“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 actual receipt of salary in the previous year is not material as far as its taxability is concerned.

Salary is chargeable to tax on “due” or “receipt” basis whichever is earlier. Income will be chargeable under the head ‘salaries’, it is vital that there must be the existence of “employer-employee” relationship between the payer and the payee. 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 or Profession” 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”.

As per Sec. 17(1), salary consists of the following:

1)   Wages

2)  Any annuity or pension

3)  Any advance of salary

4)  Any payment received by an employee in respect of any period of leave not availed by him

5)  Any gratuity

6)  The portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognized provident fund to the extent it is taxable

7)  Any fees, commissions, perquisites or profit in lieu of or in addition to any salary or wages

8)  Transferred balance in a recognized provident fund to the extent it is taxable

9)  Contribution by the Central Government or any other employer to the account of an employee under a pension scheme

“Perquisite” may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages.

As per Sec. 17(2), perquisite consists of the following:

1)   Value of rent-free/concessional rent accommodation provided by the employer.

2)  Any sum paid by employer in respect of an obligation which was actually payable by the assessee.

3)  Value of any benefit/amenity granted free or at concessional rate to specified employees etc.

• By a Company to an employee who is a director of such company;
• By a Company to an employee who has a substantial interest in the company;
• By an employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose income under the head “Salaries” (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds Rs. 50000.

4)  The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee, shall constitute a perquisite in the hands of the employees –

Here, for the explanation –

• “Specified security” means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and, where employees stock options has been granted under any plan or scheme therefore, includes the securities offered under such plan or scheme;
• “Sweat equity shares” means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called;
• “Value” means the difference between the fair market value on the date on which the option is exercised by the assessee and the cost for acquiring specified securities by the assessee.
• “Fair Market Value” means the value determined in accordance with the method as may be prescribed;
• “Option” means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price;

5)  The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees; and

6)  The value of any other fringe benefit or amenity as may be prescribed.

“In lieu of” means “instead of”, thus profits in lieu of salary means profit that is earned instead of earning profits.

As per Sec. 17(3), a profit in lieu of salary consists of the following:

1)   The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment the modification of the terms and conditions relating thereto;

2)  Any payment other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12), clause (13) or clause (13A) of section (10), due to or received by an assessee from an employer or a former employer or from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a Key-man insurance policy including the sum allocated by way of bonus on such policy.

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