By:
NITANSHA BHATIA
(SUSHANT UNIVERSITY, GURUGRAM)
TABLE OF CONTENTS
| TOPIC | PAGE NO. |
| Index of Authorities | 3 |
| Abstract | 4 |
| Keywords | 5 |
| IntroductionResearch MethodologyLiterature ReviewChapterization -C1-Chargeability of salaryC2-What is included under salary?C3-PerquisitesC4-Profits in lieu of salaryC5-Deductions from salaryC6- Fringe Benefit Tax(FBT)Conclusion | 67891011-1213-15161718-2021 |
| Bibliography | 22 |
ABSTRACT
The Income Tax Act categorizes income into five distinct heads, each with its own set of rules and limitations. Among these, income from salary occupies a pivotal position, reflecting earnings from employment contracts, including benefits, bonuses, and allowances. However, despite its fundamental role, the provisions governing salary income are often criticized for their complexity and overlapping regulations.
The intricate nature of salary-related provisions complicates tax compliance for both taxpayers and employers alike. Issues such as ambiguous definitions of taxable components, varying tax treatments for different types of allowances, and intricate rules regarding perquisites contribute to the complexity. These complexities not only pose challenges for accurate calculation and reporting but also increase the compliance burden on taxpayers.
In light of these challenges, there is a growing consensus among researchers and tax experts regarding the need for simplification. The objective is to streamline the provisions related to salary income, making them more transparent and easier to apply. Simplification could involve clearer definitions, rationalization of tax treatments for allowances and perquisites, and harmonization of rules across related provisions.
By proposing reforms aimed at simplifying salary-related tax provisions, researchers aim to enhance compliance, reduce disputes, and ultimately promote a more taxpayer-friendly environment. Such reforms could potentially lead to more efficient tax administration and improve overall taxpayer satisfaction with the income tax system.
In conclusion, while salary remains a fundamental component of taxable income which comes under the Income Tax Act, addressing the complexities associated with their provisions is crucial for achieving fairness, clarity, and efficiency in the realm of income tax assessment and compliance.
KEYWORDS
Important relevant keywords for this research paper: Salary, Employee, Employer, Tax, Income, Payment.
INTRODUCTION
Under Income Tax Act, there are five heads of income like salary, House Property, Business or profession, capital gains and other source. Salary is one of the essential head among them. Basic test for chargeability of Income as salary is employer and employee that is master and servant relationship among payer and payee. It is very important for a payment to fall under the head of ‘salaries’. For example Salary of a Member of Parliament is not chargeable under the head “salaries” as a Member of Parliament is not a Government employee. According to Section 15 of Income Tax Act the following income may be chargeable to income tax under the head “salaries”.
Any salary due from an employer to an assessee in previous year, whether actually paid or not.
Any salary paid or allowed to him in the previous year by or on behalf of an employer (or a former employer) though not due or before it became due.
Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer (or a former employer) if not charged against tax for any earlier previous year.
Here it should be noted that any advance salary, once included in the total income of a person on receipt basis will not be again chargeable to than when the salary becomes due.
RESEARCH METHODOLOGY
This research paper will help in understanding the concept of taxing on income under the head of salary and the perquisites and deductions from such income. However, the profits and fringe tax benefit under this head will be looked over. The motive of this present paper is to point out the shortcomings and difficulties related with the provisions of salary as a main head of Income. Though this paper researcher has suggested various proposals for generalization of different provisions related to salary income. This evaluates the fairness and effectiveness of the existing provisions governing ‘salary’ income.
The research will create findings from primary sources like the Income Tax Act itself, secondary sources like the legal literature and expert analyses. Considering these findings, potential references will be formulated to enhance clarity and propose improvements in the procedure of ‘salary’ income under the Income Tax Act. With this structured method ensures a complete understanding of the legal framework under ‘salary’ income taxation, by critical analysis and evaluation of the sources.
