16/08/2014
Easy way to learn Income Tax HARISH
Head of Income Salary
Basic conceptual part
Employer and employee relationship Place for accrual of Salary
Year of chargeability
Employer and Employee relationship
There must be employer and employee relationship between the payer and payee. ( payer means the person paying the salary and payee means the person who receive the salary)
If there is no such relationship, then there is no question of charging tax under salaries.
In case of Directors of the company, the employer and employee relationship need to be presumed from Articles of Association. If Articles of association permit, the remuneration shall fall within the meaning of salary. However, the Managing director remuneration must fall within the meaning of salary.
There require contract of service for charging tax under salary .In such case there exist best control over what is required to be done by the employee.
Contract for service doesnot include under the ambit of charging tax under the head salaries. Since there is no effective control over the other persons.
MP and MLA Remuneration doesnot fall within the meaning of salary since there is no employer and employee relationship between the Government and MP and MLA.
Retainer fee or remuneration paid to advocate general by the government doesnot fall within the meaning of salary. The reason is advocate general is a professional person and there is no employer and employee relationship also.
Remuneration received by judge will fall within the meaning of salary since there exist employer and employee relationship between government and Judges.
Chargeability
Salary is chargeable to tax on due basis or receipts basis which ever is earlier.
Example
Advance salary is chargeable to tax on receipts basis and arrears of salary is chargeable to tax on due basis.
1
Easy way to learn Income Tax HARISH
Place of accrual
Place of accrual refers to the place where service rendered and deeming provisions (Please Refer Section 9). The salary income originates in India or Deemed to Originate in India will be chargeable to tax.
Example
Salary paid by Government of India to a foreign citizen shall be chargeable to tax if service is done in India.
Salary paid by Government of India to a citizen of Indian origin in respect of service rendered outside India chargeable to tax.
Section 17 (1) Definition of salary (Please refer the definition part)
Section 17 (2) Profit in lieu of salary
Profit in lieu of salary include:-
1. Any compensation due to or received by the assesses from his employee or former employee in connection with the following
1. Termination of the employment.
2. Modification of terms of employment.
2. Any payment due to or received by the assesses from his employee or former employee
3. Any payment due to or received by the assesses from Provident fund or any other fund or any sum received under Key man insurance policy including the
sum allocated by way of Bonus.
Notes (Exempted payment were excluded from the purview)
4. Any amount due to or received whether in lump sum or otherwise in connection with the following.
1) Before joining the employment with that person
2) After cessation of employment with that person
Deduction
Section 16 of income tax Act
There are following deduction
1. Profession tax
2. Entertainment allowance
Profession tax (Tax on Employment)
2
Easy way to learn Income Tax HARISH
If any sum paid by the Assessee as profession tax under276 (2) of Articles of the constitution it is allowed as deduction.
Entertainment allowance.
Who can claim this deduction?
Only Government servant can claim the following deductions
Following shall be allowed as deduction
1. Rs 5000/-
2. 1/5th of salary ( 20% of salary)
3. Actual salary
Salary for this purpose include Basic pay only
Exemptions for salary category
Section 10 (5) to 10 (14) deals with various exemptions.
Value of leave travel concession or Assistance 10(5) and Rule 2 (B)
Value of leave travel concession or Assistance received by an individual from his employee or former employee in connection with the following.
1. On leave to any place in India
2. Any place in India after retirement from service or after termination of the service.
Note
Any allowance received for Foreign Company will not be eligible for deductions.
Family Include the following
Spouse and children
Brothers and sisters wholly dependent on individual
Number of trips qualifies for exemption
Exemption is available in respect of 2 journey performed in a 4 block of calender year commencing from 1986.
Block of 4 calender year Runs from 1986 to 1989, 1990 to 1993, 1994 to 1997 so forth.
One journey can be carrying forwarded and can be claimed as a deduction in the succeeding block of calendar year.
Quantum of deduction
3
Easy way to learn Income Tax HARISH
1.If Journey performed by Air
Amount doesnot exceed the air economy fair of national carrier to the shortest destination of place of Journey.
