MEANING AND CHARACTERISTICS OF

SALARY

SUBMITTED TO Mr. Rana Navneet Roy

(FACULTY, Principles of Taxation)

SUBMITTED BY
PALLAVI TIKARIHA

SECTION A
ROLL NO: 99
SEMESTER V
B.A.LL.B (HONS.)
SUBMITTED ON: 16/8/2016

HIDAYATULLAH NATIONAL LAW UNIVERSITY, RAIPUR (C.G.)

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 Acknowledgements

Thanks to the Almighty who gave me the strength to accomplish the project with sheer hard
work and honesty.
This research venture has been made possible due to the generous co-operation of various
persons. To list them all is not practicable, even to repay them in words is beyond the domain
of my lexicon.
May I observe the protocol to show my deep gratitude to the venerated Faculty-in-charge Mr.
Rana Navneet Roy, for his kind gesture in allotting me such a wonderful research topic. Sir,
you’re sincere and honest approach have always inspired me and pulled me back on track
whenever I went astray.
I would like to thank all the members of HNLU family in general and my blooming and
charismatic friends in particular for their wholehearted co-operation throughout the odyssey.

Pallavi Tikariha
Roll No. 99
Semester V

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 Contents

Acknowledgments...................................................................................................... 2

Introduction................................................................................................................ 4

Objectives and Research Methodology...................................................................... 5

Essential norms of salary income………………………………………………….…6-9

Meaning of salary………………………………………………………………….....10

Characteristics of Salary……………………………………………………………..11

Conclusion.................................................................................................................. 12

References................................................................................................................... 13

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 Introduction
The term "Income" has been defined under Section 2(24) of Income Tax Act, 1961. The said
definition is an inclusive definition and not an exhaustive one. Income means a receipt in the
form of money or money’s worth which is derived from definite source with some sort of
regularity or expected regularity. These definite sources of income are salaries, house
property, business or profession, capital gains and any other source. If an income is not
derived from any of these sources, it is not taxable under the Income Tax Act, 1961
(hereinafter referred as ‘Act’). For example, if a person finds a purse containing Rs.1000 on
road, it is not treated as income since it is not received from any definite source.

Scope of total income is determined with reference to residential status of a person i.e. total
income of each person is based on his residential status. Once we know what incomes of a
person are taxable, then we need to know how to compute total taxable income according to
the provisions of Income Tax Act.

As per section 14 of Income Tax Act, 1961, all income, purposes of charge of income tax and
computation of total income, are classified under the following heads of income:
1. Income under the head salaries (Section 15 – 17)
2. Income from house property (Section 22 – 27)
3. Profits and gains from business or profession (Section 28 – 44)
4. Capital gains (Section 45 – 55)
5. Income from other sources (Section 56 – 59)

Salary is one of the heads of income. In this project we shall discuss the essential norms of
salary income and study the meaning and characteristics of salary.

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Objective
1. To study essential norms of salary income.
2. To study meaning and characteristics of salary.

Research methodology:

This research paper is descriptive in nature because it uses mainly descriptive language for
the explanation of the various topics mentioned in the project.

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SALARY AS AN ESSENTIAL NORM OF INCOME

The meaning of salary for the purpose of income tax is much wider than what is
normally understood. Every payment made by the employer to his employee for service
would be chargeable as tax as income from salaries. The term ‘salary’ for the purposes of
Income Tax Act, 1961 will include both monetary payments (e.g. basic salary, bonus,
commission, allowances, etc.) as well as non-monetary facilities (e.g. housing
accommodation, medical facility, interest free loans etc.)
In order to understand the meaning of expression salary, one has to keep in mind the
following norms:
Relationship between payer and payee: Income under the head "Salaries" covers all
remuneration due/paid to a person in respect of services rendered by him under an express
or implied contract of employment. Charge under this head of income presumes the
relationship of an employer and an employee between the payer and payee in contrast to
that of a principal and an agent. The distinction between the two types of relationship is
vital because income earned by an employee from his employer is chargeable under the
head "Salaries", whereas income earned by an agent is chargeable either under the head
"Profits and gains of business or profession" or under the head "Income from other
sources.
(i) Employer and employee vis-à-vis principal and agent- An employee works under
the direct control and supervision of his employer. He not only receives instructions
from his employer but is subject to right of the employer to control the manner in
which he should carry out the instructions. On the other hand, an agent is generally
free to carry out his principal's instructions according to his own discretion.
(ii) Income from holding of an office - whether from employment- The emoluments to
be taxable under the head "Salaries" must be received by virtue of an office
amounting to employment. Mere holding of an office is not, however, sufficient to
bring the tax incidence under the head Salaries.
(iii) Employer and contractor – their relationship- It may be true in a broad sense to say
that one who is employed is an employee and it would certainly sound funny to
refer to a bank president as an employee of his bank. While, however, it is strictly
correct to say that everyone who is an employee is employed by another, it is not
equally true to say that everyone who is employed by another is his employee. For

