Session -5 &6Computation of Total Income

ByB.Pani

M.Com,LLB,FCA,FICWA,ACS,DISA,MBAbpani2001@yahoo.co.in 9731397829

Heads of Income

• Salaries• Income from House Property• Profits and gains of business or profession• Capital gains• Income from other sources

Salaries

• Any salary due from an employer or former employer to any assessee in the previous year whether paid or not.

• Any salary paid in the previous year though not due or before it became due to him.

• Any arrears of salary paid or allowed to him if not charged to tax in earlier years.

Conditions to be satisfied

• Employer employee relationship• Contract of service and not contract for

service• Salary is chargeable to tax either on due basis

or on receipt basis whichever is earlier.• The place of accrual of salary is the place

where services are rendered.• Partner’s salary is treated as income from

business profession.

Salaries

Includesi) Wagesii) Any annuity or pensioniii)Any gratuityiv)Any fees, commission, perquisites or profits in lieu of

or in addition to any salary or wages.v) Any advance salaryvi)Any payment received for leave not availedvii)The contribution made by the Central Govt to the

account of an employee under a pension scheme.

Perquisite• Includes• Value of rent free accomodation• Value of any concession in the matter of rent

provided to the assessee by the employer.• The value of any benefit or amenity provided free

of cost or at concessional rate.• Any sum paid by the employer in respect of any

obligation payable by the employee.• Any sum payable by an employer to effect an

assurance on life or annuity

COMPONENTS OF SALARY

Employee compensation

Basic salary Allowances Perquisites / Local Benefits

Retirals

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Perquisites do not include• Value of any medical treatment for employee and his

family in a hospital maintained by the employer.• Reimbursement of expenditure incurred by the

employee for his medical treatment and his family in Govt or other approved hospitals.

• Any portion of the premium paid by the employer to effect insurance on health of the employee and his family members.

• Any sum reimbursed in respect of medical expenditure incurred not exceeding Rs 15000.

• Any expenditure incurred by the employer for treatment of employee or his family members abroad.

Profits in lieu of salary

• Any compensation for termination or modification of terms of employment.

• Any payment received under keyman insurance policy.

• Any amount due to or received whether in lump sum or otherwise before joining the employment or after cessation of his employment

Deduction from salaries

• Entertain allowance granted to an employee who is in receipt of salary from the Govt a sum equivalent to one fifth of his salary or five thousand rupees whichever is lower.

• A deduction of any sum paid by the assessee on account of tax on employment.

Example• Compute the salary income for Assessment year 2009-

10 in the following cases• Mr X is in Govt service receives Rs 4000 pm as basic

salary Rs 500/- pm as DA and Rs 600 pm as entertainment allowance

• Mr Y is an Executive Director of a private company is in receipt of Rs 25000/- as basic salary and Rs 5000 pm as entertainment allowance.

• Mr Z is employed in a multinational company for a salary of Rs 1 lac pm. Value of taxable perquisite is Rs 160000/- per year.He pays professional tax of Rs 2500/- for the year.

AnswerParticulars Mr X Mr Y Mr Z

Salary 48000 300000 1200000

DA 6000 - -

Entertainment All 7200 60000 -

Perquisites - - 160000

Total 61200 360000 1360000

Less Ent. All 5000 - -

Less Prof Tax - - 2500

Taxable Salary 56200 360000 1357500

Gratuity Sec 10 (10)

• Any death cum retirement Gratuity received by Govt employee is wholly exempt

• Any employee covered under payment of Gratuity Act the least of the following is exempt

i) Rs 350000/-ii)15 days salary based on last drawn salary for

each completed year of service or part thereof in excess of six months

Pension• Pension periodically received and commuted

pension• Uncommuted pension is taxable as salary in the

hands of both Govt. and Non-Govt employees.• Any commuted pension is exempt for Govt.

Employee• Any commuted pension received by non Govt

employee is exempt as followsi) If receiving gratuity 1/3 rd of commuted valueii) If not receiving gratuity ½ of commuted value.

TAXABILITY OF COMPONENTS

Component Description

Basic Salary

Basic Salary Fully taxable

Allowances

House Rent Allowance (“HRA”)

Allowance paid to meet the expenditure on rent

As per Section 10(13A) of the Income Tax Act, 1961 (“the Act”), HRA is exempt upto the minimum of the following:

amount of HRA received rent paid in excess of 10 percent of the basic salary 40/50 percent of the basic salary

Conveyance Allowance

Allowance to meet the expenditure for commuting to and from office

Exempt upto Rs 800 pm, ie Rs 9,600 pa as per Section 10(14)

TAXABILITY OF COMPONENTS

Component Description

Children education allowance

Allowance for expenditure incurred by employee on children’s education

Exempt from tax upto Rs.100 per month per child (for a maximum

of two children) as per Section 10(14)

