Meaning and Essentials of Salary Income | Income Tax Act, 1961

[Meaning of Salary, Characteristics of Salary Income, Essentials of Salary Income, Income Under the Head Salaries Notes]

What Constitutes Salary under sec. 17 of Income-tax act, 1961? Explain the essentials (Basis) for taxability of income under the head salary (Characteristics of salaries).

Meaning of Salary under Sec. 17

"Salary" is the remuneration received by or accruing to an individual, periodically, for service rendered as a result of an express or implied contract. The actual receipt of salary in the previous year is not material as far as its taxability is concerned. The existence of the employer-employee relationship is the essential condition for taxing a particular receipt under the head “salaries.”

For the purpose of Income Tax, “Salary” includes [Sec. 17(1)]:

a)      Wages

b)      Annuity or pension

c)       Gratuity

d)      Fees, Commission, perquisites or profits in lieu of salary

e)      Advance of Salary

f)       Receipt from Provident Fund

g)      Contribution of an employer to a Recognised Provident Fund in excess of the prescribed limit

h)      Leave Encashment

i)        Compensation as a result of variation in Service contract etc.

The following points are taken into consideration while calculating salary income

a.       Only receipts from employer whether from present, past or future are taxable under this head, others excluded.

b.      If salary forgone under legal obligations it is exempted, but if foregone voluntarily, it is taxable.

c.       Salary received after cessation of employment is taxable.

d.      Salary in lieu of notice is taxable.

e.      Salary is always shown on a gross basis i.e. after adding the amount of contribution already deducted with salary.

Essentials for Taxability of an Income Under the head “Salary”
or  Characteristics of Salary:

1)      Employer and employee relationship: 

An income can be taxed under the head "Salaries" only if there is a relationship between an employer and employee between the payer and the payee. An employer is one who not only directs what and when a thing is to be done but how it is to be done, and the employee is one who is bound to carry out the instruction given to him by such employer. Exceptions:

a)      Salary of a member of parliament — Taxable under the head other sources. However, the salary of a Cabinet Minister or Chief Minister is taxable under the head salary.

b)      Salary of a partner in the same has been allowed to the firm — Taxable under the head PGBP

c)       Salary of a guest lecturer — Taxable under the head other sources

2)      The place for accrual of Salary

Salary will be deemed to accrue or arise at a place where the services are rendered.

Exception: Salary receivable by a citizen of India who is a Government employee and who is posted outside India shall be deemed to accrue or arise in India although services are rendered outside India. However, overseas allowances and perquisites received outside India by him shall be exempt under section 10(7).

3)      Basis of Charge: 

As per section 15, the following income shall be chargeable to income-tax under the head "Salaries":

(a)    any salary due from an employer or a former employer to an assessee in the previous year, whether paid in that previous year or not;

(b)   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 in that previous year or before it became due to him;

(c)    Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to Income-tax in any earlier previous year.

4)      Nature of Employer: 

An employer may be an individual, i.e., Sole proprietor, partnership firm, limited liability partnership firm, HUF, Company, Local Authority AOP, BOI or any other artificial judicial person.

5)      Deductions made by the employer: 

If salaries are received after certain deductions made by the employer on account of professional tax, contribution to PF, TDS etc., the salary will be Gross salary due to the employee.

6)      Foregoing and surrender of salary: 

Voluntary foregoing of salary is taxable whether it is paid or not but the voluntary surrender of salaries is exempted from tax.

7)      Taxability of Salary: 

Salary is taxable on due or receipt basis whichever is earlier.

8)      Previous year for salaries: 

The Previous year for the income under the head ‘salaries’ shall always be a financial year of the government of India (i.e., April to March)