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 instance, a solicitor who is engaged by a client to do certain work for him is
employed by him for that purpose, as his doctor who gives his professional skill to a
patient, but no one would think of referring to either of these professional men as an
employee or his patient.1
(iv) Payment received in capacity other than employee- Payment received by an
individual from a person other than his employer cannot be termed as salary and
consequently, such payment is not chargeable to tax under the head salaries. Such
payment may be chargeable under the head ‘Profits and gains of business or
profession’. For instance commission received by a director is not an employee of
the company; commission cannot be termed as salary.

1. Salary and wages – conceptually not different- Conceptually, there is no difference

between salary and wages. Both are compensation for work done or services rendered,
though ordinarily salary is paid in connection with services of non-manual type of work,
while wages are paid in connection with annual services.
2. Salary from more than one source- If an individual receives salary from more than one
employer during the same previous year; salary from each source is taxable under the
head Salaries. For instance if clerk works with two employers on part time basis, salary
from both the employers will be chargeable to tax under the head Salaries.
3. Salary from former employer, present employer and prospective employer- Remuneration
received during the previous year is chargeable to ax under the head Salaries irrespective
of whether it is received from a former, present or prospective employer.
4. Salary income must be real and non fictitious- Amount taxable under the head Salaries is
real salary and non fictitious salary. There should be an intention to pay and receive
salary. Where for an example, there was merely in order to comply with the requirement
of the Board of Education Rules an agreement between the school teacher and the
governing body of the school granting a certain salary to the school teacher and
simultaneously there was another agreement by which an identical sum was to be
returned by the school teacher to the governing body as donation, it was said that there
was in reality no agreement to pay and receive salary.2

1
Vinod K. Singhania and Kapil Singhania, Taxman’s Direct Tax- Law and Practice
2
Girish Ahuja, Ravi Gupta, Direct Taxes: Law and Practise, 39 (30 th ed., 2014-2015).

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5. Foregoing of salary- Section 15 taxes on due basis, even if it is not received. If therefore,
an employee forgoes his salary, it does not mean that salary so forgone is not taxable.
Once salary has accrued to an employee, its subsequent waiver does not make it exempt
from liability. Such voluntary waiver or foregoing by an employee of salary due to him is
merely an application of income and is nonetheless chargeable to tax.3
6. Surrender of salary- If an employee opts to surrender his salary to the Central
Government under section 2 of the Voluntary Surrender of Salaries Act, 1961, the salary
so surrendered would be excluded while computing his taxable income. Thus tax is not
payable in respect of salary surrendered, which can be basic salary as well as different
allowances.
7. Salary paid tax free- If salary is paid tax-free by the employer, the employer has to
include in his taxable income not only the salary received but also the amount of tax paid
by the employer. It does not make any difference whether tax is paid under terms of
contract by the employer or voluntarily. Under section 17(2)(iv) such payment is
statutorily deemed as perquisite.
8. Voluntary payments- Salary, perquisite or allowance may come as gift to an employee
and yet it would be taxable. The act does not make any distinction between gratuitous
payment and contractual payment.

