B.—Salaries
Salaries
15(1)
The following income shall be chargeable to income-tax under the head “Salaries”:—
- (a) any salary due from an employer to an assessee in the tax year, whether paid or not;
- (b) any salary paid or allowed to him in the tax year by or on behalf of an employer though not due or before it became due to him;
- (c) any arrears of salary paid or allowed to him in the tax year by or on behalf of an employer, if not charged to income-tax for any earlier tax year.
15(2)
For the purposes of sub-section (1), employer includes former employer.
15(3)
If any salary paid in advance is included in the total income of any person for any tax year, it shall not be included again in the total income of such person when the salary becomes due.
15(4)
Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as salary for the purposes of this section.
1. Section Summary
This section defines what constitutes "salary" for income tax purposes and specifies when such income becomes taxable. It clarifies that salary includes not only amounts due and paid but also advance payments and arrears. Additionally, it excludes payments to partners of a firm from being treated as salary.
2. Key Changes
- Clarification on Advance Salary (15(3)): The new law explicitly states that if advance salary is taxed in one year, it cannot be taxed again when it becomes due. This prevents double taxation of the same income.
- Exclusion of Partner Remuneration (15(4)): The law now clearly excludes any payment to a partner from a firm (e.g., salary, bonus, commission) from being treated as salary. Such payments are taxed under other provisions (e.g., as business income).
3. Practical Implications
- For Employees: Employees must report all salary income, including advance payments and arrears, in the year it is received or becomes due. Advance salary is taxed only once, avoiding double taxation.
- For Employers: Employers must ensure accurate reporting of salary payments, including advances and arrears, in the appropriate tax year.
- For Partners: Partners in firms should note that their remuneration is not treated as salary and will be taxed under different provisions (e.g., business income).
4. Critical Concepts
- Salary Due vs. Salary Paid: Salary is taxable when it is either due (even if unpaid) or paid (even if not yet due).
- Advance Salary: If taxed in the year it is received, it is not taxed again when it becomes due.
- Arrears of Salary: Unpaid salary from previous years is taxed in the year it is received, provided it was not taxed earlier.
- Partner Remuneration: Payments to partners are excluded from the definition of salary and are taxed under other heads of income.
5. Compliance Steps
- For Employees:
- Report all salary income (including advance and arrears) in the correct tax year.
- Maintain records of advance salary payments to avoid double taxation.
- For Employers:
- Deduct TDS (Tax Deducted at Source) on salary payments, including advances and arrears, in the year they are paid or become due.
- Ensure proper documentation and reporting of partner remuneration under the appropriate income head.
6. Examples
- Advance Salary: An employee receives ₹1 lakh as advance salary in March 2023 for work to be performed in April 2023. This ₹1 lakh is taxed in FY 2022-23 (when received) and will not be taxed again in FY 2023-24 (when it becomes due).
- Arrears of Salary: An employee receives ₹50,000 in March 2023 as unpaid salary for FY 2021-22. This ₹50,000 is taxed in FY 2022-23 (when received) if it was not taxed earlier.
- Partner Remuneration: A partner in a firm receives ₹2 lakh as "salary" from the firm. This ₹2 lakh is not treated as salary but as business income and taxed accordingly.
7. Effective Date/Transition Rules
The provisions are effective from the date the new income tax law comes into force. Taxpayers and employers should apply these rules to salary payments made or due after the effective date.