Income From Salary- Sections and Components

What does “Income from Salary” mean?

The vast majority of taxpayers (more than 80%) record salary income on their income tax filings. Salary is the money paid to or payable to an employee in exchange for services given to his employer under an express or implied contract of conditions of service (letter of appointment). It’s vital to remember that even if a receipt is labelled as pay or remuneration in the hands of an individual, it may not qualify as “salary income” under the Income Tax Act. Between the payer and payee of salary, there must be an employer-employee or master-servant relationship. Again, simple payment of a sum does not define a particular receipt as compensation; an employee must have the right to receive remuneration from the employer.

• A member of parliament’s (MP) or Member of the Legislative Assembly’s (MLA) salary or remuneration is NOT salary, however, a Minister’s remuneration is taxable as salary.’
• The remuneration paid by a firm partner is taxable as income from business and profession, not as a salary.
• An employee’s pension for previous employment is taxable as wage, while the pension received by his family (family pension) after his death is taxable as income from other sources.

Salary income is taxed based on receipt or due date, whichever comes first. This means that if your salary is due on the last day of the month but you receive it the next month, the salary is taxed in the month it was due. If the employer fails to pay the compensation on time, or if the employer fails to pay some or all of the salary in a given fiscal year, the salary will still be taxable on a due basis.

Sections of Income Tax Act on Salary

Components of Income from Salary

Various receipts that are taxed as salary income are listed in section 17 of the Income Tax Act. Basic compensation or earnings, allowances and perquisites, and profits instead of salary are the three broad categories. These receipts will be detailed further down:

Basic Salary

• This is the pay for work or services performed by an employee for an employer in the context of an employer-employee relationship. This is listed as a base salary on an employee’s pay stub.
• This is fully taxable as salary income.
• Occasionally, the basic pay is paid in advance. This advance salary is taxed on a receipt-by-receipt basis.
• Sometimes the employee’s basic wage is paid in exchange for previous services. ‘Salary arrears’ is the term for this type of pay. If it was not taxed in the year it was due, it is fully taxable in the year it is received on a receipt basis. The taxpayer, on the other hand, maybe eligible for relief under section 89 of the Internal Revenue Code.

Dearness Allowance

• Inflation is defined as an increase in the cost of living over some time. The Consumer Price Index is used to calculate inflation (CPI). The company gives Dearness Allowance (DA) to employees to offset the effects of inflation.
• The DA is a stipend paid by the government to its employees and those working in the public sector. The DA is calculated as a percentage of the employee’s base wage. This percentage is calculated using the Consumer Price Index and the Central Pay Commission’s suggested formula.
• As part of the basic wage, the Dearness Allowance is fully taxed. For the computation of various allowances under the heading of income from salaries, the amount of basic salary and DA is frequently required.

House Rent Allowance

• Salaried employees who live in rented housing are likely to get House Rent Allowance from their employer to help cover the cost of the rent. This type of allowance is included in the salary and is listed separately on the pay stub. In Form No. 16, the total amount of HRA received in a year or for a specific length of time with a specific employer (if an employee is for a portion of the year with a specific employer) is listed individually.
• In most circumstances, the entire amount of HRA is not taxable. You must send the right amount of taxable HRA to your employer for inclusion in the taxable salary on which TDS is deducted for TDS to be deducted.
• You must know your basic salary and DA, whether you live in a metro or non-metro city, the amount of HRA you received in a year, and the amount of rent you paid to calculate the taxable HRA.

What are Perquisites?

The taxable pay, according to the Income Tax Act, includes the basic salary, allowances, perquisites, and gains instead of salary. The distinction between perquisites and allowances is normally difficult to discern. The allowances are usually paid in cash and are intended to recompense the employee for various expenses spent while performing his or her job. These benefits are included in the employee’s pay package, but they are not specifically listed as part of the employee’s pay package.

Perquisites are the benefits that a person receives or is entitled to as a result of his or her position or work. To calculate taxable salary income, the perquisites must be included in the taxable salary. Because perquisites are usually provided in-kind rather than cash, they must be valued for an equivalent amount of cash to be included in salary income. For tax deduction reasons, the employee must value them and report such a valuation to his or her employer (TDS). Rule 3 of the Income Tax Rules explains how to value perquisites.