Income from Salary

DEFINITION

According to [Sec 17 (1)] Salary includes

                (i)             wages;

                (ii)            any annuity or pension;

                (iii)           any gratuity;

                (iv)           any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;

                (v)            any advance of salary;

                (vi)           any payment received by an employee in respect of any period of leave not availed of by him;

                (vii)          the annual accretion to the balance at the credit of an employee participating in a recognised provident fund,

                                (viii)      the contribution made by the Central Government in the previous year, to the account of an employee under a pension scheme .

Features of salary                      

                     Income from salary is the first head of income. The following are the important features of salary income.

1.      Employer – employee relationship

There should be an employer employee relationship or master servant relationship between two persons. In other words the amount received by an employee from his employer while occupying the position of his employment is taxable under this head.

2.      Deductions from salary

The deductions from salary, like employees contribution to PF, state insurance etc are merely applications of income and hence it is the gross salary which is taxable and not the net salary.

3.      Tax free salary

In the case of tax free salary, tax payable on salary income by the employee is borne by the employer. Tax paid by the employer on behalf of employee is included in the salary income of the employee. But the employee can claim the credit of such payment of tax.

4.      Surrender of salary

Salary surrendered by an employee is also taxable under the head salary income.

5.      Place of accrual of salary

Salary is accrued at the place where services are being rendered.

6.      Amount after the service

Any amount received by employees after cessation of employment like pension is also taxable under the head Salary.

7.      Family pension

Any family pension received by the widow or legal heirs of a deceased employee is not taxable under the head salaries but is taxable under the head income from other sources

SCHEME OF TAXATION-INCOME FROM SALARY

Particulars Amount
Basic items:

Basic pay

Special pay

Bonus

Fees

Commission

Advance salary

Arrear salary

Allowances:

Fully Taxable allowance

Partly taxable allowance

Fully exempted allowance

Perquisites:

Taxable for all

Taxable for specifies employees only

Exempted for all

Special items:

Gratuity

Pension

Leave encashment

Provident fund

Deductions under Sec16

Standard deduction [N.A from AY 2006-07]

Entertainment allowance

Professional tax

 

Xxxx

Xxxx

Xxxx

Xxxx

Xxxx

Xxxx

Xxxx

 

Xxxx

Xxxx

Xxxx

 

Xxxx

Xxxx

Xxxx

 

Xxxx

Xxxx

Xxxx

Xxxx

 

Nil

Xxx

Xxx

Income from salary XXXX

Advance salary

Advance salary is taxable on receipt basis. It is taxed in the assessment year relevant to the previous year in which the salary is received, irrespective of the incidence of tax in the hands of the employee.

Arrear salary

It is taxed on receipt basis provided it is not taxed earlier. The recipient can claim relief under Sec 89.

ALLOWANCES

Allowance is a fixed amount of money given along with salary in order to meet some particular requirement connected with the services rendered by the employee. It is taxed on due or receipt basis. They are generally classified into the following;

  1. Fully taxable allowance
  2. Partly taxable allowance
  3. Fully exempted allowance
Fully taxable Partly taxable Fully exempted
Dearness allowance

City compensatory allowance

Project allowance

Medical allowance

Lunch allowance

Holiday trip allowance

Petrol allowance

Deputation allowance

Family allowance

House rent allowance

Entrainment allowance

Education allowance

Hostel allowance

Travelling allowance

Conveyance allowance

Uniform allowance

Academic research allowance

 

Foreign allowance

Allowance to high court and supreme court judges

Out of pocket allowance for NCC officers

Allowance to employees of UNO

Dearness Allowance(DA)

                The allowance given by the employer to employee to meet the high cost of living on account of inflation. It is included in salary and is always taxable.

City Compensatory Allowance (CCA)

                The allowance given by the employer to employee to compensate the high cost of living in big cities. It is fully taxable.

House Rent allowance (HRA)

                It is an allowance given to an assesee by his employer to meet the expenditure on payment of rent in respect of residential accommodation occupied by him. In case an assessee lives in his own house or lives in a house for which he is not paying any rent, then the whole amount of HRA received will be taxed. Other wise  The least of the following is exempted and the balance is taxable.

1)     Actual amount of HRA received during the PY.

