Page 173 - DCOM301_INCOME_TAX_LAWS_I

Income Tax Laws – I

Notes Explain the Types of perquisites
Compute the Valuation of Perquisites
Trace the cases of Profits in lieu of or in addition to salary
List down the Deductions allowed from salaries (section 16)

Introduction

Income is taxable under the IT Act under five basic heads of income. It is important to understand
the basics of these heads of income, to have more clarity as to how your taxable income and tax
payable is computed. The income earned by any person is computed under the following
categories:

Income from Salary
Income from House Property
Income from Business of Profession
Income from Capital Gains

Income from other sources
In this unit we will study the very first head of income i.e., “Income from Salaries”. Income
under the head salaries covers all possible remuneration due or paid to a person in respect of
services rendered by him in an express or implied contract of employment. However, arrears of
salary are taxable on payment basis and not on due basis. Payment received by an individual
other than an employer cannot be termed as salary and consequently cannot be taxed under this
head. Salary is taxed on due basis or receipt basis whichever is earlier. If the employer pays the
salary tax-free the employee has to include in his taxable income not only the salary but also the
amount of tax paid by the employer.

7.1 Definition of Salary

Salary is the remuneration received by or accruing to an individual, periodically, for service
rendered as a result of an express or implied contract. The actual receipt of salary in the previous
year is not material as far as its taxability is concerned. The existence of employer-employee
relationship is the sine-qua-non for taxing a particular receipt under the head “salaries.”

Example: The salary received by a partner from his partnership firm carrying on a
business is not chargeable as “Salaries” but as “Profits & Gains from Business or Profession”.
Similarly, salary received by a person as MP or MLA is taxable as “Income from other sources”,
but if a person received salary as Minister of State or Central Government, the same shall be
charged to tax under the head “Salaries”. Pension received by an assessee from his former
employer is taxable as “Salaries” whereas pension received on his death by members of his
family (Family Pension) is taxed as “Income from other sources”.
Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of Salaries.
“Salary” includes:

1. Wages or Salary: ‘Salary’ is generally used in respect of payment for services of a higher
class, whereas ‘wages’ is confined to the earnings of labourers. However, for income-tax
purposes there is no difference between salary and wages.

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