For any income to be taxed as income from salary, there has to
be employer-employee relationship. If any payment is to be regarded as salary, employer-employee relationship must
be established. However, the employer-employee relationship need not exist at the time of making payment. It is
enough if the primary nexus for the payment happens to be the services rendered by the employee to the employer.
If, at the time of rendering of services, employer-employee relationship is established, it is not necessary that
at the time of payment also, the relationship should subsist.
For this reason, any salary, bonus, commission or remuneration,
due to, or received by, a partner of a firm from the firm shall not be regarded as salary. Such salary is taxable
as business income of the assessee.
Income from salaries is wide enough to include remuneration in
any form including perquisites due for personal service under an express or implied contract of employment or
service. Pension is chargeable to tax under income from salary.
Salary income is taxable on due or receipt whichever is
Salary payable for services rendered in India is deemed to be
earned in India. When an employee proceeds on leave to a foreign country and leave salary is paid to him, it is
also taxable as income arising in India.
If an employee retired in India settles in a foreign country and
receives pension from India, such pension will be considered as income accruing in India and will be taxable in
Salary or pension paid by any foreign government to its
employees working in India is taxable in India as salary. The foreign government will be considered as
Pension to widow of a deceased employee is not taxable in her
hands as salary income, but is taxable as income from other sources.
The amounts received on encashment of leave salary due to an
employee either in service or at the time of his retirement are taxable as part of salary income.
Salary of member of parliament: It is undeniable that a Member of Parliament is not an employee
of the government. Therefore, the salary received by him as MP will not be chargeable to Income Tax under the head
“salaries”, but as income from other sources.
Items included in Salary:
Ø Any annuity or pension
Ø Fees, commission, perquisites or profits in lieu of or in
addition to any salary or wages.
Ø Advance Salary
Ø Leave Encashment
Ø Any contribution made by the employer to Recognised
Provident Fund in excess of 12% of salary of employee.
Ø Interest credited to the balance of the employee on the
Recognised Provident Fund exceeding the rate fixed by the central government.
Ø Any contribution made by the Central Government or an
employer other than the Central Government in the previous year, to the account of an employee under a
pension scheme as per section 80CCD.
Ø Notice period salary (taxable on receipt basis)
Ø Bonus (taxable on receipt basis)