Salary

Essential norms of Salary income : (1) Relationship between payer & payee :- Income under the head salaries includes remuneration due/paid to a person in respect of services rendered by him under an express or implied contract of employment. Charge under this head of income presumes the relationship of an employer and an employee between the payer and payee in contrast to that of a principal and agent. The distinction between the two types of relationship is vital because income earned by an employee from his employer is chargeable under the head Salaries, whereas income earned by an agent is chargeable under the head profits and gains of business or profession or income from other sources.

Salary
1.1- Employer and employee vis-s-vis principal and agent 1.2- Employer and Contractor-Their relationship 1.3-Sub-contractor 1.4-Payment received in capacity other than employee1.5 Salary and wages 1.6 -Salary from more than one source 1.7-Salary from former employer, present employer or prospective employer. 1.8 salary income must be real and not fictitious 1.9-Foregoing of salary 1.10 Salary paid tax-free

Salary
Salary u/s.17(1) Salary u/s. 17(1) is defined to include the following :(a) Wages (b)any annuity or pension (c) any gratuity (d) any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages (e) any advance of salary (f) any advance of salary (g) the portion of the annual accretion in any previous year to the balance at the credit of an employee participating in Recognised Provident Fund to the extent it is taxable (h) transferred balance in a Recognised Provident Fund to the extent it is taxable (i) the contribution made by the Central Government in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD.

Different forms of Salary-How taxed

Salary is taxable on due or receipt basis which ever is earlier. Advance salary :- Advance salary is taxable on receipt basis in the assessment year relevant to the previous year in which it is received, irrespective of incidence of tax in the hands of the employee. The recipient can, claim relief u/s.89 of the Act. Arrear salary :- It is taxable on receipt basis, if the same has not been subjected to tax earlier on due basis. The recipient can, claim relief u/s.89 of the Act. Leave salary :- As per service rules, an employee gets different leaves. Encashment of leave by surrendering leave.

Different forms of Salary-How taxed

Tax treatment for encashment of leave is as under.
Nature of leave encashment
Leave encashment during continuity of employment

Status of employee

Whether it is taxable

Government/non- It is chargeable to tax. government However, relief can be taken employee u/s. 89 of the Act. It is fully exempt from tax under section 10 (10AA)(i) It is fully or partly exempt from tax under section 10 (10AA)(ii)

Leave encashment at the Government time of retirement/leaving employee the job Leave encashment at the Non-Government time of retirement/leaving employee the job

Different forms of Salary-How taxed

Government employees getting leave encashment at the time of retirement[Sec.10(10AA(i)].- In the case of a Central/State Government employee, any amount received as cash equivalent of leave salary in respect of earned leave at his credit at the time of his retirement is exempt from tax. Non-Government employees getting leave encashment at the time of retirement[Sec.10(10AA(ii)].- In the case of a non-Government employee (including an employee of a local authority or public sector undertaking), leave salary is exempt from tax on the basis of least of the following.

Different forms of Salary-How taxed

1 Period of earned leave (in number of months) to the credit of the employee at the time of his retirement or leaving the job. 2 10X Average monthly salary 3 The amount specified by the Government i.e. Rs.3,00,000 4 Leave encashment actually received at the time of retirement.

Gratuity-[Sec.10(10)]
Gratuity is a retirement benefit. It is generally payable at the time of cessation of employment and on the basis of duration of service. Tax treatment of gratuity is as under.
Status of employee Government employee Whether gratuity is taxable It is fully exempt from tax u/s. 10 (10) (i)

Non-Government employee covered by It is fully or partly exempt from tax u/s. the Payment of Gratuity Act, 1972 10(10)(ii) Non-Government employee not covered by the Payment of Gratuity Act, 1972 It is fully or partly exempt from tax u/s. 10(10)(iii)

Gratuity-[Sec.10(10)]
IN THE CASE OF EMPLOYEES COVERED BY THE PAYMENT OF GRATUITY ACT,1972, the least of the following is exempt from tax. 1 15 days salary (last drawn) X Length of service
2 3 Rs. 10,00,000 Gratuity actually received.

IN THE CASE OF OTHER EMPLOYEE, the least of the following is exempt from tax.
1 Half months average salary for each completed year of service

2
3

Rs. 10,00,00
Gratuity actually received.