LAW OF TAXATION
CONCEPT OF SALARY UNDER INCOME TAX ACT, 1961
FROM: SUBMITTED TO: CHIRAG MADAN DR.ANUPAM KURLWAL KURLWAL 7th SEM (BA.LLB)
R.NO – 1524
SYNOPSIS
1. Intr Introd oduc ucti tion on 2. Genera Generall definit definition ion of Sala Salary ry 3. Head Headss of of Inc Incom omee 4. Salary 5. Different Different meaning meaning of Salary for different different purposes purposes 6. Meanin Meaning g and scope scope of sala salary ry 7. Deduct Deduction ionss from from salary salary 8. Relief when when salary salary is paid in in advance advance or arrears arrears etc. 9. Case Case laws laws 10. Some important questions that may arise
INTRODUCTION 1
The government of India of India imposes an income tax on taxable income of individuals, Hindu Undivided Families (HUFs), companies, firms, co-operative societies and trusts (identified as body of individuals and association of persons) and any other artificial person. Levy of tax is separate on each of the persons. The levy is governed by the Indian Income Tax Act, 1961. The Indian Income Tax Department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue under the Ministry of Finance, Govt. of India. There were 33 million income taxpayers in 2008. The CBDT is a part of Department of Revenue in the Ministry of Finance. On one hand, CBDT provides essential inputs for policy and planning of direct taxes in India, at the same time it is also responsible for administration of direct tax laws through the Income Tax Department. The Central Board of Direct Taxes is a statutory authority functioning under the Central Board of Revenue Act, 1963. The officials of the Board in their ex-officio capacity also function as a Division of the Ministry dealing with matters relating to levy and collection of direct taxes. The Central Board of Revenue as the Department apex body charged with the administration of taxes came into existence as a result of the Central Board of Revenue Act, 1924. Initially the Board was in charge of both direct and indirect taxes. However, when the administration of taxes became too unwieldy for one Board to handle, the Board was split up into two, namely the Central Board of Direct Taxes and Central Board of Excise and Customs with effect from 1.1.1964. This bifurcation was brought about about by constitut constitution ion of the two Boards Boards u/s 3 of the Central Central Boards Boards of Revenue Act, 1963. Organisational Structure of the Central Board of Direct Taxes: The CBDT is headed
by Chairman Chairman and also also comprise comprisess of six members members,, all of whom whom are ex-officio ex-officio Special Special Secretary to Government of India. Member Member (Income (Income Tax) Member (Legislation and Computerisation) Member (Revenue) Member (Personnel & Vigilance) Member (Investigation) Member (Audit & Judicial) The Chairman and Members of CBDT are selected from Indian Revenue Service (IRS), a premier premier civil service service of of India, whose member memberss constitute constitute the top top management management of of Income Income Tax Department. 1
http://en.wikipedia.org/wiki/Income_tax_in_India
Responsibilities of Chairman and Members, Central Board of Direct Taxes
Various functions and responsibilities of CBDT are distributed amongst Chairman and six Members, with only fundamental issues reserved for collective decision by CBDT. In addition, the Chairman and every Member of CBDT are responsible for exercising supervisory control over definite areas of field offices of Income Tax Department, known as Zones.
GENRAL DEFINATION OF SALARY: 1
Salary is a fixed amount of money or compensation paid to an employee by an employer in return for work performed. Salary is paid, most frequently, in a bi-weekly paycheck to an exempt or professional employee. In most years, an employee’s salary is paid in 26 even paychecks over the course course of the year. year. An employee who is paid a salary is expected to complete a whole job in return for the salary. This is different from a non-exempt employee who is paid an hourly rate or by the piece produced. produced. This This employee employee is general generally ly eligible eligible to collect collect overtime. overtime. The salaried employee or employee who is paid by salary does not track hours worked and is not paid for overtime. (Some public sector, often union represented, employees expect to account for hours and collect compensatory time off. This is not the norm in the private sector.) Because of Fair Labor Standards Act (FLSA) rules about overtime payment, employers are required to closely track the hours and partial hours worked by non-exempt or hourly employees. Salary is determined by market pay rates for people doing similar work in similar industries in the same region. Salary is also determined by the pay rates and salary ranges established by an individual individual employer. employer. Salary Salary is also affected affected by the the number of people people available available to perform perfor m the specific specific job in the the employer’s employer’s employm employment ent locale. locale. Many companies participate in salary market surveys to create a trustworthy resource for salary research. More and more salary research is occurring online using salary calculators.
