Salary Advance is Taxable or not

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When a tax payer receives a sum in the nature of salary paid in arrears or in advance, or receives salary for more than twelve months in any financial year, or receives profits in lieu of salary or family pension paid in arrears, and his total income is taxable at a rate higher than it would have been taxable otherwise, he may claim tax rate relief.

Some additional receipts, such as gratuities for previous services, compensation received from the employer or former employer upon termination of work, payment received in commutation of pension, and so on, are also eligible for said relief, subject to specific circumstances. The relief must be sought in the same financial year that the excess payment in arrears or advance is taxed. In general, the relief provided by these provisions is mathematical in nature, as it entails calculating two tax rates. The first is the tax rate that applies to the overall income in the year of receipt, including the additional amount.

Tax on Salary Advice

An employee’s advance salary is taxed in the year it is received. In the case of advance salary, however, an employee might seek relief under section 89. A bonus earned by an employee is also taxed in the year it is received.

Exceptions to Tax Relief

When the tax payer has already claimed advantage or exemption under another section of the Act, there has been considerable debate over whether relief under this clause can be obtained. 

It has now been clarified that no such relief may be obtained in respect of the amount received by a taxpayer upon voluntary retirement or termination of employment if the taxpayer has already claimed an exemption in respect of the same under another provision.

How to calculate relief under section 89?

  1. Determine the amount of tax that must be paid on the whole income – including arrears – in the year it is received.
  2. Calculate the tax due on the whole income in the year it is received, excluding any arrears
  3. Determine the difference between steps one and two.
  4. Subtract the arrears from the total revenue for the year.
  5. Determine the amount of tax due based on the overall revenue for the year in which the arrears occur, including the arrears.
  6. Determine the difference between steps 4 and 5. 
  7. The tax reduction permitted is the difference between the amounts in Step 3 and Step 6.

Recent Amendment for Salaried Class

As per an amendment in the Budget 2018, tax exemption on medical reimbursement amounting to Rs. 15,000 and transport allowance amounting to Rs. 19,200 in a financial year have been replaced with a standard deduction of Rs. 40,000 (For FY 2018-19) and Rs. 50,000 (For FY 2019-20). With this, I have reached to the end of this Article. I have tried to address some of not much talked areas in Salary.

Tax Treatment of Fees or Commission 

Fees or commission received by the employee from the employer are charged to tax as salary income. Commission will be taxed as salary income, irrespective of  the fact that it is received as fixed monthly amount or is received as a percentage of any particular item like turnover achieved by the employee.