What does Salary include?

[This post elucidates about components of salary, the monetary benefits paid by employers which do not include in salary, points to be considered for taxation of salary, place of accrual of salary, etc.]

Salary is the remuneration which includes the pay, allowances, bonus, or commission payable monthly or otherwise or any monetary payment, by whatever name called from one or more employers.  Section 17(1) of the Income-tax Act gives an inclusive and not exhaustive definition of “Salaries” including therein (i) Wages (ii) Annuity or pension (iii) Gratuity (iv) Fees, Commission, perquisites, or profits in lieu of salary (v) Advance of Salary (vi) Amount transferred from unrecognized provident fund to recognized provident fund (vii) Contribution of an employer to a Recognised Provident Fund in excess of the prescribed limit (viii) Leave Encashment (ix) Compensation as a result of variation in Service contract, etc. (x) Contribution made by the Central Government to the account of an employee under a notified pension scheme.

However, salary does not include the following;

 (a)                   dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the employee concerned;

(b)                    employer’s contribution to the provident fund account of the employee;

(c)                    allowances which are exempted from payment of tax;

(d)                   the value of perquisites specified in clause (2) of section 17 of the Income-tax Act;

(e)                    any payment or expenditure specifically excluded under proviso to sub-clause (iii) of clause (2) or proviso to clause (2) of section 17;

(f)                    lump-sum payments received at the time of termination of service or superannuation or voluntary retirement, like gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and similar payments;

As per Income tax Act 1961 the following points to be considered for taxation of salary:

a) Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is earlier.

b) The existence of the relationship between employer and employee is a must between the payer and payee to tax the income under this head.

c) Income from salary taxable during the year shall consist of following:

i. Salary due from employer (including former employer) to taxpayer during the previous year, whether paid or not;

ii. Salary paid by employer (including former employer) to taxpayer during the previous year before it became due;

iii. Arrear of salary paid by the employer (including former employer) to the taxpayer during the previous year, if not charged to tax in an earlier year;

Exceptions – Remuneration, bonus or commission received by a partner from the firm is not taxable under the head Salaries rather it would be taxable under the head business or profession.

Place of accrual of salary:

Salary accrues where the services are rendered even if it is paid outside India; Salary paid by the Foreign Government to his employee serving in India is taxable under the head Salaries; Leave salary paid abroad in respect of leave earned in India shall be deemed to accrue or arise in India.

(Exceptions – If a Citizen of India render services outside India, and receives a salary from the Government of India, it would be taxable as salary deemed to have accrued in India).

Read: Taxability of various components of salaries