0SALARY
Relationship of the receiver with payer: Income under head salary is taxable only if there is employer, employee relationship between payer and payee. And this relation is said to exist only if there is control over the method of doing the work of other person.
Control is said to exist if the payer can direct what has to be done, when, how and by whom it has to be done, and the receiver is bound to follow all his instructions. This relationship is also called master - servant or principal - agent relationship.
Few common examples when there is no control of payer over payee are:
- Partner of a firm-any salary, bonus etc. by whatever name called received by a partner from the firm shall not be regarded as salary.
- Director who is not employee.
- Members of Parliament.
- Guest Lecturers etc.
In all the above cases income of the receiver is not taxable under head salary.
Taxability of Salary:
| Particulars | Treatment |
| Wages for workers | The same would be treated as salary and would be taxable accordingly. There arises no difference between wages & salary. |
| Salary received by a partner of a firm | Such remuneration would be treated as business income since the partner is not an employee of the entity. |
| Director Fees | Sitting fees paid to directors for attending board meeting is not a salary but taxable as “Other Income”. |
| Director Remuneration | Any amount payable to any whole time directors who are also an employee of the company would be treated as salary. In any other case, the same would be treated as the “Other Income”. |
| Pension to retired employee | Pension is paid in pursuance to the terms of the employment. Hence, any amount received as pension would be considered as “Salary” in the hand of the recipient. |
| Pension to the legal heir of the deceased employee | Amount received by legal heir of the deceased employee, who is not an employee of the organization, would be considered as the “Income from Other Sources” and not as “Income from Salary”. |
| Remuneration paid to teacher of any University / College | Any such remuneration would be treated as “Salary” if the terms of employment provide a condition for checking such any paper. However, in any other case, such income is considered as “Other Income”. |
| Voluntary Retirement payment by employer to employees | Since the employee would get the amount in accordance with the terms of employment obligation, the same would be considered as “Salary”. |
| Remuneration to the MP / MLA | Such income shall be considered as “Income from Other Sources” as there exists no employer / employee relationship. |
Employer includes:
- Former
- Present
- Prospective Employer
No Intention to Pay:
Agreement between teacher and management to pay salary to employee and another agreement by which an identical sum has to be returned by the same teacher doesn’t constitute salary because here salary is not real but fictitious. (Actual intention to pay is important)
More than one Employer:
- Salary from each source is taxable under the head salary.
- Ex: Mr. A works in two places as part time job. His salary from both places is calculated under the head’s salary.
Salary and Wages:
From income tax point of view there is no difference between salary and wages.
Contract of Service Vs Contract for Service
Wherever there exists employer-employee relationship there is a “Contract of Service”. In this employer can control and direct the work to be performed by employee. In this income received by a person shall be regarded as salary. Where there is no employer – employee relationship then two people enjoy the relationship of “Contract for Service”. In this the contractee can only be told what is to be done. There can be no specific instructions about how it is to be done. In this case income shall be taxable as income of business and profession or income of other sources.
“Contract of Service” employer, employee relationship whereas “Contract for Service” doesn’t result in such a relationship. Therefore any income from such relation is not to be taxed under this head of income.
Basis of Charge[Section 15]
Salary is taxable on receipt or due basis whichever is earlier.
Salary from more than one source
If an individual receives salary from more than one employer during the same previous year (maybe due to change in employment or due to employment with more than one employer simultaneously), salary from each source is taxable under the head “Salaries”. For instance, if a clerk works with two employers on part time basis, salary from both the employers will be chargeable to tax under the head “Salaries”.
Salary due or Received in foreign currency
If the Salary is earned in foreign currency, it will be converted into rupees.
- Conversion rate: Buying rate on specified date.
- Specified date: Last date of the month immediately preceding the month in which the salary is due / paid in advance / paid in arrears.
Computation of the salary in grade system
Ex: If any employee joins the service on 1-5-2013 and is placed in the grade of Rs.32,500 – 500 – 38,000 – 800 – 44,000. It means that:
- He will get a basic salary of Rs.32,500 w.e.f 1-5-2013.
- He will get annual increment of Rs.500 p.m. w.e.f. 1-5-2014 & onwards till his salary reaches Rs. 38,000
- Thereafter, he will get on annual income incremental of Rs. 800 p.m. till his salary reaches Rs. 44,400.
- No further increment will be given thereafter till he is placed in other grade.
