We all receive salary every month but only few know about the meaning of salary as per Income Tax Department. It is important to know the meaning of salary as in few cases the income you understood as salary may not be considered as salary income to Income Tax Department !!! Hence let us understand the meaning of salary in detail.
1) Relationship between payer and payee-Relationship between payer and payee of salary must be of an employer and employee. In other words, amount received by an individual shall be treated as SALARY only if the relationship between payer and payee is of an employer and employee or master and servant. Employer may be an individual, firm, company, Central Government, State Government, Public Body or Local Authority.
So if payment received by an individual from a person other than his employer can not be treated as salary and hence not taxed under the head of “Salary”. For example if college lecturer receive any emoluments for academic or non-academic work is treated as salary. But if another university paid amount for setting up question paper to him is not treated as salary, as in this case there is no relation between employee and employer.
2) Both Salary and Wages are same-Conceptually there is no difference between salary and wages. Usually meaning of salary in broader aspect is considered as remuneration paid for the services which are non-manual. Whereas meaning of salary in broader aspect is considered as remuneration paid for the services which are manual in nature.
3) Salary from more than one source-If an individual receives salary from more than one employer during the same financial year then including all such receivable will be considered as salary and such total is taxed under the head of salary income.
4) Salary from former, present and prospective employer-Whether the salary received from former employer, present employer or prospective employer within a year is treated as total salary income and will be considered as salary for calculation purpose. Such situation arises when one changes 3-4 jobs in a year.
5) Salary must be real but not fictitious-For example, let us say there is any agreement between school and a teacher for granting certain salary to teacher and simultaneously there was an another agreement by which the same teacher will agree to return the same equal sum to the school as donation. Such set up is not treated as salary. So in such set up it clearly understandable that there is no real intention to pay the salary but it was set up to show like that. In a similar way if there is no intention to render service and any agreement so made is also not to be treated as salary.
6) Salary is taxable on “Due” or “Receipt”basis-Salary will be taxable either on Due or Receipt basis whichever is earlier. To understand it in a better way, let us say you joined any organization on June 1st 2013 and it is the condition that Salary will become due on first day of the next month but will be payable on seventh day of next month and we assume that from 1st April 2013 to 1st June 2013 you don’t have any prior salary income. Then the calculation will follow as below.
As I said above, salary will be taxed either on “Due” or “Receipt” base. In above case you notice that March 2014 salary will be due on 1st April 2014 which falls on next financial year i.e 2014-15. Hence salary of the months from June 2013 to February 2014 are only considered as taxable salary for financial year 2013-014. So even though you joined and worked for 10 months for financial year 2013-2014 but only 9 months salary will be considered for calculation purpose.
7) Surrender of Salary-If an employee surrenders his salary to Central Govt under Sec 2. of Voluntary Surrender of Salaries Act, 1961, then the said surrender will be excluded for calculation of salary income.
8) Salary paid tax-free-If salary is paid tax free by employer, then the employee has to include in his taxable income not only salary received but also amount of tax paid by employer. There is no difference between whether the tax paid under terms of contact by the employer or employee.
9) Voluntary payments by employee-Any voluntary gifts in whatever name should also be treated as salary and included while taxing.
10) Place of accrual of Salary-Place of service is important than payment. Hence suppose service is rendered in India but salary is paid outside India, still considered as taxable salary for an individual. Similarly if pension is paid outside India for the service rendered in India or leave salary paid abroad in respect of leave earned in India are few cases which are still considered as salary income for taxation.
11) Advance Salary-Let us say in the month of March 2014, you received two months advance salary (April and May 2014 Salary) then for financial year 2013-14 total number of salaries will be 14 (12 as usual and 2 months advance salary) for taxation. Similarly for 2014-15 only 10 months salary will be taxed (as April and May months salary falls under previous financial year). Hence salary will be taxable on receipt base.
12) Arrears Salary-Any arrears received in any financial year is taxable income if and only if it is not taxed previously on “Due” basis. For example let us see below two situations.
- Mr.X receives arrears of Rs.50,000 on March 2014 pertaining to the financial year 2012-13. It was not taxed in the financial year 2012-13. So in this case Rs.50,000 is taxable income for financial year 2013-14. But can claim the relief under Sec 89 (which gives relief basically on tax slabs).
- Mr.X receives arrears of Rs.50,000 on March 2014 pertaining to the financial year 2012-13. It was taxed in the financial year 2012-13 on the bases of “Due”. So in this case Rs.50,000 is not taxable income for financial year 2013-14.
Hope above information will give you new meaning to you.