Income From Salary

1

Income from Salary

By

Prof. Augustin Amaladas and Prof.Amala shanthi

St. Joseph’s College of Commerce and Jyoti Nivas college respectively, Bangalore

M.Com., AICWA.,PGDFM., B.Ed.

09845844319 [email protected]

What do you mean by rest?

Casually sit back and relax andenjoy your Income tax

It is so simplified in such a way that you can easily understand

Players!!Now you Do some ExerciseEven not Studied So far.

This slides arePrepared for Any one who

Had not Attended classes

regularlyOr do not have Time or money.

Education for all

B. Com, BBM, M.Com,

ICWACACS

MBAs

2

Dedicated to our kids

Joewin Shamalina

And Tim Sebastian

3

salary

Basic + DA+Commission etc

Normal components

Allowances

PerquisitesTaxable

Toemployee

Fringe Benefit taxTaxable

To Employer

ApplicableTo companies

4

Definition of salary

• Section 15• Employer and employee relationship is very

important.• Director of a company is not an employee-therefore

his remuneration does not come under salary• Emolument received by college lecturer for

valuation of answer scripts in the university does not come under salary because he/She is not an employee of the university but employee of a college.They come under income from other sources

Alternative work is rest

5

Paper setting, MP and MLA

• If the same lecturer receives emoluments(remuneration or salary) from his college for academic or non academic work constitute salary.

• Question paper set to other colleges or other universities comes under other sources.

• A Member of parliament(MP), Member of the state assembly(MLA) receives remuneration does not come under salary as there is no employer employee relationship between government of India and MP and MLA.-therefore comes under other sources.

Threat is your opportunity

6

Salary and wages

• Income tax point of view there is no difference between salary and wages.

Strength is your weakness

7

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. He is calculated under the head salary in both the places.

All problems and happiness are temporary

8

Pension from former employer

• As pension paid due to the previous employer employee relationships it is taxed under salary provided the same employee receives(alive)

• If, after the death of such employee family pension received by spouse(wife or husband) comes under other sources, as there is no employer employee relationship after the death of such employee.

Take your life as it is

9

Employer includes

• Former

• Present

• And prospective employer

Love others in order to love oneself

10

If No intention to pay?

• Agreement between teacher and management to pay salary to employee and another agreement by which an identical sum has to be returned by the same teacher(assessee)-does not constitute salary because salary is not real but fictitious.(Actual intension to pay is important)

Play every day

11

Whether salary taxed on payment or due basis?

• Salary is taxable on due or receipt whichever

earlier• Advance salary received or

salary of the last month not received is taxed in the current previous year

• See Example: Next slide

Work is worship other wise?

12

Example

• April 2008 salary received in March 2008-taxable in the previous year 2007-08 itself as it is received in 2007-08 period(receipt or due which ever is earlier)

• March 2008 salary received in April 2008-taxable in the previous year 2007-08 only(receipt or due which ever is earlier)

Otherwise hardship

13

Surrender of salary

• Surrender to central government- either by government employee or private employee-not taxable salary.

Women have changed but men have not changed in India

14

If Tax paid by employer?

• If Employer pays tax on employee then total salary to such employee will be

Net salary received + tax paid by employer

Change in attitude of men required to have a harmony in family life

15

Gifts given by employer?

• Taxable under the head salary

Men also should learn cooking as woman is working like men

16

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 interest on provident fund paid out of the employer’s contribution.

• The contribution paid by employer under notified pension scheme

Do not fight.If you want to fight, fight after??

17

Pension received by former employee who rendered service in India

• Pension received outside india by an employee who rendered services in India taxable in India to all assessees(resident, not ordinarily resident and non resident) as salary is from India.

• Place of accrual of salary is important-from India or from outside India

After meal why?

18

Exercise-1

• 1.Pension paid abroad for the services rendered in India?

• 2.Leave salary paid outside India for the services rendered in India?

• 3.Salary paid by government of India to an Indian National outside India if services rendered outside India?

• 4.Allowances received outside India by Central government employee for services rendered outside India?

Normally people do not fight after meal.

19

Answer-1

• 1.taxable as services rendered in India• 2. Taxable as services rendered in India• 3. - DO-• 4. Allowances paid by government of

India to its employees(Indian nationals) outside India for the services rendered outside India are exempted as per section 10(7)

20

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]

21

Leave encashment

• It is not related to casual leave• For every completed year of service employee is

entitled to receive a certain number of days of paid leave.Employee either can take leave or en cash it while in service or after retirement.