1
http://humanresources.about.co http://humanresources.about.com/od/glossarys/g/sa m/od/glossarys/g/salary.htm lary.htm
HEADS OF INCOME (Section 14) 1
Section 14 provides that save as otherwise provided by this Act, all income shall , for the
purpose purpose of charge charge of income-ta income-tax x and computatio computation n of total total income , be classified classified under under the following heads of income : A) Salaries. B) Income from house property. C) Profits and gains of business or profession. D) Capital Gains. E) Income from other sources
In order to be chargeable to income- tax , an income must be brought under anyone of the heads , stated above . The words “save as otherwise provided under this Act” refer only to the exemptions granted under this Act.
SALARY (Sections 15 to 17) 1
Section 14,Income- tax Act,1961
1. Income Chargeable to Income-tax under the head “Salaries” (Section 15) According to 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 or not; (b) Any salary paid or allowed to him in the previous year by or on behalf of the employer or a former employer, though not due 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 for any earlier previous years. For the removal of doubts, an explanation to Section 15 declares that where any salary paid in advance is included in the total income of any person for any previous year, it shall not be included included again in in the total total income income of the person person when when the salary salary becomes becomes due. due.1
2
Some Important Points Regarding salary
1) Salaries – Every kind of remuneration of every kind of servant, public or private, and however highly or lowly placed he may be , is covered under the scope of this term used in
1
Taxation laws, ninth edition,2007,Kailash Rai , pg 47
2
Income-tax. law and accounts,1983 edition ,Dr. H.C . Mehotra, pg 54
the Income – tax Act , there is no difference between the wages of labourer or high officials.
2) Relationship of employer and employee – It is very essential for the payment to fall under the heads of “salaries” that the relationship of the employer and employee must exist between the payer and the payee. Every servant is an employee; but an agent may or may not be an employee. It is very essential that an distinction is drawn between income from employment which is taxable under this section , and income from an office not amounting to employment which is taxable under head “ Income from other sources” or as “ Profit and Gains from Business or Profession”. If an employee does any work for his employer which is not connected with its service; then the remuneration for such work shall not be treated as salary. For example, examiner’s remuneration received by a University teacher from his University.
3) Salaries and Professional income - Every profession involves the making of successive engagement and successive contracts. If the employment is merely incidental to the profession profession the the gains from from such employm employment ent would would be professio professional nal earning earning under section section 28 and not under section 15. For instance, a professional lawyer may be engaged in a case. His earning from this engagement will be taxable as professional earning under section 28; but if he is employed by a mill company as its legal adviser and also to work as standing counsel for the company, the remuneration received by him would be taxable under the head “Salaries”. In fact, whether, an engagement is merely incidental to the profession amounts to employment depends upon the duration of the employment and the other circumstances of the case. When a person occupies a regular post or office amounting to the service, it is an employment as distinct from mere engagement in the course of the profession. profession.
(4) Receipts from persons other than the employer – Perquisites or profits or any remuneration received from person other than the employer would be taxable under the head “Income from other Sources “ even if they accure to the employee by reason of his employment . For example, remuneration received by a professor of a college for acting as a examiner in a University or Board.
(5) Payment made after cessation of employment – Payment made by an employer to his employee after the cessation of his employment is also taxable under the head “Salaries”. It is taxable under this head because it represents remuneration for services rendered in the past.
(6) Payment in commutation of pension – A lump- sum received in commutation of pension by a government government is is excluded excluded from his salary salary income. income. If it is received received by a nonnongovernment employee besides receiving a gratuity it is excluded from his salary income to the extent of the commuted value of one – third of the pension which he is normally entitled to receive. If a non- government employee doesn’t get a gratuity then the commuted value of one half of such pension is excluded from his salary income .
(7) Application of salary – Voluntary foregoing. The voluntary foregoing by an employee of the salary due to him is normally mere application of the income and the salary is none the less taxable. It would be taxable on the further ground that salary is taxable if it is due, whether paid or not. But in reality there is no agreement to pay any salary, the apparent foregoing of a fictional salary would not attract tax.
(8) Tax free salary – When a salary is paid tax free , the employee has to include the total income , the gross salary i.e. the aggregate of the net salary received plus the amount of tax paid on his his behalf behalf by employer employer , except except under under provisions provisions of sub sub clauses clauses (vii) and and (ix) of of Section 10(6)
(9) Deductions by employer - Compulsory deduction from salary are also instances of mere application of income. The fact that a portion of salary has to be devoted compulsorily to some purpose under contractual obligation obligation does not prevent it from being assessabl assessablee as income income under the head “salary” “salary” , for for it is a case of application application of of income . For example, an assessee was engaged on a fixed salary upon the obligatory condition that the employer should provide him with board, lodging etc. for which he should pay an amount which is deducted from his gross salary before payment . Held, the tax was chargeable on the gross salary without any allowance for compulsory deduction made by the employer.