2)     Excess of rent paid over 10% of salary

3)     40% of salary (50% of salary in Mumbai, Kolkata , Delhi and Chennai)

 [Salary= basic pay +DA [FP]+fixed % of commission]

Entertainment Allowance (EA)

                Entertainment allowance is not eligible for exemption but it only qualifies deduction. Entertainment allowance is first included in the salary and then deduction is allowed under [Sec16 (ii)]. Deduction is allowable only for Govt. employees ( from AY 2002-03) and the quantum of deduction  is least of the following

1)     Rs.5,000

2)     20% of salary

3)     Actual amount of entertainment allowance granted during the PY.

[Salary=Basic pay only]

Children Education Allowance

                It is exempt up to Rs.100 pm per child subject to a maximum of two children.

Children Hostel Allowance

 If hostel expenditure allowance is given, it is exempt to the extent up to Rs.300 pm per child subject to a maximum of two children.

Special allowance

                Any special allowance given by the employer to employee in the performance of duties is exempt to the extent of amount actually spent. Eg, uniform allowance, travelling allowance, conveyance allowance, daily allowance, academic research allowance etc.

PERQUISITES

                Perquisite means monetary benefits, facilities or advantages provided by the employer to the employee in addition to salary. It may be a casual emolument, fee or profit attached to a position or employment. Perquisites denote personal advantage. Perquisites may be provided either in cash or in kind. When the perquisites are provided in cash there is no need for valuation. But if perquisites are provided in kind, the value of such perquisites are to be determined as per income tax rules.

For taxation purpose perquisites may be divided into 3;

  1. Perquisite taxable for all
  2. Perquisite taxable for specified employees only
  3. Perquisite exempted for all

Specified employee

Specified employee is one

i)                   who is  a director cum employee of a company

ii)                 who is employee sum shareholder having substantial interest in the company

iii)               any other employee whose monetary salary exceed Rs50,000/-p.a

[Monetary salary= basic pay+ DA+ Bonus+ Fees +Commission +all taxable allowance- Professional tax- Entrainment allowance]

[Substantial interest means 20% or more paid up capital / 20% or more voting power]

Taxable for all For specified employees only Exempted for all
Rent free house

House at concessional rent

Any obligation of employee paid by the employer

 

Domestic servant

Watchman

Gardner

Sweeper

Supply of gas electricity and water

Education facility

Transport faculty

Medical facility

Interest free loans

Free lunch

Laptop, mobile etc

Rent Free House

Unfurnished house

1)     For govt. employees- value is equal to the license fee which would have been determined by the central or state govt. in accordance with the rules framed by the government for allotment of houses to its officers.

2)     For private employees and other employees

City

Owned by employer

Taken on rent

Population exceeding 25 lakhs

15% salary

 

Actual rent or 15 % of salary whichever is less.

Population exceeding 10 lakhs but up to 25 lakhs

10 % of salary

Other places

7.5% of salary

[Salary = basic salary+ DA[FP]+Bonus+Commission+fees+taxable allowance+ all other monetary payments+ leave encashment]

Value of rent free furnished house [Rule 3(1)]

Value of furnished house = value of unfurnished house + value of furniture

                The value of furniture is determined as follows

1)     10 % per annum of the original cost of furniture, if furniture is owned by the employer.

2)     Actual hire charges payable, if furniture is hired by the employer.

Accommodation in a Hotel

If the accommodation is provided in a hotel, the perquisite shall be calculated at the rate of 24%of salary paid. But if the following conditions are satisfied, hotel accommodation is not chargeable to tax

a)      if it is provided for a period not exceeding 15 days in aggregate and

b)     such accommodation is provided in connection with transfer of employee from one place to another place.

Valuation of concessional rent

                In case the accommodation is provided by the employer at a concessional rent then, rent paid /payable by the employee will be deducted from form the value of accommodation .Balance amount is the value of concessional rent.

Free education

ü  Free education facilities and training facilitates to employees is not taxable

ü  If the school fees of employee’s children are directly paid by or reimbursed by the employer to employee, the amount so paid or reimbursed is taxable for all types of employees

ü  If the education is provided in the school owned by the employer

                                                Cost of education in similar institute     xxx

                                Less:1,000/month/child                             xxx

                                Taxable value                                                                xxx

 

Gas, Electricity or Water

The taxable value of gas, electricity or water is determined as follows:

1)     If the connection of gas, electricity or water is in the name of the employee and the bills paid or reimbursed by the employer, it is taxable in the hands of all employees. The taxable value is actual charges paid or reimbursed by the employer.