Other than Air
Option 1. Rail service is available
Amount doesnot exceed A/C First class to the shortest destination of place of Journey. Option 2. Rail service is not available and Recognized Public service doesnot exist. Amount doesnot exceed A/C First class to the shortest destination of place of Journey Option 2. Rail service is not available and Recognized Public service exist
Amount doesnot exceed First class or deluxe class of such public transport to the shortest destination of place of Journey.
2. Exemption in case of Foreign National 10(6)
In case of an Individual who is not a citizen of India following shall be exempt.
1. Remuneration received by him as an employee of following category or staff member of the following categories shall be allowed as an exemption.
a) Official of Embassy
b) High Commission
c) Consulate
d) Staff member of Above
Notes
The above categories were involve with foreign affairs and hence excluded.
2. Remuneration received by him as an employee of the foreign enterprise during his stay in India if the following conditions were met.
a) foreign enterprise doesnot engaged in any trade or Business in India
b) His stay does not exceed 90 days in aggregate during the previous year.
c) Such remuneration shall not be deductible from income chargeable in India.
3. Remuneration received by him as an employee of the foreign ship provided his stay does not exceed 90 days in aggregate during the previous year.
4. Remuneration received by him as an employee of the foreign Government during his stay in india in connection with his training in any enterprise owned and controlled by Government of India or Government company or any subsidiary owned by Government company.
4
Easy way to learn Income Tax HARISH
Perquisite and allowance to Indian Citizen Employed Abroad 10 (7)
Any perquisite or allowance paid to a citizen of India in connection with abroad employment is exempt from Tax.
Gratuity 10 (10)
1. Government servant
Any death cm retirement gratuity is wholly exempt from tax
Employees covered under payment of Gratuity Act 1976
Least of the following is exempt from tax.
1) Rs 3,50,000/-
2) 15 days salary out of 26 days salary based on last drawn salary
3) Actual gratuity received
Salary for this purpose include basic pay and DA
Employees not covered under payment of Gratuity Act 1976
4) Rs 3,50,000/-
5) Half month days salary based on last 10 month average
6) Actual gratuity received
Salary for this purpose include basic pay and DA and commission as a % of Turn over achieved by the employee
Notes
Gratuity received during the period of service is always taxable
If the employee receives gratuity from more than 2 employers then aggregate amount of Gratuity exempt doesnot exceeds the limits prescribed
In case where an employee receives gratuity in earlier year in former employer and received gratuity in another employer then the limit of Rs 3.5 lakhs will be proportionately reduced by the amount of tax exempt in earlier year.
Commuted pension 10 (10) (A)
Un commuted pension means the pension which is received by the employee periodically and which is chargeable to tax u/s 15 in the hand of both Government and Non Government employee.
Commuted pension refers to taking lump sum amount by commuting the whole or part of the pension
Where an employee had commuted his pension then the remaining portion will be received periodically
5
Easy way to learn Income Tax HARISH
Any commuted pension received by the government employee is wholly exemempt from tax
Judges of High court and supreme court also entitled for this exemption ( Vide circular (623 Dt 6/1/92)
In case of Non government employees following shall be exempt from tax
1. If the employee is in receipts of Gratuity
1/3 of commuted pension which we would have received had he commuted the whole pension (100%)
2. 2. If the employee is in not receipts of Gratuity
1/2 of commuted pension which we would have received had he commuted the whole pension (100%)
Leave salary Sec 10 (10 AA)
1. Government servant
Any amount received as cash equivalent to earned leave to the credit of the employee is wholly exempt from tax.
2. Non government servant
Least of the following shall be exempt from tax
1. Cash equivalent of leave ( on the basis of average of last 10 month salary) to the credit of the employee at the time of retirement( calculated 30 days credit for each completed year of service
2. 10 month salary based on average of last 10 month salary
3. Amount notified by the Government Rs 300000
4. Leave encashment actually received
Notes
Leave encashment received during the period of service is always taxable
If the employee receives Leave encashment from more than 2 employers then aggregate amount of Gratuity exempt doesnot exceeds the limits prescribed
In case where an employee receives Leave encashment in earlier year in former employer and received gratuity in another employer then the limit of Rs 3 lakhs will be proportionately reduced by the amount of tax exempt in earlier year.
