Page 176 - DCOM301_INCOME_TAX_LAWS_I

Unit 7: Income under the Head Salaries

2. Deduction for entertainment allowance – Section 16 (ii) Notes
3. Deduction on account of any sum paid towards tax on employment – Section 16(iii).

Task Identify key words and ingredients for an income to be considered as salary under
the Act.

7.2.1 Due Basis of Taxation

The basis of taxation of income from salary is normally on ‘due’ basis. Thus, salary due to an
employee is taxable regardless of the fact whether he actually receives it or not. Exceptions to
this rule are of cases where salary is received in advance by an employee which is chargeable to
tax as and when it is received although the salary is not due to him.
But in order to ensure that there is no double taxation of the same item of income in the hands
of the same employee, the explanation to Section 15 specifically provides that where an item of
a salary income received by an employee in advance is taxed as and when it is received, it shall
not again be charged to tax when it becomes due to the assessee. In order to attract liability to tax
under this head, it is not essential that the employee, who is liable to tax under this head, must
receive salary from his present employer.

Example: Rama is an employee of Tara Pvt. Ltd. getting a salary of ` 40,000 per month
which becomes due on the last day of the month but is paid on the 7th of next month. Salary for
which months will be taxable for AY 2013–14?

Solution: The salary for the months of April 2012 to March 2013 will be taxable for the Assessment
Year 2013–14 because salary for April 2012 will be due on 30th April, 2012 (i.e. within the same
month).

Example: Mr. Y is an employee of Y Ltd. His salary is ` 25,000 per month. Salary becomes
due on last day of each month. In March, 2013, he received salary of April and May in Advance.
Compute taxable amount for AY 2013–14 and AY 2014–15.

Solution: Taxable Salary for AY 2013–14 (PY 2012–13):
Salary for the months of April, 2012 to March, 2013 will be taxable on due basis.
Salary for the month of April 2013 and May, 2014 will also be taxable on receipt basis. It will not
be taxable then in AY 2014–15 on receipt basis.
Thus, taxable salary for AY 2013–14 = ` 25,000×12 + ` 25,000×2 = ` 3,50,000
Taxable Salary for AY 2014–15 (PY 2013–14):

Salary for the month of June, 2014 to March, 2015 will only be taxable on due basis. Salary for
April and May 2014 will not be taxable as that has already been taxed on receipt basis in the
AY 2013–14.

Thus, taxable salary for AY 2014–15 = 25,000×10 = 2, 50,000

7.2.2 Employer and Employee Relationship

The salary of an employee is a separate source, distinct from other classes of income. The basis
of liability under the head salaries is the employer-employee relationship. Before charging the

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