(10) Salary of a Member of Parliament – This is not chargeable under the head “salaries” as a Member of Parliament is not a government employee. The relation between him and the government is not of a servant and master. It is taxable under the head “Income from other Sources “.
DIFFERENT MEANING OF SALARY FOR DIFFERENT PURPOSES
For computation of
Concession
House rent
Qualifying
Entertainmen
Standard
taxable income under
in rent or rent
allowance
amount of
t allowance
head salaries
– free home
Gratuity
Gas ,
Determination
deduction
electric
of salary
contribution
under
energy
regarding
to R.P.F*
section
or water
perquisites
16(1)
under sec. 17 (2)(iii) (c)
1.Basic salary 2.Advance salary 3.Arrears of salary
1.Basic
1.Basic
Same as for
Basic salary
Basic
Same as
Basic
Basic salary,
salary
salary
house rent
exclusive of
salary-fees ,
for house
salary
dearness
2.Allowances
2.Dearness
allowance
any
Commission
rent
exclusive
allowance, all
as per
allowance,
,
allowance
of all
other
preceding
benefit or any any
Perquisite Perquisite ,
extras
allowances,
column.
other
Advance
commission
perquisite.
salary .
etc and all
Profit in lieu
other
of salary ,
monetary
Excess
payrnents.
3.Bonus
4.Pension
the terms of 4.Commision
5.Gratuity
(excluding 6.Fee.Commision.Bonus
dearness
7.Allowances
allowance
including ,Dearness
not entering
allowance
into retirement
8.Profits 8.Profits in lieu of
benefits of
Salary
the employee 9.Perquisites
,employers
10.Excess contribution contribution
contribution
to R.P.F * by e mployer
to R.P.F.*
over 10% salary
allowances
11. Excess interest received from R.P.F* 12.Taxable 12.Taxable transferred balance to R.P.F* R.P.F*
allowance if
employmen t so provide i.e. it is taken into account for retirement benefits , (excluding all allowances bonus, commission etc)
contribution by employer to R.P.F* over 10% of salary Interest credited to R.P.F in
exempt from
excess of
tax
9% rate,
,deductable
taxable
amount of
transferred
entertainment
balance to
allowance
R.P.F*
and perquisites)
* R.P.F – Recognised Provident Fund.
MEANING AND SCOPE OF SALARY (SECTION 17) The term “salary” has been defined under section 17(1). According to this section, “Salary” includes the following:
1. Wages – The term “salary” includes wages. “Wages” means “pay given for labour,
usually manual or mechanical, at short stated intervals, as distinguished from salaries or fees. “
2. Annuity or pension – The term “salary” includes any annuity or pension. Thus, annuity
and pension paid by the employer are taxable under he head “salary” whether they are paid voluntarily or under a contractual obligation. If annuity or pension is paid by the employer , it is taxable under the head “salary”, but if it is paid by a person other than the employer , e.g., annuities paid under an insurance policy policy or under a deed or will, it is taxable as under “ income from other sources “ and not a “ salary “. In a simple language an “annuity “ is a sum of money payable yearly or at any rate periodically , from a source which is exclusively or at any rate primarily personal estate .Thus, in a legal parlance ,”annuity “ means a fixed sum payable yearly or periodically. Pension is a periodical allowance or a stipend granted on account of past services. Pension is taxable under the head salary but payment payment in communicati communication on of pension pension falling falling under under section section 10 (10-A) (10-A) is exempted exempted from from income-tax.
3. Gratuity – “Salary” also include gratuity. A gratuity may be understood as a payment
made by the employer to the employee for the services rendered by him to the employer. Certain gratuities are exempted under section 10 (10). It is to be noted that gratuity paid by the employer is taxed under the head “salary” but if paid by a person other than the employer, it will be table as “Income from other sources “and not as “salary”.
4. Fees, commission, Perquisites or Profits in lieu of or in addition to salary or wages:
(A) Fee.- Fees may be understood to mean “reward or compensation for services rendered
or to be rendered : especially payment for professional services , optional amount, or fixed by custom or laws , charge ; pay . “
(B) Commission – Commission means “ the percentage or allowance made to a factor or
agent for transacting business for another .For this purpose , there is no difference between the commission which is wholly dependent upon the work done and fixed salary on a monthly basis. Thus, fees, commissions, perquisites or profits may be in lieu of or addition to regular remuneration and include honorarium or purely voluntary payments. They are all as much taxable as regular salary or wages.
