SALARY

Basic elements of salary

• Payer and payee must have employer and employee (or Master & Servant) relationship; and

• Payment must have been made by the employer in such capacity. 

Definition of Salary [Sec. 17(1)]
As per sec. 17(1) of the Income-tax Act, 1961, salary 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;

• Any payment received in respect of any period of leave not availed of by the assessee;

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

• Transferred balance in a Recognised Provident Fund to the extent it is taxable.

• Contribution made by the employer in the previous year, to the account of an employee under a pension scheme referred to in sec. 80CCD. 

Basis of charge [Sec. 15]
Salary is chargeable to tax either on 'due' basis or on 'receipt ' basis, whichever is earlier.

Salary which is received in India or earned in India shall be taxable in hands of all assessee whether resident or non resident in India . Salary is deemed to be earned in India provided -

• The service is rendered in India ;

• The rest period or leave period, which is preceded and succeeded by the service rendered in India and forms part of the service contract of employment.

Exception: Salary paid to a Government employee, being a citizen of India , is deemed to accrue in India , irrespective of place of work [Sec. 9(1)(iii)].

Computation of salary, at a glance
Computation of income under the head 'Salaries' of ....... for the A.Y. ..........

• Basic Salary: Fully taxable in all cases.

• Dearness Allowance (DA) or Dearness Pay (DP): Fully taxable whether forming part of retirement benefits or not.

• Fees: Fully taxable in all cases.

• Commission: Fully Taxable.

• Bonus: Contractual bonus is taxable as bonus whereas voluntary bonus is taxable as perquisite.

Annuity [Sec. 17(1)(ii)]
Annuity means a yearly allowance, income or the grant of an annual sum for life or in perpetuity. While annuity payable by a present employer is taxable as salary even if, it is received voluntarily without any contractual obligation of the employer, whereas an annuity received from an ex-employer is taxed as profit in lieu of salary' u/s 17(3)(ii). Annuity received from a person other than employer e.g. from insurer, etc. is taxable u/s 56 as Income from other sources'.

Treatment: Fully taxable.  

Salary received in lieu of notice period
When an employer retrenches an employee then he will have to give a proper notice. If an employer fails to do so then he will have to pay salary equivalent to notice period, apart from retrenchment compensation. Such amount is known as salary received in lieu of notice period.

Treatment: Fully taxable in the year of receipt.

Profits in lieu of salary [Sec.17(3)]
Following receipts are taxable as profits in lieu of salary:

• The amount of any compensation due to or received by an assessee from his employer or former employer or in connection with the (a) termination of his employment, (b) modification of the terms and conditions of employment.

• Any payment due to or received by an assessee from his employer or former employer except the following:

  1. Gratuity exempted u/s 10(10);

  2. House rent allowance exempted u/s 10(13A);

  3. Commuted pension exempted u/s 10(10A);

  4. Retrenchment compensation exempted u/s 10(10B);

  5. Payment from an approved Superannuation Fund u/s 10(13);

  6. Payment from statutory provident fund or public provident fund;

  7. Payment from recognised provident fund to the extent it is exempt u/s 10(12).

• Any payment from unrecognised provident fund or such other fund to the extent to which it does not consist of contributions by the assessee or interest on such contributions.

• Any sum received by the employee under the Keyman Insurance Policy including the sum allocated by way of bonus on such policy.

• Any amount received (in lump sum or otherwise) prior to employment or after cessation of employment.