LITERATURE REVIEW
‘Understanding the Chargeability of Salary Under the Income Tax Act’ (2018)
- Thorough explanation of the Section 15 of Income Tax Act, that defines the origin for counting income as salary.
- Detailed information on the employer and employee relationship requirement for payments to be categorized under the salary.
- Description on components of salary containing wages, pensions, gratuities, profits, commissions and perquisites.
‘Perquisites and Their Taxation Under the Income Tax Act’ (2020)
- Complete definition of perquisites as provided under Section 17(2) of the Income Tax Act.
- Some of the examples of perquisites are cars, housing, and stock options are given by the employer.
- Description of how perquisites are taxed based on their appropriate market value.
‘Simplification of Provisions of Salary in the Income Tax Act’ (2019)
- Conversation on complexities in agreement due to an over lapping of regulations and unclear definitions of salary-oriented taxes.
- Suggestions given for simplification, such as clear definitions and consistent rules to enhance the conformity and to reduce the disputes.
- Prominence on the need for reforming the streamlined provisions related to salary income and increase the satisfaction of taxpayer.
CHAPTER 1: CHARGEABILITY OF SALARY
Section-15 deals with the basis of charge. The salary‟ received by the assessee is part of his total income and is chargeable for taxation purposes under Section-15 of the act. Incomes which are chargeable under the head of salaries are –
- Any salary due from employer to the assessee in previous year, whether paid or not .
- Any salary or allowed in the previous year though not due or before it became due.
- Any arrears of salary paid or allowed in the previous year if not charged to income tax in any previous year.
The term ‘salary’ used in the section in a widest possible sense to include not only the salaries which are due and paid, but every amount which is paid and the amount due.
Salary is paid by an employer to an employee and the existence of the employer- employee relationship or the contract of employment is therefore a must. It may be noted that it is a mandate that a compulsory deduction and voluntary foregoing by an employee of salary due to are mere application of income and the salary is nonetheless taxable. Money embezzled by employee would constitute his income. When an employee who embezzled money, on being detected, executed promissory note in the favour of the employer, it was held that money embezzled would constitute income and will be liable to be taxed.
CHAPTER-2 WHAT IS INCLUDED UNDER THE HEAD OF SALARY?
The term “salary” for taxation purposes encompasses a broader scope than its conventional definition, incorporating both monetary and non-monetary elements. It includes wages, annuities, pensions, gratuities, fees, commissions, perquisites, and profits received by an employee in addition to regular salary or wages. Advances of salary and payments for accrued but unused leave periods also fall under this definition. Moreover, annual increments to the balance of employees participating in recognized provident funds, as well as the aggregate transferred balance in such funds, are considered part of salary for tax purposes. Additionally, contributions made by the central government to an employee’s pension scheme account in a previous year, as specified under Section 80-CCD, are also included in the comprehensive definition of salary. This inclusive definition ensures that all forms of remuneration and benefits received by employees are appropriately accounted for and taxed under the Income Tax Act, promoting transparency and equity in taxation.
Wages- In common parlance, the term wages means pay given for labour, usually manual or mechanical or at short stated intervals, as distinguished from salary or fees.
Annuity or pension- an annuity is a sum of money payable yearly or at any rate periodically from a source which is primarily personal estate whereas pension is a periodical allowance or a stipend granted on account of past services.
Gratuity- It is paid to an employee for his long and meritorious services rendered by him to the employer. A gratuity is not paid out of gratitude or as a gift.
Fees, commission, etc.- Fees is a reward given for services rendered or to be rendered: especially payment for professional services, optional amount, or fixed by customs or laws, charge, or pay whereas commission means the percentage or allowance made to an agent for transacting business for another.
In the case of CIT V. Navnitlal Sakarlalr, agreements between the company and its managing directors entitled them to renumeration but also empowered the Board of Directors to resolve in respect of any year relevant to AY1973-74, the Board of Directors to resolve that “the amount of commission payable to each of the managing directors” should be expended to purchase single premium deferred annual policies on their lives.