• Note: Any thing received while in service is normally taxable.After retirement there are some concessions given.

22

1.Leave encashment

1.Received while in Service

Fully taxable(government orNon government employee)

Received At the time of retirement

Government Employees-Exempted

Central/State govt.

Employees(2)

Non government employee(including local authority

and corporation employees)(see next slide)

23

Non-government employee(including local authority

and corporation employees)

Least of the followingExempted out of leave cash received

a) 10 months average salary*b) Amount specified by the government-3,50,000

c) Actually received at the time of retirementd) [Period of leave on 30 days basis (if more

than 30 days as per service rules)for every completed yearof 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.Note: Immediately before the

The retirement

24

• Basic + DA which comes for retirement +fixed percentage of commission only on sales.

• Do not consider fixed amount of commission on sales

• Do not consider variable or fixed percentage of commission on purchase

• BDA employee is not a government employee as for as the leave encashment point of view.

• Note: 1.Fixed % of commission is different from fixed amount of commission(monthly fixed amount)

25

Exercise-1• X an employee of the central government receives Rs.4,00,000 as

cash equivalent to leave credit to his salary on 1st Feb. 200X after his retirement.

• a)How much is taxable?• b)Suppose X is a private employee and received Rs.15000 as

salary and served 20 years and 3 months and taken 3 months leave while in service at the time of retirement?

• c)If X had rendered 24 years and 8 months of service and he is employee of BDA and received Rs 15,000 basic, 40% DA out of which only 60% will come for retirement purpose and 5% variable and 4% fixed commission on sales where sales achieved in the previous year was Rs.30,00,000. Leave availed while in service was 10 months and 8 months leave en cashed ?

• d)Suppose X receives leave encashment while in service and he is a government employee?

26

Answer

• a) after the retirement leave encashment by government employee is not taxable.

• b)If he is a private employee the least of the following is exempted 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 while

in service(-)leave en cashed while in service x (average salary) = 20months-3month-0 months(15,000)=2,55,000How much is exempted? How much is taxable?

27

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)

28

• c) Working Notes:-• No of years of service= 24 years and 8 months=24 years

only(fraction is ignored)• Average salary=15000 +(40% x 60% x15000) +(4% x 10/12)

(30,00,000)=15000 +3600 +30,00,000 x10/12 x 4%/10=28,600• Rs. 30,00,000 is for 12 months but we have to calculate for ten

months only before the date of retirement.• Least of the following is exempted out of Rs.4,00,000:• A) Actually received-Rs.4,00,000• B) 10 months average salary-10 x 28,600=Rs.2,86,000• C) (24 months-10 months-8 months) x 28,600=Rs.1,71,600• D) Maximum limit-Rs.3,00,000• Least of the above is Rs.1,71,600 which is exempted .• Therefore taxable leave salary is • Rs.4,00,000-Rs.1,71,600=Rs.2,28,400

29

• D) Salary received by government employee while in service is fully taxable.

30

@Exercise-2

• X a non government employee receives Rs.2,50,000 as leave salary at the time of retirement on February 20, 2008. On the following information, determine the amount of taxable leave salary: Basic salary Rs.15,000 per month since 2005. Duration of service : 26 years; leave at the credit of X at the time of retirement: 25 months; entitlement of leave salary: 60 days’ salary for every year of service and leave availed while in service: 27 months.

@Courtesy-Income taxBy Dr. Singhania

31

Working notes for exercise-2

• 1. No of years:26 years equal to 26 months for our calculations because every completed year of service one month is allowed.

• 2.Average salary Rs.15,000

Least of the following is exempted from Rs.2,50,000

a) Actually received Rs.2,50,000

b) 10 months salary=10 x Rs.15,000=1,50,000

c) Maximum limit Rs.3,00,000

d) (26 months-27 months-8 months) x Rs.15,000=0

(as it is negative it is equal to Zero)

Least exempted leave encashment is Rs.0. Therefore taxable leave encashment is Rs.2,50,000.

32

Fees and commission

• Taxable as salary if paid to employee by employer

33

Bonus

• It is taxable on due basis.

• If it is not taxable on due basis it is taxable on receipt basis.

34

Gratuity1.Government Employee(Central,State 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 statutory corporation

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 statutory corporation

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)

35

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 is exempted 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 one year

The least of the following is exempted 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.3,50,000

3. Gratuity actually received

Note:

Fraction of the year is not considered

36

Exercise-1• Mr. X retires from service on Nov.18 200X and received Rs.3,40,000 as

gratuity after 32 years and 8 months. His salary at the time of retirement is Basic Rs.19000 and DA 40% on Basic and 4% commission on sales.

