Salary Income Tax Definitions & Calculations

Charge of Income Under the Head "Salaries"

On this page:

  1. What's Salary Income?
  2. Employer & Employee Relationship
  3. Salary Definition
  4. Scope of Charge of Salary
  5. Computation of Income Under the head "Salaries"

What's Salary Income?

Section 15 is the charging section for the head "Salaries". It provides for charge to income tax of certain incomes from an employer or a former employer to an assessee under the head "Salaries".

The taxability of the salary income in a previous year is as under: -

  1. Any salary due in the previous year, whether paid or not;

  2. Any salary paid/allowed in the previous year, though not due or before it became due to him;

  3. Any arrears of salary paid/allowed in the previous year, if not charged to income tax for any earlier previous year.

  4. However, if any salary paid in advance is included in the total income of any person for any previous year, then it shall not be included again in the total income of the person when the salary becomes due.

In short, Salary Income is chargeable to income tax on "due" basis or "receipt" basis whichever is earlier.

Note: Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner (even if under representative capacity) of a firm, from the firm shall not be regarded as "salary" for the purposes of this section.


Employer & Employee Relationship

Section 15 brings to charge under the head "Salary", any amount due from, or amount paid or allowed by, an employer or a former employer to an assessee employee.

Therefore, only if there is an employer and employee relationship (either in the present or in the past), the income can be charged to income- tax under the head "Salaries".

It is necessary to distinguish the relationship of master and servant from that of an employer and independent contractor.

The test laid down is that in the case of master and servant, the master can order or require what is to be done and how it is to be done (control & supervision) but in case of an independent contractor an employer can only say what is to be done but not how it shall be done.

In essence, the real test would be whether the employment is a "Contract of Service" (in which case it is chargeable as "Salary") or "Contract for Service" (in which case it is chargeable as "Profits and Gains of Business or Profession" or "Other Sources").


The salary received by MLA and MPs are chargeable only under the head "Other Sources", since there is no employer-employee relationship.

The salary paid to partners by firm is taxable as "Profits and Gains of Business or Profession" as the partners and firm are not different and they are self-employed.

However, the salary of Judges is chargeable as "Salaries".


Salary Definition u/s 17(1)

The term "Salary" has been defined under Section 17(1) to include -

  1. Wages;

  2. Any annuity or pension;

  3. Any gratuity;

  4. Any fees, commissions, perquisites or profits in lieu of or in addition to any 'salary or wages';

  5. Any advance of salary;

  6. Any payment received by an employee in respect of any period of leave not availed of by him (leave salary);

  7. Recognised provident fund, to the following extent:

    a Contribution by employer to Recognised Provident Fund (RPF) xxx
    Less: 12% of the Salary xxx
    b Interest credited to employee in respect of RPF xxx
    Less: Interest at the prescribed rate (9.5%) xxx
    c Transferred balance of accumulated amount from URPF to RPF xxx
    Amounts exempt for each year, had the URPF been RPF xxx

    d: Contribution made, by the Central Government in the Previous Year, to the account of the employee under a pension scheme referred to in 80CCD.

  8. Note: For the purpose of a. above Salary = Basic Pay + Dearness Allowance, if terms of employment provide + Commission as a Fixed Percentage on Turnover.

The term "Salary" has been defined inclusively. Hence, it is to be understood in common parlance. It is the consideration for the service rendered by the employee to the employer or former employer.


Scope of Charge of Salary Income

Salary Income earned by a Resident for services rendered in or outside India are both taxable (whether received in India or not).

In the case of a non-resident or a not ordinarily resident, Salary received in India, whether for services rendered in India or outside India, is taxable in India.

Besides, the following (whether received in India or not), is taxable in their hands in India, since they are deemed to accrue or arise in India: -

  • earned for services rendered in India,

  • earned for rest period or leave period which is preceded and succeeded by services rendered in India and forming part of service contract of employment,

  • earned by a Citizen of India, for services rendered outside India, if paid by Government of India.


Computation of Income Under the head "Salaries"

The computation of income under the head salaries will be as under: -

Salary (including Profit in lieu of Salary) XXX*
Allowances XXX*
Perquisites XXX*
Retirement Benefits XXX*
Gross Taxable Salary XXX*
Less: Deductions under section 16 XXX
Salary Income or Income under the head "Salaries" XXX

Note:* Amount exempt under section 10, to be reduced from the respective items.


Do not wait until the conditions are perfect to begin. Beginning makes the conditions perfect. - Alan Cohen



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