9. Salary under section 17(1)- Under section 17(1), salary is defined to include the
following:
a. wages;
b. any annuity or pension;
c. any gratuity;
d. any fees, commissions, perquisites or profits in lieu of or in addition to any salary or
wages;
e. any advance of salary;
f. any payment received by an employee in respect of any period of leave not availed
of by him;
g. the portion of the annual accretion in any previous year to the balance at the credit of
an employee participating in a Recognised Provident Fund, to the extent it is taxable;

3
Vinod K. Singhania and Kapil Singhania, Taxman’s Direct Tax- Law and Practice

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h. transferred balance in Recognised Provident Fund to the extent to which it is
chargeable to tax;
i. the contribution made by the Central Government or any other employer in the
previous year, to the account of an employee under a notified pension scheme
referred to in section 80CCD.

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MEANING OF SALARY

The term salary has been defined differently for the purposes in the Act. The
definition as to what constitutes salary is very wide. As already discussed earlier, it is an
inclusive definition and includes monetary as well as non monetary items.4 Salary, in simple
words, means remuneration of a person, which he has received from his employer for
rendering services to him. But receipts for all kinds of services rendered cannot be taxed as
salary. The remuneration received by professionals like doctors, architects, lawyers etc.
cannot be covered under salary since it is not received from their employers but from their
clients. So, it is taxed under business or profession head. 5

Section 17 of the Act gives an inclusive definition of salary. Broadly, it includes:

1. Basic salary
2. Fees, Commission and Bonus
3. Taxable value of cash allowances
4. Taxable value of perquisites
5. Retirement Benefits

Although, all the components of salary income are included in salary, there are certain
incomes in each of these categories, which are either fully exempt or exempt upto a certain
limit. The aggregate of the above incomes, after the exemption(s) available, if any, is known
as ‘Gross Salary’. From the ‘Gross Salary’, the following three deductions are allowed
under Section 16 of the Act to arrive at the figure of Net Salary:
1. Standard deduction - Section 16 (i)
2. Deduction for entertainment allowance – Section 16 (ii)
3. Deduction on account of any sum paid towards tax on employment – Section 16(iii).6

In order to understand what is included in salary, let us discuss few characteristics of salary.

4
http://www.icaiknowledgegateway.org/littledms/folder1/chapter-4-income-from-salaries.pdf
5
http://www.dawnhrs.co.in/pdf/Income_Under_Various_Heads.pdf
6
Girish Ahuja, Ravi Gupta, Direct Taxes: Law and Practise, 39 (30 th ed., 2014-2015).

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CHARACTERSTICS OF SALARY

1. The relationship of payer and payee must be of employer and employee for an income to
be categorized as salary income. For example: Salary income of a Member of Parliament
cannot be specified as salary, since it is received from Government of India which is not
his employer.
2. The Act makes no distinction between salary and wages, though generally salary is paid
for non-manual work and wages are paid for manual work.
3. Salary received from employer, whether one or more than one is included in this head.
4. Salary is taxable either on due basis or receipt basis which ever matures earlier.
i. Due basis – when it is earned even if it is not received in the previous year.
ii. Receipt basis – when it is received even if it is not earned in the previous year.
iii. Arrears of salary- which were not due and received earlier are taxable when due or
received, whichever is earlier.
5. Compulsory deductions from salary such as employees’ contribution to provident fund,
deduction on account of medical scheme or staff welfare scheme etc. are examples of
instances of application of income. In these cases, for computing total income, these
deductions have to be added back.7

7
Kanga, Palkhiwala and Vyas, The Law and Practice of Income Tax, Lexis Nexis Butterworths

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 CONCLUSION

From the whole study emerges heads of income, meaning of salary, income that forms
part of salary. There are 5 heads of income into which income of persons can be divided
namely Income from salary, house property, business or profession, capital gains and other
sources.
Any remuneration paid by an employer to an employee in consideration of his services is
called salaries. It includes monetary value of those benefits and facilities, which are provided
by the employer and are taxable.
They include basic salary, advance salary, fees, commission, bonus, taxable value of cash
allowances, perquisites and retirement benefits.

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 REFERENCE

 Girish Ahuja & Ravi Gupta, Direct Tax- Law and Practice, Bharat Publications.
 Kanga, Palkhiwala and Vyas, The Law and Practice of Income Tax, Lexis Nexis
Butterworths.
 Vinod K. Singhania and Kapil Singhania, Taxman’s Direct Tax- Law and Practice.

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