Income under the head salaries is the first and the most important head for individuals. In this article, we will discuss when income will be chargeable to tax under the head income from salaries.
Before considering any income under the head salaries, the first condition to be looked for is the relationship between the payer and payee.
If relationship of the payer and payee is employer and employee, then the income is always taxable under the head salaries. If such relationship doesn’t establish, then you have to look for some other head where the conditions to that head satisfies. Most probably you will be assessed under the head “income from other sources” or “profits and gains from business and profession”.
Now the question is how to determine that the payment is due to employer and employee relationship.
Employer and employee relationship
In order to determine the relationship between payer and payee, you should understand whether the relationship of master and servant established.
Master define when and how things are to be done, and the servant is bound to do the job according to the directions or instructions. The master should have full control and supervision on servant’s work. It’s the job of the servant to execute the work as per the command of the master.
The difference between a contractor and employee is that the former undertakes work not under the order and direct control of the party, however the later has no such liberty. The contractor is bound by the contract signed between the payer and payee, but not by the order of the party.
To know the relationship, you need to know how the right of control exist in the agreement executed between the payer and payee.
You are required to understand the difference between contract for service and contract of service
In both contract for service and contract of service, the payee can order what is to be done. However contract of service defines how the work shall be done. Let us understand the difference in detail.
Contract of service versus contract for service
To define the relationship as employee and employer, the nature of engagement should be for contract of service. If the nature of payment is for contract of service, then its chargeable under the head income from salaries.
In a contract of service following things exist:
- Day to day control and supervision is with the master.
- The master determine the manner in which works must be executed by the servant. The master can ask the servant to do the job as per his instructions.
- Servant works for a periodic remuneration and bound to serve for the master. At the same time, he can’t offer his services to others without the permission of his master.
In contract for service following things exist:
- The person can offer his services to anyone who is willing to pay a fee.
- To execute the work, day to day control should not exist.
- The person working in contract for service, may have profit or losses depending on this work. Payer will be liable for the amount that they are agreed to as per the contract.
- Executor will only be answerable for the work he has undertaken based on the terms and conditions of the contract. However, work in general will be carried out based on the expertise he has.
If the nature of agreement between the payer and payee is contract of service, then the relationship between them is employer and employee.
Here are certain cases where its held that income in these cases will not be taxable under the head salary;
Salary to MP and MLA – Is it taxable under the head salaries
Salary to Member of Parliament (MP) and member of the legislative assembly (MLA) is taxable under the head “Income from other sources” as the relationship between the government and a Member of Parliament or member of the legislative assembly is not an employer and employee.
If such MLA or MP is a cabinet minister or chief minister, then employer and employee relationship established between the government and such MLA or MP. Therefore income in this case, will be taxable under the head “income from salaries”.
Is remuneration to partners from partnership firm taxable as salary
As per the explanation 2 to section 15 of the Income tax act, any salary, bonus, commissionaire or remuneration due to or received by an assessee from a partnership firm in which he/she is a partner, shall not be chargeable to tax under the head salary as there is no employer-employee relationship. It has to be taxed under the head “profits and gains of business or profession”.
Are honorariums taxable as salaries in India
Honorarium can be paid to anyone for a service in a volunteer capacity for which no official charge is made.
Honorarium paid to doctors, lectures, chartered accountants and others can not be charged to tax under the head income from salary. Its chargeable to tax under the head income from other sources.
Please note, salary to high court and supreme court judges is taxable under the head income from salary because our law terms the payments made to high court and supreme court judges as salary.
Salary in case of transfer or sifting jobs
On the basis of the above discussion, if income is due or received from your employer or former employer for the services rendered due to your employment, then the whole amount due or received during the previous year will be charged to tax under the head income from salary.
If you have sifted job during the previous year, salary received from former employer has to be disclosed to present employer in order to deduct tax at source at the applicable rate.
In case you haven’t disclosed it to the present employer then you can still show it in your income tax return and pay the balance tax liability as applicable to you. However, it’s always advised to disclose the salary received from former employer to present employer as less deduction of tax due to not disclosing will attract interest liability under different sections of income tax act, 1961.
If the relationship is employer and employee, income received from employer by the employees is always taxable under the head income from salaries. However the question is in which year you will be liable to tax. For instance, if you have worked for 6 months but haven’t received your salary during the previous year, will you be liable to tax in that previous year as you satisfy the basic condition of employee and employer relationship. Yes, you are taxable in the same previous year in which it becomes due to you even though you haven’t received it yet.