Perquisites/Local Benefits

Reimbursement of Car expenses (in lieu of conveyance allowance)

Reimbursements in the nature of car maintenance, fuel, chauffeur's salary & insurance of the car

Not taxed in the hands of employees

FBT levied on 20% of expenditure and payable by the employer

Medical Reimbursement

Reimbursement for medical expenditure incurred by an employee

Exempt from tax upto Rs 15,000 pa as per Section 17(2)

FBT levied on 20% of expenditure upto Rs 15,000 by the employer

Component Description

Accommodation Owned by the employer

15% of salary (in cities having population exceeding twenty-five lakhs)

10% of salary (in cities having population exceeding ten lakhs but not exceeding twenty-five lakhs)

7.5% of salary in any other place

Leased by the employer

15% of salary; or

actual rent paid; whichever is lower

Hotel accommodation

24% of salary; or

actual charges; whichever is lower

TAXABILITY OF COMPONENTS

TAXABILITY OF COMPONENTS

Component Description

Retirals

Contribution to Recognized Provident Fund (“PF”)

Kind of retirement benefit provided to the employees

Employer’s is exempt upto 12 percent of the basic salary

Deduction under Section 80C is available to an employee with respect to employee’s contribution to PF which is equal to employer’s contribution

Valuation of Furnished Accomodation

• 10% of the cost of furniture to be added to the value of the unfurnished houe.

Salary for the purpose of valuation of Accomodation

• It includes the pay ,allowances, bonus or commission but does not include

i) Dearness Allowance or Dearness Payii)Employer’s contribution to provident fundiii)Allowances exempt from tax.

Example

• Mr X has been provided with furnished accomodation at Delhi. The WDV of the furniture works out to be Rs 3000 where as the actual cost is Rs 27000/-.Mr X draws Rs 15000/- pm as basic pay and Rs 2500 as monthly commission,Calculate the value of perquisite of rent free accomodation

Answer

• Basic Pay-15000x12= 180000• Commission 2500x12=30000• Total Rs 210000• Value of accomodation= 15%= Rs 31500/-• Value of furniture 10 %= Rs 2700/-Value of the furnished accommodation= Rs

34200/-

Example

• Mr X the director of P Ltd had following income during the year 2008-09; Basic Salary Rs 3500 pm, DA Rs 500 pm, HRA Rs 600 pm.Rent paid for his house in Kolkata is Rs 750/- per month. X and the company each contributed 12.5% of salary to the recognised provident fund. Compute the taxable salary in the hands of Mr X.

Answer

• Basic Salary 3500x12= Rs 42000/-• DA 500x12= Rs 6000/-• HRA Rs7200-4200*= Rs 3000/-• Employer’s contribution in excess of 12% of salary Rs

48000x.5%= Rs 240Gross salary Rs 51240/-*Least of the followingi)Actual rent paid over 10% of salary=9000-4800=4200ii) Actual HRA received Rs 7200/-iii) 50% of Salary Rs 24000/-

Valuation of Rent free Accommodation in case of Govt Employees

• The value of such accomodation is equal to the licence fees determined by the Central or State Govt in accordance with the rules frame in this regard.

Salary for different purposes• Employer’s contribution to PF- Basic salary, DA if

provided in terms of employment and commission as a percentage of turnover.

• Entertainment Allowance- Only basic salary and excludes all allowances and perquisites.

• Gratuity- Basic salary, DA if provided in terms of employment and commission as a percentage of turnover.

• Leave salary- Basic salary, DA if provided in terms of employment and commission as a percentage of turnover.

• HRA- Basic salary, DA if provided in terms of employment and commission as a percentage of turnover of relevant period. Relevant period means the period during which the said accommodation was occupied.

• Accommodation-It includes the pay ,allowances, bonus or commission but does not include

i) Dearness Allowance or Dearness Payii)Employer’s contribution to provident fundiii)Allowances exempt from tax.

Example• X posted at Mumbai receives salary of Rs

10000/- pm. His employer contributes Rs 15600/-PM to PF. His other allowances are Project Allowance of Rs 36000/- and medical allowances of Rs 3000/-. He gets 0.5% commission on a turnover of Rs 480000/-. He got reimbursement of Rs 25000/- for medical treatment of his wife in a private nursing home.He has been provided with a car with driver the cost of which is Rs 60000/- pa.Calculate taxable salary of Mr X

Answer• Salary Rs 120000/-• Project Allowance Rs 36000/-• Medical Allowance Rs 3000/-• Commission 0.5% Rs 2400/-• Medical reimbursement 25000-15000=Rs 10000/-• Car with Driver Nil• Contribution in excess of 12%= 15600-

14688=Rs912/-• Taxable salary

120000+36000+3000+2400+10000+912=Rs 172312/-

Example• X received basic pay Rs 162000, special allowance Rs

9000,entertainment allowance Rs 8000 and reimbursement of medical expenditure Rs 3800.. He has been provided with rent free furnished flat in Mumbai with lease rent of Rs 50000. Some of the household appliances are provided costing Rs 36000/- wef 1st June 2008.The company pays hire charges of Rs 10000 for three ACs provided throughout the year.Calculate the value of Rent free accomodation (i) X as a Govt Employee paying licence fee of Rs 4000 (ii) X as a employee in pvt sector.

