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SALARY: BASIS OF CHARGE
Section 15 of the Income Tax Act, 196, is charging section for the head Income under salary. As per this section salary ischargeable to tax on ‘due’ basis or on ‘receipt’ basis, whichever is earlier.
It means when salary is received in advance it is assessed in the year of receipt and not in the year in which it becomes due.Also, if the salary received in arrears has already been assessed on due basis the same cannot be taxed again when it isactually paid.
To give an example:
Mr. Alladin draws his salary in advance for the month of April 2018 in the month of March 2018. The same becomes chargeable on receipt basis and is to be taxed as the income of the P.Y.2017-18 i.e., A.Y. 2018-19. Also note the salary for the A.Y. 2019-20 will not include same salary as was taxed in March that was due in April 2018.
Now, suppose Ms Ginni receives the salary due for March 2018 in the month of April 2018. The salary would still be chargeable as income of the P.Y. 2017-18 i.e., A.Y. 2018-19 on due basis. Obviously, salary for the A.Y. 2019-20 will not include that of March 2018.
Advance salary is taxable when it is received by the employee irrespective of the fact whether it is due or not. It may so happen that when advance salary is included and charged in a particular previous year, the rate of tax at which the employee is assessed may be higher than the normal rate of tax to which he would have been assessed. Section 89(1) provides for relief in these types of cases. For the same refer the link: https://thetaxtalk.com/2018/09/13/arrears-received-claim-relief-u-s-89-of-the-income-tax-act-1961/.
Loan is different from salary. When an employee takes a loan from his employer, which is repayable in certain specified installments, the loan amount cannot be brought to tax as salary of the employee.
Similarly, advance against salary is different from advance salary.
Advance against salary is an advance taken by the employee from his employer. This advance is generally adjusted with his salary over a specified time period. It cannot be taxed as salary.
As per law, salary arrears must be charged on due basis. However, there are circumstances when it may not be possible to bring the same to charge on due basis.
For Example: Say pay commission appointed by the Central Government recommends revision of salaries of employees. In such case employee will receive arrears received in that connection will be charged on receipt basis. Here again the relief under section 89(1) is available.
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