDING OUT AVERAGE MONTHLY SALARY
Salary for the purpose of leave encashment means, basic salary and also includes dearness allowance if terms of
employment so provide. It also includes commission as per the terms under law.
“Average Salary” for this purpose is to calculated on the basis of average salary drawn during the period of 10 months
immediately preceding the retirement.
WHEN EARNED LEAVE ENCASHMENT IS RECEIVED FROM MORE THAN ONE EMPLOYER:
when leave salary or leave encashment is received from two or more employers(either in the same years or different
years) the maximum amount of exemption during the life time of the employee concerned cannot exceed Rs. 3,00,000.
• Provisions of Section 10(10AA) would apply in case of Voluntary retirement from service by way of resignation.
• Relief under Sec. 89 would be admissible in respect of encashment of leave salary by an employee while in service.
• Salary paid to the legal heirs of the deceased employee in respect of the credit of leave at the time of his/her death is
not taxable as salary.
• Sum equivalent of leave salary received by the family of a Government servant who died in harness is not taxable in
the hands of the recipient.
 R, an employee of Calcutta State Government, retires on Feb 27th 1987 and receives cash of Rs.12,00,000 equivalent of
earned leave. What will be the taxable amount on the leave encashment?
 X was employed by PQR Ltd up to March 15, 1988. at the time of leaving PQR Ltd., He was paid Rs.3,50,000 as leave salary
out of which Rs. 57,000 was exempt from tax under Section 10(10AA)(ii). Thereafter he joined ABC(P.) Ltd. And received
Rs. 4,12,200 as leave salary at the time ofmhis retirement on December 31, 2016. Determine the amount of taxable leave
salary from the following information:
salary at the time of retirement(per month) Rs. 22,000
Average salary received during10months ending on December 31,2016
from March 1,2016 to July 31, 2016(per month) Rs.22,600
from august 1, 2016 to December 31, 2016 Rs.22,900
Duration of Service 14 years and 11 months
Leave entitlement for every year of service 45 days
Leave availed while in service 90 days
Leave at the credit of employee at the time of retirement 18 months(14*45-90)/30.
Leave salary paid at the time of retirement Rs. 4,12,200
(at the rate of Rs.22,900 per month. i.e., 18*22,900)