• Sales achieved preceding ten months was Rs.15,00,000. Basic salary was more by Rs.2000 since 1st April 200X.

• 60% of DA will come for retirement purpose.

• Answer the following:How much is taxable gratuity?

• A)If Mr.X is a government employee?

• B) If Mr. X is a private employee who is covered under the payment of gratuity act?

• C) If Mr. X is a BDA employee?

• D) If Mr.X is a Bangalore Mahanagara paliga(BMP) employee?

• E) If Mr. X is a XYZ public Ltd.(a Government company)employee who is not covered under the payment of gratuity Act.

• F) After the death of Mr.X wife receives gratuity how much taxable under the head salary?

• Mr. X retires from service on Nov.18 200X and received Rs.3,40,000 as gratuity after 32 years and 8 months. His salary at the time of retirement is Basic Rs.19000 and DA 40% on Basic and 4% commission on sales.

• Sales achieved preceding ten months was Rs.15,00,000. Basic salary was more by Rs.2000 since 1st April 200X.

• 60% of DA will come for retirement purpose.

• Answer the following:How much is taxable gratuity?

• A)If Mr.X is a government employee?

• B) If Mr. X is a private employee who is covered under the payment of gratuity act?

• C) If Mr. X is a BDA employee?

• D) If Mr.X is a Bangalore Mahanagara paliga(BMP) employee?

• E) If Mr. X is a XYZ public Ltd.(a Government company)employee who is not covered under the payment of gratuity Act.

• F) After the death of Mr.X wife receives gratuity how much taxable under the head salary?

37

AnswerParticulars Government

employee A BDA employee

BMP Employee

1.Years of service

2.Meaning of salary

3.How much taxable?

Not applicable

Not necessary

Not taxable

Local authority= Government employee

Not necessary

Not taxable

BMP is a corporation.therefore the employee is a private employee who is covered under the payment of gratuity Act.

Year of service=33 years.

Basic + Full DA =Rs.19,000 +40%(19000)=26,600

Least of the following is exempted:

1. Rs.3,50,000

2. Gratuity actually received Rs.Rs.3,40,000

3. (15/26)x 33 x Rs.26,600=5,06,423

Least=Rs.3,40,000 exempted.Therefore nothing is taxable

38

Particulars XYZ Public limited government company not covered under the payment of gratuity Act

Wife receives after the death of Mr.X

1.Year of service

2.Meaning of salary

Fraction of the year is ignored. Therefore 32 years

Average salary 10 months preceding the month of retirement=Basic+DA which comes for retirement +fixed % of commission= January to October salary= Jan to March Rs.17,000 each and 19000 from April to October=Rs.1,84,000+

Rs.7360 x10(DA)+6000 x 10(Commission)

Average salary=3,17,600/10

=Rs.31760

Not required as there is no employer employee relationship after the death of Mr.X.The gratuity received is taxable under the head income under other sources.


1.(15/30) x32 x31,760=Rs.5,08,160

2.Rs. 3,50,000

3.Gratuity actually received=Rs. 3,40,000

Least : Rs. 3,40,000

Therefore Gratuity received is fully exempted.

39

Pension

• Regular pension received by the employee himself ( not dead )after the retirement is taxable as salary.

• Family pension(after the death of husband/wife) received by wife/husband comes under income from other sources as there 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.

40

Commuted pension-Sec.17(1)(ii)

• Instead of receiving monthly pension some portion of regular pension can be accumulated and can be received( after retirement/voluntary retirement) a lump sum is known as commuted pension.

• 1. Government employee-Exempted after retirement.

• Government employee means:-Central, state,local authority and corporation employees(totally 4)

41

Non Government employee-commuted pension

• If gratuity received Maximum 1/3 of the regular pension can be commuted which is not taxable.

• If gratuity is not received ½ of the regular pension can be commuted which is not taxable.

• Note: above those limits are taxable for non government employees

• See example in the next slide

42

Example – commuted pension

• Mr. X receives pension every month Rs.10,000. He wants to commute some portion of the pension.

• ? 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.

43

Answer for commuted pension

• A,B and C all are government employees therefore any amount of pension commuted are exempted . It is because government never exceeds the statutory limit of 1/3 or ½ depends on 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 can commute ½ of pension ie. ½(10,000)=Rs.5,000.

• Note:remaining pension regularly received (after commutation)is taxable.

