Salary Income Under Income Tax

Salary Income Under Income Tax

Salary income refers to the compensation received by an employee from a current or former employer for the execution of services about employment. Thus, income is taxable as salary under Section 15 providing an employer-employee relationship exists between the payer and payee. Salary income may well be in any form like a gift, pension, gratuity, usual remuneration, and then on. during this article, we glance at various aspects of salary income under the taxation Act.

Meaning Of Salary Under Income Tax Act

Under the income tax Act, the term salary is defined to incorporate the following:

  • Wages;
  • Annuity or pension;
  • Gratuity;
  • Fees, commissions, perquisites, or profits instead of or in addition to any salary or wages;
  • Advance of salary;
  • Payments received by the employee for unused leave not availed by him/her;
  • The portion of annual accretion during any previous year to the balance at the credit of an employee participating in a recognized provident fund to the extent it’s taxable;
  • Transferred balance in an exceedingly recognized provident fund to the extent it’s taxable;
  • Contribution by the Central Government to the account of an employee under a pension scheme stated in section 80CCD (i.e NPS);

Computing Total Salary Income

Salary Income Under Income Tax

When calculating the subject of taxation, wages consist of:

  • All wages owed to the taxpayer by the employer (current or former) in the preceding year, whether or not paid
  • Any salary paid or allowed to an employee within the previous year by or on behalf of an employer though undue or before it became due; and
  • Any arrears of wages paid or permitted to him in the preceding year by or on behalf of his employer unless related to an increase in his income in the preceding year. Wage income is taxed on a set or received basis.

Wage income is taxed on a set or received basis. Once a salary has accrued, its subsequent waiver is simply an application of income and is susceptible to be taxed.

Taxability Of Various Salary Components

Salary ComponentTaxability under Income Tax Act
Basic salaryTaxable
Dearness allowanceTaxable
Advance salary taxableTaxable in the year received arrears
Arrears of salary taxableTaxable in the year received, if not taxed on due basis leave leave leave
Leave encashment at the time of retirement taxableTaxable – Exempt in some scenarios
Salary in lieu of notice taxable taxableTaxable on receipt
Salary to partnerTaxable under the head of “Profits and gains of business or profession” 
Fees and commissionTaxable
BonusTaxable
GratuityTaxable – Exempt in some scenarios
PensionTaxable – Exempt in some scenarios
Annuity from EmployerTaxable
Retrenchment compensation exempt exempt exempt exemptExempt from tax to a certain extent remuneration-remuneration-remuneration-remuneration
Remuneration for extra workTaxable
Salary to Foreign CitizensTaxable – Exempt in some scenarios

Salary Income

Amount taxable under the pinnacle “Salaries” is real salary and not fictitious salary. There must be willingness or intention to pay and receive benefits. There should be an intention to render services.

Who Can Receive Salary?

Salary is compensation for personalized services that may well be provided by a standard person and not an association or entity. Hence, salary income is chargeable within the hands of a private only. No other variety of individuals like a firm or HUF, LLP, or Company can earn salary income. Also, if the association of employer and employee prevails, the income that will be charged would be classed under the pinnacle “Salaries”. It doesn’t matter whether the worker is functioning full-time or part-time. Finally, any payment received by an employee from his present, former or prospective employer is charged to tax under the top “Salaries”.

Income Not Salary

The benefits to be taxable under the top “Salaries” must be established by an office amounting to an occupation. Mere allotment of an office isn’t sufficient to bring the tax incidence under the pinnacle “Salaries”. Also, an income received by a private from an individual aside from his employer can not be termed as salary, and subsequently, such income might not be taxable under the top “Salaries”. All such income must be accounted for under the top “Profits and Gains of Business or Profession”.

Due Date & Calculation Period Of Salary

Salaries are usually paid on the last business day of the month. The Minimum Wage Act of 1948 governs India’s minimum wage and its calculation. As per the Act, if an organization houses but 1000 employees, then the salary is paid on the 7th of each month. If the corporate houses over 1000 employees, then the salary is paid on the 10th of each month. within the case of state and semi-government employees, salary is due on the primary day of the following month, and for other employees, the salary is due on the day of reckoning of every month.

Period Of Calculation

For Government Employees – 1st March to 28th February

For Private Employees – From April 1 to  March 31.

Leave Salary

In the case of non-Government employees, leave salary is exempt from tax to the extent of the smallest amount of the following:

  • Cash equivalent of the leave salary in respect of the amount of earned leave to the credit of an employee only at the time of retirement whether on superannuation or otherwise; or
  • 10 months average salary. Average salary is to be calculated on the idea of average salary drawn during the amount of 10 months immediately preceding the retirement or superannuation; or
  • Tax-free amount determined by the government;
  • Leave encashment received upon retirement. 

Tax On Suspended Employee’s Salary

During the suspension period, the employer isn’t permitted to essentially work and is also not supplied with full compensation but only the required allowances, which might be taxable.