income from salary bt

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Income from Salary



IMP POINTSSection 15

Employer and employee relationship is very

important to determine the income as Salary. If More than one employer-Salary from each

source is taxable under the head salary

Example: Mr. A works in two places part time

job. Income is calculated under the headsalary in both the places.



Basis of Charge –Sec 15

Whether salary taxed on payment or due

basis? Salary is taxable on due or receipt basis whichever

earlier

Advance salary received or salary of the last month

not received is taxed in the current previous year Example: April 2009 salary received in March 2009-

taxable in the previous year 2008-09 itself as it isreceived in 2008-09 period(receipt or due which ever is

earlier) March 2009 salary received in April 2009-taxable in

the previous year 2008-09 only(receipt or due whichever is earlier)



Salary under section 17(1) Wages

Any annuities or pension

Any gratuity

Any fees, commission Perquisites( received in kind)

Profit in lieu of salary

Advance of salary

Any accretion(addition) due to contribution and interest onprovident fund paid out of the employer’s contribution.

The contribution paid by employer under notified pensionscheme



Different forms of salary-

Retirement benefits 1. Leave encashment salary

2.Gratuity

3.Pension 4.Retrenchment compensation

5.Provident Fund

[Examination point of view these five items are very important]



Leave encashment For every completed year of service employee

is entitled to receive a certain number of days

of paid leave.Employee either can take leave oren cash it while in service or after retirement.

Note: Any thing received while in service isnormally taxable. After retirement there are

some concessions given.



1.Leave encashment

1.Received while in

Service

Fully taxable(government or

Non government employee)

Received At the time

of retirement

Government

Employees-ExemptedCentral/

State govt.

mployees(2)

Non government employee(including local authority

and corporation employees)

(see next slide)



Non-government employee

(including local authority

and corporation employees)

Least of the following

Exempted out of leave cash received

a) 10 months average salary*

b) Amount specified by the government-3,00,000

c) Actually received at the time of retirementd) [Period of leave on 30 days basis for every completed year

of service( -) leave availed while in service(-)leave encashed

while in service] x (average salary)*

*Average salaryBasic + % DA comes

only for retirement +fixed

% of commission on sales.ote: Immediately before the

The retirement



Exercise-1

X an employee of the central government receives

Rs.4,00,000 as cash equivalent to leave credit to his salary on1st Feb. 2009X after his retirement.

a)How much is taxable?

b)Suppose X is a private employee and received Rs.15000 assalary and served 20 years and taken 3 months leave while in

service at the time of retirement?



Answer

a) after the retirement leave encashment by governmentemployee is not taxable.

b)If he is a private employee the least of the following isexempted from the amount received Rs.4,00,000

1.Actually received-Rs.4,00,000;

2.10 months average salary=15000 x 10=1,50,000; 3.Maximum limit=Rs.3,00,000

4. One month for completed year of service(-)leave availed whilein service(-)leave en cashed while in service x *(average salary)

= 20months-3month-0 months*(15,000)=2,55,000

How much is exempted? How much is taxable?The lowest of all four is Rs.1,50,000 is exempted from Rs.4,00,000

Therefore taxable leave encashment is Rs.2,50,000.

(Rs.4,00,000-1,50,000)



ra u y1.Government

Employee(Central,Sta

te and local authority

employees)(three)

2.Average salary:

Not necessary

3.No of days in a

month-Not necessary

4..Received while in

service is fully taxable

5.Received Gratuity

at the time of

retirement

Exempted

Non Government employee

under the payment of

gratuity Act.

Including statutorycorporation

Average salary:last drawn

includes Basic+DA

No of days in a month-

26 days only

Received while in service is

fully taxable

Received Gratuity at the

time of retirement:

Least of the following is

exempted

see in the next page.

Non Government employee

under not covered under

the payment of gratuity

Act. Including statutorycorporation

Average Salary: Basic +DA

comes for retirement +Fixed

% of commission on sales

No of days in a month-

30 days only

Received while in service is

fully taxable

Received Gratuity at the

time of retirement:

Least of the following is

exempted(next page)



Non Government employee under the

payment of gratuity Act.

Including statutory corporation

Non Government employee under not

covered under the payment of gratuity

Act. Including statutory corporation

The Least of the following isexempted from gratuity received:

1.(15/26) x (last salary drawn

)x (number of years of service )

ie.Basic+DA(No commission please)

Year= above 6 months is

considered as one year.

