SALARY INCOME(Sec15,16 & 17)

What is salary?

• Payer & Payee• More than one source• Foregoing salary is salary income• Tax free salary should include the tax paid by the employee

Basis of Charge

• Salary is chargeable to tax when it is due to be paid whether it is paid or not

• Salary is chargeable to tax when any amount is paid whether it is due or not

• Arrears of salary paid to employee is chargeable to tax.

CHART SHOWING COMPUTATION OF INCOME FROM SALARIES

• Salary/wages• Advance salary• Dearness Pay• Dearness allowance• Bonus• Fees• Commission• Perquisite in lieu of or in addition to salary/wages• Amt. rec. in respect of Encashment of earned leave salary

during service• Contribution of employer in RPF in excess of 12% of salary• Interest on RPF in excess of 9.5%

Cont.

On retirement of employee: add• Unrecognised provident fund(a)Share of employer(b)Interest on share of employer• Taxable part of gratuity• Taxable part of encashment of earned leave• If retrenched- taxable part of retrenchment

compensation• In case of voluntary retirement- taxable part of voluntary

retirement compensation

CONT.

• Pension: (a) Taxable part of commuted pension(b) Pension from the date of retirement till the

end of P.Y.

Gross salary incomeLESS:• Entertainment allowance-Max rs.5000• Professional tax Taxable salary

House Rent Allowance

The least of the following is exempt from tax:1.50% of Salary where the assessee lives in Mumbai,

Delhi ,Chennai & Calcutta and 40% in other cases2.Actual HRA received3.Excess of rent paid over 10% of Salary.Exempted Amount= least of the aboveTaxable Amount= Actual HRA Rec.- Exempted amt.(Salary for HRA means basic salary , commission if based

on fixed percentage of sale & DA ,if it is part of retirement benefits)

Allowances:

• Conveyance: Exempted upto Rs.800 per month if used for travel between home and place of work

• Medical expenses: Exempted when it is a reimbursement of actual expenses upto Rs.15000 .Beyond this limit, it is taxable.

• Fixed Medical allowance is taxable• City compensatory allowance is taxable in all cases

Allowances(cont.)

• Tiffin allowance: It is taxable• Tea & snacks during office hours are not

charged to tax as perquisite while free meals in excess of Rs50 per meal is a perquisite

• Servant allowances: It is taxable• Gifts: Perquisite in respect of gift where it is

below Rs.5000, the value is taken as nil

LEAVE TRAVEL CONCESSIONSec. 10(5)

• This exemption is available to indians as well as foreigners

• The amount exempt under this clause shall in no case exceed the amount of expenses actually incurred for the purpose of such travel

• The value of any L.T.C. received by or due to an individual,

(a) From his employer for himself & his family in connection with his proceeding on leave to any place in india is exempt

Cont.• (b) From his employer or former employer for

himself & his family in connection with his proceeding on leave to any place in india after retirement from his service or after the termination of his service is exempt

• Amount of exemption is the actual fare paid for travel anywhere in India by the economy class airfare of national carrier by shortest route, or first class air conditioned rail fare, or any other mode not exceeding the shortest first class rail fare.

PROVIDENT FUNDStatutory provident fund

Recognised provident fund

Unrecognised provident fund

Employees contribution

Ded u/s 80 C Ded u/s 80 C No ded

Employer’s cont. &interest

exempted Annual accretion is taxable(a)employer’s cont.-in excess of 12% of salary(b)interest-in excess of 9.5%

Not exempted per year

Lumpsum at the time of retirement

exempt exempt Employer’s cont. &Interest thereon- taxable

PERQUISITESIt means any benefit in addition to salary and wages. Any sum paid by the employer which otherwise would have been payable by the employee.• Eg. Rent free house accommodation, car, amenities provided free of cost,• concessional interest on housing loan, etc•The benefit should be from the employer to be charged as salary•It could be in cash or kind•It should have a legal origin

Perquisites taxable (Category APerquisites taxable in the hands of all employees (fringe benefit tax whether payable or not by

employer) Furnished /Unfurnished house without rent or at a

concession (not in a remote area, house for MPs, and stay in hotel on transfer not exceeding 15 days)

Service of sweeper, gardener( not taxable for non specified employee)

Education facility to employees family members (not taxable for non specified employee)

Perquisites taxable (with or without FBT)

Contribution by employer to effect an assurance on the life of the employee or to effect an annuity

Interest free loan( exempted for loan not exeeding Rs.20000, or loan for medical treatment)

