Salary received by an employee is taxable on receipt or due basis, whichever is earlier. Salary is generally taxable on due basis, whereas, advance salary or arrears salary is taxable on receipt basis. In this article we will explain taxability of salary on due or receipt basis.
Employee receives a monthly salary from his employer. This may be on the last day of the month or a pre-decided day of the next month. Generally salary is taxable on due basis. Consider this example: Salary for the month of March, 2016 was due on 31st March, 2016 and received on 7th April, 2016. In this case salary for the month of March will be taxed in the financial year 2015-16 and not in the year of receipt i.e. 2016-17.
In following two conditions, salary is taxable on receipt basis.
When employee receives arrears of salary for the previous year’s, which was not taxed earlier on due basis, then salary received is taxed on receipt basis. Arrears of salary are common for Government employees as their salary get revised with every pay commission order. Advance salary received is always taxed on receipt basis.
A taxpayer can claim relief u/s 89(1) for arrears or advance salary for which he should file Form 10E.
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