BLOG on Income Tax Management for - AY 2022-23 & 2023-24

Section-15 : Basis of Charge of Salary Income

Under Section 15, the following incomes are chargeable to Income-tax under the head ‘Salaries’;

any salary due from an employer or a former employer to an assessee in the previous year whether paid or not;
any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it becomes due to him;
any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer if not charged to income-tax for any earlier previous year.

The same is explained in the table given below—

Nature of Salary	Is it Taxable as income of the Previous Year 2018-19
Salary becomes due during the previous year 2018-19 (whether paid during the same year or not)	Yes
Salary is received during the previous year 2018-19 (whether it becomes due in a subsequent year)	Yes
Arrears of salary received during the previous year 2018-19 although it pertains to one of the earlier years and the same were not taxed earlier on due basis	Yes
Arrears of salary received during the previous year 2018-19 although it pertains to one of the earlier years but the same were taxed earlier on due basis	Yes

Any salary, bonus, commission or remuneration, by whatever name called due to or received by a partner of a firm from firm shall not be regarded as salary for the purposes of this section.

 Salary is taxable on “due” or “receipt” basis whichever is earlier -

Basis of charge in respect of salary income is fixed by section 15. Salary is chargeable to tax either on “due” basis or on “receipt” basis, whichever matures earlier.

For Example :

if salary of 2019-20 is received in advance in 2018-19, it is included in the total income of the previous year 2018-19 on “receipt” basis (as tax incidence matures earlier on “receipt” basis, “due” basis is not relevant in this case; therefore, salary will not be included in total income of the previous year 2019-20).

On the other hand, if salary which has become due in 2017-18 and received in 2018-19, is included in total income of the previous year 2017-18 on “due” basis (as incidence of tax matures earlier on “due” basis, “receipt” basis is inapplicable; salary will, therefore, not be included in total income of the previous year 2018-19).

 Accounting method of the employee not relevant -

It is worthwhile to mention that salary is chargeable to tax on “due” or “receipt” basis (whichever matures earlier) regardless of the fact whether books of account, in respect of salary income, are maintained by the assessee on mercantile basis or cash basis. Method of accounting cannot, therefore, vary the basis of charge fixed by section 15.

Table showing List and different form of Salary for Computing Salary Income

Basic Salary

Taxable.

Dearness allowance / Pay

Taxable.

Advance Salary

Taxable in the year of receipt.

Arrears of Salary

Taxable in the year of receipt, if not taxed on due basis earlier.

Leave Encashment while in Service

Taxable.

Leave encashment at the time of retirement or at the time of leaving the job

In case of Government employees. it is fully exempt from tax.
in case of non-Government employees, it is exempt from tax to the extent of the least of the following:
1. Cash equivalent of leave salary in respect of the period of earned leave at the credit of employee at the time of retirement (which cannot exceed 30 days’ “average salary” for every completed year of service); or
2. 10 months “average salary; or
3. Amount specified by the Government, i.e., Rs. 3,00,000; or
4. Leave encashment actually received at the time of retirement.

Notes.

Government employee for this purpose is a Central Government employee or a State Government employee.
“Average salary” for this purpose is to be calculated on the basis of average salary drawn during the period of 10 months immediately preceding the retirement.

Salary in lieu of notice

Taxable

Salary to Partner

Not chargeable under the head “Salaries” but taxable under the head “Profits and gains of business or profession”.

Fees and Commission

Taxable.

Bonus

Taxable on receipt basis if not taxed earlier on due basis.

Gratuity

In case of Government employee it is fully exempt from tax.
In case of non-Government employee covered by the Payment of Gratuity Act, 1972 it is exempt from tax to the extent of the least of the following:
1. 15 days’ salary for each year of service (or part thereof exceeding 6 months);
2. Rs. 10,00,000; or
3. Gratuity actually received.
In case of non-Government employee (not covered by the Payment of Graft liv Act) it is exempt from tax to the extent of the least of the following:
1. Rs. 10,00,000;
2. Half month’s salary for each completed year of service; or
3. Gratuity actually received.

Note - “Average salary” for this purpose is to be calculated on the basis of average salary drawn during the period of 10 months immediately preceding the month in which the employee has retired

Pension

Uncommuted pension is taxable in all cases. Commuted pension is fully exempt from tax in the case of a Government employee (i.e.. an employee of the Central Government, State Government, local authority and statutory corporation).

In the case of non-Government employee, commuted pension is exempt to the extent given below —

1/3 of normal pension is exempt if the employee receives gratuity; or
1/2 of normal pension is exempt from tax if the employee does not receive gratuity.

Pension under new pension scheme in the case of a Government employee or any other employee joining on or after January 1, 2004 .

Employer’s contribution is first included in salary and then a deduction is available (to the extent of 10 % of salary) under section 80CCD.
Employee’s contribution is deductible under section 80CCD to the extent of 10 % of salary.
When pension is received out of the aforesaid amount, it will be taxable in the year of receipt.

Annuity from employer

Taxable as salary.

Annual accretion to the credit balance in recognized provident fund

Excess of employer’s contribution over 12% of salary is taxable.
Excess of interest over notified interest is taxable (notified rate of interest is 9.5 % ).

Retrenchment compensation

Exempt from tax to the extent of least of the following:

Amount calculated under section 25F(b) of the Industrial Disputes Act; or
An amount specified by the Government (i.e., Rs. 5,00,000).

When compensation is paid under any scheme approved by the Central Government, these limits are not applicable and the entire amount is exempt.

Remuneration for extra duties

Fully taxable under section 15.

Compensation received under Voluntary Retirement Scheme (VRS)

Exempt up to Rs. 5 lakh, if a few conditions are satisfied.

One of the conditions is the amount payable on account of voluntary retirement or voluntary separation of the employees does not exceed

the amount equivalent to 3 months’ salary for each completed year of service, or
salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation. (Relief under Section 89 is not available. )

Salary from UNO

Not chargeable to tax.

Salary received by a Teacher / Researcher from a SAARC member State

Not Taxable up to 2 years