Use of Employers movable assets are taxable except laptop, desktop & car

Perquisites taxable (Category B)

B1.Car or other automotive conveyance ( not taxable for non specified employee)

B2. Transport facility by a Transport undertaking( not railways & airlines)

B3 Traveling touring accomodationB4 Free Food & Beverage ( Rs.50 within office hours

exempted)B5 Gift voucher beyond Rs.5000B6 Club Membership & credit Card

SPECIFIED EMPLOYEE

• A director is a specified employee• An employee who holds 20% or more voting power

(called substantial interest)• Where an employee is drawing salary of more than

Rs.50,000 per year ( without considering non monetary benefit and exemptions like HRA) but , since the minimum exemption limit is Rs.1,10,000, practically all tax payers are specified employees.

Rent Free Unfurnished Accomodation

• Classified as Central & State Government Employees

• Private Sector Employees

• Accomodation provided to MPs, judges of High court & Supreme Courts, employees who are in Govt. service being provided accomodation by virtue of their employment is exempted from any tax

Central & State Govt. Employees

Valuation of Rent Free Unfurnished Accommodation (private sector)

Population as per 2001 census

Property owned by Employer

Leased or rent

Above 25 lakhs

15% of salary for the period

Amount of lease rent or 15% of salary

Between

10- 25 lakhs

10% of salary for the period

Same as above

Any other 7.5% of salary for the period

Same as above

Meaning of salary for House accomodation

• Salary includes – - basic salary - DA ( if terms of employment provide) - bonus, commission, fees - all other taxable allowances - any monetary payment chargeable to tax,

but not monetary payments in the nature of perquisite

Exception to accomodation rules

• It is not applicable to an accomodation located in a remote area( 40 kms from town) and in a mining, project ,oil exploration site

• Where on account of transfer, an employee is given two accomodation , only one will be taxed for 90 days. Beyond that the lesser of the two will be taxed.

Furnished accomodation

• Step 1: Find out the value of the accomodation without the value of the furniture

• Add 10% of the value of furniture if owned by employer or actual hire charges when hired

( Furniture includes TV, fridge, radio and any household appliances)

Furnished accomodation in a Hotel

It Includes accomodation in a motel, guest house.

The value of perquisite is the lower of the two.• 24% of salary paid during the period when

accomodation is taken or• Actual paid by the employer(not taxable if provided for 15 days in a P.Y. and

when an employee is transferred)

Accomodation at a concessional value

Value is determined as follows:• Find out the value of accomodation as if it is

not provided at a concession• Deduct the value of rent charged from the

employee

Perquisite of free domestic servants

• When servants are engaged by employee and reimbursed by employer, taxable in all cases

• When engaged by employer only specified employees are taxable

• Servant allowances are always taxable• If servants are provided in a rent free

accomodation , they are not valued separately

Valuation of gas, electric energy or water supply

• All assesses are taxable except non specified employees

Perquisite of Motor Car

Perquisite in respect of motor car is taxable only when the employer is not liable to fringe benefit tax (like sole proprietor, charitable institutions, etc) Private company employees will not pay any tax.

• 1.Car is owned by Employee• 2. Car is owned or hired by Employer a) Expenses met by Employer b) Expenses met by Employee

Motor car perquisite

• Car owned by Employeea) Expenses met by Employee - No Taxb) Expenses met or reimbursed by Employer - Official purpose only No tax - Used for private purpose-actual expenses

less recovery taxable -Partly used for private purpose (cont. next

slide)

Motor car perquisite( Cont.)

Car owned by employee (cont.)-Partly used for private purpose

SMALL CAR LARGE CAR

EXPENDITURE INCURRED BY EMPLOYER

EXPENDITURE INCURRED BY EMPLOYER

Less: 1800 p.m. Less: 2400 p.m.

Add: 900 p.m. for chauffer(if any)

Add: 900 p.m. for chauffer(if any)

Value of perquisite Value of perquisite

2.When Car is owned or hired by Employer

• I CASE: Car is used wholly for official duties value of perquisite is nil

• II CASE: Car is used wholly for private or personal purposes of employee or any member of his household

Actual amount of expenditure on running & Actual amt. of expenditure on running & maintenance of car maintenance of car

add: remuneration, if any, paid to chauffeur add: remuneration,if any, paid to chauffeurAdd: depreciation @ 10%p.a. of actual cost of car less: amt. charged from employeeLess: amt. charged from employee VALUE OF PERQUISITE VALUE OF PERQUISITE

Car owned by employer

Car taken on lease by employer

III CASE:

IV CASE:

