Income is taxable as salary under Section 15 only if the payer and payee have an employer-employee relationship. This article examines various aspects of salary income as defined by the Income Tax Act.
Salary Income: An Introduction
Salary Income Under the Income Tax Act encompasses various forms of compensation, such as gifts, pensions, gratuities, and usual remuneration. The taxable amount under the ‘Salaries’ category pertains to actual earnings, not fictitious ones. There must be a genuine intention to pay and receive a salary, backed by services rendered. It’s essential to note that there’s no provision for a tax-free salary in India. Explore the comprehensive details of income from salary in the following section.
Keep reading as everything about income from salary is explained in the section below.
Salary Income: Definition under the Income Tax Act
Section 17 of the Income Tax Act includes a broad definition of “Salary” in subsection (1). It is a much broader term than most people realize. The amount received by the employee from his employer in any of the following forms during a fiscal year will be considered “Salary” for income tax purposes using various forms like ITR 1 Sahaj Form Online, etc:
- Wages
- Annuity or pension
- Gratuity
- Fees, commissions
- Perquisites or profits instead of or in addition to any salary or wages;
- Advance of salary
- Payment received by an employee in respect of any period of leave not availed
- The portion of annual accretion in any previous year to the balance at the credit of an employee participating in a recognized provident fund to the extent it is taxable;
- Transferred balance in a recognized provident fund to the extent it is taxable;
- Contribution by the Central Government to the account of an employee under a pension scheme under Section 80CCD ( NPS). Also, one needs to be aware of income tax for pensioners calculation.
Who All Are Eligible to Earn Salary?
Salary is compensation for services that can only be rendered by a real person as opposed to a business or any other entity. Salary income is therefore only taxable in the hands of a person. Any other sort of individual, including a business or HUF (80TTB of income tax act), LLP, or partnership, is not permitted to receive salary income. Furthermore, the income earned can be categorised as ‘Salaries’ only if the employer-employee relationship prevails. It is irrelevant whether the employee works full-time or part-time. Lastly, any payment provided to an employee by his current, former, or prospective employer is taxed as salary.
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Pre-requisites for Income to Be Considered Salary
- The payments that are taxed under the heading ‘Salaries’ must be acquired by an occupation.
- Furthermore, income received by an individual from someone other than his employer cannot be considered salary, and hence may not be taxable under the heading ‘Salaries.’
Nature of Taxability of Salary
The basis of tax charged on salary is addressed under Section 15 of the Income Tax Act. Salary will be taxed on either a ‘due basis’ or a ‘receipt basis,’ whichever comes first. To be more specific, taxable salary income during the previous year shall consist of the following:
- Any salary due to the employee during the year, whether paid or not.
- Salary arrears paid to the employee during the year but not taxed in any previous years
- Any cash is given to the employee in advance before salary became due or payable.
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Moreover, the following component of salary is taxable in the year it is received
- Basic salary
- Dearness allowance
- Advance salary
- Arrears of salary (if not taxed on a due basis)
- Salary instead of notice
- Salary to partner
- Fees and commission
- Bonus
- Annuity from Employer
- Remuneration for extra work
The following modes of compensation are also taxable to varying degrees
- Leave encashment at the time of retirement (exempt in some scenarios)
- Salary to foreign citizens (exempt in some scenarios)
- Retrenchment compensation (exempt to a certain extent)
- Gratuity for employees (exempt in some scenarios)
- Pension (exempt in some scenarios)
Taxability of Salary: Place of Accrual
Salary is taxable in India under the heading ‘Salaries’ if-
- Even though the payment is made outside of India, the services are rendered in India.
- The salary provided by the foreign government to its staff serving in India,
- Leave remuneration paid to employees outside India for leaves earned in India is presumed to accumulate or arise in India and is taxed under the ‘Salary’ heading.
The Takeaway
Now that you’ve perused the vast definition of the term ‘salary’ under the Income Tax Act, you might be worrying about how you will deal with the hassle of filing your income tax returns. However there is no need to worry and you may remain at ease, as Vakilsearch experts are equipped to take this hassle off your hands, all you need to do is reach out to our team for a free consultation today!
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