Some important facts about Salary under Taxation

Salary Due on Last Day of Months v/s Salary due on 1st Day of Next Month :

The point of time at which the salary becomes due depends upon the terms of employment agreement between the employer and the employee.

Ø   If salary is due on the last day of the month, salary from April 2019 to March 2020 shall become due during PY 2019-20.

Ø   If salary is due on the 1st day of the next month, salary from March 2018 to February 2019 shall become due during PY 2018-19.


 'Contract of Service' v/s 'Contract far Service':

Ø   Contract of Service: The employment agreement under which the employee agrees to work under the control and supervision of the employer is generally referred to as a 'contract of service.


Ø   Contract for Service: Under a contract for service, one person agrees to provide specific services to the other person on freelancer basis. In other words, both parties are on equal footing and there does not exist a relationship of employer-employee between the two parties. Income from a contract for service is generally taxable u/h PGBP in the hands of the payee.


'Advance Salary v/s 'Advance Against Salary.

Ø   Advance Salary: In such cases, salary for a future period is taken in advance by the employee. Advance salary is taxable when it is received by the employee irrespective of the fact whether it is due or not.


Ø   Advance Against Salary: Advance against salary is different from advance salary. It is an advance taken by the employee from his employer. This advance is generally adjusted with his salary over a specified time period. It cannot be taxed as salary.

Foregoing of Salary v/s surrender of Salary

Ø   Foregoing of Salary: Foregoing of salary refers to walver of salary by the employee. Once salary accrues, the subsequent waiver by the employee does not absolve him from his income tax liability. Such waiver is only an application of salary and hence, chargeable to tax.


Example: An employee instructs his employer that he is not interested in receiving his salary for April 2017 and the same might be donated to a girls' hostel. In this case, the employee cannot claim that he cannot be charged in respect of the salary for April 2017. It is only due to his instruction that the donation was made to a girls' hostel by his employer. It is only an application of income. Hence, the salary for the month of April 2017 will be taxable in the hands of the employee.


Ø   Surrender of Salary If an employee surrenders his salary to the Central Government u/s 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered would be exempt while computing his taxable income.


Tax-Free Salary

In such cases, the employer bears the burden of the tax on the salary of the employee. If tax has been paid by the employer on behalf of the employee, such payment of tax shall be considered to be a monetary perquisite in the hands of the employee taxable u/s 17(2)(iv).


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