2.Rs.3,50,000

3.Gratuity actually received

Note:

If he worked more than one company

collectively more than 6 months equal to

The least of the following isexempted from gratuity received:

1.(15/30) x (10 preceding months

average salary) x (number of

fully completed years of service)Basic + % DA comes for

retirement + Fixed Percentage of

commission on sales

2. Rs.3,50,0003. Gratuity actually received

Note:

Fraction of the year is not

considered



Pension

Regular pension received by the employeehimself ( not dead )after the retirement istaxable as salary.

Family pension(after the death of husband/wife) received by wife/husbandcomes under income from other sources asthere is no employer and employee

relationship after the death of husband who was an employee.

•Standard deduction is available ie. 1/3 rd of family pension or

•15,000 whichever is lower is deductible from family pension.



Commuted pension-Sec.17(1)(ii) Instead of receiving monthly pension some portion of

regular pension can be accumulated and can bereceived at the time of retirement a lump sum isknown as commuted pension.

1. In case of Government employee-Exempted afterretirement.

Government employee means:-Central, state,localauthority and corporation employees(totally 4)

2.Non Government

If gratuity received Maximum 1/3 of the regular

pension is not taxable. If gratuity is not received ½ of the regular pension is

not taxable.

Note: above those limits are taxable for non

government employees



Example – commuted pension Mr. X receives pension every month Rs.10,000.

He wants to commute some portion of thepension.

? How much can he commute if

A) he is a state government employee B) he is a Bangalooru development authority

employee.

C) He is receiving gratuity from Karnataka

Government. D) He is an employee of Shanthi Ltd.



Answer for commuted pension A,B and C all are government employees

therefore any amount of pension commutedare exempted . It is because government never

exceeds the statutory limit of 1/3 or ½ dependson the situation.D) If he an employee of Shanthi ltd. Max.1/3 if

he receives gratuity ie 1/3(10,000)=Rs.3333

If he does not receive gratuity he cancommute ½ of pension ie. ½(10,000)=Rs.5,000.Note:remaining pension regularly received

(after commutation)is taxable.



Pension scheme-(after 1st Jan

2004) Applicable for those join after 1st Jan 2004

Contribution made by employer –taxable

Employer and employee’s contribution to theextent of 10% is deductible as savingU/S80CCD. Beyond 10% is not deductible.

When pension received –fully taxed in the

hands of recipient Salary=Basic +DA if it comes for retirement

benefit

Example-next page



Annuity[17(1)(ii)]

Annual payment constantly paid by employer toemployee. It is a yearly grant.

Even paid voluntarily it is taxable

Annuity received from ex employer is taxed as

profit in lieu of salary-taxed as salary.

Profit in lieu of salary In connection with termination of employment

If company wants a manager to quit immediately as per theservice rules he is paid a lump sum immediately. Suchcompensation is treated as salary.

The compensation can be received from present or formeremployer.



Salary received from a United

Nations organisation Not taxable in India as per sec 2 of the United

Nations (Privileges and Immunities) Act,1947.

Pension also exempt

VRS[10(10C)] Voluntary Retirement schemeMaximum amount of exemption is Rs.5,00,000.

Conditions:

The same employee can not be re-employed in thesame or any other company comes under the samemanagement.

As per prescribed guidelines

Government services



owances

City compensatory allowance Fully taxable as salary

Compensation for higher cost of living in cities

Tiffin allowance, fixed medicalallowance

Any amount received in cash is always taxable

before the expenditure incurred



House rent allowance(10[13A])

There will be no tax exemption if the residentialaccommodation is self occupied (not taken house

for rent by employee or employee has not paid any

rent for residential accommodation used by him

[section 10(13A) of Income Tax Act and rule 2A]

•Salary means basic plus DA (if forming part of retirement benefits)

• plus commission (if fixed as a percentage of turnover).

•Exemption will be lowest of

• (a) 50% of salary where residential accommodation is in Mumbai,

Kolkata, Delhi or Chennai and 40% of at other place

(b)(Rent paid minus 10% of salary)

(c) Actual allowance paid.



House rent allowance Important points:

1.It is advisable to calculate claim month wise if any changes in salary or house rent allowance or rent paid

or place of stay during the previous year. 2. Salary to be estimated on due basis when you

calculate the meaning of salary

Place of work is not important but the place of accommodation taken is important either to claim50% or 40% depends on type of city.

After receiving rent allowance either he stays in hisown house or rent accomodation is not taken rentallowance for such period is taxable.



Answer-HRA

A) Rented house in Pune:

Since salary, place of stay, HRA and rent paid are samethroughout the year we can calculate for the whole financial year.

