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Salary

Essential norms of Salary income :-

(1) Relationship between payer & payee :- Income under thehead salaries includes remuneration due/paid to a person inrespect of services rendered by him under an express or

implied contract of employment. Charge under this head ofincome presumes the relationship of an employer and anemployee between the payer and payee in contrast to thatof a principal and agent. The distinction between the twotypes of relationship is vital because income earned by an

employee from his employer is chargeable under the headSalaries,whereas income earned by an agent is chargeableunder the head profitsand gains of business or professionor income from other sources.

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Salary

1.1- Employer and employee vis-s-vis principal and agent

1.2- Employer and Contractor-Their relationship

1.3-Sub-contractor

1.4-Payment received in capacity other than employee-

1.5 Salary and wages

1.6 -Salary from more than one source

1.7-Salary from former employer, present employer or

prospective employer. 1.8 salary income must be real and not fictitious

1.9-Foregoing of salary 1.10 Salary paid tax-free

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Salary

Salary u/s.17(1) Salary u/s. 17(1) is defined to include the

following :(a) Wages (b)any annuity or pension (c) any

gratuity (d) any fees, commission, perquisite or profits in lieu

of or in addition to any salary or wages (e) any advance of

salary (f) any advance of salary (g) the portion of theannual accretion in any previous year to the balance at the

credit of an employee participating in Recognised Provident

Fund to the extent it is taxable (h) transferred balance in a

Recognised Provident Fund to the extent it is taxable (i) thecontribution made by the Central Government in the

previous year, to the account of an employee under a

pension scheme referred to in section 80CCD.

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Different forms of Salary-How taxed

Salary is taxable on due or receipt basis which ever isearlier.

Advance salary :- Advance salary is taxable on receipt basisin the assessment year relevant to the previous year in

which it is received, irrespective of incidence of tax in thehands of the employee. The recipient can, claim relief u/s.89of the Act.

Arrear salary :- It is taxable on receipt basis, if the same hasnot been subjected to tax earlier on due basis. The recipient

can, claim relief u/s.89 of the Act.

Leave salary :- As per service rules, an employee getsdifferent leaves. Encashment of leave by surrendering leave.

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Different forms of Salary-How taxed

Tax treatment for encashment of leave is as under.

Nature of leave

encashment

Status of

employee

Whether it is taxable

Leave encashment during

continuity of employment

Government/non-

governmentemployee

It is chargeable to tax.

However, relief can be takenu/s. 89 of the Act.

Leave encashment at the

time of retirement/leaving

the job

Government

employee

It is fully exempt from tax

under section 10 (10AA)(i)

Leave encashment at thetime of retirement/leaving

the job

Non-Governmentemployee It is fully or partly exempt fromtax under section 10 (10AA)(ii)

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Different forms of Salary-How taxed

Government employees getting leave encashment at the

time of retirement[Sec.10(10AA(i)].- In the case of a

Central/State Government employee, any amount received

as cash equivalent of leave salary in respect of earned leave

at his credit at the time of his retirement is exempt from tax.

Non-Government employees getting leave encashment at

the time of retirement[Sec.10(10AA(ii)].- In the case of a

non-Government employee (including an employee of a

local authority or public sector undertaking), leave salary isexempt from tax on the basis of least of the following.

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Different forms of Salary-How taxed

1 Period of earned leave (in number of months) to the credit of the employee at

the time of his retirement or leaving the job.

2 10X Average monthly salary

3 The amount specified by the Government i.e. Rs.3,00,000

4 Leave encashment actually received at the time of retirement.

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Gratuity-[Sec.10(10)]

Gratuity is a retirement benefit. It is generally payable at the

time of cessation of employment and on the basis of

duration of service. Tax treatment of gratuity is as under.

Status of employee Whether gratuity is taxable

Government employee It is fully exempt from tax u/s. 10 (10) (i)

Non-Government employee covered by

the Payment of Gratuity Act, 1972

It is fully or partly exempt from tax u/s.

10(10)(ii)

Non-Government employee not

covered by the Payment of Gratuity

Act, 1972

It is fully or partly exempt from tax u/s.

10(10)(iii)

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Gratuity-[Sec.10(10)]

IN THE CASE OF EMPLOYEES COVERED BY THE PAYMENT OF

GRATUITY ACT,1972, the least of the following is exempt

from tax.

IN THE CASE OF OTHER EMPLOYEE, the least of the following

is exempt from tax.

1 15 days salary (last drawn) X Length of service

2 Rs. 10,00,000

3 Gratuity actually received.

1 Half months average salary for each completed year of service

2 Rs. 10,00,00

3 Gratuity actually received.