Those having income from salary are concerned with the changes taking place in the Income Tax Act, 1961. So, at very outset one must understand what constitutes ‘Salary’ for Income Tax purposes.

Salary income include pay, wages, city compensatory allowance, house rent allowance and all other allowances, gratuity, fees, commission, pension, leave encashment, value of perquisites provided by the employer, profits in lieu of salary or in addition to salary, the annual accretion to the balance at the credit of an employee participating in Recognised Provident Fund to the following extent, which is chargeable to tax –

• In case of employer’s contribution, the amount of contribution in excess of 12% of salary.
• In respect of interest credited on the balance to the credit of employee, interest exceeding specified rate, which is 9.5% p.a. or as may be fixed by Central Government.

Salary shall also include the contribution made by the Central Government in the previous year, to the account of an employee under a notified pension scheme u/s 80CCD.

In case, one is employed by more than one employer, then aggregate of such receipts will be taken as salary. Some of the above receipts and perquisites are given special treatment and not included in taxable salary.

Taxable Salary is the salary due to the employee whether received by him or not. Salary for services rendered in a year is taxable income of that year even if the employee has not been paid his salary till the close of that year.

Also arrears of salary are taxed in the year of receipts if the same has not been taxed earlier on due basis and salary paid in advance is also taxed in the year of receipt. In other words, tax is collected at the first occurrence of any of the events, namely, the salary is earned; it is received as due; or it is received in anticipation of services to be rendered.  However, the assessee is entitled to tax relief u/s 89(1) in case of receipt of arrear salary.

One of the important tests to determine that whether a particular receipt is salary or not, the employer-employee relationship between payer and payee should exist. If such a relationship does not exist, then the income falls outside the scope of this head.

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