House rent Allowance received (12,000x12) Rs.1,44,000

Least of the following is exempted:1.40% of salary*=26000 x 12 x40% 1,24,800

2.Rent paid-10% of salary* 1,48,800

[(15000-10% x26000) x 12]

3.Actually received 1,44,000

The Least is Rs.1,24,800 which is exempted out of HRA received.There fore taxable HRA is Rs.19,200 ie (1,44,000-1,24,800)

*Salary means:

20,000+(30% x20,000)=26,000



Answer-HRA

b) Rented house in Mumbai

Since salary, place of stay, HRA and rent paid are samethroughout the year we can calculate for the whole financial year.

House rent Allowance received (12,000x12) Rs.1,44,000

Least of the following is exempted:1.40% of salary*=26000 x 12 x50% 1,56,800

2.Rent paid-10% of salary* 1,48,800

[(15000-10% x26000) x 12]

3.Actually received 1,44,000

The Least is Rs.1,44,000 which is exempted out of HRA received.There fore taxable HRA is Zero ie (1,44,000-1,44,000)

*Salary means:

20,000+(30% x20,000)=26,000



Entertainment allowance[16(ii)]In case of *government employees:Least of

the following is deductible:

1. Rs. 5,000;

2. 20% of salary**;3.Amount of entertainment allowance

granted during the previous year.Non government employees are not

exempted

*Government employee

Central and State government employees

**Salary excludes any allowance

Benefit or other perquisites



Special allowances[10(14)]

For official duties (afterReaching office)

Not directly relate to

Official duty

(General)1.Official travel/transfer

Allowance to meet the cost2.Conveyance allowance

to meet customers

3.daily allowance on official

Tour/journey

4.Helper allowance to carry

Official documents

5. Research allowance

6. Uniform allowance to do

Official duty

To be

Spent

Fully

Other

Wise,

amountnot

Spent

taxable

See in

theNext

slide



Not directly relate to

Official duty

(General)

1.Allowance for

transport

employees

2.Childreneducation

allowance

&70% of allowance

Or Rs. 6000 per

month whichever is

lower exempted

Rs.100 per monthper child max.two

children.If in hostel

Rs.300 extra per

child for two

children

3. Traveling

allowance to

commute from

home to office

4. Other borderarea allowances

Rs. 800 per month.

If handicapped

person Rs.1600 per

month is exempted.

Depends onaltitude/Place

They are fixed.Whether spent

Or not.Excess

Taxable as they

Are not givenFor official

Duty



ExerciseParticulars No. of

Children/

Name

Amount

received

from

employer

Exempted from tax

Chargeableto tax

1.Educational

allowance

2.Hostel

expenditure

3. Transport

allowance from

house to office or

vice-versa

4.Transport

company

employee – daily

allowance

5. -DO-

Three

Three

-------

Y

X

300 PM per

child

400 per

child per

month

12000

72000

1,20,000

100 x2 x12=2400

300 x2

x12=7,200(limited to

two children

800 x12=9600

70%(72000) or 6000 per

month which ever is

lower=50,400

6000 x 12=72000 or

70%(1,20000)=84000Whichever is lower

(200 x2 x12+300

x12=8400

(100 x2 x12 +400

x12)=7200

12000-9600=2400

72000-50,400=21600

1,20,000-72000=48000

Amount spent or not, exemptions are given

Exercise



Exercise

Salary income and various allowances: Compute the gross salary of Mr. Amal for the assessment year 2009-10on the basis of the following

information: 1. Basic pay Rs. 8,000 per month

2. DA –40% of basic pay

3. City compensatory allowance-10% of basic pay

4.Medical allowance –Rs.800 per month

5. Children educational allowance- Rs. 200 per month for threechildren

6. Hostel expenditure allowance-Rs. 400 per child per month for 2children

7. Transport allowance- Rs. 18,600 8. Overtime allowance-Rs. 4000

Answer:



Answer:

Computation of gross salary of Mr. Amal for the assessment year2009-10:

Taxable allowances

1. Basic pay Rs. 8,000 x 12 96,000

. DA –40% of basic pay(8000 x 40% x12) 38 400

3. City compensatory allowance-10% x 8000 x12 9,600

4.Medical allowance –Rs.800 x 12 9,600

5. Children educational allowance-[ (Rs. 200-100)2 x 12+

200 x 12] 4,800 6. Hostel expenditure allowance-(Rs. 400-300) 2 x 12 2,400

7. Transport allowance- Rs. 18,600-(800 x 12) 9,000

8. Overtime allowance-Rs. 4000 4,000

Gross salary 1,73, 800

Children education – Rs. 100 per month per child for two children allowed.