Salary for this purpose include basic pay and DA and commission as a % of Turn over achieved by the employee
Retrenchment compensation 10 (10 B)
Any compensation received by a workman is exempt to the extent of following
6
Easy way to learn Income Tax HARISH
1. Rs 500000
2. Amount specified under Industrial Dispute Act
Voluntary Retirement or separation 10 (10C) and Rule 2 (BA)
Amount received or receivable by the following employees
1. Public sector company
2. Any other company
3. Any authority established under central state or provincial Act
4. local authority
5. Co operative society
6. University
7. IIT
8. Any state government
9. Any Central government
10. Institution having importance through out india or in any state on the Central government may specify
11. Any institute of Management as Central Government may specify in this connection.
At the time of VRS or termination of service under voluntary retirement or in the case of Public company under voluntary separation is exempt up to Rs 500000.
The scheme must be framed under Rule 2 BA
Condition under Rule 2 BA ( Important)
1. It applies to an employee of the company who has completed 10 year of service or completed 40 years of age which ever is earlier.
2. It applies to all the employees including workers and executive of the company and excluding the directors of the company
3. The scheme of Voluntary retirement or separation has been drawn up to result in overall reduction in the existing strength of the employee of the company
4. The Vacancy caused by Voluntary retirement or separation is not to be filled up
5. The retiring employee shall not be employed in another company or concern belonging to the same management.
6. The amount receivable on account of Voluntary retirement or separation doesnot exceed the amount equivalent to 3 month salary for each completed year of service or salary at the time of retirement multiplied by the balance month of services left before the date of retirement.
Note
The condition that an employee of the company who has completed 10 year of service or completed 40 years of age which ever is earlier is not applicable to Voluntary separation scheme framed by Public Sector Company.
Salary for this purpose include basic pay and DA and commission as a % of Turn over achieved by the employee
7
Easy way to learn Income Tax HARISH
Statutory Provident Fund 10 (11)
Any payement from Statutory Provident Fund (PF Act 1925) or public provident fund is wholly exempted from tax.
Recognized Provident fund 10 (12)
The accumulated balance due and becoming payable to an employee participating in a recognised PF shall be exempt in the following case in Rule 8 of part A of the fourth schedule
1. In the case of an employee who has rendered continuous service of more than 5 years or more.
2. In the case of an employee whose service has been terminated by reason of the employee ill health or by contraction or discontinuance of the employers business or other reason beyond the control of employee.
3. in the case of employee who obtains the employment with any other employee who maintains any recognised Provident fund to which the accumulated balance becoming due and payable is transferred.
4. Where the accumulated balance becoming due and payable is so transferred , the period of service under the former employer shall also be included in calculating the continuous service .
Approved super Annuation Fund 10 (13)
Any payment from an approved superannuation fund is exempt from tax if it is made on the following situations
1. on the death of a beneficiary
2. to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming in capacitated prior to such retirement
3. By way of refund of contribution on the death of beneficiary
House rent Allowance 10 (13 A)
HRA is allowed as an exemption to the extent of least of the following
1. Excess of rent paid over 10 % of salary
2. If the accomodation is in CCDM, then 50% of the salary and 40% of salary in other cases
3. Actual HRA
Special allowance 10 (14) and Rule 2BB
Following are allowed as an allowance under CBDT rules 2 BB
1. Any allowance granted and spend to meet the cost of
a) Travel on tour or transfer
8
Easy way to learn Income Tax HARISH
b) Ordinary daily charges which is incurred on account of absent from place of employment
c) Conveyance allowance granted to meet the expenditure incurred on conveyance in the performance of duties provided free conveyance is not provided by the employer
d) Expenditure incurred on a helper in the performance of duties
e) The academic, research and training pursuit in educational and research institute
f) Purchase or maintance of uniform for wear during the performance of duties.
2. Composite hill Allowance
Rs 300/- Pm provided the place is located at a height of 1000 meters above from sea level.
Rs 800/- Pm in certain notified areas
Rs 700 Pm in Siachen area of Jammu and Kashmir
3. Tribal Area Allowance
Rs 200 Pm is exempt (Assam, Bihar, Karnataka, Madhya Pradesh, Orissa, Tripura, Tamil Nadu, UP)
4. Special allowance
Border area Allowance Rs 200
Remote area Allowance Rs 300
Difficult area Allowance Rs 750
Distributed area Allowance Rs 1050
5. Employee working in a public transport system
Rs 6000/- Pm or 70 % of such allowance which ever is lower.