Answer• If X is a Govt employee Rs 4000 is taxable value of

the unfurnished flat• If X is a employee in private sector15% of Rs 179000(162000+9000+8000)= Rs 26850/-10% of cost of furniture=36000*10%*10/12=Rs 3000Add rent of air conditioner Rs 10000/-Valuation of furniture Rs 13000/- Value of rent free furnished accommodation(i)As Govt employee Rs 4000+13000=Rs 17000/-(ii)As pvt employee Rs 26850+13000=Rs 39850/-

Example• Mr Shah retires on 31/10/2008 voluntarily from Zuari

Agro Ltd as per the scheme approved u/s 10(10C) of Income Tax Act. He furnishes the following particulars ; Salary Rs 5000pm,Pension Rs 3000 pm, DA forming part of basic Rs1000pm, Compensation on retirement Rs 200000, Gratuity Rs 120000, Commuted pension of 70% Rs 42000 on 31/01/2009,Leave salary of Rs 30000, Service period 20 years and eight months, Leave availed while in service 25 months. But for Voluntary retirement Mr Shah would have retired only after 40 months.The last increment he received was in 2007.Compute his taxable income for the AY 2009-10

Gratuity

• Least of the following is exemptedi) Rs 350000/-ii)Half month salary for 20 years 6000/2*20=Rs

60000iii)Actual gratuity Rs 120000Rs 60000/- being the least is exempt and

balance Rs 60000/- is taxable

Pension

• Uncommuted pension before the date of commutation 3000*3=Rs 9000/-

• Uncommuted pension after the date of commutation 3000*30%*2=Rs 1800/-

• Commuted pension Rs 42000/-Less exempt1/3rd of 42000/70*100=Rs 20000/-Taxable commuted pension= Rs 22000/-Total taxable pension =9000+1800+22000= Rs

32800/-

Compensation on voluntary Retirement

• Least of the following is exempti)20*3*6000=Rs360000/- or 40*6000=Rs

240000/- which ever is lower Rs 240000/-ii)Rs 500000/-iii) Actual amount of compensation received Rs

200000/-Rs 200000/- being the least of above is exempt

Leave Salary

• Least of the following is exempti)Cash equivalent of leave to the credit of

employee (20 months-25 months)Nilii) 10 months salary 6000*10=Rs 60000/-iii) Amount notified Rs 300000/-iv) Actual leave salary Rs 30000/-Rs Nil being the least is exempt, balance Rs

30000/- is taxable

Computation of taxable salary of Mr Shah

• Salary 5000*7= Rs 35000/-• DA 1000*7=Rs 7000/-• Pension Rs 32800/-• Compensation on voluntary retirement Nil• Leave salary Rs 30000/-Total Taxable salary Rs 104800/-

Relief U/S 89• If any person receives any portion of his salary in

arrears or in advance he can claim relief in terms of Sec 89. The relief has to be computed in the following manner

1.Calculate the tax payable on the total income including the additional salary of the relevent previous year in which the same is received.

2.Calculate the tax payable excluding the additional salary of the relevant previous year in which the same is received

3.Find out the difference4.Compute the tax on the total income after

excluding the additional salary in the previous years to which such salary relates.

5.Compute the tax on total income after including the additional salary in the previous year to which such salary relates.

6.Find out the difference between 4 and 5 The excess of tax computed at 3 over 6 is the amount

admissible as relief.

Example

• During the financial year ending 31st March 2009 Mr X an employee of a public sector undertaking is paid Rs 242000 as basic salary and Rs 60000 as arrear of salary for the year 1998-99.During the financial year X has received Rs 120000/- as salary. X deposited Rs 10000/- and 20000 in PPF for the year 98-99 and 08-09 respectively. Calculate the relief u/s 89.

AnswerTaxable income on receipt basis 2009-10

1999-2000 Taxable income on accrual basis 2009-10

1999-2000

Salary 242000 120000 242000 120000

Arrear salary 60000 60000

Gross salary 302000 120000 242000 180000

Standard deduction 20000 20000

Net Income 302000 100000 242000 160000

Less deduction under 80C

20000 20000

Taxable income 282000 100000 222000 160000

Tax 33600 9000 18400 22000

Rebate u/s 88 2000 2000

Tax & surcharge 34608 7000 18952 20000

• Relief u/s 89=41608-38952=2656