What Happens When Salary is Paid in Advance or Foregone?
Salaried individuals occasionally face situations where salary is either paid in advance or voluntarily foregone. These scenarios, though uncommon, have specific tax implications under the Income Tax Act, 1961.
This guide explains how advance and foregone salaries are taxed, highlights the relevant sections, and provides practical examples to clarify the rules.
Taxation of Advance Salary
Advance salary refers to payments made to an employee before they are due. Taxation rules for such payments are governed by Section 15 of the Income Tax Act.
Relevant Tax Rule
- Salary is taxable on a due or receipt basis, whichever is earlier.
- Advance salary is taxable in the year it is received, even if it pertains to future services.
Example of Advance Salary Taxation
Mr. A receives ₹1,20,000 in March 2023 as advance salary for services to be rendered in April and May 2023.
Tax Implications:
- The ₹1,20,000 is taxable in FY 2022–23, even though the salary becomes due later.
Relief Under Section 89(1)
Advance salary can lead to a higher tax liability if it pushes the taxpayer into a higher slab. Relief is available under Section 89(1) to mitigate this impact.
Learn more about claiming relief under Section 89(1) on the Income Tax India official website.
Taxation of Foregone Salary
Foregone salary occurs when an employee voluntarily waives their right to receive payment. Tax treatment depends on when the waiver occurs.
Tax Rules for Foregone Salary
- Waived After Accrual:
- Taxable, as the salary has already become the employee’s right.
- Treated as an application of income and taxed accordingly.
- Waived Before Accrual:
- Not taxable, as the salary was never a part of the employee’s income.
Example of Foregone Salary Taxation
Scenario 1: Waiver After Accrual
Ms. B is entitled to ₹10,00,000 for FY 2022–23 but waives ₹3,00,000 in March 2023.
- Tax Implications: ₹10,00,000 is taxable, as it had already accrued.
Scenario 2: Waiver Before Accrual
Mr. C waives ₹5,00,000 of his salary in January 2023 before it becomes due.
- Tax Implications: ₹5,00,000 is not taxable, as it was waived before accrual.
Claiming Relief for Advance Salary
Steps to Claim Relief Under Section 89(1)
- Calculate the total tax payable for the year, including advance salary.
- Recalculate tax liability as if the advance salary were distributed across relevant years.
- The difference between the two liabilities is the relief amount claimable under Section 89(1).
Planning Tips for Advance and Foregone Salary
- Use Section 89(1) Relief:
Always claim relief if advance salary increases your tax burden. - Document Salary Waivers Clearly:
Ensure salary waivers are recorded with the employer before they accrue to avoid unnecessary taxation. - Understand the Timing of Taxation:
Salary is taxed on receipt or accrual—whichever is earlier. Plan accordingly.
FAQs on Advance and Foregone Salary
1. Is advance salary taxable in the year of receipt?
Yes, as per Section 15, advance salary is taxable in the year it is received.
2. Can relief be claimed for advance salary?
Yes, relief under Section 89(1) can be claimed to mitigate the tax burden.
3. Is foregone salary taxable?
If waived after accrual, it is taxable. If waived before accrual, it is not taxable.
4. How should foregone salary be documented?
Salary waivers should be documented before the payment accrues.
5. What is the difference between advance and foregone salary?
- Advance salary is paid before becoming due and is taxed in the year of receipt.
- Foregone salary is voluntarily waived and taxed only if waived after accrual.
Conclusion
The tax implications for advance and foregone salaries depend on the timing of receipt or waiver. Employees should document waivers clearly and leverage provisions like Section 89(1) for advance salary relief. Understanding these rules helps optimize tax planning and compliance with the Income Tax Act, 1961.
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