UNIT 1 – SALARIES
1.1 INTRODUCTION
Chargeability of Salaries (Sections 15, 16 & 17)
Income under the head “Salaries” is governed by three sections:
Section 15 – Chargeability / Basis of Charge
• Salary due
• Salary paid or allowed (though not due)
• Arrears of salary
Section 16 – Deductions from Salary
• Standard deduction (Sec 16(ia))
• Entertainment allowance (Sec 16(ii)) – only for Govt. employees
• Professional tax (Sec 16(iii))
Section 17 – Meaning / Definition
• Salary – Sec 17(1)
• Perquisites – Sec 17(2)
• Profits in lieu of salary – Sec 17(3)
Employer–Employee Relationship (Master–Servant Test)
(From PDF:
Chapter 3 (Applicable for May)
Salary income arises only when employer–employee relation exists.
Key elements:
Contract of employment
Employer’s right to control and supervise work
Employer’s right to dismiss
Employer instructs what work and how to perform
Without employer–employee relationship → NOT salary
(e.g., consulting fees = business/profession income)
Example (PDF): Sujata (actress) employed in Chopra Films → monthly `2 lakhs = Salary.
Meaning & Components of Salary (Section 17(1))
Salary includes monetary + non-monetary items:
Basic salary, wages, pay
Dearness allowance (DA)
Bonus, commission, fees
Allowances (Sec 10 based exemptions apply)
Advance salary (Sec 15)
Arrears of salary (Sec 15 r/w Sec 89)
Leave encashment (Sec 10(10AA))
Gratuity (Sec 10(10))
Pension (Sec 10(10A))
Annuity (Sec 17(1))
Employer’s contribution to RPF above 12% (Sec 17(1)(vii))
Perquisites (Sec 17(2))
Profits in lieu of salary (Sec 17(3))
Compensation from employer/past employer (Sec 17(3))
VRS benefits (Sec 10(10C))
All details are later covered under Section 17.
Year of Taxability – Due or Receipt Basis (Sec 15)
Salary is taxable on the earlier of:
When due, even if not received
When received, even if not due
Examples (PDF logic applied):
Salary due in April but received in March → taxable in March.
Arrears taxable in year of receipt (Sec 15) but relief may be claimed u/s 89.
Advance Salary (Sec 15)
Taxable on receipt, even if not yet due.
Not taxed again when it becomes due.
Relief u/s 89 may apply.
Arrears of Salary (Sec 15 r/w Sec 89)
Taxable when received, unless taxed earlier on due basis.
Relief u/s 89 may be claimed.
Place of Accrual of Salary (Sec 9(1)(ii))
Salary is deemed to accrue where services are rendered.
Implications:
Services rendered in India → taxable in India, even if:
• Employer is foreign
• Salary paid abroad
Residential Status & Taxability
Resident: Global salary taxable (Sec 5).
Non-Resident: Only salary for services rendered in India (Sec 5 r/w Sec 9).
Government salary abroad – allowances exempt (Sec 10(7)).
Dual Employment / Multiple Employers
If employee works for multiple employers:
Salary from all employers is taxable (Sec 15).
Employee must disclose previous salary to current employer u/s 192(2).
Voluntary / Gratuitous Payments from Employer (Sec 17(1)/17(3))
Voluntary payments from employer / ex-employer → taxable unless exempt.
If linked to employment → salary or profits in lieu of salary.
Pension (Sec 17(1), Sec 10(10A))
Uncommuted pension → fully taxable.
Commuted pension:
• Govt. employees → fully exempt (Sec 10(10A)(i))
• Non-govt employees → partly exempt under Sec 10(10A)(ii)
Tax-Free Salary (Employer Paying Tax) – Sec 17(2)(iv)
If employer pays income tax on behalf of employee:
It becomes a taxable perquisite.
Salary becomes tax-free only nominally; tax paid is added back.
Surrender / Foregoing of Salary
Surrender after salary becomes due → taxable (Sec 15).
Surrender before due → not taxable.
Surrender under Voluntary Surrender of Salaries Act, 1961 → exempt.
Payments from Third Parties
Taxable only if linked to employment (Section 17 principles):
Tips distributed by employer → salary
Tips paid directly by customers → not salary (but may be IFOS)
Retirement Benefits (Overview)
Covered under various sections:
Gratuity – Sec 10(10)
Pension – Sec 10(10A)
Leave encashment – Sec 10(10AA)
VRS compensation – Sec 10(10C)
Retrenchment – Sec 10(10B)
“Salary” for PF / HRA / Gratuity Purposes (Sec 17 Usage)
Meaning of salary differs based on provision:
PF (RPF) → Basic + DA (retirement forming part) + turnover commission
Gratuity → Based on last drawn salary or average salary (Sec 10(10))
Leave encashment → Average salary of last 10 months (Sec 10(10AA))
HRA → Sec 10(13A) rules use salary = Basic + DA (forming part)
Salary vs Business Income (Contract of Service vs Contract for
Service)
Contract of service → employee → salary
Contract for service → professional/consultant → PGBP / IFOS
Judicial Principles (as per PDF text)
Employer–employee relationship is essential for assessing salary.
Voluntary employer payments linked to employment → taxable.
Foreign salary for services in India → taxable in India.
Tips paid directly by customers → IFOS; not salary.