(C) Perquisites -Perquisites mean any casual emoluments, fees or profit attached to an
office in addition to salary and wages. In simple words, it’s a perso a personal nal advantage. advantage. It does does not cover a mere reimbursement of any expenditure incidental to the employment. Like if an employee is provided with a watchman for official use there is no personal advantage to the employee, hence there is no perquisites. If the watchman is provided for personal as well as official use, the value of the perquisites only relating to personal use is taxable. Similarly if the traveling bills for official duties are reimbursed to the employee, there is no advantage to the assesse, so it is not a perquisite. The perquisites may be in cash or in kind or in the money or money’s worth and also in amenities which are not convertible to the money All cash allowance is included in the ordinary meaning of perquisites: - all cash allowance is included and hence taxable under section 17(2) of income tax act. City compensatory allowance, bad climate allowance, shift allowance and incentive bonus are included as perquisites perquis ites under under section section 17(2) of income income tax act. act. A perquisite is taxable as salary only when it is provided by the employer during the continuance of employment: - any perquisites allowed by a person other than employer is taxable as income from other sources. For example tips received by hotel waiters from customers are taxable as income from other sources
Non user user of the perquis perquisites ites by an an assesse assesse is of no no consequences consequences unless unless the right right to perquisites perquis ites is foregone before it it accrues accrues to him: - there may may be circumsta circumstances nces under which the employee may not make use of the perquisites provided by the employer. Where the income is accrued or received but it is subsequently given up, it remain the income of the recipient [CIT vs. Shoorji Vallabhdas and co. (1962) 46 ITR 144 (SC)]. The voluntary forgoing by the employee of the salary due to him is normally a mere application of income and the salary is nonetheless taxable. Unless the assesse forgoes his right of the provision of such perquisites before the income accrues, the notional income has to be brought to charge as perquisites equitant to the value of rent free accommodation [CIT vs. Bawa Singh Chauhan (1984) ITR 8]. Wide scope of the inclusive definition of perquisites: - the definition of the perquisites is inclusive but not limited to them only. The scope of an inclusive definition cannot be restricted only to those words which accrue in definition, but with extend to many other things not mentioned in it. Therefore, any other item not listed in the definition of perquisites perquis ites will will have to to be evaluated evaluated in accordance accordance with with the general general and and commercial commercial meaning of the word perquisites1. 2
The following propositions should also be kept in view:
•Personal benefit-“Perquisite” denotes something that benefits a man by going into his own pocket;; it does not, pocket not, however, however, cover a mere reimbur reimbursement sement of of necessary necessary expenses expenses incurred incurred by him. •Cash or kind- It may be provided in cash or in kind. •Should be provided by employer- Perquisites are included in salary income only if they are received by an employee from his employer (maybe former, present or prospective). Perquisites, received from a person other than employer, are taxable under the head “Profits and gains of business or profession” or “Income from other sources” . • Enforceable right- A benefit or advantage would be taxable asperquisite only if it has a legal origin. As an authorized advantage taken by an employee without his employer’s authority would create a legal obligation to restore such advantage, it would not amount to” perquisite” perquis ite” taxable taxable under the the Act On the other hand, if the the benefit benefit has been been conferred conferred unilaterally without the aid of an agreement between the parties, the employee can be taxed 1
http://www.taxalertindia.com/2011/08/salary-perquisites-section-172.html#axzz1aB1NDwkx
2
http://www.scribd.com/doc/18595665/Perquisites-Sec-172
under perquisite. It is not necessary that the benefit should have been received under an enforceable right. •Personal accident policy- Premium paid by employer towards personal accident policy of employee is not taxable as perquisite. •Pensionary deferred annuity benefits- Payments made by an employer to provide deferred annuity benefits to his employees are taxable as perquisites only when a vested interest accrues to the employee. • Personal advantage during employment- Perquisites are taxable under the head “Salaries” only if they are: (a) Allowed by an employer to his employee, (b) allowed during the continuance of employment, (c) Directly dependent upon services, (d) Resulting in the nature of personal advantage to the employee, and (e) Derived by virtue to employer’s authority. It is not necessary that recurring and regular receipt alone is a Perquisite. Even a casual and non-recurring receipt can be perquisite if The aforesaid conditions are satisfied.