6. Children Education Allowance
Exempt up to Rs 100/- subject to a maximum of Two children
7. Children hostel allowance
Exempt up to Rs 300/- subject to a maximum of two children
8. Counter insurgency allowance
Exempt up to Rs 3900/- Pm to the members of armed force operating in an areas away from their permanent locations for a period of more than 30 days
9. Transport allowance to the person who is suffering Blindness Rs 1600/-Pm
9
Easy way to learn Income Tax HARISH
10. Transport allowance to the person who is suffering Blindness Rs 800/- Pm
11. Underground allowance
Exempt Rs 800 pm
12 High altitude allowances
Exempt Rs 1060 Pm for the altitude of 9000 to 15000 Ft
Exempt Rs 1600Pm for the altitude above 15000 Ft
13 Special Allowance of members of armed force
Special compensatory allowance highly active field allowance Rs 4200 pm Island duty allowance of Rs 3250/-
Section 17 (2) perquisite (Important)
1) Value of rent free accommodation provided by the employer to the employee.
2) Value of concession in the matter of rent in respect of any accommodation provided by the employer to the employee
3) Value of any amenity or benefit provided free of cost or at concessional rate in case of specified employee
4) Any sum paid by the employer in respect of any obligation on behalf of the employee
5) Any sum payable by the employer to effect an assurance on the life of the employee or to effect a contract for annuity
6) The value of any other fringe benefit or amenity as may be prescribed.
7) The value of specified sweat equity shares transferred or allotted directly or indirectly at free of cost or at concessional rate to the assessee
8) Any contribution to super annuation fund by the employer in respect of assessee to the extent it exceed Rs one lakh
Medical facility is not a taxable perquisite (Important)
The value of following medical facility or expenditure incurred in favour of an employee is not treated as perquisite and therefore it is not taxable.
1) Medical facility provided to an employee or any member of his family in any hospital maintained by the employer.
10
Easy way to learn Income Tax HARISH
2) Any sum paid by the employer in respect of any expense actually incurred by the employee or any member of his family on his medical treatment or medical treatment of any member of family in :-
a) Any hospital maintained by the Government or
b) Any approved hospital under central health scheme or similar scheme of state government
c) Any hospital, approved by chief commissioner for medical treatment of specified disease or Ailment.
3) A)Group medial insurance taken on the life of employee or
B) Reimbursement of medical insurance premium paid by the employee on his health or health of any member of his family under the scheme approved u/s 80 D.
4) Re imbursement by the employer of actual expenditure incurred by an employee for medical treatment from any doctor in respect of employee or any member of his family.
5) Actual expenditure incurred by an employer in respect of following
a) Medical treatment of employer or any member of his family outside India
b) Travel and stay abroad of patient and one attendant subject to the following condition
i) The expenditure on medical treatment and stay abroad will be exempted to the extend permitted by RBI.
ii) The expenditure on medical treatment shall be exempted only in the case of employee whose gross total income as computed before included the said travel expense Rs 2Lakh.
Value of rent free accommodation
Government employee
Where the accommodation provided by union or state government in connection with holding office or post in connection with affair of such union and state government or
Holding post in any undertaking which is hold by union or state government. The value of perquisite shall be the license fee determined by such union and
state government in connection with Rules framed in this behalf as reduced by rent ,if any, paid by employee.
Other employees
The value of perquisite will depends upon whether the accommodation is owned by the employer.
Calculation of Rent free unfurnished accommodation
Where the accommodation is owned by the employer
A) 15% of salaries where the cities having population of More than 25lakh as per 2001 census.
B) 10% in other cities
11
Easy way to learn Income Tax HARISH
Where the accommodation is taken on lease or rent
Least of the following
a) Actual cost of lease rental paid or payable by the employer or
b) 10 % of salary
Reduced by the rent, if any, paid by the employee Calculation of Rent free furnished accommodation
Calculate the value as per the above calculation and add the following.
a) 10 % original cost where the furniture owned by the employer
b) Actual hire charges payable by the employer where the furniture is hired
Reduce any hire charges which is beard by the employee during the previous year.
