It can take any form, such as a gift, pension, gratuity, usual remuneration and so on. In this article, we look at salary income under the Income Tax Act.
Meaning of salary under the Income Tax Act.
Under the Act, the term salary includes:
- Wages
- Annuity or pension
- Gratuity
- Fees, commissions, perquisites or profits in lieu of, or in addition to, any salary or wages
- Advance of salary
- Payment received by an employee for any period of leave not availed
- The portion of annual accretion in any previous year to the balance at the credit of an employee in a recognised provident fund, to the extent it is taxable
- Transferred balance in a recognised provident fund, to the extent it is taxable
- Contribution by the Central Government to an employee’s account under a pension scheme referred to in Section 80CCD (the NPS)
Computing total salary income.
While computing total salary income, salary consists of:
- Salary dueAny salary due from an employer (current or former) to an assessee in the previous year, whether actually paid or not.
- Salary paid in advanceAny salary paid or allowed to an employee in the previous year by or on behalf of an employer, though not due or before it became due.
- Arrears of salaryAny arrears paid or allowed in the previous year, if not charged to income tax for any earlier previous year.
Salary income is chargeable to tax either on a due basis or on a receipt basis. Once salary has accrued, its subsequent waiver is only an application of income and is liable to be taxed.
Taxability of various salary components.
| Salary component | Taxability under the Income Tax Act |
|---|---|
| Basic salary | Taxable |
| Dearness allowance | Taxable |
| Advance salary | Taxable in the year received |
| Arrears of salary | Taxable in the year received, if not taxed on a due basis |
| Leave encashment at time of retirement | Taxable; exempt in some scenarios |
| Salary in lieu of notice | Taxable on receipt |
| Salary to partner | Taxable under the head “Profits and gains of business or profession” |
| Fees and commission | Taxable |
| Bonus | Taxable |
| Gratuity | Taxable; exempt in some scenarios |
| Pension | Taxable; exempt in some scenarios |
| Annuity from employer | Taxable |
| Retrenchment compensation | Exempt from tax to a certain extent |
| Remuneration for extra work | Taxable |
| Salary to foreign citizens | Taxable; exempt in some scenarios |
Who can receive salary?
Salary is compensation for personal services, which can be provided by an individual and not by an association or entity. Salary income is therefore chargeable only in the hands of an individual. A firm, HUF, LLP or company cannot earn salary income.
If an employer-employee relationship exists, the income is classed under the head “Salaries”, whether the employee works full time or part time, and whether it is received from a present, former or prospective employer.
Income that is not salary.
To be taxable under “Salaries”, the benefits must be provided by virtue of an office amounting to an occupation. Income received by an individual from a person other than his or her employer cannot be termed salary, and may not be taxable under the head “Salaries”.
Due date and calculation period of salary.
The Minimum Wages Act, 1948 governs minimum wages and their calculation in India. As per the Act, the due dates are:
Less than 1,000 employees
Salary is paid on the 7th of every month.
More than 1,000 employees
Salary is paid on the 10th of every month.
Government and semi-government employees
Salary is due on the first day of the next month.
Other employees
Salary is due on the last day of each month.
Period of calculation
| Employees | Period |
|---|---|
| Government employees | 1st March to 28th February |
| Private employees | 1st April to 31st March |
Leave salary.
For a non-government employee, leave salary is exempt from tax up to the least of the following:
- The cash equivalent of leave salary for the period of earned leave to the employee’s credit, only at the time of retirement, whether on superannuation or otherwise
- 10 months’ average salary, calculated on the average salary drawn during the 10 months immediately before retirement or superannuation
- The amount not chargeable to tax as specified by the Government
- The leave encashment actually received at the time of retirement
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