2)     If the connection of gas, electricity is in the name of the employer, the perquisite will be taxable only in the case of specified employee. The taxable value is actual charges paid or reimbursed by the employer.

3)     Where supply of electricity, gas etc is made from resources owned by the employer without purchasing them from any other outside agency, the taxable value of such perquisites shall be taken as manufacturing cost per unit incurred by the employer.

 

Domestic servant, Sweeper, Watchman, and Gardner

1)     if the servant is appointed by the employee and the employer pays his salary, the full amount of salary will be taxed in the hands of all employees

2)     if the servant is appointed by the employer and paid by him, it is taxable in the hands of specified employees only. The value is the actual wages paid by the employer

3)     if a gardener is appointed by the employer in a building owned by him, and occupied by the employee, it is not a taxable perquisite.

Gratuity [Sec 10(10)]:

                It is the lump sum amount paid by the employer to employee voluntarily or under law for the meritorious service rendered by the latter. It is paid at the time of retirement or death of employee whichever is earlier.

                Gratuity is exempted under Sec10(10) to the extent of the following

a)      For Govt or Semi govt. employees- amount of gratuity received is fully exempt

b)     For employees covered under Payment of Gratuity Act 1972, the least of the following is exempt.

  1. 15 days average salary for every one completed year of service or part thereof in excess of 6 months
  2. actual amount received
  3. notified limit Rs3,50,000/-

[Number of days in a month shall be 26]

[Average salary = last drawn salary immediately preceding the retirement]

[ Average salary= Basic pay + DA[FP]+% of commission]

c)      for other employees- least of the following is exempt provided service is more than 5 years

  1. ½ months average salary for every completed year of service9 part to be ignored)
  2. Actual amount received
  3. Notified limit Rs.3,50,000/-

[Average salary means 10 months average salary preceding the month of retirement]

[Average salary= Basic pay + DA [FP] +% of commission]

For govt.employess- Fully Exempted

Payment of gratuity Act 1972 Other employees
Least of the following exempted:

  1. Actual gratuity received
  2. Rs.3,50,000
  3. 15 days average salary for every one completed year of service or part thereof in excess of 6 months
Least of the following exempted:

  1. Actual gratuity received
  2. Rs.3,50,000
  3. Half month average salary for every one completed year of service
      Number of days in a month shall be 26

Average salary = last drawn salary immediately preceding the retirement

Average salary= Basic pay + DA[FP]+% of commission

Above 6 months- take as one year

6 months or below- ignore

 

      Average salary = last 10 months salary immediately preceding the retirement

Average salary= Basic pay + DA[FP]+% of commission

Fraction of a service is to be ignored

 

Annuity or Pension [Sec 10( 10A)]:

                Pension is the periodical payment made by the employer to the employee after retirement. Commuted pension is a one time payment. It means lump sum amount taken by commuting the pension or part of the pension. Annuity is the annual payment made by an employer to employee. Uncommuted pension is the balance which he receives after commutation. Un commuted pension is taxable under the head salary in the hands of both Govt. and non Govt. employee.

a)      In the case of govt.employee :- commuted value of pension received is fully exempted

b)     In the case of other employees:

  1. Who receives gratuity:- 1/3rd of the commuted value of pension which he is normally entitled to receive.
  2. Who does not receive gratuity:- ½ o f the commuted value of pension which he is normally entitled to receive.

Encashment of earned leave [Sec 10(10AA)

                Every employee can surrender the accumulated leave at the time of retirement Encashment of earned leave during service is fully taxable as salary. But encashment of earned leave at the time of retirement or resignation, exempt to the following extent.

1)     Govt. employees             :- amount fully exempt

2)     Other employees            :- least of the following is exempt.

  1. Cash equivalent of leave due at the rate of average salary for the period of earned leave to the credit
  2. 10 X Average salary
  3. Amount of leave encashment actually received
  4. Rs.3,00,000/-

[Average salary means average salary drawn during the period of ten months immediately preceding his retirement.]

[In case leave encashment is given to legal heirs of deceased employee, it will not be taxed under salary]

[Employee is eligible for one month leave for one years service]

Free medical facilitates

1)     Fixed medical allowance is always chargeable to tax

2)     Free medical facilities provided by employer to employee is tax free subject to the following conditions

  1. if treatment was taken from a hospital maintained by the employer, it is fully exempt.
  2. If treatment was undertaken in a Govt. hospital or any other approved hospital, it is fully exempt.
  3. In case treatment is taken from a private or unrecognized hospital, the benefit is exempt up to Rs.15,000
  4. In case of medical insurance premium of employee is paid by employer under a scheme approved by the central Govt., it is fully exempt.