Hotel accommodation
Government employee
Where the accommodation provided by union or state government in a hotel, then value of the perquisite is least of the following
24% of gross salary paid or payable for the previous year or
Actual hire charges paid or payable to such hotel
Reduce any hire charges which is beard by the employee during the previous year.
The calculation shall be for the period during which accommodation is availed.
Where such accommodation is provided in connection with transfer of employee in one place to an other place for less than 15 days there is no question of perquisite. If exceeds 15 days then perquisite need to be calculated.
Additional points
Where accommodation is provided to an employee who working in the following category then there is no taxable perquisite at all.
a) Mining site
b) Onshore oil exploration site
c) Project ex*****on site located in a remote area
d) Off shore site of similar nature ( Remote area)
12
Easy way to learn Income Tax HARISH
Where on account of transfer of employee in one place to an other place , the employer provided with new place of posting while retaining the accommodation at old place, the value of perquisite is determined is as follows.
a) For a period not exceeding 90 days, the value of perquisite is determined with reference to only one such accommodation which bears lower perquisite.
b) For a period exceeding 90 days, value of perquisite is charged for both such
accommodation.
Note
The test is for 90 days
Accommodation include the following
Accommodation in :-
Flat
Farm house or part there of
Accommodation in a hotel, motel, caravan, mobile home or in ship or other floating structure (House boat)
Salary for the purpose
Salary includes the following
Pay, allowance, bonus or commission payable monthly or otherwise or any other monetary payment payable by whatever name called from one or more employees as the case may be but does not include the following.
i) Dearness allowance or pay unless it include the part of super annuation or the retirement benefit of the employee concerned
ii) Employer contribution to PF of the employee
iii) Allowance which are exempt from payment of tax
iv) Value of perquisite which is specified u/s 17 (2)
v) Any payment or benefit in the nature of allotment of shares ,debentures, or warrants under ESOP or scheme in accordance with guidelines prescribed by the government in this connection.
2 Value of concession in the matter of rent
No specific calculation in
3. Value of any other amenity or benefit to specified employees (Important)
Specified employees
Following category of employees were called specified employees
I) Director of the company
II) A person who have substantial interest in employer company
III) An employee who is not covered (I) and (II) above whose income under the head salary excluding all the non monetary allowance and perquisite exceeds Rs 50,000/-
Notes
13
Easy way to learn Income Tax HARISH
While computing the limit of Rs 50,000/- following are excluded
I) All non monetary allowance
II) Monetary allowance which is exempt u/s 10
III) Deduction under 16 (ii) and (iii)
a) Perquisite in respect of domestic servant
If employer had made a provision for Gardner, sweeper, watchman or personal attendant
The actual value of perquisite shall be the total amount of salary which is borne by the employer less amount if any paid by the employee
b) Perquisite in respect of Gas, electricity energy and water supply for house hold.
If the above facility owned by the employer
Manufacturing cost incurred by the manufacturer shall be value of the perquisite
If the above facility Hired by the employer from outside agency.
The amount paid by the employer on that account shall be the value of perquisite.
Reduce the amount if any paid by the employee on that account.
c) Perquisite in respect of Education allowance
Where free education allowance provided by the employer to any member of house hold of employee
Actual cost incurred by the employer for providing such education.
Where education institution maintained or sponsored by the employer and providing free or concessional education facility to the household of employee
Value of perquisite shall be cost of such education in near or similar locality. If the cost of education is less than Rs 1000/- child then there is no perquisite. Reduce the amount if any paid by the employee on that account.
d) Perquisite in respect of Transport facility
Where any undertaking engaged in carrying goods or passengers and providing free transportation allowance to the employee or any member of house hold,
14
Easy way to learn Income Tax HARISH
Value of perquisite shall be value at which such benefit or amenity was granted to the public by such undertaking.
3) Value of other Fringe benefit or amenity Section 17 (2) (Vi) Refer text book.
In computing the value of benefit or amenity, any amount paid or recovered or borne by the employee or any member of the house hold shall be reduced and the balance amount shall be charged to tax as perquisite in the hand of employee.