Annual accretion to provident fund- Such fund is to consist of (a) contributions made by the employer in excess of 10%of the employee’s salary and (b) interest thereon which is in excess of the amount calculated at a rate of 7.5% per Annum. Such amount shall be deemed to have been received by the employee in that previous year and shall be included in his total income.
CHAPTER-3 PERQUISITES OF SALARY
The term salary includes perquisites too. The term perquisite indicates some extra benefit in addition to the amount that may be legally due by way of contract for services rendered. The definition of “perquisite” under Section 17(2) of the Income Tax Act outlines various benefits and amenities provided by employers to employees, which are subject to taxation. This includes the value of rent-free accommodations provided by the employer to the employee, as well as any rent concessions for accommodations. Additionally, benefits or amenities provided free of cost or at concessional rates are taxable under specific conditions:
a. Benefits granted by a company to its directors are considered taxable perquisites.
b. Similarly, benefits provided to employees who hold a substantial interest in the company are also taxable.
c. For other employees not falling under (a) or (b), if their annual income under the head “salaries” exceeds Rs. 50,000, excluding monetary payments, any non-monetary benefits or amenities provided free or at concessional rates are taxable.
Moreover, any sums paid by the employer in lieu of obligations that would have been borne by the employee are treated as taxable perquisites. This includes contributions made by the employer towards life insurance or annuities through funds other than recognized provident funds or approved superannuation funds like a Deposit Linked Insurance Fund.
The Income Tax Act acknowledges that the definition of perquisite is not exhaustive. Other items that may qualify as taxable perquisites include lodging allowances, lump sum bonuses, additional payments for duties performed outside regular office hours, allowances for increased living costs in foreign countries, and utilities such as gas, electricity, or water supplied at the employer’s expense. Additionally, the provisions of household servants, payment of club fees or bills by the employer, expenditure on the education of an employee’s children, and the settlement of employee debts or income tax obligations by the employer are also taxable under specific circumstances.
In summary, the broad scope of taxable perquisites under the Income Tax Act ensures comprehensive coverage of benefits and payments provided by employers to employees, reflecting the diverse nature of remuneration beyond monetary compensation.
Tax-free Benefits-
Employers often extend various facilities and perquisites to their employees to enhance work efficiency and welfare. These include providing telephones at employees’ residences, facilitating easy communication for work purposes. Transport services, either free of charge or at concessional rates, offered by employers engaged in passenger or goods transport businesses, ensure convenient commuting for their staff. Privilege passes and tickets granted by the Indian Railways to its employees enable them to travel with ease for personal or official reasons.
Further afield, the government sometimes grants perquisites to Indian citizens working abroad, reflecting recognition of their service beyond national borders. Contributions made by employers to staff group insurance schemes and personal accident policies reinforce employee security and well-being. Within office premises, refreshments during working hours and subsidized lunches cater to employees’ comfort and sustenance, fostering a conducive work environment.
Moreover, recreational facilities accessible to all employees promote a balanced work-life dynamic. Conveyance facilities provided from residences to offices and back, along with medical benefits within prescribed limits, underscore employers’ commitment to employee welfare. Additionally, certain dignitaries such as Judges of High Courts, Supreme Court officers, Union Ministers, and Parliamentary opposition leaders are provided rent-free official residences, acknowledging their roles and responsibilities within the public sphere. These diverse provisions reflect employers’ efforts to support and enhance the overall experience of their workforce.
Cash Allowances –
Cash Allowances are included in the ordinary meaning of „perquisites‟ and would fall under Section-17(2). Thus, city compensatory allowance, bad climate, shift allowance and incentive bonus are held to be „perquisites‟ and thus are taxable receipts.
