2.a Chargeability¶
Salary meaning and Chargeability¶
The Income Tax Act, 1961, under Sections 15-17, deals with the taxation of income under the head "Salaries." Salary refers to the remuneration received by or accruing to an individual periodically for services rendered as a result of an express or implied contract. According to Section 15, salary income is taxable on both a due basis and a receipt basis, meaning that it is subject to tax when it becomes due to the employee or when it is actually received, whichever is earlier. Additionally, advance salary received in a previous year is also liable to be taxed in the year of receipt. Importantly, the Act ensures that there is no double taxation of the same income, meaning that the same salary income cannot be taxed twice under different provisions of the Act.
2. Conditions for Chargeability of Salary¶
The chargeability of salary under the Income Tax Act is subject to certain conditions:
Employer-Employee Relationship: The payment must arise from an employer-employee relationship, which can be either express or implied. The existence of this relationship is a key factor in determining whether the income qualifies as salary.
Taxable on Due or Receipt Basis: Salary is taxable in the year it is due or the year it is received, whichever is earlier. This ensures that the income is taxed in the appropriate fiscal year.
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Advance Salary: Any salary received in advance is also taxed in the year of receipt. This includes any payments made in anticipation of future services or as a lump sum before the due date.
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Arrears of Salary: If any arrears of salary are received, they are also taxable in the year of receipt. However, the taxpayer may be eligible for relief under Section 89 for any excess tax burden due to the receipt of arrears.
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No Double Taxation: The same salary income cannot be taxed twice. For instance, if advance salary has been taxed in the year of receipt, it will not be taxed again when it becomes due.
3. Basis of Chargeability¶
The basis of chargeability for salary income under the Income Tax Act is grounded in the principle that salary is taxed either when it becomes due or when it is actually received, whichever occurs first. This ensures that all income that is due or received during a financial year is brought to tax in that year. Additionally, the Act provides that any salary, including advance salary or arrears, is subject to tax in the year in which it is received. This approach helps in capturing all forms of salary income and prevents deferral of tax liability through timing differences between receipt and accrual of income.
4. Definition of Salary Under Section 17: Inclusive and Not Exhaustive¶
Section 17 of the Income Tax Act provides an inclusive definition of "salary," meaning it covers a wide range of payments made by an employer to an employee, but it is not exhaustive. The term "salary" includes the following:
Wages: Basic pay or wages paid to an employee for services rendered.
Pension: Retirement benefits paid to employees, except those who are government employees (where pensions are partially exempt).
Annuity: Regular payments made to an employee or their nominee, often after retirement.
Gratuity: A lump-sum payment made to employees as a reward for long service or as a retirement benefit. Fees, Commission, Perquisites, and Profits in Lieu of Salary: These include any additional payments or benefits provided by the employer, such as bonuses, commissions, or non-cash benefits like company cars or housing.
Leave Encashment: Payments made to employees in lieu of unutilized leave.
Allowances: Regular payments made to cover specific expenses, such as house rent allowance (HRA), conveyance allowance, or medical allowance.
Advance Salary and Arrears: Any salary paid in advance or arrears of salary received is included in the definition of salary.
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