Salary is the remuneration received by or accruing to an individual periodically for service rendered as a result of an express or implied contract. The existence of employer-employee relationship is the sine-qua-non for taxing a particular receipt under the head “salaries.” No, payment can be taxed under this section unless the relationship of employer and employee exists. Thus, There should be contractual employer-employee relationship. The contract may be express, oral or implied. For instance, the salary received by a partner from his partnership firm carrying on a business is not chargeable as “Salaries” but as “Profits & Gains from Business & Profession”. Similarly, salary received by a person as MP or MLA is taxable as “Income from other sources”., but if a person receives salary as Minister of State/Central Government, the same shall be charged to tax under the head “Salaries”. Pension received by an assessee from his former employer is taxable as “Salaries” whereas pension received on his death by members of his family (Family Pension) is taxed as “Income from other sources”.
Under the Income-tax Act “Salary” includes :-
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Wages
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Annuity or pension
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Gratuity
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Fees, commission, perquisites or profits in lieu of salary
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Advance of Salary
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Receipt from Provident Fund
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Contribution of employer to a Recognised Provident Fund in excess of the prescribed limit
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Leave Encashment
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Compensation as a result of variation in Service contract etc.
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The deductions from salary income admissible under the Income-tax Act are :-
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Standard Deduction
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Professional/Employment tax levied by the State Govt.
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Entertainment Allowance
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