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SALARY and its components, Advance Salary, Arrears of Salary

Content :

Salary & its Components

"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 employer-employee relationship is the sine-qua-non for taxing a particular receipt under the head "salaries." Accordingly:

  1. The Pension received by an assessee from his former employer is taxable as "Salaries" whereas pension received on death of an employee by members of his/her family as Family Pension is taxed as "Income from Other Sources".

  2. The salary received by a partner from his partnership firm carrying on a business is not chargeable as "Salaries" but as "Profits & Gains from Business & Profession".

For the purpose of Income Tax, "Salary" includes

  1. Wages
  2. Annuity or pension
  3. Gratuity
  4. Fees, Commission, perquisites or profits in lieu of salary

    Fees or commission received by the employee from the employer are charged to tax as salary income. Commission will be taxed as salary income, irrespective of the fact that it is received as fixed monthly amount or is received as percentage of turnover.

    Any voluntarily gift received by the employee from the employer is charged to tax as salary income (perquisite). However, non-monetary gifts are exempt upto ₹ 5,000. If gift has no relation to the service rendered by the employee, then the same can be charged to tax under the head 'Income from other sources'.

  5. Advance of Salary
  6. Receipt from Provident Fund
  7. Contribution of employer to a Recognised Provident Fund in excess of the prescribed limit
  8. Leave Encashment
  9. Compensation as a result of variation in Service contract etc.

    Compensation received from the employer in connection with modification of terms of employment, will be charged to tax as salary income

    If an employee receives any payment in respect of extra work done by him then the same is charged to tax under the head 'Salaries'.

Important Points: Place of accrual of salary:
  1. Salary accrues where the services are rendered even if it is paid outside India;
  2. Salary paid by the Foreign Government to his employee serving india is taxable under the head Salaries;
  3. Leave salary paid abroad in respect of leave earned india shall be deemed to accrue or arise india.

Deductions from Salary: The income chargeable under the head Salaries shall be computed after making the following deductions:

  1. A deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee who is in receipt of 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;
  2. 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, leviable by or under any law.

Taxability of Advance Salary

Advance salary received by an employee is taxed in the year of receipt. However, an employee can claim relief under section 89 in respect of advance salary.

Similarly, Bonus received by an employee is charged to tax in the year of receipt.

Taxability of Arrears of Salary

Arrears of salary received by an employee are taxed in the year of receipt if the same were not taxed earlier on due basis. However, an employee can claim relief under section 89 in respect of arrears of salary.

Tax treatment of salary received by an Indian citizen deputed outside India

Salary received by an Indian citizen deputed outside India by the Government is treated as income deemed to be accrued or arisen india and will be taxed india. However, in such a case allowance and perquisites will be exempt from tax.

Tax treatment of salary foregone by the employee

Salary is charged to tax on due or receipt basis whichever is earlier, hence, salary foregone by the employee is charged to tax on due basis, even though it is not received by him. In other words, salary foregone after its accrual is charged to tax, even though it is not received by the employee. However, if salary is surrendered to the Central Government under section 2 of the Voluntary Surrender of Salary (Exemption from Taxation) Act, 1961, then such surrendered salary is not charged to tax.

Tax treatment of amount received before joining the job

Any payment received by an employee from his present employer or former employer or prospective employer will be charged to tax under the head 'Salaries' (as profits in lieu of salary). Hence, amount received from prospective employer will also be charged to tax under the head 'Salaries'.

Relief under section 89 in respect of arrears of salary

Under section 89, read with Rule 21A(2), an employee can claim relief in respect of arrears of salary. Relief can be computed in the following manner:

  1. Calculate total tax liability on the total income, including the additional salary (Advance Salary or Arrears of Salary) of the year in which such salary is received.
  2. Calculate total tax liability on the total income, excluding the additional salary of the year in which such salary is received.
  3. Find the difference between tax computed at (1) and (2) above.
  4. Calculate total tax liability on the total income, including the additional salary (Advance Salary or Arrears of Salary) of the year(s) to which such salary relates to.
  5. Calculate total tax liability on the total income, excluding the additional salary of the year(s) to which such salary relates to.
  6. Find the difference between tax computed at (4) and (5) above.

Relief under section 89 is the excess of tax computed at 3 over tax computed at 6. No relief is available, if tax computed at 3 is less than tax computed at 6. If the additional salary pertains to more than one previous year, then relief shall be computed in above manner by spreading such salary over the previous years to which such salary pertains to.

Frequently Asked Questions

Whatever is received by an employee from an employer in cash, kind or as a facility (perquisite) is considered as Salary.
If a person has the right/power to hire and fire another, then he is an employer of the latter.
Allowances are fixed amounts, apart from salary, which are paid by an employer for the purpose of meeting some particular requirements of the employee. There are generally three types of allowances for the purpose of income tax- taxable, fully exempted and partially exempted.
Yes.
Yes. These are in the nature of perquisite.
Yes. You will have to pay self-assessment tax and file the return.
Form-16 is a certificate of TDS and in your case it will not apply. However your employer must issue a salary statement.
Yes. However pension received from the United Nation is exempt.
No. It is taxable under 'other sources'.
The bank.
No. They are exempt subject to conditions and limits laid down in the Income Tax Act.
Yes. However certain benefit of spread over of income to the years to which it relates can be availed for lower incidence of tax. This is called relief u/s 89(1) of Income-tax Act.
Yes.
Yes.
It is taxable if received while in service. However, when received as retirement benefit, it is exempt subject to certain conditions.
No.

Disclaimer : This site does not make any claim that the information provided on its pages is correct and up-to-date. The contents of this site cannot be treated or interpreted as a statement of law. In case, any loss or damage is caused to any person due to his/her treating or interpreting the contents of this site or any part thereof as correct, complete and up-to-date statement of law out of ignorance or otherwise, this site will not be liable in any manner whatsoever for such loss or damage.
In case of any doubt / clarification, please visit the official website of Income Tax Department.

Updated : Jan 24, 2019
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