Due basis or receipt basis – When salary income is taxable

Before getting into what is due basis or receipt basis and when salary income is chargeable to tax, you first need to understand whether your income is taxable under the head salaries or under some other head of income.

For instance, if you are hired by a software company as a contractor, amount incurred by you from the software company will not be taxable under the head salary as the money paid to you is not due to contract of service. In simpler terms, you are not an employee of the software company. Therefore, instead of calculating income under the head salaries, you need to do the calculation as applicable to income chargeable under the head profits and gains from business and profession.

Heads of Income

Section 14 of the Income Tax Act, 1961 requires assessee to classify his income under the following 5 different heads:

  • Income from salaries, 
  • Income from house property, 
  • Profits and gains of business or profession,
  • Income from capital gains, and 
  • Income from other sources.

To get it taxable under the head income from salaries, you need to apply the provisions of section 10,15,16,17 and other sections of income tax act, 1961 as applicable.

To get your income chargeable to tax under the head salaries, the first and foremost condition to be satisfied is that the payer and payee agreement must be a contract of service. This means payment must be from employer to employee due to the contract of service.

If your income satisfies the first basic condition that its received by you from your employer due to the employment, then income will be considered as salary income. Therefore, it will be taxable under the head salaries.

Now the question is how to know in which year salary income is charged to tax. Will you be including your March 2019 salary in income under the head salaries for the previous year 2018-19 if its received in the month of April 2019. These type of questions often asked by taxpayers.

To know in which year salary income is charged to tax and the basic conditions to be satisfied to get it taxed under the head income from salaries, we have to understand the basis of charge as specified in Section 15.

Basis of charge – when salary income is chargeable to tax

As per the provisions of section 15, following income shall be chargeable to tax under the head salaries;

  • any salary due from an employer or a former employer to an assessee in the previous year, whether paid in that previous year or not;
  • any salary paid or allowed to an assessee in the previous year by or on behalf of an employer or a former employer, though not due in that previous year or before it becomes due to him. Its known as advance salary.
  • any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income tax in any earlier previous year.

As per above provisions, salary from employer is always taxable on due basis irrespective of when its received. However, advance salary and arrears of salary are taxable when it’s received. Therefore, it can be concluded that salary is taxable on due or receipt basis, whenever is earlier.

To know more about the basis of charge, you have to understand the difference between due basis and receipt basis.

How to know when salary income is due

From the contract signed between the payer and payee, you can know when salary is due to the employee. In general, salary becomes due when employee has the legal right to demand payment from the employer on the basis of his/her employment.

If the salary is due as per the contract but has not been paid by the employer to employee, then the charge to tax is attached. It means in this case salary will be chargeable to tax on due basis irrespective of whether its paid to you or not.

For instance, if as per the agreement, the employer is liable to pay salary at the end of the month, then its chargeable to tax on the same month in which its incurred irrespective of whether its paid or not. In this way, salary due for the previous year 2018-19 (starting from April 2018 to March 2019), is chargeable to tax on the same year if its due but not paid.

Please note, assessee and income tax officer has no option to choose the basis of charge.

When salary income is chargeable to tax on payment basis

However, in the case of advance salary and arrears of salary, it will be chargeable to tax on payment basis irrespective of whether its due or not. This means if salary is received, it’s immaterial to which year it relates.

For instance, if the government of India has increased dearness allowance with effect from an earlier year, then such arrears of salary will be chargeable to tax in the previous year in which employee has received it. For arrears of salary, assessee can claim relief under section 89 of income tax act,1961. You are required to claim relief while filing your tax return.

Please note, employer will be deducting tax from arrears of salary at the applicable income tax slab rates at the time of payment. Deducted TDS amount will be deposited with government against the employee’s permanent account number or PAN.

From the provisions of section 15 and above discussions, it’s clear that if income is chargeable as salary due to employer and employee relationship, then it must be taxable on due or receipt basis whichever is earlier.

When allowances are taxable as salary income

Even though allowances are not specifically included in the definition of salary, its chargeable to tax because of the inclusive nature of section 17 of the income tax act, 1961.

As a part of salary, allowances are chargeable to tax when its due to employee.

To summaries, salary income is taxable on due basis or on receipt basis,whichever is earlier. This means,

  • If salary is due during the previous year, then its taxable even if its not received.
  • Salary received during the previous year is taxable is the same year even if it was not due in that year.
  • Arrears of salary is taxable in the year in which its received even it was due in earlier previous years.

Is perquisites taxable on due basis or receipt basis

Employer can provide certain non monetary benefits to employees in addition to the above allowances and other payments as specified in section 17. These type of benefits given by the employer to employee is known as perquisite.

Below is a list of few perquisites which is chargeable to tax under the head income from salaries.

  • Rent free accommodation
  • Facility of domestic servant such as watchman, gardener, sweeper.
  • Free education

In all these cases, money has neither due nor paid to employee. These are benefits given to employees for their employment with the employer.

If these type of non monetary benefits are extended to the employee, then its chargeable to tax under the head income from salaries. This means its chargeable to tax if allowed by the employer to employee.

Please note, if salary is already taxed on due basis in any previous year, then it can not again be chargeable to tax on payment basis.

If you are taxable, then you can reduce your tax liability by investing in any specified investment options available under chapter VI-A of the income tax act, 1961. Here is a list of few eligible investment instruments:

  • Public provident fund or PPF
  • National saving certificate or NSC
  • Five year bank fixed deposits or FDs
  • Unit linked insurance plans
  • Mutual funds
  • Equity linked saving schemes

For detail list of investment options, expenses and other contributions to get eligible for full tax deduction under section 80C, we suggest you to refer the full list as specified in section 80C.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.