SALARY TAX

Money which you earn from differenct sources is taxed differently. So if you are a salary earner, your salary income to be taxed will be calculated in a different way from gains.

The term "Salaries" includes remuneration in any form for personal service, under an expressed or implied contract of employment or service. Section 17 of Income Tax Act defines salary to include:-

• Wages

• Pensions or Annuities

• Gratuities

• Advance of Salary

• Any cess, commission, perquisites or profits in lieu of or in addition to salary or wages.

• Any encashment of leave salary.

• Any amount of credit to provident fund of employee to the extent it is taxable.

Therefore "salary" includes basic salary, encashment of leave salary, advance of salary, arrears of salary, various allowances such as dearness allowance, entertainment allowance, house rent allowance, conveyance allowance and also includes perquisites by way of free housing, free car, free schooling for children of employees, etc.

The following are the essential conditions for income to be treated as salary income:-

• There must be relation of employer and employee between the payer of income and receiver of income.

• Salary may be from more than one employer.

• Salary may be received from not just the present employer but also a prospective employer and in some cases even from a former employer for example pension received from a former employer.

• Salary income must be real and not fictitious there must an intention to pay and receive salary.

• Forgoing of salary ie if an employee surrenders his salary to the central government, then the salary so surrendered will not be treated as taxable income of the employee.

• Salary paid tax free - Tax free salary means the salary on which income tax is borne not by the employee but by the employer. Tax free salary is also taxable in the hands of the employee.

Salary is taxable in the year of receipt or in the year of earning of the salary income, whichever is earlier. i.e. if the salary has been received first, then it will be taxable in the year of receipt. If it has been earned first but not yet received then it will be taxable in the year of earning. Salary income is taxable in the hands of individuals only. No other type of person such as a firm or HUF, companies can earn salary income.

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