Deductions from salary

• Professional Tax paid BY THE ASSESSEE [Sec.16(iii)]• Entertainment allowance: available only for

Government employees [sec.16(ii)] actual amt. received 1/5 th of basic salary limit- rs. 500000The least of the above will be the amount for deduction

INCOME FROM SALARIES (RETIREMENT)

• PENSION• COMMUTED PENSION• LEAVE ENCASHMENT SALARY• GRATUITY • RETRENCHMENT COMPENSATION• COMPENSATION ON VOLUNTARY

RETIREMENT

PENSION[sec.10(10A)]

1.Pension from UNO2.Pension received

by the family of armed forces

3.Family pension received by family members after the death of employee

It is not chargeable to tax

Exempted

Taxable as in the hands of recipient as income from other sources

PENSION (cont.)

• Pension received in case of non govt. employee -Taxable

COMMUTED PENSION

• Uncommuted Pension

• Commuted Pension

Commuted Pension

Govt. /Non GovtEmployee

Govt. Employee

Non-Govt. Employee

Taxable

Exempted from TaxIt is fully or partlyexempted

COMMUTED PENSION (cont.)

Central /state Govt, Local authority employee

Non Govt. Employee

Non Govt. Employee

With or without Gratuity

Gratuity is received

Gratuity is not received

ExemptedFully

1/3 of normalExempted

½ of normal is exempted

GOVERNMENT EMPLOYEES GETTING LEAVE ENCASHMENT AT TIME OF RETIREMENT:

Govt employee at that time is exempted from tax.

While leave encashment while in service is taxable

NON GOVERNMENT EMPLOYEES are chargeable to tax on leave encashment while in service LEAVE ENCASHMENT AT TIME OF RETIREMENT:He is exempted on basis of least of the following: 1.period of earned leave (in no.of months) to the credit of employee at the time of his retirement or leaving the job)* average monthly salary

2.10 months *average monthly salary3. the amt. specified by the government Rs.3,00,000 4. leave encashment actually received at the time of retirement

•Salary for this purpose means 1.basic salary and includes 2 .dearness allowances if terms of employment so provide3.Commision if it is fixed % based on turnover

•It is calculated on the basis of average salary drawn during the period of 10 months immediately preceding the retirement.( date wise)

HOW TO FIND OUT AVERAGE MONTHLY SALARY?

GRATUITY [SEC10(10)]

1. GRATUITY WHILE IN SERVICE IS FULLY TAXABLE2. GRATUITY AS RETIREMENT BENEFITS• Government employee –fully exempt• Non-government employee-fully or partially exempt

under section 10• Non-government employees not covered by the

Payment of Gratuity Act ,1972- fully or partially exempt under section 10

GRATUITY (cont.)

• IN CASE OF GOVT EMPLOYEES:– wholly exempt

• IN CASE OF EMPLOYEES COVERED UNDER PAYMENT OF GRATUITY ACT:– 15 days salary based on last drawn for each year of service

(26 days a month as working days)– Rs.10 LACS– gratuity actually received (the least of the above 3 is exempt from tax and the balance

is taxable)

GRATUITY (cont.)

• how to find length of service -if 6mths or less then ignored else taken as 1 full year

• what is salary: Salary means last drawn by employee and includes dearness allowance,dearness pay, comm. on sales

• how to determine 15 days salary -calculated by dividing salary last drawn by 26 days

RETRENCHMENT COMPENSATION [SEC 10(10B)]• Years of job * avg. Salary *15• Limit – rs 5lac• Amount received least of the above will be exemptTaxable amount = amt received – exempted amount. NOTE- • Years of job= completed years + 1year for excess over 6months.• Average salary- (a) in case of monthly salary- on the basis of

salary of last 3months pay (b)in case of weekly wages- on the basis of

wages of last 4 weeks (c) in case of daily wages – on the basis of wages

of last 12 full working days.

Cont.Salary means• Remuneration in money.• Allowances• Value of house accommodation, supply of

light, water, medical attendance, other amenity or service or any concessional supply of food grains or other articles.

• Travel concessionsSalary does not excludeBonus, contribution to pension fund or

provident fund, gratuity

COMPENSATION ON VOLUNTARY RETIREMENT [Sec.10(10C)]

• The amount equivalent to 3 month’s salary for each completed year of service

• Salary at the time of retirement*balance months of service left before the date of his retirement

• Amount receieved• Maximum statutory limit-rs 500000Meaning of salary- basic salary, D.A. if it is given as per

terms of employment, comm. Based upon fixed % of turnover