TAXATION I

UNIT 2
INCOME FROM SALARIES
 Characteristic Features of Salary

1. Relationship of Employer and Employee.

To fall under the head ‘Salaries’, it should be the relationship between the payer
and the receiver of the salary.
Employer: A Government, A Local authority, A Company or
any other public body, An Association, HUF, or An Individual

Salary/Remuneration

Employee: All kinds of servants, Public or Private or

employee of a foreign government

2. Nature of Employer.

An employer may be an individual, i.e. Sole proprietor, partnership firm, limited

liability partnership firm, H.U.F., Company, Local Authority, AOP/BOI or any
artifical juridical person.
3. Salary from more than one 4. Salary from Present, Past or
employer. Prospective Employer.

Any amount of salary received or Salary received or due from present, past
due from one or more than one or future employer is also taxable under
employer/source shall be taxable this head.
under this head ‘Salaries’.

5. Tax free Salary. 6. Salary received as Member of

At times employer pays full salary to Parliament or Member of State
the employees and also pays tax on Legislature.
behalf of the employee to the IT
dept. In this case for computation of Income received by any MP/MLA is not
Incoem from Salaries, the salary of treated as salary and is not considered
the employee considered for tax under this head. But is is taxable under
calculation would be the gross the head ‘Income from other sources’.
amount (i.e. the salary drawn by the
employee the tax paid by the
employer).
7. Receipts from Persons other than Employer.
Any benefits or any remuneration received from persons other than the employer,
would not be taxable under the head ‘salaries’ but will be taxable under the head
‘income from other sources’.

8. Place of accrual of Salary Income

Salary is said to be accrued at the place where the services are rendered. If the
services are rendered in India, then salary accrues in India and vice versa. Two
exceptions to the rule:
a. A pension payable outside India.
b. The Government of India employs Indian citizens for services to be rendered in
foreign countries.

9. Deductions made by the Employer.

If an employer makes certain deductions out of the salary payable to an employee,
them such deductions are also to be taken as application of income by an employee,
i.e.
Gross Salary/Salary= Net salary received + Deductions made by the employer.
EX: a. Deductions made to recover the loan advanced by the employer,
b. Employee’s contribution towards PF, IT and PT, etc.
10. Salary or Pension received by UNO Employees.

It is fully exempted as per circular no. 293 Dated 10/2/81

11. Salary received by a teacher/researcher from a SAARC member state

Exempted upto 2 years.

12. Salary as Partner 13. Salary received by a sole

proprietor from his proprietary
Any salary, commission or concern
remuneration received by a working Any salary or remuneration received by
partner from a firm/ Limited Liability a sole-proprietor from his proprietary
partnership shall not be taxable under business cannot be treated as his salary
the head ‘Salaries’, instead taxable income. Hence, such remuneration
under the head Profits and Gains in received by the owner from his
the hands of partner to the extent proprietary concern is not taxable in the
deduction is allowed to firm. hands of the owner.
14. Payments received by Legal heirs of a
Deceased Employee.

Any ex-gratia payment or compensation

given to widow or legal heirs of an
employee who dies during service is not
taxable as salary income but family pension
received is taxable under ‘other sources’.

15. Payments 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.
16. Voluntary foregoing: Application of
Salary.

Voluntary foregoing of salary is taxable

when it is due, whether paid or not.
Voluntary foregoing is different from
voluntary surrender of salaries which is
exempted from tax.

17. Previous year for Salaries.

The previous year for the income under
the head ‘Salaries’ shall always be the
financial year of the Government of india
(i.e. April to March).
18. Taxability of Salary on due or receipt, whichever is earlier basis.
U/S 15(a) salary is taxable on due basis whether received or not. Salary becomes
due after doing work and in India it is due on monthly basis. As per our financial
system the year starts on 1st April and ends on 31st of March.
The salary can be due in two situations:
a. If salary is due on 1st day of the month, during the financial year 2019-20
first salary shall be due on 1 st of April 2019 and it shall be for the month of
March 2019 and last salary shall be due on 1 st March 2020 for the month of
February 2020.
b. If salary is due on the last day of the month, during the financial year 2019-
20, first salary shall be due on 30 th April 2019 and last salary shall be due
on 30th March 2020 for the month of March 2020.

