Advance learning on tax treatment of various forms of salary like bonus, overtime pay, salary in lieu of notice period, etc. (Theory)
Tax treatment of advance salary :Advance salary received by an employee is taxed in the year of receipt. The rule behind this is the basis of taxability of salary, i.e., salary is taxed on due or receipt basis, whichever is earlier. However, an employee can claim relief under section 89 (discussed later) in respect of advance salary.
Arrears of salary :
Arrears of salary received by an employee are taxed in the year of receipt if the same were not taxed earlier on due basis. However, an employee can claim relief under section 89 (discussed later) in respect of arrears of salary.
Tax treatment of bonus :
Bonus received by an employee is charged to tax in the year of receipt. Relief under section 89 can be claimed in respect of arrears of bonus received during the year.
Tax treatment of fees or commission :
Fees or commission received by the employee from the employer are charged to tax as salary income. Commission will be taxed as salary income, irrespective of the fact that it is received as fixed monthly amount or is received as a percentage of any particular item like turnover achieved by the employee.
Tax treatment of salary in lieu of notice period :
Salary in lieu of notice period is charged to tax on receipt basis, i.e., it is charged to tax in the year of receipt.
Gifts received from the employer :
Any voluntarily gift received by the employee from the employer is charged to tax as salary income (perquisite). However, non-monetary gifts are exempt upto Rs. 5,000. The detailed tax treatment of gift in the form of perquisite is discussed in advance learning on perquisites.
If gift has no relation to the service rendered by the employee, then the same can be charged to tax under the head “Income from other sources”.
Compensation received from the employer :
Compensation received from the employer in connection with modification of terms of employment will be charged to tax as salary income, i.e., profits in lieu of salary.
Pay for extra work :
If an employee receives any payment in respect of extra work done by him then the same is charged to tax under the head “Salaries”. In other words, remuneration received for extra work will be charged to tax as salary income.
Tax treatment of allowances :
Tax treatment of various allowances is discussed in the advance learning on allowances.
Tax treatment of perquisites :
Tax treatment of various perquisites is discussed in the advance learning on perquisites.
Tax treatment of retirement benefits :
Tax treatment of various retirement benefits is discussed in the advance learning on retirement benefits.
Tax treatment of salary received by a partner :
For taxing any income under the head “Salaries”, the relation of the payer and payee should be that of the employer and the employee. In case of a partnership firm, the partners are not the employees of the firm and, hence, salary received by the partners from the firm is not charged to tax under the head “Salaries”. Salary received by partner from the firm is charged to tax under the head “Profits and gains of business or profession”.
Tax treatment of salary received by an Indian citizen deputed outside India :
Salary received by an Indian citizen deputed outside India by the Government is treated as income deemed to be accrued or arisen in India and will be taxed in India. However, in such a case allowance and perquisites will be exempt from tax.
Tax treatment of salary foregone by the employee :
Salary is charged to tax on due or receipt basis whichever is earlier, hence, salary foregone by the employee is charged to tax on due basis, even though it is not received by him. In other words, salary foregone after its accrual is charged to tax, even though it is not received by the employee.
Tax treatment of surrender of salary to the Central Government :
Salary foregone after its accrual is charged to tax, even though it is not received by the employee. However, if salary is surrendered to the Central Government under section 2 of the Voluntary Surrender of Salary (Exemption from Taxation) Act, 1961, then such surrendered salary is not charged to tax.
Tax treatment of salary received from the UNO :
Salary received from the United Nations Organisation is exempt from tax as per section 2 of the United Nations (Privileges and Immunities) Act, 1947.
Tax treatment of amount received before joining the job :
Any payment received by an employee from his present employer or former employer or prospe ctive employer will be charged to tax under the head “Salaries” (as profits in lieu of salary). Hence, amount received from prospective employer will also be charged to tax under the head “Salaries”.
Relief under section 89 in respect of arrears of salary :
Under section 89, read with Rule 21A(2), an employee can claim relief in respect of arrears of salary. Relief can be computed in the following manner:
Step 1 : Calculate total tax liability (including surcharge and cess, if any) on the total income, including the additional salary of the previous year in which such salary is received.
Step 2 : Calculate total tax liability (including surcharge and cess, if any) on the total income, excluding the additional salary of the previous year in which such salary is received.
Step 3 : Find the difference between tax computed at (1) and (2) above.
Step 4 : Calculate total tax liability (including surcharge and cess, if any) on the total income, including the additional salary of the previous year(s) to which such salary relates to.
Step 5 : Calculate total tax liability (including surcharge and cess, if any) on the total income, excluding the additional salary of the previous year(s) to which such salary relates to.
Step 6 : Find the difference between tax computed at (4) and (5) above. Relief under section 89 is the excess of tax computed at Step 3 over tax computed at Step 6. No relief is available, if tax computed at Step 3 is less than tax computed at Step 6. If the additional salary pertains to more than one previous year, then relief shall be computed in above manner by spreading such salary over the previous years to which such salary pertains to.
To read details of this Amendment Finance Act, 2013 (Click Here)
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