Rise of American Accounts. "Hollywood. "

Direct Tax

Computation of Income from Salary.

HEAD SALARIES DEFINED.

Under section 15 , the following incomes are chargeable to Income-tax under the head ' Salaries ' :

(a) any salary due from an employer or a 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 an employer or a former employer though not due or before it becomes due to him :

(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer if not charged to income-tax for any earlier previous year.

Under the provisions of this section the amount of salary due in the year, amount of advance salary received and the amount of arrears of salary received during the year from the present or past employer are to be included in this head.

In the explanation attached to section 15 ,it has been clearly mentioned that for the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due.

The important rule is that income once taxed cannot be taxed again, so any salary paid in advance ( if taxed in a previous year when the advance salary was received) will not be included again in the total income of the person when the salary becomes due. Advance salary does not include loans.

Any salary, bonus, commission or remuneration, by whatever name called due to or received by a partner of a firm shall not be regarded as salary for the purposes of this section.

.CHARACTERISTIC OF SALARY.

For any payment to be made taxable under the head ' Salaries ' it must fulfil the following characteristic. In case any receipt is not covered under any of these features it will not come under this head :

1. Relationship of Employer and Employee.

For a payment to fall under the head ' Salaries ' the relationship of employer and employee must exist between payee and the receiver of the salary. The employer may be a Government, a Local authority, a company or any other public body or an Association or H. U. F. or even an individual . Every kind of payment to every kind of servant, public or private, however high or low placed he may be is covered under the provisions of this Act. Even the remuneration payable to an employee of a foreign Govt. falls within this section. Even servant is an employee, but an agent may or may not be employee . A detailing agent of a selling concern is it's employee whereas the person holding an agency to sell the goods of such a concern will not be employee. The relationship of master and servant is the only test to establish the relationship of employer and employee. A director of a company, though holding an office, is not an employee unless it is so provided in the independent contract, or the Articles of Association of the company provide for such a relationship .

[ Ram Prashad v. C. I. T. (86 I. T. R. 122,127(S.C.) ]

2. Salary from more than one Employer.

Any amount of salary received or due from one or more than one employer / source shall be taxable under this head, Such situation may arise when an employee is working with two employers simultaneously or has worked with one employer and later on serves with another employer after leaving service with first employer, salary from both the employers shall be taxable under this head.

3. Salary from Present, Past or Prospective Employer.

Salary received or due from present, past or future employer is also taxable under this head.

4. Tax Free Salary.

Sometimes, the employer allows an employee to draw tax-free salary, e. g., the employer pays full salary to the employee and also pays tax on this directly to the department. The employee's assessment is to be made not on the amount of salary he is drawing but on gross amount i.e., salary drawn plus the tax paid by the employer

5. Salary Received as Member of Parliament or Member of State Legislature.

A member of Parliament or of State Legislature is not treated as an employee of the government and hence, salary received by such persons (MPs & MLAs) is not taxable under the head ' Salaries '. It is taxable as income from other sources '.Any allowances received by them is fully exempted from tax.

6. Receipts from Persons other than Employer.

Perquisites or benefits or any other remuneration received from persons other than the employer, would be taxable not under the head ' Salaries ' but under the head ' income from other sources ' even if they accrue to the employee by reason of his employment or while he was discharging his normal duties, e. g., amount received by a professor of a college for acting as an examiner in a university.

7. Place of Accrual of Salary Income.

Salary accrues at that place where the services are rendered. If the services are rendered in India, the salary accrues in India and if the services are rendered outside India, the salary accrues in India and if the services are rendered outside India, the salary accrues outside India. Thus, if a person employed in India goes on leave to England and gets his leave salary there, the salary is said to accrue in India and not in England , because it is paid for services rendered in India. Pension paid in a foreign country for services rendered in India, will be Indian income, as it is paid for the services rendered in India although in the past. On the other hand, if any person is employed in India and transferred to its branch in England, the salary received by him in England is not Indian income, but it is income arising in England as the services is rendered in England. Followings are the two exceptions to this rule :

1. A pension payable outside India to a person who has gone to foreign country for permanent settlement is not deemed to arise in India, if pension is payable to a person appointed by the Secretary of State or to a person who was appointed before 15th August 1947, as a Judge of the Federal Court or of a High Court and who continued to serve or on after the commencement of the Constitution as a Judge in India. This is a special concession granted to certain officials of Government, who were employees before independence but continued to serve after this.

