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A B C of Salaries

For the purposes of charge of income-tax and computation of total income, generally all income are classified under five heads of income under the Income-tax Act, 1961 (the Act) and ‘Salaries’ is one of them. One of the most essential ingredients to classify an income under the head “Salaries” is the existence of employer-employee relations between the payer and payee. If employer-employee relation exists then what is paid by or due from the payer is chargeable as “Salaries” otherwise it may be classified either under the head “Profits and gains of business or profession” or “Income from other sources” depending upon facts in each such case.

Where a doctor uses his motor vehicle to attend his duty as an employee of a hospital he is not entitled to any current repairs, insurance or depreciation on the motor vehicle as no such deduction is available under the head ‘Salaries’; but if the doctor is not an employee then his income from the hospital is chargeable under the head “Profits and gains of business or profession” and accordingly he will be entitled to current repairs, insurance or depreciation on the motor vehicle. Similarly where a college teacher earns his income from his college it is salary but if he receives any remuneration from another college for either setting a question paper or evaluating answer scripts then said remuneration is “Income from other sources” as there is no employer-employee relation with reference to said remuneration. Again the remunerations received by all the dignitaries holding the Constitutional posts in the Union and States including ministers are treated as “Salaries” but the remunerations received by Member of Parliament, State Legislature are not treated as “Salaries” but as “Income from other sources”. Similarly ‘pension’ is chargeable as “Salaries” but ‘family pension’ in chargeable as “Income from other sources”. Salary, bonus, commission/remuneration due to/received by a partner of a firm from the firm in which he is a partner is not chargeable under "Salaries" but under "Profit and gains of business or profession" [Explanation 2 to section 15 and section 28(v)].

Salary is chargeable to income-tax under section 15 of the Act. Section 15 states (a) any salary ‘due’ from an employer/ former employer in the previous year (whether paid or not); (b) any salary ‘paid’/allowed in the previous year by an employer/ former employer (though not ‘due’ / before it became ‘due’); (c) any arrears of salary ‘paid’/allowed in the previous year if not charged to income-tax for any earlier previous year; shall be chargeable under the head “Salaries”. However relief for income-tax when salary etc is paid in arrears/ in advance is allowable [section 89].

Care must be taken to understand what ‘salary’ is/ includes as for different purposes different meanings have been assigned to salary.
i) For the purposes of sections 15 and 16 salary includes wages, annuity, pension, gratuity, fees, commissions, perquisites, profits in lieu of / in addition to salary/wages, advance of salary, payment received for un-availed leave encashment etc. [section 17(1)].

ii) For the purposes of Employers’ contribution towards Recognized Provident Funds, House Rent Allowance [Section 10(13A) read with Rule 2A of the Income-tax Rules, 1962 (the Rules)], Gratuity [section 10(10)], Leave encashment [10(10AA)] salary includes dearness allowance where it is taken for retirement benefits but excludes all other allowances and perquisites. [Rule 2(h) of Part A of the Fourth Schedule to the Act].

iii) For the purposes of ‘perquisite’ salary includes pay, allowance, bonus, commission and other monetary payments made by the employer(s) but do not include dearness allowance/ dearness pay unless it is taken for retirement benefits; employer’s contribution to the provident fund, exempted allowances, value of specified perquisites, any payment/expenditure specifically excluded.
Salary income must be ‘real’ and not ‘nominal’. With a view to ascertaining the ‘real’ income various computation of ‘value’ of perquisites in the form of residential accommodation, use of motor car, benefits resulting from provision of services of sweeper/ gardener/ watchman/ personal attendant, supply of gas/electric energy/water, free/concessional educational facilities to any member, any other benefits and medical benefits are prescribed under Rules 3 and 3A of the Rules.

Deductions allowable from salaries are a) ‘entertainment allowance’ and b) ‘professional tax’. Those Government employees who are in receipt of ‘entertainment allowance’ gets a deduction of least of i) Rs 5,000/-, ii) 20% of salary, iii) Amount of ‘entertainment allowance’ received [section 16(ii)]. The other deduction is amount of ‘professional tax’ paid [section 16(iii)].

While computing income under the head “Salaries” attention must be given to various provisions dealing with exemptions under various clauses of section 10. Some of these exemptions are ‘total’, some are ‘partial’ again some are ‘conditional’. Where any of these exemptions are ‘total’ then it may not be included in “Salaries” as such incomes do not form part of total income [Refer the heading of Chapter III of the Act]. Where such exemptions are ‘partial’ or ‘conditional’ then such incomes are to be included in “Salaries” then after computation the required exemptions are to be allowed. Some of the provisions dealing with exemptions relevant to “Salaries” are mentioned in below sections of the Act:

10(5) read with Rule 2B of the Rules-Leave Travel Concession/Assistance;
10(7)-Any allowance/perquisite paid/allowed to a citizen of India by Government for services rendered outside India. NOTE: Only allowance/perquisite is exempt but salary other than any allowance/perquisite is taxable [Refer section 9(1) (iii)];
10(10)-Any death-cum-retirement gratuity;
10(10A)-Any payment in commutation of pension;
10(10AA)-Any payment as cash equivalent to leave salary;
10(10B)-Retrenchment compensation;
10(10C) read with Rule 2BA of the Rules-Any amount on voluntary retirement from specified employers;
10(10CC)-Tax on perquisite paid by employer;
10(11)-Any payment from a provident fund to which Provident Funds Act, 1925 applies and from Public Provident Fund;
10(12)-Accumulated balance of a recognized provident fund to the extent provided in Rule 8 of Part A of the Fourth Schedule to the Act;
10(13)-Any payment from approved superannuation fund;
10(13A) read with Rule 2A of the Rules-House Rent Allowance;
10(14) read with Rule 2BB of the Rules-Any special allowance/ benefit;
10(17A) (ii)-reward approved by Central Government in public interest;
10(18)-Any pension received by a recipient of Param Vir Chakra/ Maha Vir Chakra/ Vir Chakra or notified gallantry award;
10(26)-Any income which accrues/arises to a member of Scheduled Tribe from any source in some specified areas of North Eastern Region or the Ladakh region of Jammu and Kashmir;
10(26AAA)- Any income which accrues/arises to a Sikkimese from any source in Sikkim;
10(45)-Any notified allowance/perquisite of present/former Chairman/Member of Union Public Service Commission;

Similarly for foreign employees some provisions of exemptions are mentioned in following sections of the Act:- a) 10(6)-Salary of Foreign Diplomatic personnel (if Indian Diplomatic personnel enjoys similar exemption in that country), foreign employee of a foreign enterprise, foreign non-resident as a member of foreign ship’s crew, foreign trainee; b) 10(8)-Income of a foreign Government employee under co-operative technical assistance programme; c) 10(8A), & 10(8B)-Remuneration/fees received by non-resident consultants and their foreign employees.

One of the fundamental rules of any law is that it cannot be made self sufficient. The laws of the land in force are inter-dependent. Sometimes provisions of various laws on same issue also contradict. At the time of such contradiction it is required to understand, with reference to the issue involved, which law is a general law and which one is a special law. Where there is an apparent conflict between two independent provisions of law, the special provision must prevail [1965] 57 ITR 331 (SC).

Now let us understand some laws which states that such salary shall not be taxable, but no such reference can be found in the Act.

1. Based on the Convention on the Privileges and Immunities, adopted by the General Assembly of the United Nations on the 13th day of February, 1946, section 2 of the United Nations (Privileges and Immunities) Act, 1947 confers on United Nations and its representatives and officers of certain privileges and immunities. The provisions set out in the Schedule to this Act shall have the force of law in India. Section 18 of the said Act states “Officials of the United Nations shall: … (b) be exempt from taxation on the salaries and emoluments paid to them by the United Nations;...” Again the question whether pension received by the erstwhile officials of the United Nations from it would be exempt from income-tax was considered by the Karnataka High Court in the case of CIT v. K. Ramaiah [1980] 126 ITR 638. The High Court held that since, under section 17 of the Act, salary has been defined to include pension, if salary is exempted from tax, so shall be the pension. In view of the foregoing, apart from salary received by employees of the UNO or any person covered under the UN (Privileges and Immunities), Act, 1947, pension received by them from the UN will also be exempt from income-tax. [Circular No. 293 dated 10/02/1981].

2. The Governments of South Asian Association for Regional Cooperation(SAARC) Member States comprising Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka, have entered into a Limited Multilateral Agreement on Avoidance of Double Taxation and Mutual Administrative Assistance in Tax Matters. This Agreement is effective from 01/04/2011 in India vide Notification No. 3/2011 dated 10/01/2011. A professor, teacher or research scholar who is or was a resident of the Member State immediately before visiting the other Member State for the purpose of teaching or engaging in research, or both, at a university, college or other similar approved institution in that other Member State shall be exempts from tax in that other Member State on any remuneration for such teaching or research for a period not exceeding two years from the date of his/her arrival in that other Member State.[Article 8 of the Agreement].

3. Section 23D of the Supreme Court Judges (Salaries and Conditions of Services) Act, 1958 deals with Exemption from liability to pay income-tax on certain perquisites or allowances received by a Judge. These are (a) the value of rent-free official residence provided; (b) the value of conveyance facilities; (c) the sumptuary allowance and (d) the value of leave travel concession provided to a Judge and members of his family. Therefore, these perquisites or allowances shall not be included in the computation of Judge’s income chargeable under the head ‘Salaries’ under section 15 of the Act.

4. Similarly Section 22-D of the High Court Judges (Salaries and Conditions of Services) Act, 1954 deals with Exemption from liability to pay income-tax on certain perquisites received by a Judge. These are (a) the value of rent-free official residence provided or the allowance paid; (b) the value of conveyance facilities; (c) the sumptuary allowance and (d) the value of leave travel concession provided to a Judge and members of his family.

5. By virtue of sections 2 and 3 of the Voluntary Surrender Of Salaries (Exemption From Taxation) Act, 1961 where salary including any allowance ‘paid’ or ‘due’ has been surrendered by a declaration in writing in the public interest in favor of, and paid to, the Central Government in accordance with the rules made in this behalf by that Government; and such part of the salary shall not be included in his total income for the purposes of any law relating to taxation on income. Therefore the amount of surrendered salary is not taxable.

nbdiwakar on March 19 2016 15:18:15

Dada, Superb as usual

ITKP on March 21 2016 17:08:25

Very useful for those who are going to appear in departmental exams. Just Superb.

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