19. Salary grade/Pay scale.

In some organizations like Government offices, Banks, post offices etc., salary to
employees is paid as per pay scales or salary grades. The pay scales fixes the
starting salary of an employee and also the annual increment in future years of
employment.
Example of grade/pay scale:
8000-300-11000

20. Advance Salary received vs. Advance against salary

In case an assesse receives some salary in advance in a previous year which was
actually not due in that year, it shall be taxable in the year of receipt. In case, any
loan or advance is taken it is not treated as advance salary.
21. Arrears of Salary received.
Any amount of salary received from present
or past employer during relevant previous
year and which relates to some earlier
previous years, is treated as arrears of salary.
It is taxable in the year in which received
and not in the year in which it belongs.

22. Salary in lieu of notice.

To terminate the services of an employee it
is essential to serve a notice as per service
agreement. In case it is desired to relieve
the employee immediately, he is given
salary in lieu of such notice period. Such
amount is fully taxable under the head
‘Salaries’ on receipt basis.
23. No relevance of Method of Accounting.
A salaried individual is not required to adopt any method of accounting for
computation of his salary income. The method of accounting is relevant for
computing business or profession income or while computing income under the
head ‘other sources’.

METHOD

24. Salary in foreign Currency.

Salary received or receivable in foreign
currency shall be converted into Indian
currency by applying specific Telegraphic
Transfer Buying Rate.
Computation of Salary Income
PROVIDENT FUNDS
Provident fund (Provident Fund Act, 1925) is
a kind of security fund in which the
employees contribute a part of their salary and
the employer also contributes on behalf of
their employees. Provident funds are
maintained by many organizations for the
benefits of their employees.
For proper understanding the
treatment of provident fund facility ,
it necessary to know different types
of provident funds and the working
system of such funds.

TYPES OF PROVIDENT FUNDS

Statutory Provident Fund(S.P.F.)

Recognized Provident Fund (R.P.F.)
Unrecognized Provident Fund (U.R.P.F.)
Public Provident Fund (P.P.F.)
TREATMENT OF PROVIDENT FUNDS
Statutory Provident Fund (S.P.F.): Recognized Provident Fund (R.P.F.):
A provident fund maintained by a If a provident fund maintained by a private
government or semi government organization fulfills the conditions
organization is knows as government prescribed in the law for recognition of the
provident fund or a statutory provident funds and on a application made, the
fund . the provident fund maintained by commissioner of the income tax agents
Pakistan Armed forces, Central or recognitions to such funds. It is knows as
provident government , Railways ,WAPDA recognized provident fund. If the
,etc are the example of such funds. The commissioner of income tax refuses the
provident fund Act, 1925 , applies to such recognition, an appeal can to the board .
provident funds. recognized provident fund is beneficial for
both employers and employees.

Unrecognized Provident Fund (U.R.P.F.): Public Provident Fund(P.P.F.):

It is provident fund maintained by a All the above funds were for salaried people. On July
private organization which has not been 1, 1968, a new fund known as PPF was started so
granted recognition by the income tax that self-employed people may also enjoy the benefit
authorities because: 1. The conditions of deduction u/s 80C. Self employed people are
prescribe in the law regarding the doctors, lawyers, accountants, actors, traders etc.
provident fund are not fulfilled. 2. No
application for recognition has been made
by the organization. 3. The application is
turned down on same technical grounds by
the income Tax Authorities.
Allowances- [Section 17(3)]
An allowance is the financial benefit given to the employee by the employer over and
above the regular salary. These benefits are provided to cover expenses which may be
incurred to facilitate the discharge of service
These allowances are divided into three categories on the basis of their tax treatment.
1. Fully Exempted Allowances 2. Fully Taxable Allowances
3. Partially Taxable Allowances