2. The Govt. of India employs Indian citizens for services to be rendered in foreign countries and salary paid outside India is deemed to accrue or arise in India. The provision helps in taxing the salaries received by Government servants posted abroad. But under Section 10(7) the allowances and perquisites paid or allowed by the Government outside India are to be excluded from total income.

.8. Deductions made by the Employer.

If, an employer makes certain deductions out of the salary payable to an employee, amount so deducted is deemed to be received by the employee and the amount so deducted is also taken as application of income by the employee. Some important types of deductions made by the employer are as follows :

1. Deductions made to recover the loan advanced by the employer.

2. Employee 's contribution towards the provident fund, income - tax and profession tax.

3. Deduction made to pay the premium on life insurance policy of the employee.

4. Any other deduction for which the employee has authorised the employer.

In case an employee receives his salary after certain deductions made by employer on account of profession tax, contribution to provident fund, tax deducted at source, the 'salary ' will not be the net amount received, rather it will be the gross salary due to the employee.

Gross Salary / Salary = Net Salary received ADD Deductions made by employer.

.9. Salary or Pension received by UNO Employees.

It is fully exempted as per circular No. 293 Dt. 10-2-81.

10. Salary received by a teacher / researcher from a SAARC member State.

Exempted upto 2 years.

11. Salary as Partner.

Any salary, commission or remuneration received by a working partner from a firm / LLP shall not be taxable under the head ' Salaries ' . It is taxable under the head Profits & Gains.

12. Payment 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 '.

13. Payment 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.

14. Voluntary foregoing : Application of Salary.

Voluntary foregoing of salary by an employee is simply an application of income by him and, therefore, any voluntary foregoing of salary is taxable when it is due, whether paid or not ( Section 15) . The salary which is voluntarily foregone must be actually due in the name of the employee. Voluntary foregoing is different from voluntary surrender of salaries which is exempted from tax.

15. Previous year for Salaries.

The previous year for the income under the head ' Salaries ' shall always be financial year of the Government of India ( i.e.,April to March)

16. 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. Every employee gets salary on completion of a month. As per our financial system the year starts on 1st April and ends on 31st March. As such first salary for the month of April becomes due on 1st day of next month. But in some cases salary becomes due on the last day of the month and salary for the month of April shall be due on 30th April. This results into following two situations :

(a). If salary is due on 1st day of the month, during the financial year 2015-16 first salary shall be due on 1st April 2015 and it shall be for the month of March 2015 and last salary shall be due on 1st March 2016 for the month of February 2016.

(b). If salary is due on the last day of the month, during the financial year 2015-16 first salary shall be due on 30th April 2015 and it shall be for the month of April 2015 and last salary shall be due on 31st March 2016 for the month of March 2016.

17. Salary grade / Pay scale.

In some organisations like Government offices, Banks, Post Offices, Railways, Universities, College etc. salary to employees is paid as per scales or salary grades. The pay scales fixes the starting salary of an employee and also the annual increment in future years of employment.

The annual increment is granted to employee after completion of one full year of service e. g. if an employee joins his service /job on 1st September 2011, he will be granted 1st annual increment w. e. f. 1st September 2012.

18. Advance salary received.

In case an assessee 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.