According to (Sec 17 (2)) 'perquisite' includes the following: A. The value of rent-free accommodation provided to the assessee by his employer; B. The value of any concession in the matter of rent with respect to any C. D. E. F.
accommodation provided to the assessee by his employer; The value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases: Any benefit given by a company to an employee, who is a director thereof; Any benefit given by a company to an employee, being a person who has a substantial interest in the company; Any benefit given by any employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose
income under the head "Salaries" (whether due from, or paid or allowed by, one or more employer/s), exclusive of the value of all benefits or amenities, not provided for by way of monetary payment, exceeds Rs 50,000. However, nothing in this subclause shall apply to the value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants, directly or indirectly under any Employees' Stock Option Plan or Scheme of the company offered to such employees in accordance with the guidelines, issued in this behalf by the Central Government. The use of any vehicle, provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this sub-clause. G. Any sum, paid by the employer in respect of any obligation which, but for such payment, payment, would would have been been payable by by the assessee; assessee; H. Any sum, payable by the employer, whether directly or through a fund, other than a recognized provident fund or an approved superannuation fund or a Deposit-linked Insurance Fund, established under section 3G of the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948 (46 of 1948), or, as the case may be, section 6C of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952)], to effect an assurance on the life of the assessee or to effect a contract for an annuity; and I. The value of any other fringe benefit or amenity as may be prescribed.
1
Nothing in this clause shall apply to the following:
The value of any medical treatment provided to an employee or any member of his family in any hospital maintained by the employer; 2. Any sum, paid by the employer in respect of any expenditure, actually incurred by the employee on his medical treatment or treatment of any member of his family1.
(a) In any hospital, maintained by the Government or any local authority or any other hospital approved by the Government for the purposes of medical treatment of its employees; (b) In respect of the prescribed diseases or ailments, in any hospital approved by the Chief Commissioner, having regard to the prescribed guidelines. In such a case, the employee shall attach, with his return of income, a certificate from the hospit al 1
http://finance.indiamart.com/taxation/income_tax/tax_advance_salary_perquisites.ht ml
specifying the disease or ailment for which medical treatment was required and the receipt for the amount paid to the hospital. 3. Any portion of the premium, paid by an employer in relation to an employee, to effect or to keep in force an insurance on the health of such employee under any scheme approved by the Central Government for the purposes of clause (ib) of subsection (1) of section 36; 4. Any sum, paid by the employer in respect of any premium paid paid by the employee to effect or to keep in force an insurance on his health or the health of any member of his family under any scheme, approved by the Central Government for the purposes of section 80D; 5. Any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family other than the treatment referred to in clauses (i) and (ii); so, however, that such sum does not exceed Rs 15,000 in the previous year; 6 .Any expenditure incurred by the employer on the following: 7. Medical treatment of the employee, or any member of the family of such employee, outside India; 8. Travel and stay abroad of the employee or any member of the family of such employee for medical treatment; 9. Travel and stay abroad of one attendant who accompanies the patient in connection with such treatment, subject to the following conditions: 10. The expenditure on medical treatment and stay abroad shall be ex cluded from perquisite perquisite only only to the extent extent permitted permitted by by the Reserve Reserve Bank Bank of India; India; and 11. The expenditure on travel shall be excluded from perquisite only in the case of an employee whose gross total income, as computed before including therein the said expenditure, does not exceed two lakh rupees; 12. Any sum, paid by the employer in respect of any expenditure actually incurred by the employee for any of the purposes specified in clause (vi) subject to the conditions specified in or under that clause: For the assessment year beginning on the 1st day of April, 2002, nothing contained in this clause shall apply to any employee whose income under the head "Salaries" (whether due from, or paid or allowed by, one or more employers) exclusive of the value of all perquisites, not provided for by way of monetary payment, does not exceed Rs. 1,00,000.
Explanation
For the purposes of clause (2), i. 'Hospital' includes a dispensary or a clinic or a nursing home; ii. 'Family', in relation to an individual, shall have the same meaning as in clause (5) of section 10; and 'Gross total income' shall have the same meaning as in clause (5) of section 80B;
D. Profits in lieu of or in addition to any salary or wages.
According to section 17(3), profits in lieu of salary includes : (1) The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto;
(2) Any payment (other than any payment referred to in clause (10) clause (10A)clause (10B, clause (11), clause (12), clause (13) or clause (13A) of section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum, received under a Keyman insurance policy, including the sum allocated by way of bonus on such policy. The expression "Keyman Insurance policy" shall have the meaning assigned to it in clause (10D) of section 10;
(3) Any amount, due to or received, whether in lump sum or otherwise, by any assessee from any person in the following cases: (a) Before his joining any employment with with that person; or (b) After cessation of his employment employment with that person.
The word “profit” in the expression “profit in lieu of salary “ should be taken to mean advantage or gain employee by receipt of any amount and such payment payment is not required to be out of profits of the employer .
5. Any advance of salary – The term “salary “ includes any advance of salary.
5-A. payment in respect of leave not availed of – Any payment received by an employee
in respect of any period of leave not availed of by him shall be included within the meaning of ‘salary’ chargeable to income – tax.
