Income from Salary

Income from Salary is the most common and the simplest head of income in the Indian income tax provisions, which is of great significance to all salaried individuals.

To start with, any amount received by a person would be considered as salary if that amount is received pursuant to an employer-employee relationship. So, this makes it very clear that consultancy services and professional services provided independently would not be covered under this head. Salary is charged to tax on due or receipt basis whichever is earlier. Hence, it is necessary to pay tax for advance salary also. Further, tax has to be paid as soon as it gets accrued (arisen) negating the fact whether salary is credited in the bank account or not.

Regarding the taxability, all components of salary, by whatever name called, shall be taxable as salary viz. wages, annuity or pension, gratuity, profits in lieu of salary, advance salary, etc.

Now then, one would be curious to know about what can be claimed as deduction against income from salary. A certain portion of specified allowances can be reduced from the income component like house rent allowance (HRA), conveyance allowance, travelling allowance, children education allowance, etc.  Further, profession tax and entertainment allowance (privileged for government employees) are allowed as deductions from salary.

Tax has to be deducted by employer for salary paid to employee at the time of making the payment or credit in the books of the employer. While employer is making the calculation for TDS, it is advisable that the employee provides other details like income from salary from previous employer, income from other heads such as income from house property and interest incomes, deductions of life insurance premium, housing loan repayment details, mediclaim, etc. Practically, employees fail to give these details and consequently end up paying additional taxes and interest at the time of return filing.

Question arises regarding the country where the salary gets accrued in few situations such as:

• A person who worked in India settles abroad after employment. Consequently, he receives pension in abroad for his services
• Leave salary paid abroad in respect of leave earned in India

In all these situations, salary would be accrued in India since the determinant factor for income from salary is the place where the services are rendered i.e. salary gets accrued in the place where the services are rendered. However, there is an exception to this rule wherein if a Government employee who is a citizen of India renders services outside India (say Indian citizen working for an Indian embassy in Dubai), salary would get accrued in India only, even though the services are rendered outside India.

Even though the provisions of income tax relating to salary are quite simpler, it is pertinent to note that proper claims of deductions and effective calculation of TDS would ensure speedy assessments and processing of returns of salaried individuals.