Hostel expenditure Rs. 300 per child per month for two children allowed



Perquisites

Casual emolument or benefit attached to

an office or positionin addition to

salary or wages

Something that benefits a man by going into hisown pocket

Whether perquisites should be given in Kind?



Perquisites Need not be in kind.It can be in cash.

What are the conditions to be fulfilled to becomea perks?

Conditions



1.Allowed by

Employer to

Employee4.Personal

advantage

To the

employee

5. Derived by

Virtue of

Employer’s

authority

3.Directly

Depend

upon service

2.Allowed during

Continuance

Of employment

Conditions

To become

perquisites



Other conditions Employer and employee relationship should exist

at any point of time-need not be an employeenow.

Legal origin is important-Un authorizedadvantage taken by employee without employer’sauthority will not become perquisites.



1.Rent free

Accommodation

Provided

By employer

4.PersonalObligations of

Employee

Met by

employer

5. Funds paidBy employer

Other than

RPF/Insurance

fund

3.value of

Benefits provided

Like furnitureIn the accommodation2.concessional

Accommodation

Provided

By employer

Perquisites

Includes

6.Fringe

Benefits

Allowed

To employeesOf Other

Than

companies

Accommodation Related(1-3)

Including sweeper,gardener,watchman,gas,electricity,



Perquisites Taxable in the hands of employee

In the hands of employee

1. (R)ent free or concessional rent

accommodation

2. (S)weeper in the house, gardener,

watchman, personal attendant

3. Free/concessional

(g)as,electricity,water etc

4. (E)ducational facility to employee’s

family members including servantsand depentant, parents, spouse and

children(need not be dependent)

5. (L)eave travel concession beyond 2

travels in a block period

Short form(RSGEL)

Category – B

1.Car given by employer

2. Transport facility given by transport

undertakings except Railway and

airlines.

( only to Specified Employee)



Special items in computation perquisites:

Rent Free accomodation(RFA)

Company’s House given at free of cost or rentedby company given to employee at free/cocessional

rent. Step1. Unfurnished Accomodation

Central or

State Government

employeesPrivate employees



1.Central or state government

employee-RFALicense fee of flat determined by

central government is perquisites

in the hands of employee.

Fair market value of rent

is not important



RFA-Government employee-

Exercise Exercise:- Mr. X is working in Central government

service given rent free accommodation in angovernment apartment at free of cost. The license fee

prescribed by government is Rs.3000 but fair rental value of the house is Rs. 10,000. How much is taxable?

Answer:-

Fair rent is not considered. The license fee Rs. 3,000 is

taxable in the hands of Specified employee.

2 Private Employees(RFA)



2. Private Employees(RFA)

It depends on Population of the city whereaccommodation provided.

Exceeding population25 lakhs

Population beyond10 lakhs-Up to25 lakhs

Population Upto10 lakhs

OwnedBy

employer 15%of salary

or amount paid

By company

To outsider

Whichever

Is lower

Rented

By

company

Owned

By

employer

Rented OwnedBy

employer Rented

By

company15% of salary 10% of

salary7.5% of Salary

Population as per 2001 census



Explanation to the diagram 1.If house property is owned by employer

depends on the population of the city percentage differs. Big city it is 15% of salary,

medium city it is 10% and small city it is 7.5%of salary for accommodation with out any facility like furniture.

If house is rented by employer given toemployee it is 15% of salary or rent paid by

employer whichever is less taxable forspecified employees irrespective of the type of city.



If Furniture provided by employerIf rented

Actual hire

chargespayable

If owned

10% of original

Cost of furniture

Meaning o sa ary or RFA



Meaning o sa ary or RFA

All Cash salary received or recivable in hand(including taxable allowances) by the employeehimself.

Excludes all *perquisites and *DA which will notcome under retirement purpose

If any allowance is exempted ( like HRA(partly),children educational allowance upto Rs.100 Permonth or transport allowance up to Rs. 800 permonth etc.) to the extent exempted is not

included in the meaning of salary but balance isincluded in the meaning of salary.