6. Annual accretion to provident fund.- That portion of the annual accretion in any
previous previo us years to the balance balance at the the credit of of an employee employee particip participating ating in a recoganised recoganised provident provide nt fund as consis consistt of :(a) Contributions made by the employer in excess of 10% of the employee’s salary and (b) Interest thereon which is in excess of one-third of the employee’s employee’s salary or in excess of
the amount calculated at the rate of 7.5% per annum, shall be deemed to have been received by the employee in that previous year and shall be included in his total income for the purpose of income- tax.
7. Sums in transferred balance - The amount transferred from an unrecoganised
provident provide nt fund to to a recoganised recoganised provident provident fund fund account account of the the employee employee is included included in the employee’s total income under the head “salary”. Clause (vii) of sub-section (1) of Section 17 provides that “salary” includes the aggregate of all sums that are comprised in the transferred balance as referred to in sub- rule (2) of rule 11 of Part A of the Fourth Schedule.
8. Contribution by the Central Government or any other employer to the account of employee under pension scheme [Section 17 (1) (viii)]. – It provides that “salary”
shall include the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD.
It is obvious that the above definition of salary under Section 17 (1) is inclusive and not exhaustive. Consequently, the receipts not covered under the categories of receipts stated under section 17 (1) may also be included in salary.
DEDUCTIONS FROM SALARIES Deduction under Section 16 :
The income chargeable under the head “salaries” shall be computed after making the following deductions :
(i) Expenditure incidental to the employm employment ent (i.e. , standard deduction ) [Section 16 (i)].
The income chargeable under the head "Salaries" shall be computed after making the following deductions, namely :-
(i) In the case of an assessee whose income from salary, before allowing a deduction under the clause, (a) Does not exceed one lakh rupees, a deduction of a sum equal to thirty-three and onethird per cent of the salary or twenty-five thousand rupees, whichever is less;
(b) Exceeds one lakh rupees but does not exceed five lakh rupees, a deduction of a sum of twenty thousand rupees.
For the purposes of above clause, where salary is due from, or paid or allowed by, more than one employer, the deduction under this clause shall be computed with reference to
the aggregate salary due, paid or allowed to the assessee and shall in no case exceed the amount specified under this clause;
(ii) A deduction in respect of any allowance in the nature of an entertainment allowance specifically granted to the assessee by his employer
–
(a) In the case of an assessee who is in receipt of a salary from the Government, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less; and
(b) In the case of any other assessee who is in receipt of such entertainment allowance and has been continuously in receipt of such entertainment allowance regularly from his present present employer employer from from a date before the the 1st day of April, April, 1955, 1955, the amount amount of such such entertainment allowance regularly received by the assessee from his present employer in any previous year ending before the 1st day of April, 1955, or a sum equal to onefifth of his salary (exclusive of any allowance, benefit or other perquisite) or seven thousand five hundred rupees, whichever is the least;
(iii) Deduction of any sum paid on account of a tax on employment [Section 16 (iii)].
In computing the income chargeable under the head ‘salary’, it allows a deduction of any sum paid by the assessee on account of a tax on employment within the meaning of clause (2) of Article 276 of the Constitution of India leviable by or under any law.
Deductions from Salary income Certain deductions are available while determining the taxable salary income. 1
STANDARD DEDUCTION
Income tax slabs 2009-2010 (for Men) in India: 1
http://www.surfindia.com/finance/income-tax/salary-income-tax.html
Income Tax Slab (in Tax Rs.)
0 to 1,60,000
No Tax
1,60, ,60,0 001 to 3,0 3,00, 0,00 000 0
10%
3,00, ,00,0 001 to 5, 5,00, 00,000 000
20%
Above 5,00,000
30%
Income tax slabs 2009-2010 (for Women) in India: Income Tax Slab (in Tax Rs.)
0 to 1,90,000
No Tax
1,90, ,90,0 001 to 3,0 3,00, 0,00 000 0
10%
3,00, ,00,0 001 to 5, 5,00, 00,000 000
20%
Above 5,00,000
30%
Income tax slabs 2009-2010 (for Senior Citizens) in India: Income Tax Slab (in Tax Rs.)
0 to 2,40,000
No Tax
2,40, ,40,0 001 to 3,0 3,00, 0,00 000 0
10%
3,00, ,00,0 001 to 5, 5,00, 00,000 000
20%
Above 5,00,000
30%
RELIEF WHEN SALARY, ETC., IS PAID IN ARREARS OR IN ADVANCE. (SECTION 89) Where by reason of any portion of an assessee's salary being paid in arrears or in advance or by reason of his having received in any one financial year salary for more than twelve months or a payment which under the provisions of clause (3) of section 17 is a profit in lieu of salary, his income is assessed at a rate higher than that at which it would otherwise
have been assessed the Assessing Officer shall, on an application made to him in this behalf, grant grant such such relief relief as may be presc prescribed. ribed.
