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January 12, 2023
By
Pragati

What is Salary Income?

Salary income is the money an employee receives from a current or former employer in exchange for doing tasks related to their employment. Therefore, only where there is an employer-employee link between the payer and payee is income subject to Section 15's salary taxation. Salary income can come in a variety of forms, including gifts, pensions, gratuities, regular compensation, and so on. We examine many facets of salary income under the Income Tax Act in this article.

How is total income from salaries calculated?

1. Any wages owing to an assessee from a previous employer (current or past), whether or not they were paid;

2. Any salary paid or permitted to an employee by or on behalf of an employer in the previous year even though it was past due or before it was required; and 

3. Any arrears of salary paid or permitted to him in the prior year by or on duty on the part of an employer, if not charged to income tax for any earlier prior year.

Taxes can be applied on salary income either on a due basis or a receipt basis. Salary is only an application of income once it has accrued, and any future waiver is subject to taxation.

Who can receive a salary?

Salary is payment for individualized services that may be rendered by a normal individual, not by a group or organization. Salary income is therefore only taxable in the hands of an individual. No other sort of person, such as a company, HUF, LLP, or firm, is permitted to receive salary income. Additionally, the income that would be levied would be categorized under the heading "Salaries" if the association of employer and employee prevails. It makes no difference if the employee works full- or part-time hours. The final point is that any payment an employee receives from a current, previous, or potential employer will be taxed under the "Salaries" heading.

Not Salary Income

Incentives that fall under the heading "Salaries" must be derived from a position that qualifies as a profession. To put the tax incidence under the heading "Salaries," the allocation of an office alone is insufficient. Additionally, an user's income from a source besides his employer cannot be classified as a salary, and as a result, may not be taxed under the "Salaries" category. Every penny of this revenue needs to be reported under the category "Profits and Gains of Business or Profession."

Due Date and Salary Calculation Period

Typically, salaries are paid on the final business day of each month. India's minimum wage and its calculation are governed by the Minimum Wages Act of 1948. According to the Act, if a business hires fewer than 1000 people, the wage is paid on the seventh of the month. The wage is paid on the tenth of every month if the company employs more than 1000 people. Government and semi-government employees must pay their salaries on the first of the following month, while all other employees must do so on the last day of each month. 

Period of Calculation

For Government Employees – 1st March to 28th February

For Private Employees – 1st April to 31st March

Leaving Pay

Non-Government employees' leave salaries are tax-free up to the minimum of the following amounts:

Only after the date of retirement, whether through superannuation or another source, will an employee get the cash equivalent of the leave salary in relation to the period of earned leave to their credit, or 10 months' worth of average pay. Amounts not subject to tax, as determined by the government, or Leave encashment actually received at the time of retirement are used to calculate the average salary. This calculation is based on the average salary drawn over the ten months immediately preceding the retirement or superannuation.

Tax on the Salary of a Suspended Employee

The employer is effectively prohibited from working during the suspension period, and only the necessary allowances—which would be taxable—are granted in lieu of full pay.

Indian Tax-Free Salary

In India, the concept of a tax-free salary does not exist. The employee's taxable income will be included in the tax payment made by the employer on their behalf.

FAQs

1. Is Family pension taxed as salary income?

​No, it is taxable as income from other sources.

2. ​If I receive my pension through a bank, who will issue Form-16 or pension statements to me- the bank or my former employer?

You will receive it from the Bank

​3. Are arrears of salary taxable?

​​​​Yes. However, the benefit of spread over of income to the years to which it relates to can be availed for lower incidence of tax. This is called as relief u/s 89 ​ of the Income-tax Act.

4. Are retirement benefits like PF and Gratuity taxable?

​​In the hands of a Government employee, Gratuity and PF receipts on retirement are exempt from tax. In the hands of non-Government employee, gratuity is exempt subject to the limits prescribed in this regard and PF receipts are exempt from tax, if the same are received from a recognised PF after rendering continuous service of not less than 5 years

5. Is pension income taxed as salary income?

Yes. However, pension received from the United Nations Organisation is exempt.

6. Even if no taxes have been deducted from salary, is there any need for my employer to issue Form-16 to me?

​​Form-16 is a certificate of TDS. In your case it will not apply. However, your employer can issue a salary statement.​

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