In the case of CIT v. R.R Bajoria (1968) the court observed Section-10(14) grants exemption from taxation in respect of any special allowance or benefit, not covered by the provisions of Section-17(2), specifically granted to meet the expenses wholly, necessarily and exclusively incurred by the assessee in performance of his duties of an office or employment of profit, to the extent of which such expenses are actually incurred for that purpose. Further any such allowance to meet his personal expenses at the place where the duty of his office etc. are ordinary performed by him or at the place where he ordinarily resides or to compensate him for the increased cost of living comma is also to be exempt. But the proviso list down that the exemption will not apply to any allowance in the nature of persona allowance granted to the assessee to renumerate or compensate him for performing duties of a special nature relating to his office or employment unless such allowance is related to the place of his posting or residence. Thus, the provisions of Section-10(14) are designed to curb the practice of claiming exemption by styling some payments as allowances when those really represent an extra amount of salary.
CHAPTER-4 PROFITS IN LIEU OF SALARY
Section-17 (3) provides for the profits in lieu of salary-
Compensation received from an employer or former employer due to termination of employment or changes in terms, payments from provident funds or similar funds, amounts from Keyman Insurance Policies, and lump-sum payments received before joining or after leaving employment are all taxable under the Income Tax Act. These payments encompass severance packages, withdrawals from employee provident funds, proceeds from keyman insurance policies, and various lump-sum settlements, each subject to specific tax treatments to ensure compliance with income tax regulations governing employment-related income.
Payments received from an approved superannuation fund enjoy tax exemption under the Income Tax Act across various scenarios.
Firstly, on the death of a beneficiary, these funds provide financial support to nominees or legal heirs without tax implications. Secondly, payments to an employee in lieu of or as commutation of annuity upon retirement at or after a specified age, or due to incapacity before retirement, are exempted from taxation. Thirdly, refunds of contributions made upon the death of a beneficiary are also tax-exempt, ensuring beneficiaries receive full benefits. Finally, refunds of contributions to an employee upon leaving service, except by retirement or after reaching a specified age, or due to incapacity before retirement, are exempted from tax. These exemptions aim to facilitate the efficient and fair disbursement of retirement benefits from superannuation funds, promoting financial security for employees and their beneficiaries.
CHAPTER-5 DEDUCTIONS FROM SALARIES
Under Section 16 of the Income Tax Act, deductions are allowed to compute the income chargeable under the head of salaries for taxation purposes. Employees are eligible for a standard deduction from their salary income to account for expenditures incidental to their employment. This deduction is a fixed amount allowed by law to reduce taxable salary income, providing relief to employees from certain employment-related expenses.
In the case of employees receiving salary from the government, a deduction known as Entertainment Allowance is applicable. This deduction applies specifically to entertainment allowances granted by the employer, limited to the lesser of one-fifth of the employee’s salary or Rs. 5,000 per annum. This provision ensures that a portion of entertainment-related expenses borne by the employee is not subject to tax, up to the prescribed limit.
Deductions are also allowed for any sum paid by the employee on account of a tax on employment. This includes taxes paid towards employment-related levies or contributions, ensuring that such payments do not form part of the taxable salary income. These deductions under Section 16 aim to fairly calculate taxable salary income, providing specific allowances for certain expenses and taxes incurred during the course of employment.
CHAPTER-6 FRINGE TAX BENEFITS
A new chapter XII-H has been inserted in the Income-Tax Act containing Sections- 115W to 115WL which provides for additional income tax on fringe benefits known as, Fringe Benefit Tax‟. The chapter aforementioned is divided into three parts. Part- A gives the meanings of certain expressions used in the chapter. Part-B enumerates the basis of charge. Part-C provides for the procedure for filing of return in relevance of fringe benefits, assessment and the payment of tax thereon.
Fringe Benefit Tax Payable by Employer
Fringe Tax Benefit is payable by an employer on the fringe benefits provided or deemed to have been provided and assessed by him to his employees based in India and determined on a presumptive basis. The value of such benefits can be determined as a proportion of the total amount of the expenses incurred for some identified purposes.