CASE LAWS In Major LHG conville of convillepur vs. CIT Punjab,NWF and Delhi province, Lahore AIR 1935 Lah 978 “salary signifies a recompense given to any man for his pains bestowed bestowed upon another another man’s man’s business business “. Where Where a father father and son son are joint joint owners owners of agricultural property and son gets certain allowances for managing the property besides his share of the income from the property. Only the surplus allowance can be taxed as his salary, his share of the income is to be treated as agricultural.
In Amar Dye Chemicals Ltd and another vs. Union of India and others AIR 1974 SC 636 Salary – Managing Director of Company whether servant or agent – Test – Assessee appointed as Managing Director to manage business of company in terms of and within powers powers prescribed prescribed in articles articles of association association and and under terms terms of of agreement agreement he could could be removed for not discharging work diligently or not acting in interest of company – Assessee held was servant servant and not agent of company – Remuneration payable to assessee would be salary.
In CIT, UP,CP and Berar, Lucknow vs. ID Varshani AIR 1954 All 58 in this the assessee was called a Managing Agent but the powers conferred upon him under the Articles were more in the nature of powers given to a servant and those powers could be terminated , he was admitted to the benefits of the Company’s Provident Fund as being an employee of the company and value of rent-free quarters occupied by him was added as income under the head ‘salary’. It was held that the assessee was in fact the Chief Manager of the Company and his remuneration was properly assessed as salary.
In Cit vs. Navnitlal Sakarlal AIR 2001 SC 235 , agreements between the company and its Managing directors entitled them to remuneration but also empowered the Board of Directors to resolve in respect of any year not to pay any remuneration to them. For the previous previous rear relevant relevant to to AY 1973-74, 1973-74, the Board Board of Director Directorss resolved resolved that “the “the amount of commission payable to each of the Managing directors” should be expended to purchase single premium deferred annuity policies on their lives. The said resolution neither referred to the provision in agreement for non-payment of remuneration nor saying that the Managing Directors should not be paid any remuneration or part thereof. In such circumstances, it was held that the amount of commission did accrue to the Managing Directors and could not be said to have been diverted. Therefore, it constituted part of their remuneration and was includible in their hands as salaries.
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Some important questions that may arise
Is the allowance paid outside India by the Government to the Indian citizens taxable?
Any allowance, paid outside India by the Government to an Indian citizen for rendering services outside India, is fully exempt from tax u/s.10 (7) of the Income-tax Act. How is the tax determined on the salary received by ships crew?
Under section 10(6)(viii), salary that is received by or due to a Non-resident foreign national, who is a member of a ships crew, is exempt from tax, provided the total stay of the crew member in India does not exceed 90 days in the previous year. If a person foregoes his salary for any reason, would it be taxable?
Since the salary is taxable on due or receipt basis, whichever is earlier, foregoing of salary would amount to giving up something, which is due to him. Hence, even if a person foregoes salary, the same would still be taxable. In the case of a Hindu undivided family, how would you determine whether the remuneration, received by an individual is the income of the individual or the income of the Hindu undivided family?
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Finance.indiamart.com/taxation/income_tax/tax_salaries_wages.html
If the remuneration, received by the co-parcener, is compensation made for the services rendered by the individual co-parcener, then it will be income of the individual co parcener. parcener. If the remuneration remuneration received received by the the individual individual co-parcener co-parcener is is because because of investments of the family funds, then it will be considered as the income of the Hindu undivided family. If the income was essentially earned as a result of the funds invested, then the fact that the co-parcener had rendered some service will not change the character of the receipt. It will still be regarded as income of the Hindu undivided family. However, on the other hand, if the co-parcener has received remuneration for services rendered by him, even if his services were availed of because he was a member of the family which had invested funds in that business or that he had obtained qualifying shares from out of the family funds, the receipt would be the income of the individual. If an assessee is employed employed in a company company where he is called Managing Agent Agent but is in fact, the Chief Manager of the company, under what head would the remuneration that is paid to him be charged?
Though he may be called a Managing Agent, the remuneration earned by him will be charged under the head of Salaries and not as Business Income. The fact that he is actually the Chief Manager of the company will make the remuneration earned by him chargeable to tax under the head Salaries. It is the true nature of the contract that will determine the relationship between the assessee and the company. Once it is established that the managing director functions, subject to the control and supervision of the Board of Directors, the inevitable corollary is that an employer - employee relationship exists and, that being so, his remuneration is assessable under the head "salary". Is the salary, bonus, commission or remuneration, received by a partner of a firm from the firm regarded as salary?
