Introduction

Salary

Salary is the recompense or consideration given to a person for the pains he has bestowed upon another’s business”

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.

What is Salary Income?

Every payment made by an employer to his employee for the services rendered would be chargeable to income under the head “Salaries”. “Salary” is a fixed and regular remuneration made by an

employer to an employee on a periodic basis.

Before an income can become chargeable under the head “salaries”, it is vital that there should exist an employer and employee relationship between the payer and payee.

The term ‘salary’ includes both monetary payments (e.g. basic salary, DA, bonus, commission, allowances etc.) as well as nonmonetary facilities (e.g. housing accommodation, medical facility, interest-free loans etc.).

Condition for Taxation of income under the head Salary:

• Only if there exists Employer – Employee Relationship between the Payer and Payee income is chargeable under the head salary. And this relation is said to exist only if there is control over the method of doing the work of other person. An employee is supervised and controlled by an employer. The employer’s instruction must be followed by the employee.
• Alternatively, the relationship under AGENCY is that of an agent and a principal. The income that is earned by an agent is known as ‘Business Profits’. An agent can choose to finish a task or achieve a target as per his style and understanding of working.

Employer-employee relationship :

• Every payment made by an employer to his employee for service rendered would be chargeable to tax as salaries. Before an income can become chargeable under the head ‘salaries’.
• It is vital that there should exist between the payer and the payee, the relationship of an employer and an employee.

Full-time or part-time employment:

• Once the relationship of employer and employee exists, the income is to be charged under the head “salaries”. It does not matter whether the employee is a full-time employee or a part-time one.
• If, for example, an employee works with more than one employer, salaries received from all the employers should be clubbed and brought to charge for the relevant previous years.

Place of accrual of salary:

• Salary earned in India is deemed to accrue or arise in India even if it is paid outside India or it is paid or payable after the contract of employment in India comes to an end.
• If an employee is paid pension abroad in respect of services rendered in India, the same will be deemed to accrue in India.

Salary received by a firm is nothing but an appropriation of profits. Any salary, bonus, commission, or remuneration received by the partner in whatever name called from his own firm shall not be treated as Salary income.

Provisions of Income Tax for Salary

The Income Tax Act in India contains various provisions that govern the taxation of salary income. These provisions outline how salary income is calculated, what allowances and deductions are allowed, and the rates at which income tax is levied on salary income. Here are some key provisions of the Income Tax Act related to salary income:

Basis of charge (Section 15):

• As per Section 15, salary is chargeable to tax either on ‘due basis’ or on ‘receipt basis’, whichever is earlier.
• However, where any salary, paid in advance, is assessed in the year of payment, it cannot be subsequently brought to tax in the year in which it becomes due.
• If the salary paid in arrears has already been assessed on due basis, the same cannot be taxed again when it is paid

Advance Salary:

Advance salary is taxable when it is received by the employee irrespective of the fact whether it is due or not. The rule behind this is the basis of taxability of salary i.e., salary is taxed on due or receipt basis, whichever is earlier.

Advance salary is otherwise called as salary paid or allowed though not due.

Arrears of salary:

Salary arrears must be charged on due basis. However, there are circumstances when it may not be possible to bring the same to charge on due basis, in those cases the same will be charged to receipt basis.

Deductions:

Section 16 of the Income Tax Act, 1961, deals with deductions that are allowed while calculating the income chargeable under the head “Salaries.”

These deductions pertain to the employment conditions and expenses related to an individual’s job. These deductions help reduce the taxable income under the “Salaries” head, and the remaining income is subject to income tax as per the applicable slab rates.

Standard Deduction:

• Old Tax Regime: The standard deduction remains at ₹50,000 or the amount of salary/pension received, whichever is lower.
• New Tax Regime: The standard deduction has been increased to ₹75,000 or the amount of salary/pension received, whichever is lower.

Professional tax on employment:

• Professional tax or taxes on employment levied by a State and allowed as deduction only when it is actually paid by the employee during the previous year.
• The total amount by way of professional tax payable in respect of any one person shall not exceed Rs. 2,500 per annum.

Salary, perquisite and profits in lieu of salary (Section 17)

The meaning of the term ‘salary’ for purposes of income tax is much wider than what is normally understood and it includes both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans etc.).

Definition of Salary as per Section 17(1) of IT Act:

For the purpose of this section Salary includes

• 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
• Leave Encashment
• Employers contribution to provident fund in excess of 12% of Salary
• The contribution by the central government or any other employer in the previous year to the account of an employee under a pension scheme u/s 80CCD.

Perquisites [Section 17(2)]:

The term ‘perquisite’ indicates some extra benefit in addition to the amount that may be legally due by way of contract for services rendered. In modern times, the salary package of an employee normally includes monetary salary and perquisites like housing, car etc.

• Perquisite may be provided in cash or in kind.
• Reimbursement of expenses incurred in the official discharge of duties is not a perquisite.
• Perquisite may arise in the course of employment or in the course of profession.
• Perquisite will become taxable only if it has a legal origin. An unauthorised advantage taken by an employee without his employer’s sanction cannot be considered as a perquisite under the Act.
• If it arises from a relationship of employer-employee, then the value of the perquisite is taxable as salary. However, if it arises during the course of profession, the value of such perquisite is chargeable as profits and gains of business or profession.

Example:

Mr. A, an employee, is given a house by his employer. On 31.3.2025, he is terminated from service, but he continues to occupy the house without the permission of the employer for six more months after which he is evicted by the employer. The question arises whether the value of the benefit enjoyed by him during the six months period can be considered as a perquisite and be charged to salary. It cannot be done since the relationship of employer-employee ceased to exist after 31.3.2025. However, the definition of income is wide enough to bring the value of the benefit enjoyed by Mr. A to tax as “Income from other sources”

Profits in lieu of salary [Section 17(3)]:

It includes the following:

1. Compensation on account of termination of his employment
2. Compensation on account of modification of the terms and conditions of employment
3. Payment from provident fund or other fund
4. Keyman Insurance policy
5. Lump sum Payment