Year of taxability

Salary is brought to tax under the provisions of section 15 of the Act. The method of accounting followed by the assessee is irrelevant and the taxability of salary income is dictated by the statutory provisions of the Act. The assessee has no option of selecting the method of accounting of his choice. Income from salary is taxable on due basis or on receipt basis, whichever is earlier. Any arrears of salary is taxable in the year of receipt if the same has not been taxed in any earlier year. In other words, even if an employee is following the mercantile system of accounting in respect of his various sources of income, salary income for the next year received in advance in the previous year relevant to assessment year 2004-05 would have to be included in the total income for assessment year 2004-05, on receipt basis. However, the same income cannot be included in the total income for assessment year 2005-06; i.e., on due basis, as it has already been taxed earlier. Similarly where an assessee is entitled to salary; i.e., it has accrued and fallen due in assessment year 2004-05, but has actually been received in the subsequent assessment year viz. 2005-06, then notwithstanding the system of accounting followed by the assessee, such salary would be included in the total income for assessment year 2004-05 on due basis and would then not be included in the total income for assessment year 2005-06, being the year of receipt.
 

Standard deduction

As per section 16(i), a deduction is allowed for the expenses which an employee might have incurred for earning the salary income. However, the deduction has no relation with the amount of actual expenses incurred and is therefore commonly referred to as ‘standard deduction’. This deduction is based on the amount of salary income and the amount of deduction eligible is computed with reference to the taxable salary income before allowing standard deduction; i.e., on the net taxable salary income after considering exemptions under section 10 and deductions in respect of entertainment allowance and profession tax but before standard deduction.

The amount of standard deduction eligible is as under:
 

Salary Income before Standard Deduction  Standard Deduction for A.Y. 2002-03 to A.Y. 2003-04 Standard Deduction for A.Y. 2004-05 Up to Rs. 75,000 331/3% of Salary 40% of salary Rs. 75,001 - Rs. 90,000 331/3% of salary Rs. 30,000 Rs. 90,001 - Rs. 1,50,000 Rs. 30,000 Rs. 30,000 Rs. 1,50,001 - Rs. 3,00,000 Rs. 25,000 Rs. 30,000 Rs. 3,00,001 - Rs. 5,00,000 Rs. 20,000 Rs. 30,000 Above Rs. 5,00,000 Nil Rs. 20,000

It may be noted that the standard deduction is only linked to the quantum of net taxable salary as aforesaid and an employee would be entitled for the entire standard deduction even if he has been employed only for a part of a year. Similarly, if an employee has worked with two or more employers during the year, the amount of standard deduction will be restricted to the aforesaid limit only. Hence it is imperative that if an employment has been changed during the year or an employee is working with two employers, the particulars of salary earned from the earlier/other employer is informed to the new/other employer so that the standard deduction is not granted twice and correct deduction of tax at source takes place.
 

Profits in lieu of salary

Income under the head ‘Salaries’ covers all remuneration due/paid to a person in respect of services rendered by him under an express or implied contract of employment. Income can be taxed under the head ‘Salaries’ only if there is a relationship of an employer and employee between the payer and the payee. However, any compensation received for either loss of employment or for modification of employment was earlier claimed to be a capital receipt and therefore not chargeable to tax. However, by virtue of the amendment made by the Finance Act, 2001 with effect from 1st April, 2002, any amount due to or received by an assessee from any person –

1. before his joining any employment with that person; or

2. after cessation of his employment with that person

is now taxable under section 17(3) as profits in lieu of salary.

Joining pay is paid by the employer to compensate the employee for loss of salary in the previous employment for not serving during the notice period. The said payment will be taxable under the head ‘Salaries’ as profit in lieu of salary.

Notice pay or Severance pay on the other hand is paid as per the terms of appointment wherein either party is required to give a notice of certain period in case of the termination of employment. In case the service is terminated before the notice period, the employee is entitled to claim salary for the notice period as per the agreement of service. The amount paid to the employee in such a case will be taxable under the head "Salaries" as profit in lieu of salary.

It may be noted that even prior to the aforesaid amendment compensation received by an assessee from his employer or former employer at or in connection with the termination of his employment or modification of the terms and conditions of employment was taxable as profit in lieu of salary under section 17(3)(i). Hence in a case where the employment ceased in March, 2000 and a gratuitous payment was received by the employee in May, 2000 it would be possible to argue that since the payment was not "at or in connection" with the termination of employment, the same is not taxable as profits in lieu of salary. However, after the amendment such payment would be covered under section 17(3)(iii) as profits in lieu of salary.

The term profits in lieu of salary also includes payments in respect of employers contribution and interest thereon received from unrecognized provident fund or unrecognized superannuation fund and payments under Keyman Insurance Policy.
 

Scheme for Filing of Returns by Salaried Employees through Employer, 2004

Pursuant to the announcement made by the Finance Minister, a new Scheme called ‘Scheme for Filing of Returns by Salaried Employees through Employer, 2004’ has been notified (Notification No. 15 of 2004/S.O. 53(E) dated 12th Jan., 2004). This is an optional scheme available to certain eligible employees and provides an additional mode of furnishing their returns of income. This scheme is to come into force from 1st April, 2004.

Who are eligible – An individual, resident in India, satisfying the following conditions is eligible:

1. The total income of the individual should include income chargeable to income-tax under the head ‘Salaries’;

2. The income from salaries before allowing deduction under section 16 should not exceed Rs. 1,50,000/-;

3. The total income of the individual should not include income chargeable to income-tax under the head ‘Profits and gains of business or profession’ or ‘Capital gains’ or, agricultural income;

4. The individual should not have received any other income from which tax has been deducted at source during the previous year by any person other than the employer.

Ineligible returns – The following types of returns cannot be submitted under the above scheme –

1. Return of income of a year other than that due in the current financial year;

2. Return of income where no PAN or incorrect PAN of the employee has been quoted;

3. Return of income under section 153A of the Income-tax Act;

4. Return of an employee having more than one employer during the relevant previous year;

5. Return of an employee who is not getting his salary from the employer as on the last day of the previous year, for which the return is being furnished.

Procedure – The following procedure is to be adopted:

1. The employee who has opted to file the return under this scheme will, on receipt of the certificate of tax deducted at source from salary in Form No. 16AA from the employer, have to verify the information given in the said Form as correct, complete and true in accordance with the provisions of Income-tax Act, 1961 and furnish the same after being signed and verified by him to the employer before the due date specified in section 139(1).

2. On receipt of duly signed and verified Form No. 16AA, the employer will have to furnish the return of income in Form No. 16AA to the Assessing Officer and obtain an acknowledgment.

3. The employer will have to ensure that the return of income is furnished to the Assessing Officer on or before the due date specified in section 139(1).

4. The date on which the employer has furnished the return of income of the employee to the Assessing Officer will be treated as the date of furnishing of return of income by the employee and the relevant provisions of the Income-tax Act, 1961, shall apply as if the return had been filed by the employee.

5. The employer shall handover the acknowledgments obtained from the Assessing Officer to the respective employees.

Other points – The certificate of tax deducted at source in Form No. 16AA itself is to be verified and is to be treated as a return and accordingly it would be necessary for the employee to furnish the details of income from other sources to the employer since it will not be possible for him while verifying Form No. 16AA to add any other income. It may be noted that in case of failure on the part of the employer to furnish Form No. 16AA in time, the consequences of belated filing may fall on the employee since the provisions of the Income-tax Act shall apply as if the return was filed by the employee. Therefore, the employee should ensure that the employer has furnished Form No. 16AA on or before the due date as specified under section 139(1).