According to Section-115W (a) employer means-
- Company
- A firm
- An association of body of individuals whether incorporated or not but excluding any fun or trust or institution eligibility for the exemptions under Clause 23C of section10 or registered under section12AA.
- A lawful authority
- Any of the artificial juridical person not falling within any of the proceedings sub-clauses.
Charge of the Fringe Benefit Tax
FBT means the tax chargeable under Section- 115WA. According to it, in addition to the income- tax charged under this act, there shall be charge for every assessment year commencing on or after 1/4/2006, additional income-tax in respect of the fringe benefits provided or deemed to have been provided by the employer to his employees during this previous year at the rate of 30% on the value of such fringe benefits.
Notwithstanding that no income tax is payable by an employer on his total income computed in accordance with the provisions of this act, the tax of fringe benefits shall be payable by such employer. In other perspective, fringe benefits tax shall be payable at the rate of 30% plus surcharge if any and education cess at the rate of 2% in respect of fringe benefits provided or deemed to have been provided by the employers to his employees during the previous year. Such fringe benefit tax shall be payable even if the even if the employer is not liable is not liable to pay income-tax on his total income. Therefore, even the loss making concern will have to pay fringe benefit tax although there is no income-tax is payable by them. As per CBDT circular, the FBT will not be allowed as a deduction in calculating the income chargeable under the head, profits and gains of business or profession.
Meaning of Fringe Benefits
- Any consideration for employment provided by way which it needs to be addressed.
- Any privilege, service, facility or amenity, that is directly or indirectly, provided by an employer, whether by the way of compensation or otherwise to his employees.
- Any free or concessional ticket which is provided by the employer for a private journey of his employees or their family members.
- Any contribution made by the employer to an approved superannuation fund for employees.
Items of expenditure on which the Fringe Benefit Tax is to be paid
Employers often provide various benefits and amenities to their employees, which are crucial for enhancing morale and maintaining productivity. These include entertainment, such as corporate events and outings, which foster team spirit and employee engagement. Additionally, the provision of hospitality to clients or guests, excluding the food and beverages provided to employees at the workplace, is also a common practice. Sales promotion activities and publicity efforts are undertaken to boost market presence and brand recognition, contributing to business growth.
Employee welfare forms another significant aspect, covering expenditures required by statutory obligations or to ensure occupational safety and health standards. This excludes expenses that do not directly benefit employees’ welfare. Conveyance, travel arrangements, and accommodation facilities provided during business trips or assignments are also managed by employers, ensuring smooth operations and employee convenience.
Moreover, employers often shoulder expenses related to the repair, maintenance, and depreciation of motor vehicles or aircraft used for official purposes. Celebrations of festivals and cultural events within the organization further contribute to a positive work environment. Health club memberships and similar facilities are sometimes extended to employees, promoting their well-being and work-life balance.
Furthermore, access to club facilities and occasional gifts are provided as tokens of appreciation or recognition. Scholarships offered to employees or their dependents support educational pursuits, demonstrating a commitment to personal and professional growth within the workforce. These varied provisions underscore the comprehensive approach taken by employers to ensure employee satisfaction, welfare, and engagement in the workplace.
Certain perquisites and benefits or amenity not to be treated as fringe benefits
Privileges, services, facilities or an amenity for the purpose of fringe benefits does not include perquisites in respect of which tax is to be paid or payable by the employee.
CONCLUSION
Based on a comprehensive study on income under the head of salary, it can be concluded that various factors such as taxation laws, employee benefits, salary structures, and government policies play significant roles in determining individuals’ net income from salaries. Moreover, understanding these factors is crucial for both employees and employers to ensure compliance with regulations and optimize financial planning. Furthermore, exploring the evolution of salary structures over time and their adaptation to changing economic conditions and workforce demographics provides valuable insights into contemporary compensation practices.
There are many more areas where simplification is required. If government implement above suggestions then salary as a basic head of income will get simplified and purpose of simplification of tax will be achieved as expected.