Tax treatment of various forms of salary like bonus, overtime pay, salary in lieu of notice period, etc. is explained in this video.
1. Tax treatment of advance salary
Advance salary received by an employee is taxed in the year of receipt. The rule behind this is the basis of taxability of salary, i.e., salary is taxed on due or receipt basis, whichever is earlier. However, an employee can claim relief under section 89 in respect of advance salary.
2. Arrears of salary
Arrears of salary received by an employee are taxed in the year of receipt if the same were not taxed earlier on due basis. However, an employee can claim relief under section 89 in respect of arrears of salary.
3. Tax treatment of bonus
Bonus received by an employee is charged to tax in the year of receipt. Relief
under section 89 can be claimed in respect of arrears of bonus received during the
year.
4. Tax treatment of fees or commission
Fees or commission received by the employee from the employer are charged to tax as salary income. Commission will be taxed as salary income, irrespective of the fact that it is received as fixed monthly amount or is received as a percentage of any particular item like turnover achieved by the employee.
5. Tax treatment of salary in lieu of notice period
Salary in lieu of notice period is charged to tax on receipt basis, i.e., it is charged to tax in the year of receipt.
6. Gifts received from the employer
Any voluntarily gift received by the employee from the employer is charged to tax as salary income (perquisite). However, non-monetary gifts are exempt upto Rs. 5,000. The detailed tax treatment of gift in the form of perquisite is discussed in advance learning on perquisites.
7. Compensation received from the employer
Compensation received from the employer in connection with modification of terms of employment will be charged to tax as salary income, i.e., profits in lieu of salary.
8. Pay for extra work
If an employee receives any payment in respect of extra work done by him then the same is charged to tax under the head “Salaries”. In other words, remuneration received for extra work will be charged to tax as salary income.
9. Tax treatment of salary received by a partner
For taxing any income under the head “Salaries”, the relation of the payer and payee should be that of the employer and the employee. In case of a partnership firm, the partners are not the employees of the firm and, hence, salary received by the partners from the firm is not charged to tax under the head “Salaries”. Salary received by partner from the firm is charged to tax under the head “Profits and
gains of business or profession”.
10. Tax treatment of salary received by an Indian citizen deputed outside India
Salary received by an Indian citizen deputed outside India by the Government is treated as income deemed to be accrued or arisen in India and will be taxed in India. However, in such a case allowance and perquisites will be exempt from tax.
11. Tax treatment of salary foregone by the employee
Salary is charged to tax on due or receipt basis whichever is earlier, hence, salary foregone by the employee is charged to tax on due basis, even though it is not received by him. In other words, salary foregone after its accrual is charged to tax, even though it is not received by the employee.
12. Tax treatment of amount received before joining the job
Any payment received by an employee from his present employer or former employer or prospective employer will be charged to tax under the head “Salaries” (as profits in lieu of salary). Hence, amount received from prospective employer will also be charged to tax under the head “Salaries”.
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