19. 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 the year to which it belongs [ C. I. T. v. Gajapathy Naidu (1964) 58 I. T. R., 114 (S. C.). In case assessee has to pay tax at a rate higher than that at which he would have paid, had these arrears been received in the year to which they belong, assessee can apply to Income - tax Officer for relief u/s 86(1) .

20. 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.

21. No Relevance of Method of Accounting.

Salary income is to be computed on due or receipt, whichever is earlier, basis as provided u/s Section 15-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 ' ( in certain cases )

.COMPUTATION OF SALARY INCOME.

Salary income of an employee is to be computed in accordance with the provisions laid down in section 15,16,and17 . Section 15, as discussed earlier gives the scope of this head and tells us that which incomes shall form part of this head. Section 16 gives deductions to be allowed out of incomes taxable under this head. Section 17(1) defines the word 'salary ' as mentioned in section 15. Section 17(2) and 17(3) further define the terms ' Perquisites ' and " profits in lieu of salary " .

Definition of word ' Salary ' [ Section 17(1) ]

According to Section 17(1) salary includes the following amounts received by an employee from his employer, during the previous year :

1. Wages

2. any annuity or pension : ( Family pension received by heirs of an employee is taxable under income from other sources) :

3. any gratuity :

4. any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages :

5. any advance of salary :

6. any payment received by an employee in respect of any period of leave not availed of by him : ( Leave encashment or salary in lieu of leave) :

7. 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 under Rule 6 of part A of the Fourth Schedule : and

8. the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of Rule 11 of Part A of the Fourth Schedule, of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax, under sub-rule (4) there, i.e., taxable portion of transferred balance from unrecognised provident fund to recognised provident fund.

9. the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in Section 80CCD.

The above definition of word ' salary ' u/s 17(1) includes the above mentioned items. These can be explained in following manner :

1. Wages - any amount received by a person for work done or job rendered is called wages. It may be received under the name of ' Pay ', ' Salary ' , ' Basic salary ' or ' Remuneration ' . It may be for actual work or leave salary or actually received or due during the relevant previous year. Salary in lieu of Notice. It is fully taxable u/s 15 if received during the relevant previous year.

2. any annuity or pension - Any amount received by employee from past employer after attaining the age of retirement or superannuation is fully taxable. It may be received direct as pension or out of a superannuation fund created by employer : in both cases it is taxable.

3. any gratuity - Any sum received by employee from his past employer as a token of gratitude for services rendered in past is called gratuity. This amount is exempted upto certain limits given u/s 10(10) and it is dealt with in this very chapter at a later stage.

4. (a) any fee - any amount received from employer under the name of fee is also fully taxable.

(b) any commission given by employer to employee is fully taxable. Any commission received by a director for standing guarantee for repayment of loan, and if he is not employee of the company, shall be taxable under " Income from other sources ". In case commission is given to an employee and it is paid as a fixed percentage of turnover achieved by such employee, such commission shall also be treated as part of the salary for all practical purposes. [ Gestener Duplicators (P) Ltd. Vs. C. I. T. (1979)SC ]

(c) any Bonus - Bonus is fully taxable under the head ' Salaries ' on receipt basis. In case arrears of bonus are received in a previous year, these are fully taxable. Bonus can be of two types :

.Statutory Bonus - It is received under some legal or contractual obligation and is fully taxable.

.Gratuitous Bonus - It is a casual benefit and is taxable as a receipt from employer and having no other implication.

(d) any Perquisites - Any benefit or amenity allowed by employer to employee. These are explained in detail later.

(e) any Profit in lieu of or in addition to salary - any cash payment received by employee from employer is called profit in lieu of salary and these are explained later.

5. any salary in lieu of leave received during service is fully taxable.

6. any advance salary - In case an assessee receives some salary in advance in a previous year and which was actually not due in that year shall be taxable in the year of receipt. It does not include any loan or advance taken from employer.

.PROVIDENT FUND.

