General Concepts and Introduction (Chapter: Salary)

Income Tax:

Sir James Wilson introduced income Tax in India for the first time in 1860.In 1922 a new income tax act
was passed and such act remained in force till 1961.Therfore the present income tax act 1961 was
introduced, which is amended year after year by central government in its budget session.

Direct and Indirect Tax:

Direct Tax – Tax ,impact and incidence of which fall on the same person, is known as direct tax such as
income tax.

Indirect Tax – Tax ,impact and incidence of which fall on two different person is known as indirect tax
such as goods and service tax act.

Impact and Incidence:

It is, thus, easy to distinguish between the impact and incidence of taxation:

• Impact refers to the initial burden of the tax, while incidence refers to the ultimate burden of
the tax.

• Impact is at the point of imposition, incidence occurs at the point of settlement.

• The impact of a tax falls upon the person from whom the tax is collected and the incidence rests
on the person who pays it eventually. For example, suppose a tax — excise duty — is imposed
on soap.

• Its impact is on the producers, in the first instance, as they are liable to pay it to the
government. But, the producers may succeed in collecting it from the consumers by raising the
price of soap by the amount of tax. In that case, consumers eventually pay the tax and so the
incidence falls upon them.

• Impact may be shifted but incidence cannot. For, incidence is the end of the shifting process.
Sometimes, however, when no shifting is possible, as in the case of income tax or such other
direct taxes, the impact coincides with incidence on the same person.

General Concepts:

Assessment year – Assessment year means the period of 12 months commencing on the 1st day of April
every year. It is the year( just after the previous year ) in which income earned in the previous year is
charged to tax.

• Eg: assessment year 24-25 is a year which commences on 1st April 24 and ends on 31st March
25.Income of the assessee earned in the previous year 23-24 is assessed in the assessment year
23-24.
General Concepts and Introduction (Chapter: Salary)

Previous Year –Previous year means the financial year immediately preceding the assessment year .
Income earned in a year is assessed in the next year. The year in which income is earned is known as
previous year and the next year in which income is assessed is known as assessment year.

Assessee – A person by whom any tax or any other some of money that is penalty or interest is payable
under this act is known as an assessee. Every person in respect of whom any proceeding under this act
has been taken for the assessment of his income or loss or the amount of refund due to him or
assessment of fringe benefit.

Heads of Income:

• According to sec 14 of the act ,income of a person shall be classified under following 5 heads:

• 1) Salaries

• 2) Income of house property

• 3) Profits and gains from Business and Profession

• 4) Capital Gains

• 5) Income from other source

For computation of income all taxable income should fall under any of the five heads of income as
mentioned above. If any type of income does not become part of any 1 of the above mentioned first 4
heads ,it should be part of the fifth head that is income from other sources.

Gross Total Income

Gross total income is the aggregate of income under all the five heads of income after adjusting the set
off and carry forward .

Exemption and Deduction:

Exemption – Every income of the assessee is charged to tax unless specifically exempted under the act.
Sec 10 provides list of income which are not to be included in the total income of the assessee for tax
purpose. In other words this incomes are out of the purview of income tax and for tax purpose , total
income is computed without taking this incomes into considerations.

Deduction –From the gross total income of the assessee, deductions are allowed on fulfillment of
conditions as prescribed in the various sections of the act.Several sections of the act also provide for
deductions while computing income under each heads of income.
General Concepts and Introduction (Chapter: Salary)

Salary:

Meaning: Salary can be defined as consideration received by a person called ‘employee’ for services
rendered to another person called ‘employer’.

Basic Elements of Salary: Payer and payee must have employer –employee (master and servant)
relationship and payment must have been made by the employer in such capacity.

Example: State whether the following receipts should be treated as salary or not:

1)A teacher receives emoluments in kind from the school in which he teaches: Yes it is treated as salary.
It is immaterial whether salary has been received in cash or in kind.

2) A teacher of a college receives fees from a university for checking answer sheets: No ,it is not a salary
because no employer – employee relationship exist between payer and payee.(college teacher is not an
employee of the university).Such receipts has been taxable under the head ‘Income from other source’

Definition of Salary:

As per Sec 17(1) of the Income tax act 1961 salary include the following:

1)Wages

2) Any annuity or pension

3) Any gratuity

4)Any fees, commission ,perquisites or profits in lieu of salary or in addition to any salary or wages

5)Any advance of salary

6)Any payment received in respect of any period of leave not availed by the assessee.

7)The portion of the annual accretion in any previous year to the balance at the credit of an employee,
participating in recognized provident fund, to the extent it is taxable.

8) Contribution made by the employer in the previous year to the account of an employee under a
pension scheme referred to in sec80CCD

Important Points:

1) Voluntary payments: The act does not make any difference between voluntary and contractual
payment. Both are taxable as salary example Bonus.

2) Overtime : Overtime remuneration is taxable as salary.

3) Remuneration for Extra Work: Where an employee gets extra payment from his employer for work
performed outside the duties of his office such payment shall be taxable as salary.

4) Salary from more than one source: If an individual receives salary from more than one employer
during the same previous year ,salary from each employer shall be taxable under the head salary.

5) Salary from former, present,prospective employer : It is chargeable to tax under the head salary.

6) A lumpsum payment made gratuitously to a widow or legal heir of employee who dies while in service
by way of compensation or otherwise is not taxable.

7) Salary received by a partner from its firm shall not be taxable as salary because there is no employer
employee relationship between the firm and the partner. Such salary is taxable under the head profits
and gain from business and profession.

8) Pension received by a widow or legal heir of deceased employee – It is not taxable as salary as no
employer employee relationship exist.

Basic salary:

It is a sum paid by employer to employee as salary and it is fully taxable.

Pay Scale or grade system

• It is a system of payment where increment scale is pre known to employee .Example basic salary
is given as 5000-1000-8000-2000 -12000.The above data indicates the increment schedule.As
per this schedule initial payment is 5000 per month which will increase by 1000every year until
salary reaches to 8000 per month . Once salary reaches to 8000 then increment will be 2000
every year till salary reaches the scale of 12000.Accordingly basic salary is calculated.

Dearness Allowance:

It is an extra amount given to an employee to meet the burden of inflation or increased cost of living. It
is fully taxable.

Fees:

An employee may be given apart from basic salary, extra remuneration for doing specific job under the
terms of employment. Such extra remuneration is termed as fee.

It is fully taxable.

Commission:

It may be as a percentage of turnover or as a percentage of profit. It is fully taxable .

Bonus:
General Concepts and Introduction (Chapter: Salary)

Bonus may be contractual or voluntary.

Fully taxable

It is taxable in the year of receipt.

Contractual bonus is taxable as bonus whereas voluntary bonus is taxable as perquisites.