No. The salary, salary, bonus, bonus, commissi commission on or remunerat remuneration, ion, by whatever whatever name name called, called, due to or received by the partner of a firm from the firm shall not be regarded as salary for the purpose purpose of tax. tax. It will will be regarded regarded as Busines Businesss Income Income and taxable taxable under the head 'profits 'profits and gains from business or profession'. Accordingly, no standard deduction, which is otherwise allowable from Salary Income, is available. Would the remuneration, received by a director be taxable under the head 'Income from salaries'?
The remuneration, received by a director is taxable as 'Income from salaries' or not, would depend upon whether the director is an employee of the payer or not. This can be determined from the nature of the relationship between the director and the payer. If the relationship of a master and servant exists between the payer and payee, then the director would be an employee and the remuneration that is received would be taxable under the head 'salaries'. However, if such relationship does not exist, then the director will not be considered an employee of the payer and the Income would be taxable as Professional Income.
If a person is following the cash system of accounting would he be liable to pay tax in respect of salary which is due to him but which he has not received?
Salary is taxable on due basis or receipt basis, whichever is earlier, irrespective of the method of accounting that is followed by the assessee. Accordingly, advance salary is taxable on receipt basis, though not due. Hence, the method of accounting followed by the assessee is not of any consequence. Explain the taxability of salary of foreign employees.
Under section 10(6)(vi), the remuneration received by An individual who is not a citizen of India foreign national as an employee of a foreign enterprise for services, rendered by him during his stay in India, would be exempt from tax, in the following cases: 1. The foreign foreign enterpr enterprise ise is not engaged engaged in any business business or trade trade in India; India; 2. The employee's employee's stay in India India does does not exceed exceed in the aggregate aggregate a period period of of 90 days days in the previous year; and 3. The remunerati remuneration, on, paid to to him, is not liable liable to be deducted deducted from from the income income of the employer chargeable under the Act. Is the salary of diplomatic personnel taxable?
Under section 10(6)(ii) of the Income-tax Act, any remuneration that is received by an individual who is not a citizen of India as an official of the Embassy, High Commission, Legation, Commission, Consulate or Trade representative of foreign State or, as a member of the staff of any of those officials would be exempt from tax, if the corresponding Indian officials in that foreign country enjoy similar exemption. Is there any significance to the place where the services are rendered for the taxability of salaries?
Salary is deemed to accrue or arise at the place where the service is rendered. Even if salary is paid outside India, if the services are rendered in India, the said salary is taxable in India. Leave salary, paid abroad, is also taxable in India as it is deemed to accrue or arise out of services rendered in India. It may be noted that salary, paid by the Indian Government to an Indian national, is deemed to accrue or arise in India even if the services are rendered outside India. Any pension, payable outside outside India India to a person person residi residing ng outside India permanent permanently, ly, shall not be taken taken as income deemed to accrue or arise in India, if the pension is payable to a person, referred to in Article 314 of the Constitution or to a person, who has been appointed as a Judge of the Federal Court or of the High Court, before the 15th of August, 1947 and continues to serve as a Judge in India on or after the commencement of the Constitution. Are there any special privileges that are enjoyed by the officials of the United Nations Organization and other such international organizations?
Under section 2 of the United Nations (Privileges and Immunities) Act, 1947, read with section 18 of the Schedule, thereto, exemption is granted from Income tax in respect of salaries and emoluments that are paid by the United Nations and other notified international organizations to its officials. Pension is also covered under this provision and no tax is payable. What is the taxability of the compensation, received by a person on voluntary retirement?
Under section 10(10C) of the Income-tax Act, compensation that is received at the time of voluntary retirement is exempt if the person satisfies the following conditions: • •
It is received at the time of voluntary retirement; It is received by an employee of a public sector company; or any other company; or authority established under the Central, State or Provincial Act; or a local authority; or a co-operative society; or a University; or an Indian Institute of Technology; or any State Government; or the Central Government; or an institution having importance throughout India or in any other State(s); or a notified institute of Management.
The compensation that is received should be in accordance with the scheme(s) of voluntary retirement, or in the case of a public sector company, a scheme of voluntary separation. Further, the schemes of the abovementioned companies and authorities must be in accordance with such guidelines as may be prescribed. The maximum amount of exemption, however, is restricted to Rs.5, 00,000/-. Once the employee has claimed an exemption under the above provisions, he is not entitled to claim any further exemption for any other assessment year.