To encourage savings for the social security of employees, the Government has set up various kinds of provident funds. The employee contributes a fixed percentage of his salary towards these funds and in many cases employer also contributes. The whole contribution along with interest is credited to employee's account. He will get payment out of this fund at the time of retirement and at some other important occasions. If the employee dies, his heirs will get the full payment.

Provident Funds are of four kinds :

1. Statutory Provident Fund or the Fund to which the Act of 1925 applies (S. P. F)

2. Recognised Provident Fund ( R. P. F)

3. Unrecognised Provident Fund ( U. R. P. F)

4. Public Provident Fund (P. P. F)

(a). Statutory Provident Fund. Statutory provident fund is the oldest type of fund. It was started in the year 1925 through a Provident Fund Act of 1925 . This fund was started with a view of promoting savings amongst government employees. Generally, this fund is maintained by Government or Semi - Government Departments like Railways, Reserve Bank of India, Colleges, Universities, local bodies, insurance companies, etc.

The employer's contribution towards the employee's statutory provident fund and the amount of interest earned on the accumulated balance to the employee's credit balance are not to be included in the income of employee and so it is ignored.

When the employee retires or leaves the service and receives any amount from the accumulated balance to his credit in the statutory provident fund, the amount so received will not be included in employee's total income [ Section 10(11) ] being exempted income.

The employee's own contribution will qualify for deduction u/s 80C.

(b). Recognised Provident Fund. As the name suggests, it is a fund to which the Commissioner of Income - tax has given the recognition as required under the Income - tax Act. Generally this fund is maintained by industrial undertakings, business houses, banks, etc.

The employer's contribution over and above 12% of employee's salary, will be included in employee's salary income for tax purposes.

The employee's contribution towards this fund will fully qualify for deduction u/s 80 C

Interest on Provident Fund credit balance upto prescribed rate (9.5%) is exempted, but interest credited over and above such rate is deemed to be employee's salary income and is included in salary income of that previous year.

(c) Unrecognised Provident Fund. It is the provident fund which is not recognised by the Commissioner of Income - tax. The employee and the employer both contribute towards this fund.

The employee's contribution is added in this salary ( if 'net salary ' or ' salary after deduction of ' is given) and he will not be allowed any deduction u/s 80C regarding this contribution while computing the total income of the employee.

The employer's contribution and interest on the accumulated credit balance of the fund are not to be included in employee's salary income from year to year.

A payment received out of this fund is taxable so far it represents the employer's contribution and interest thereon. The employee is entitled to relief under section 89(1). [ The employee's contribution is ignored because it was taxed when it was contributed ]. Interest on the employee's own contribution will be taxable as ' Income from Other Sources ' and not as salary income.

Transferred balance. When the unrecognised provident fund is recognised for the first time, the credit balance in the employee's unrecognised provident fund is transferred to the recognised provident fund account. This balance is known as transferred balance. In such case fund will be treated as RPF from the day of its inception and exemption will be allowed in same manner. Only excess of amount transferred to RPF over exempted amount shall form taxable portion of transferred balance.

(d) Public Provident Fund. So far all these funds were for the salaried people. On July 1,1968 a new fund known as public provident fund was started so that self - employed people may also enjoy the benefit of deduction u/s 80C. Self - employed people are doctors, lawyers, accountants, actors, traders, pensioners. This fund can suit all types of pockets and it's working is also very simple. The interested people can open their account in State Bank of India and it's subsidiaries. The subscription can be between Rs 500 and Rs 1,50,000 in one year. At one time one can deposit in multiples of 50 and in one month only one deposit is possible and in the year minimum subscription should be Rs. 500 and the maximum Rs1,50,000 .

Full withdrawal is possible after 15 years but in case of death of the subscriber full repayment will be made to the legal heir of nominee. Partial withdrawal and loans are also possible.

The subscription towards this type of fund is eligible for rebate in the similar manner, as in the case of statutory provident fund. Interest credited in this account is fully exempted.

Balances in the public provident fund are not liable to attachment by any court.