Exercise-RFA



Exercise-RFA

Value of rent free accommodation : Preetham is sales manager of aprivate company and for previous year 2007-08,he received the following

(amts in Rs) Basic Salary 248000

Bonus 16000

Dearness allowance(forming part of salary) 30000

Project allowance 15000

Commission on sales 16000 City compensatory allowance 25000

Medical allowance 12000

He has been provided with a rent free accommodation in Bangaloreowned by the employer. The population of Bangalore may be assumed to

be 50 lakhs as per 2001 census Determine the taxable value of the perquisite in respect of rent free

accommodation.



He has been provided with a rent free accommodation in jaipur ownedby the employer. The population of jaipur may be assumed to be15lakhs as per 2001 census

Determine : a) Meaning of salary for RFA b)the taxable value of the perquisite in respect of rent free

accommodation.

C) Calculate total taxable Salary

Solution: a) Meaning of salary:-

All Cash salary received or recivable in hand including taxableallowances by the employee himself.

Excludes all *perquisites and *DA which will not come under

retirement purpose

Any allowance is not taxed( like HRA(partly),children educational allowance upto Rs.100 Permonth or transport allowance up to Rs. 800 per

month etc.) are not included in the meaning of



b)The valuation of rent free accommodation shall be: 15% of the salary i.e. 15% of (248000+ 16000+30000+15000+16000+25000+12000)=Rs 54,300 Note: Salary shall be taken on basis for the period for which

accommodation has been provided. Employer’s contribution does not come to the assessee in cash as it is paid

directly to the department. That is why I have mentioned the meaning of

salary is cash salary received by the assessee himself.

C) Calculate total taxable Salary Basic Salary 248000 Bonus 16000 Dearness allowance(forming part of salary) 30000 Project allowance 15000 Commission on sales 16000 City compensatory allowance 25000 Medical allowance 12000

Rent free accommodation 54300 Total Taxable Salary 416300



Perquisites –Domestic servants,

free supply of gas, electricity etc Sweeper, gardener watchman personal assistant paid

by employer is perquisites to the extent of cost to theemployer.



Monthly Fixed Education allowance Training of employees is not perquisites

Fixed educational allowanceRs.100 per child per month is exempted per child.

Maximum two children.Beyond is taxable Hostel Rs.300 per month per child

exempted.Maximum two children.Beyond it is taxableto the employee

Payment of school fees and re-imbursement of school fees

Taxable as perquisites fully



Education facility to children(own) in their own

school or any other school/college If less than Rs. 1000 per month exempted

If exceeds Rs. 1000 per month

cost of education in similar institution in thenear locality (minus )Rs. 1000(minus) amountrecovered.

Example:- Employer pays Rs. 1500 per month to the

school selected by employee for three children andone grand children.How much is taxableperquisites?



Leave travel concession for Family Any place in India Only travel short route permissible Two Journey in four block period allowed. If Journey is not taken place with in two years, in

the very next year if used it can be claimed. Flight- economy class fair allowed(not taxable). Train-Air conditioned first class fair allowed(Not

taxable) Note:- Only Journey expenditure is exempted. Two

children only who are born after 1st October 1998



Employee’s obligation met by employer either giving money or

reimbursed is taxed in the hands of employee(17(2)(iv)) Example:1.Domestic servant’s salary reimbursed by

employer.

2.Gas connection in the name of the employee but

monthly gas bill paid by employer-Taxable to all employee whether specified or not.

3.If gas connection in the name of the company then there is no obligation to employer. Suchperquisites is taxable in the hands of Specifiedemployee.



Valuation of Interest

free/concession loan Difference between SBI interest rate on 1st day of

the previous year-rate of interest charged by company from employee.

SBI rate:on 1st April 2007 are:- Housing loan morethan 5 years-10.75%, Upto 5 years-10.25%,educational loan upto 4 lakhs-11.5%, above4 lakhs-13.25%

Exceptions- see in the next slide



Example X is employed by A Ltd. on 1st June 2007, he has takeninterest free Housing loan of Rs. 14,00,000.How muchis taxable?

Ans:Lending rate upto 5 years is 10.25% per annum 10.25% x 14,00,000=1,19,583 is taxable.

Suppose the interest charged by the company fromassessee is 6%, then how much is taxable?

=(10.25%-6%) x 14,00,000=Rs59500 taxable



Perquisites in respect of movable assets given to

an employee for personal use. 10 % of Original cost of such asset purchased by

employer(- )reimbursed by employee

If taken on rental basis by employer:

Rent payable(-)reimbursed by employee

Note: It is not on WDV value

Medical facilities Medical facilities availed in employer’s hospital, is not

taxable

If private –Up to Rs.15000 is not taxable if reimbursed tospecified employees.

income from salary bt

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