Characteristics of Salary Income – Employment Test
Not all payments from work are "salary"! Freelancer gets ₹50k - is it salary? Employee gets ₹50k - is it salary? Yes for employee, No for freelancer. Let's understand what makes income "salary."
Key Characteristics of Salary Income
Loading diagram…
Characteristic 1: Employer-Employee Relationship
Most crucial test!
Relationship must exist:
- Contract of service (not contract FOR service)
- Employer has control over employee
- Employee works under supervision
- Cannot delegate work to others
Example - Salary:
- Bank employee on payroll
- Government teacher
- Company software engineer
- Control: Manager assigns tasks, monitors work
Example - NOT Salary:
- Freelance consultant
- Independent contractor
- Self-employed professional
- Control: They decide when/how to work
Contract OF Service vs Contract FOR Service
Loading comparison…
Characteristic 2: Due Basis (Most Important!)
Salary taxable when DUE, not when received
Section 15: Charge on due or receipt basis, whichever is earlier
Example 1 - Due before receipt:
March 2025 salary:
- Due date: March 31, 2025 (FY 2024-25)
- Actual payment: April 5, 2025 (FY 2025-26)
- Taxable in: FY 2024-25 (due date earlier)
Example 2 - Received before due:
Advance salary:
- March 2026 salary paid in February 2025
- Due: March 2026 (FY 2025-26)
- Received: February 2025 (FY 2024-25)
- Taxable in: FY 2024-25 (receipt earlier)
Key Point: Earlier of due/receipt determines taxable year
Characteristic 3: TDS (Tax Deducted at Source)
Employer MUST deduct TDS on salary
Section 192: Mandatory TDS deduction
How it works:
- Employer estimates annual salary
- Calculates expected tax
- Deducts monthly from salary
- Deposits to government within 7 days
- Issues Form 16 (TDS certificate)
Example:
Expected annual salary: ₹12,00,000
- Expected tax: ₹1,50,000
- Monthly TDS: ₹12,500
- Employee receives: Salary - TDS
Benefit: Tax paid throughout year (not lump sum at end!)
Characteristic 4: Periodic and Regular Payment
Salary usually paid:
- Monthly (most common)
- Bi-weekly (some companies)
- Weekly (rare)
Fixed components:
- Basic salary
- Dearness allowance
- HRA
Variable components:
- Bonus (annual)
- Commission (monthly/quarterly)
- Overtime
Contrast with business income: Irregular, depends on sales/profits
Characteristic 5: No Business Risk
Employee bears NO business risk
Salary paid regardless of:
- Company profit/loss
- Economic downturn (usually)
- Individual project success
Example:
Software engineer:
- Salary: ₹80k/month (fixed)
- Company makes ₹10 crore profit → Engineer gets ₹80k
- Company makes ₹5 crore loss → Engineer still gets ₹80k
Freelancer:
- No clients → No income this month
- Bears business risk!
Employer-Employee Tests (Detailed)
Test 1: Control
- Employer dictates how, when, where work is done
- Example: Must work 9 AM - 6 PM in office → Employee
Test 2: Integration
- Part of employer's organization
- Example: On company payroll, email ID, visiting card → Employee
Test 3: Economic Reality
- Depends on one employer for livelihood
- Example: 100% income from one company → Likely employee
Test 4: Tools & Equipment
- Employer provides laptop, software
- Example: Company gives MacBook, software licenses → Employee
Test 5: Payment Method
- Regular, fixed payment
- Example: Fixed monthly salary + increment → Employee
What is NOT Salary?
X Director's sitting fees → Other Sources (if not employee-director)
X Professional fees (CA, Doctor consultancy) → Business/Profession
X Freelance income → Business/Profession
X Commission-only agents → Business (if no employer-employee relationship)
X Family pension → Other Sources (no current employment)
Practical Examples
Example 1: Clear Salary Case
Mr. Sharma:
- Works for TCS as software engineer
- Monthly salary: ₹1,20,000
- TDS deducted: ₹18,000/month
- Works 9 AM - 6 PM in TCS office
- Reports to manager
- Annual Form 16 issued
Characteristics: ✅ Employer-employee relationship ✅ Due basis (salary due monthly) ✅ TDS deducted ✅ Periodic (monthly) ✅ No business risk
Conclusion: Salary income under Section 15-17
Example 2: Borderline Case - Freelancer
Ms. Priya (Web Developer):
- Works for 5 different clients
- Charges ₹50,000/project
- Works from home, own timings
- Uses own laptop
- Invoices clients
- No TDS (only if payment > ₹30k, then 10% TDS u/s 194J)
Characteristics: ❌ No single employer ❌ Not on due basis (project completion) ❌ No mandatory salary TDS ❌ Irregular payment ✅ Bears business risk (no clients = no income)
Conclusion: Business/Professional income, NOT salary
Example 3: Employee-Director
Mr. Kumar:
- Employee of ABC Ltd (MD - Managing Director)
- Salary: ₹2,00,000/month
- Also attends board meetings
- Sitting fees: ₹10,000/meeting
Income classification:
- Salary: ₹2,00,000/month (employee capacity) → Section 15-17
- Sitting fees: ₹10,000/meeting → Other Sources (director capacity)
Two hats: Employee + Director = Two income heads!
Taxation Differences
| Aspect | Salary | Business/Profession |
|---|---|---|
| Basis | Due or receipt (earlier) | Receipt basis |
| TDS | Section 192 (mandatory) | Section 194J (if > ₹30k/payment) |
| Deductions | Section 16 (₹75k standard) | Sections 30-37 (expenses) |
| Presumptive tax | Not applicable | Section 44AD/44ADA |
| Audit | Not required | If turnover > limits |
Summary
- Salary: Income from employer-employee relationship (contract OF service)
- Key characteristics: (1) Employer-employee, (2) Due basis taxation, (3) Mandatory TDS, (4) Periodic payment, (5) No business risk
- Due basis: Taxed when due OR received (whichever earlier) - critical for year-end salary
- TDS Section 192: Employer must deduct tax monthly based on annual projection
- Control test: Employer controls how/when/where work done = Employee
- Not salary: Freelancer, consultant, director fees (other sources), family pension
- Employee-director: Salary (employee role) + Sitting fees (director role, other sources)
Quiz Time! 🎯
Loading quiz…
Next Chapter: Section 17(1) - Salary Components! 💰