Understanding Tax Liability on Salary Income: Due vs. Received Basis

When it comes to taxing salary income, there is often confusion regarding the timing of this liability. This article aims to clarify whether you need to pay taxes on salary that you haven't yet withdrawn from your company.

The Due or Receipt Basis for Taxable Income

In the context of taxable income, the term 'due or receipt basis' plays a crucial role in determining when your salary should be considered as taxable. Under this principle, the timing of your tax liability is established by the time the income becomes due to you or when you actually receive the payment, whichever comes first.

When is Salary Considered Taxable?

Based on the 'due or receipt basis', salary income becomes taxable as soon as it is due to you, regardless of whether you have withdrawn it or not. In your case, the tax liability would be applicable in the current year when the salary became due to you by the company, not when you actually withdraw the money.

This means that, even if you have not taken the salary out of your company's account, you are still responsible for paying taxes on the amount that has been earned and is due to you. Conversely, if you receive advance salary but do not withdraw it immediately, this income is also taxable in the current year, and you will not face any additional taxes when the salary becomes due in the future.

The Implications for Advanced Withdrawals

Consider the scenario where you may have received an advance salary payment that is yet to be due to you. According to the 'due or receipt basis', you are still liable to pay taxes on this amount in the current tax year, as the payment was received. While this can sometimes lead to a discrepancy between your actual salary received and the amount shown on your TDS (Tax Deducted at Source) certificate, it is important to reconcile this with your final settlement once the salary is due.

Common Scenarios and Examples

Let's consider a few scenarios to better understand the application of this principle:

Scenario 1: An employee receives their salary for December 2023 in January 2024. Even though the payment was received in 2024, the salary is considered due in 2023, and hence, the tax liability for that salary would be applicable in 2023. Scenario 2: If an employee withdraws an advance salary in June 2023, even though this salary was earned in May 2023, the tax liability would be for the year 2023, not 2024. Scenario 3: Similarly, if an employee receives a bonus in August 2023, even if the bonus is due in September 2023 and is withdrawn in November 2023, the tax liability for the bonus would be for 2023.

Conclusion

In summary, whether you have withdrawn the salary or not, tax liability on your salary is determined by the 'due or receipt basis'. It is imperative to ensure that you meet your tax obligations in the year when the income becomes due to avoid any penalties or interest charges.

For more detailed guidance on personal income tax, consulting with a professional tax advisor or reviewing the latest tax regulations can be highly beneficial. Keeping accurate records and staying informed about your tax responsibilities can help you manage your finances more effectively and avoid potential misunderstandings or discrepancies.