April 3, 2014

Interesting facts about SALARY !!

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.

Salary

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.

Salary

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.

49 Comments

  1. Sir, My colleague has retired from service w.e.f 30.6.2016. Now he wants for file it returns for FY 2016.17. For first three months his exempted income slab is up to Rs.250000.00 and next nine months it is Rs.300000.00 as he has become senior citizen w.e.f.01.7.2016. How these two slabs will be shown in a single itr-1 form?

    Reply
  2. what is due date of salary? we only know that salary is credited after 10 of every month. so March salary credited on 10 of April can be in next FY?

    Reply
    • Rajiv-Just read of what I said, it is either due or paid. In your case the due date will start immediately from the month end.

      Reply
  3. Hi Basu,

    I am paid salary for the period March 2nd’16 till April 2nd’16 on April 2nd. In this case, should I consider both the due date and paid date of the salary to be April 2nd and consider it for FY 16-17? I guess my question is how do we determine what is the due date? Is it basis the period in the payslip? For instance if the payslip says, salaries pertain to the period March 15 to April 14th’16 (of course payment happens only afterwards), then due date will be April 14th and hence it will be considerd in Fy 16-17. Is that correct

    Reply
    • Ankit-I already cleared, it is either due basis or paid basis (whichever is earlier).

      Reply
      • Thanks Basu. I am sorry for not being clear to begin with and pardon me for going again. Basically due date is the end of the period mentioned in the pay slip for which the salary is being paid. So if period is 14 th march to April 13th then due date is 13th April and hence entire salary for period 14th March to April 13 th will be included in next Fy; if period is 27th Feb to 26th March then due date is 26th March hence the salary for last 3 days of March will be included in next FY. Am I correct in both examples above. Thanks indeed for all your help here.

        Reply
  4. I worked in private college and resigned by June 2016. I received arrear salary for Feb Month on April, March month salary on May, April and May Months salary on June, June month salary on July. Now feb and March month salaries will be included in FY 2015- 2016?

    Reply
    • Dinesh-I clearly mentioned that salary will be either on due or receipt basis (whichever is earlier). Hence, it will fall in FY 2015-16.

      Reply
  5. Hi Basu,
    If I receive salary for 13 months i.e. from March 2016 to March 2017 ( as March 2017 salary will be paid within 31st March 2017, not in April 2017), will the income tax slab limit of Rs. 5 lakh will be modified accordingly for tax calculation for the 13 months salary? Because income tax slabs are generally defined for one financial year considering 12 months. Doubt is, if we do not modify the slab value, then because of considering 13 months salary in one financial year, my taxable income slab changes to 20% from 10% slab.

    Please clarify the doubt.

    Reply
    • Das-It is not based on your 12 months SALARY but based on 12 months PERIOD. Hence, any earning is there during the 12 MONTHS period is YOUR EARNING.

      Reply
  6. Hello,

    I am working with finance company. I have resigned in January, 2016 and left company in Feb, 16. Due to resignation company hold my salary of January and February, 2016. In May, 2016 I got my settlement amount including my salary, leave salary, bonus etc.

    Now please suggest in which year this amount will be taxable.

    Reply
    • Sunil-It is due or on receipt basis (whichever is earlier). So the salary received will be for FY 2015-16.

      Reply
  7. Thnx. .it helped me a lot..
    But one doubt I want you to clear …
    Let say if salary is due on first day of next month , does it mean that salary shall be taxable from March to February …
    That is in this case…March month is related to preeceding financial year…will it be taxed in this previous year ???

    Reply
    • Shubham-If salary payable in next month then DUE will be applicable for taxation.

      Reply
      • Thanks sir it helped me too

        Reply
  8. MY SIX MONTH SALARY FOR FINANCIAL YEAR 2014-15 RECEIVED ON FINANCIAL YEAR 2015-16 THIS SALARY INCLUDE IN DEFINATION OF ARREAR OR PROVISION OF DUE AND RECEIPT BASIS.WHAT TAX LIABILITY I M GOVT EMPLOYEE OF RAJASTHAN GOVT.

    Reply
    • Manish-I already explained the same in point 6. So please go through it.

      Reply
  9. Nice article, thanks for sharing the info.

    Reply
  10. Hi Basu

    I am working in one of the IT company, Quarterly payment is one of my salary component. If that component of last quarter of 2016,paid in April 2016 salary . They whether that component will be included in my form 16 of 2015-16.

    Please advice.

    Regards
    aim

    Reply
    • Aim-Yes, it is included for FY 2015-16 as salary for income tax calculated either on due or paid base (whichever is early).

      Reply
    • Thank you Basu,

      I would like to ask you that generally Form 16 getting in the month of May.
      Can we get the income certificate from CA , if we produce all the salary slips and is that valid for any Govt or Bank institution.

