Introduction
'Salary' is the first head of income. The income taxable under this head shall be calculated on due basis or on receipt basis, whichever occurs earlier. Taxable salary shall include taxable allowances, perquisites, retirement benefits and profit in lieu of salary. Certain deductions are also allowed from salary income.
1. Conditions for taxability of income under the head "Salary"
1.1. Employer-employee relationship is must
Taxability of an income under the head 'Salary' pre-requisites existence of employee and employer relationship. Before a payment can be taxed as salary, the relationship of employer and employee or master and servant must be established. The judiciary has laid down various principles for determining the relationships of employer and employee. In absence of employer-employee relationship, the income shall be assessable either as business income or income from other sources.
1.1-1. In case of Principal and Agent
The relationship of principal and agent may or may not be of an employer and employee. If agent has to work under the direct control and supervision of the principal and he has no discretion of his own in the performance of his duties, he is deemed to be an employee and the remuneration payable to him in such a case is chargeable to tax under the head salaries. On the other hand, if principal exercises only a supervisory control in respect of work entrusted to the agent and the agent has wide discretion of his own in the execution of the policies of the principal, the presumption is that the agent is not employee. The remuneration payable to the agent in such a case is liable to be taxed under the head 'Profits and gains of business or profession'.
1.1-2. In case of Director of a Company
The nature of a director's employment may be determined by the Articles of Association of a company and the service agreement, if any, under which a contractual relationship between the director and the company has been brought about. To decide the question whether a director is an employee of the company or not, one has to find out as to whether relationship of master and servant exists between the company and the director. If Articles of the company confers a specific right to the company to remove any director before expiration of his period of office by an extraordinary resolution and if he were so removed he would automatically be dismissed from the office of the managing director, the director could be considered as an employee of the company.
Example, if a company is carrying on business and an individual is employed to manage its affairs in terms of its Articles and the service agreement, and his employment can be terminated if his work is not satisfactory, he shall be treated as an employee of the company.
1.1-3. In case of partner in a firm
Salary paid to a partner by a firm is an appropriation of profits. Thus, salary received by the partners from the firm is not deemed to be received from an employer. Such salary income constitutes the business income of the partner. Similarly, any interest, salary, bonus, commission or remuneration due to, or received by the partner from such firm is chargeable to tax under the head 'Profits and gains from business or profession'.
1.1-4. In case of MLAs and MPs
Members of Parliament (MPs) or Members of the Legislative Assembly (MLAs) are not treated as Government employees. The salaries of MPs are governed by the Salaries and Allowances of Members of Parliament Act, 1954. Thus, it is taxable as income from other sources. The salaries of President, Governors and Ministers are taxable under the head salaries as they are government servants.
1.1-5. In case of Attorney-General
The relationship between Government and Advocate/Attorney-General is that of an advocate and a Client and not that of a Master and a Servant. Such remuneration is taxable under head business income and not under the head salary.
1.2. Employment is distinct from Profession
If engagement for any work is incidental to the exercise of profession, the gains arising from such engagement shall not be chargeable to tax under the head Salaries but under the head 'Profits and gains from business or profession'.
Example, movie artists sign short-term contracts for acting in movies. Such an engagement cannot be considered as an employment, but it is merely an engagement in the course of exercising a profession. The position is different when a professional permanently accepts an employment and exchanges his profession for service. The remuneration in that case is chargeable to tax under the head 'Salaries'.
2. TDS Provisions on Salary
2.1. Deduction of Tax
Every person responsible for paying any income chargeable under the head salaries shall deduct tax therefrom under Section 192. The estimated tax liability of the employee shall be recovered from his monthly salary income over the period of employment. The tax under this provision shall be deducted at the time of payment of salary only.
2.2. TDS Certificate
Where tax has been deducted by the employer under Section 192 from salary of the employee, then he shall issue a TDS certificate to the employee in Form 16. The TDS Certificate shall have two Parts - Part A and Part B. Employer is required to download both the parts from TRACES.
2.3. TDS Statement
The person responsible for deduction of tax at source shall file a statement of TDS on or before due date specified in this behalf. TDS Statement shall be filed with the Income-tax Dept. in Form 24Q on quarterly basis. Further, while submitting Form No. 24Q for the last quarter, the deductor shall include particulars of salary components of such employee for the period of employment in Annexures II and III.
3. Computation of Salary Income
The income under the head salary shall be taxable on due basis or receipt basis, whichever is earlier. Salary due from an employer to an employee, even if it is not paid during the year, shall be chargeable to tax.
The salary income shall be computed in following manner:
Particulars | Amount |
Salary | xxx |
Add: Additions |
|
a) Allowances | xxx |
b) Perquisites | xxx |
c) Profit in Lieu of Salary | xxx |
d) Retirement benefits | xxx |
e) Pension | xxx |
Less: Deductions |
|
a) Entertainment Allowance | (xxx) |
b) Employment Tax | (xxx) |
c) Standard Deduction | (xxx) |
Income chargeable under the head Salary | xxx |
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