1) Interest Free housing loan
The value of benefit or amenity on account of interest free or concessional loan made available to him shall be determined as a sum equal to the interest computed at the rates charges by SBI as on the first day of the relevant previous year in respect of loan made to the similar purpose during the first day of the relevant previous year.
Please do refer the SBI circulars for the assessment year.
Interest shall be calculated on the basis of maximum monthly outstanding balance.
Exemption
If the loan is availed for the disease specified in Rule 3 A or The amount of loan availed doesnot exceeds Rs 20,000/-
Usage of movable asset
If the moveable asset owned or hired by the employer is used by the employee or any member of the household then the value of perquisite shall be
10% p a of the actual cost of such asset or the amount of hire charges incurred by the Employer shall be the value of perquisite.
Exemption.
It doesnot covers the computers and laptops and the asset covered above. Transfer of moveable asset
Where an employer transfers any asset directly or indirectly to the employee or any member of the family then the value shall be determined as follows
1) Motor car
20 % on WDV
2) Computer and electronic gadget
50 % WDV
3) Other asset
10 % on WDV.
15
Easy way to learn Income Tax HARISH
Perquisite in respect of motor car
Where the car is owned by the employee and expenditure are met by him then there is no question of perquisite will be arise
However, the following case there may arise the question of perquisite.
Case 1 car is owned by the employer and expenditure were met by the employer
i) Wholly for the personal use: - Actual amount incurred by the employer less amount if any recovered from the employee.
ii) Partially for personal and official use:- Up to 1.6 liters
CC Rs 1800 PM and above 1.6 CC Rs 2400/- Drivers salary Rs 900 Pm.
Case II Car is owned by the employer and Expense are met by the employee
i) Wholly for personal use :- Wear and tear or Hire charges and drivers salary
ii) Partially for personal and official use: - Up to 1.6 liters CC Rs 600 PM and above 1.6 CC Rs 900/- Drivers salary Rs 900 Pm.
Case III Car is owned by the employer and expense is met by the employee.
i) Wholly for personal use :- Running and maintanence expense, wear and tear or Hire charges , Drivers salary Less amount recovered from the employee for such use.
iii) Partially for personal and official use: - Up to 1.6 liters CC Rs 1800 PM and above 1.6 CC Rs 2400/- Drivers salary Rs 900 Pm.
In the case of other conveyance allowance provided by the employer then the value shall be as follows.
i) Wholly for personal use:- The running and maintanence expense
ii) Partial for official and personal: - Actual expense incurred by the employer as reduced by Rs 900/-
Free or confessionals tickets
In case of undertaking engaged in the business of carriage of goods or passengers and providing free or concessional journey to the employee or any member of house hold.
Value of perquisite shall be the amount at which such facilities are provided to the public less amount if any recovered from the employee.
Travelling, tour and accomodation
The amount of expenditure incurred by the employer shall be regarded as the value of benefit or amenity. The amount recovered from the employee shall be reduced and the residual amount shall be regard as value of benefit or amenity
16
Easy way to learn Income Tax HARISH
If the facility is not uniformly available to the entire employee, then, the value at which such facilities are allowed to the public shall be allowed as value of amenity or benefit.
Where the employee is in tour and any member of house hold are accompanied him, the amount of expenditure shall be value of perquisite.
This will not cover Leave travel concession or assistance.
Free or concessional meals
The amount of expenditure incurred by the employer shall be the value of benefit or amenity.
Membership in a club
The amount of expenditure being membership fee and the annul fee incurred by the employee or any member of the house hold shall be the amount of benefit or amenity.
Salary General Format
Particulars Amount Amount
Salary or wages ( Including advance salary) ###
pension or Annuity ( retirement benefit) ###
Gratuity or leave salary ###
Fee, commission etc ###
Taxable allowance ###
Taxable perquisite ###
Profit in lieu or addition of salary ###
Contribution in excess of 12.5 % salary ###
Interest credited in excess of 9.5 % ###
Taxable balance transferred from UPRF to
RPF ###
Gross salary ###
Less deduction u/s 16
Entertainment allowance ###
Profession tax ###
Net salary ###
