INCOME UNDER THE HEAD “SALARY”

(A) Theory Part
1. Chargeability :
    Section 15 - The following income shall be chargeable under the head “Salary” :

(a)    Any salary due from an employer or 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 employer or a former employer though not due or before it become due to him,

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

2.      The relationship of employer and employee or master and servant must be there Instances where relationship does not exist :

   (i)  Salary to member of parliament;

  (ii)  Salary received by a working partner from partnership firm is taxed as income under head “Business or Profession”;

(iii)  Commission received by an agent is taxed as income under head “Business or Profession”;

(iv)  Director of a company is generally not an employee thus commission received is taxed under head “Business or Profession”;

  (v)  Family pension received by legal heirs is charged under head “Income from other sources”.

3      Salary Paid Tax free : Sometime, employer allows an employee to draw tax free salary. It simply means that the tax is paid by the employer on behalf of employee. Therefore at the time of calculating salary the amount of tax, so paid by the employer will be added in salary.

4     Salary from more than one sources : If an individual works with two employers on part time basis, salary from both the employer will be chargeable to tax under this head.

5.     Salary income must be real and not fictitious : There must be an intention to pay and receive salary. Example : In order to comply with the requirement of Board of Education Rules, there was an agreement between the assessee, a school teacher and school granting a certain salary to the assessee and simultaneously there was another agreement by which identical sum was to be returned by the assessee to school it cannot treated as salary.

6.     Salary and Wages : Conceptually no difference. Both are taxed under this head.

7.      Place of accrual of salary income is important : “Golden rule is that salary will be deemed to accrue or arise at a place where services are rendered.

       Exception : In case of a citizen of India who is  a Govt. employee and renders any service outside India. Salary received by him would be treated as Income deemed to accrue or arise in India, although services are rendered outside India.(sec 9)

8.      Surrender of Salary to the Central Govt. : Not taxable. 

9.    Foregoing of Salary : Once salary earned and subsequently there is waiver of the right to receive, it is treated as application of income and therefore is taxable.

10.    Period of salary taken into consideration :
    (a)    Salary of Govt. Employee and Semi Govt. employee : 1st March 2009 to 29th Feb. 2010.
            As govt. employee’s salary is due on the first day of the next month.
    (b)    Non Govt. Employee : 1st April 2009 to 31st March 2010.
        As private employee’s salary is due on the last day of the current month.

11.    Computation of Salary in Grade System / Pay-Scale :
    X joins the service in the grade of 12000-300-13800-400-17800 on 1st June 1999,
    Compute : Salary for the Previous Year 2009-10 when he is a Private Employee Govt. Employee.

12.    Contract of Service Vs. Contract for Service :

Under Contract of service employer — employee relationship exists and the employer can direct and control the work required to be done by employee. Where as under contract for service the contractee can at best specify the work required to be done and it is left to the contractor to decide the details of his work.

Thus income earned out of contract of service is taxed under salary head and income earned out of contract for service is taxable under the head business or profession.

13.    Deduction from Salary :

Certain sum are usually deducted by the employer from the salary of the employee acccording to law or

agreement, e.g. P.F., E.S.I. contribution, payment of Income Tax & Life Insurance Premium the above deductions

are treated as application of income by the employee, hence the deduction so made by the employer will be

added back to the salary actually received by the employee for the purpose of income tax.

 Example : Net salary Rs. 80,000/- after deduction of tax at source Rs. 10,000/- contribution to Recognised

Provident Fund Rs. 9,000/- and rent of bunglow @10% of salary.

14.     Definition of Salary :

         Section 17(1) gives an inclusive definition of “Salary”.

         Salary includes :

   (i)  wages;

  (ii)  annuity or pension;

  (iii)  any gratuity;

  (iv)  any fees, commission, perquisit (refer para 7) or profit in lieu of or in addition to any salary or wages.

  (v)  any advance of salary

  (vi)  any payment received by an employee in respect of any period of leave not availed by him;

  (vii)  the annual accretion to the balance at the credit of an employee participating in a recognised provident fund to the extent to which it is chargeable to tax.

  (viii)  the aggregate of all sums that comprised in the transferred balance of an employee participating in a recognised provident fund to the extent to which it is chargeable to tax.

(ix)  *the contribution made by the Central Govt. in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD.

15.     Definition of Profits in lieu of salary :

         Section 17(3) gives an inclusive definition of “Profits in lieu of salary. As per this definition it includes :

   (i)  compensation;

  (ii)  payment from an unrecognised provident fund or an unrecognised superannuation fund

  (iii)  payment under Keyman Insurance Policy.

  (iv)  Any amount due or received before joining or after cessation of employment.

  (v)  any other sum received by the employee from the employer, if not exempted under section 10 to 10(13A)

16.     Deductions (sec.16)

         The income chargeable under this head shall be the computed after giving the following deduction from gross salary :

   (i)  Entertainmnet allowance section 16 (ii)

  (ii)   Tax on employment/Professional Tax  section 16 (iii)

More Detail :- http://www.gurukpo.com