      Thanks Once Agaim
      Regards
      AIM

      Reply
  11. Hi Basu,

    I have a doubt regarding point 6 in a reverse way.
    That is, I resigned my job during oct 2015. So my taxable income for financial year 2015-16 would be from Apr 2015 to Oct-2015 only right ? Or would they take it as Apr 2015 to Mar 2016 ?

    I got this doubt while filling estimated taxable income of form 15g for PF withdrawal.
    If I calculate apr to oct my income falls below 2.5 lakhs but if I calculate from apr to mar 2016 eventhough I resigned by october my income(including fund deposit) exceeds 2.5 lakhs.

    Can you please clarify ?

    Reply
    • Divya-Your income does not include only SALARY income. Hence, it must be from April to next year March (even if you left the job in middle). If your income exceeds Rs.2.5 lakh by calculating in that manner, then you have to file IT Return.

      Reply
      • Thank you for the reply Basu

        Reply
  12. I wan to know if employees not received salary for the month of march f.y. 14-15. But they have received on September 2015. so which year its consider taxable income.

    Pls. clarify my problem.

    Reply
    • Bhaskar-Please check the date of this article. It is 2007 and IT rules changes so often. In my view your education institute is doing correct.

      Reply
  13. I have doubt on the point no 6 above “6) Salary is taxable on “Due” or “Receipt”basis-Salary will be taxable either on Due or Receipt basis whichever is earlier.” What I observed from the deposit of TDS deducted (Challan details showing in BIN records for book adjustment) is that Salary for State Goverment Employees (Teachers,other staff) end of the month and based on that salary deduction TDS is deposited or book adjustment is made at the end of the month. But actual salary receipt may be affected into the staff accounts by 4,5,6 ..10 of the next month. Please explain what is the salary calculation method for State Goverment employees of Kerala

    Reply
    • Gangadharan-What I stated is about the income tax rule and which is applicable to whole India. I am not sure about Kerala Govt rules.

      Reply
  14. I worked for a foreign company out side india from jan 2013 to march 2013, the earning were in foreign currency which were credited in to my account in india only in April 2014. i.e. The Total earnings from Jan 2013 – March 2013 were credited only in April 2014, as I was returning back to india in April 2014. What is the tax implications for Me?? . Thanks in advance.

    Reply
    • Anand-Whether the employment is from Indian origin or foreign?

      Reply
      • Dear Mr. Basu,
        The employment is of foreign origin, the company is based abroad. I would also appreciate if you could clarify the Tax clause which states that in case of a salary income, the income is taxed as on the due date or the remitted date which ever is earlier. Does this clause apply to salary income earned outside India ?

        Thanks again.

        Reply
  15. Hi Basu – thanks for the information about salary – it does help a bunch! I joined a company in Jan 2014 but received my first lumpsum salary (for Jan-Mar 2014) in April 2014. Does that mean this will be considered taxable income for FY2014-2015, even though the salary was due on Feb 01, Mar 01?

    Thanks!

    Reply
      • I joined on Jan 27, 2014 as a retainer. I was asked to submit my invoice on or around 24th of the month so the salary (retainer fees) could be deposited by 1st of the next month. So I am assuming the 1st of the next month is the due date – I’ve received payment on various dates of the month so far – (04.Apr, 16.May, 04.Jun, 30.Jun).

        Thanks!

        Reply
        • EJ-I am unable to understand the wordings like retainer fees. But if your due date of salary payment falls before 1st April then even though you received salary after 1st April, it is considered as income for you for FY 2013-14. Because DUE or RECEIPT whichever early will be considered as salary payment and taxed accordingly.

          Reply
  16. Hi Basu,

    I’m a Employer in one of the reputed IT company.
    I need an advice on how to save Income-tax. i just need to know where in I can invest my money to save income tax in a better way which would benifit me in future as well..
    Also please let me know how the tax is calculated. For Eg, if I have a salary package of around 6.5 LPA so what should be the Incometax payable for the year & how much I can save by investments..

    Please advice..

    Reply
    • Prashant-Taking advance for tax saving is not a best financial solution in long run. Instead why can’t you save from your salary monthly and invest accordingly. Also tax saving must be your one goal, but not the major goal of investing in anything. Hence consider all options like current investments, your financial goals or your dependents goals then decide. Calculating tax will not only depend on gross salary what you mentioned. It includes many components, in which some are tax free and some are taxable. So it is difficult for me to say exact amount.

      Reply
  17. Hi Basu,

    Thanks a lot for providing such a valuable blog !!

    Can you please help regarding the term insurance for me.
    I want to buy a term insurance and want to know term insurances launched by major companies post 2014 IRDA norms. Does there be new plans launched after the start of this financial year?
    I got to know that post 2014 IRDA norms and in new financial year , there would be reduction in premium with new plans in all the companies. Is it true ?
    I am bit interested in SBI life, can you please guide me for any new plan in it.

    regards,
    Anand

    Reply

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