3)     In case of treatment outside India

  1. expenses incurred on medical treatment of employee/ member of his family and stay abroad, is exempted up to the extent of foreign exchange sanctioned by RBI
  2. travel expenses ( to and fro) of employee/ member of his family and one attendant who accompanies the patient is exempted , if the gross total income of the employee does not exceed Rs2,00,000/- ( before including traveling expenses)

Retrenchment compensation [Sec 10(10B)]:

                Compensation received by a workman at the time of retrenchment is exempt to the extent of the least of the following:

a)      amount calculated under the Industrial Disputes Act, 1947 or

b)     Rs.5,00,000/-

VRS [Sec 10(10C)]:

                At the time of VRS, the least of the following is exempted subject to certain conditions

1)     Last drawn salary X3 X completed year of service.

2)     Rs.5,00,000,

3)     Actual compensation received.

Leave travel concession [Sec 10(5)]

                If an employee receives any travel concession from his employer in connection with his proceeding on leave to any place in India for himself and his family is exempt subject to rules framed by central Govt. family means spouse or the children of the individual and the parents, brothers or sisters of the individual or any of them wholly or mainly dependant on the individual.

Annual Accretion

                Annual accretion means, employer’s contribution to recognized provident fund (RPF) of the employee in excess of 12% of employee’s salary and the interest credited to RPF in excess of 9.5%. It is included in salary income and is taxable.

Transferred Balance

                Balance standing to the credit of an employee in unrecognized provident fund transferred to a recognized provident fund is called transferred balance. Out of this employer’s contribution  in excess of 12% of employee’s salary and the interest credited to RPF in excess of 9.5%will be  included in salary income and is taxable.

Provident Fund

                It is a social security scheme. The employee contributes periodically from his salary a fixed sum to the fund. Employer too will contribute a sum to this fund. At the time of retirement or death of the employee whichever comes earlier, the amount standing to the credit of the employee together with accrued interest will be paid to him or his legal heir as the case may be.

                For income tax purpose, provident fund can be classified into;

1. Statutory provident fund:

                Provident fund to which provident fund Act 1925 applies. This is generally maintained for Govt.employees.

2. Recognised provident fund:

                It is a provident fund which is recognised by Commissioner of Income Tax for income tax purpose.This type of fund is maintained by industrial undertakings, business houses and banks. Bothe employee and employer contributes towards this fund.

3. Unrecognised provident fund:

                It is neither statutory nor recognised provident fund. Both employee and employer contributes towards this fund .

4. Public provident fund:

                This is meant for public. Normally it is maintained by SBI and its associates. Even a person who is a member of any other provident fund can open an account under this type of fund to have his own savings.

Particulars

SPF

RPF

PPF

UPF

Employer’s contribution

Not taxable

Not taxable up to 12% of salary

Not arises

Not taxable

Employee’s contribution

Taxable

Taxable

Taxable

Taxable

Interest credited

Not taxable

Not taxable up to 9.5% per annum

Not taxable

Not taxable

Lump sum amount

Exempt u/s 10(11)

Exempt u/s 10(12)

Exempt u/s 10(11)

Taxable

Eligibility for deduction u/s 80C

Yes

Yes

Yes

Yes

[Salary = Basic Pay+ DA[FP]+% of commission]

DEDUCTIONS FROM SALARY:

                Income from salary is computed after making the following deductions under [Sec 16]

  1.  Standard deductions [Sec 16(i)]

                From AY 2006-07 it is not available

  1.  Entertainment allowance [Sec 16(ii)

                Entertainment allowance is first included in the salary and then deduction is allowed under [Sec16 (ii)]. Deduction is allowable only for Govt. employees (from AY 2002-03) and the quantum of deduction is least of the following

  1.  Rs.5,000
  2.  20% of salary
  3. Actual amount of entertainment allowance granted during the PY.

[Salary for this purpose excludes any allowances, benefits or perquisites]

  1.  Professional tax or employment tax [Sec 16(iii)

                It is the tax levied by state. It is allowed on payment basis. If profession tax is paid by the employer, it is included in salary as perquisites and then allowed as deduction.

Reference: Scribd.com

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