44

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 the

extent of 10% is deductible as saving U/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

45

Exercise

• Mr. X joined a government service on January 2007 for a salary of Rs.40,000 per month.The government contributes towards pension scheme is Rs.5000 per month.Find out how much is taxable for the year 2007-08, 2008-09 and 2009-10 previous year?

• Answer: 1st April-31st March• 12 months salary=40,000 x12= 4,80,000• Government contribution 5000 x12= 60,000• Total 5,40,000• Less: deduction U/S 80CCD• Upto 10% both by employer and employer=4000 x2=8000 per month.• Annual Saving =8000 x12=96000 deductible from 5.40,000.• Net taxable salary=Rs.5,40,000-96,000=4,44,000.Applicable for all three

years.• Does it make any difference if he had joined XYZ Ltd?

46

Does it make any difference if he had joined XYZ Ltd?

• No. It is because this provision is applicable both for government and any other employer.

47

Annuity[17(1)(ii)]

• Annual payment constantly paid by employer to employee.

• Even paid voluntarily it is taxable

• Annuity received from ex employer is taxed as profit in lieu of salary-taxed as salary.

48

Retrenchment compensation[10(10B)]

• The Least of the following is exempted:• 1. Amount calculated as per Industrial dispute

act.• (15 days salary for every completed year of

service and fraction beyond 6 months ie. 25 years and 7 months=26 years.)

• 2. Rs. 5,00,000 notified by Government• 3.The amount received• Exercise:-next page

Note: If approved by government, under any scheme, such amount is fully exempted.

49

Exercise

• Mr. X has working in BPL. Due to closing down of the company, company pays to Mr.X Rs. 2,60,000 as compensation.He has rendered service 20 years and 8 months.Average salary was Rs.20,000. How much is taxable? How much is exempted?

• Answer: no of years of service=21 years

• 1.Compensation as per Industrial dispute 15/30(20,000)(21)=2,10,000

• 2.Rs.5,00,000

• 3.Rs.2,60,000

• Least is Rs.2,10,000 is exempted. Therefore 50,000 is taxable ie (2,60,000-2,10,000)

50

Profit in lieu of salary

• If company wants a manager to quit immediately as per the service rules he is paid a lump sum immediately. Such compensation is treated as salary.

• The compensation can be received from present or former employer.

51

Remuneration for extra duties

• Taxed as salary

• Even warden ship remuneration also taxed as salary

52

Salary received from a United Nations organisation

• Not taxable in India

53

VRS[10(10C)]

• Voluntary Retirement scheme• Maximum amount of exemption is Rs.5,00,000.• Up to Rs. 5,00,000 is exempted• Conditions:• The same employee can not be re-employed in the same

or any other company comes under the same management.

• Salary means the last salary drawn for computation of compensation

• Basic+ DA which comes for retirement + fixed % of commission on sales.

54

Particulars Statutory PF Recognised PF Un-recognised PF Public PF

1.Who maintains?

2.Who contributes?

3.Exempted or not?

Employees contribution comes under Section 80C as savings in all cases

Government and semi-government

Both employer and similar contribution by employees

Employer’s contribution is exempted.

Private establishments having 20 or more employees

Both employer and similar contribution by employees

Employer’s contribution exceeding 12% of salary and Interest exceeding 9.5% taxable.

Not recognised by commissioner of Income-tax act

Employer contributes but there is no separate account in the name of employee

Only when employer transfers his account to employee’s account is taxable or converted to recognised PF excess over 12% of salary and excess over 9.5% towards interest is taxable

Personal savings in post office by self employed etc.

By Employee(not by employer

Since employer does not contribute nothing is taxable

Provident fund

Salary meansBasic+DA+Fixed % of Commission on Sales

55

City compensatory allowance

• Fully taxable as salary

56

House rent allowance(10[13A])

• There will be no tax exemption if the residential accommodation 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.

57

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 claim 50% or 40% depends on type of city.

• After receiving rent allowance either he stays in his own house or rent accomodation is not taken rent allowance for such period is taxable.

58

Exercise-1• Mr. X works in Mumboi but stays in Pune and receives house rent

allowance of Rs.12,000. He pays Rs. 15,000 per month as rent.His Basic is Rs.20,000, DA-30% which will come for retirement purpose.

• A)Compute taxable House rent allowance if he has taken a rented house in Pune.

• B) If he stays in Mumboi and pays the same rent.

• C) suppose he stays in his own house in Mumboi

• D) suppose he has taken a house for rent in Mumboi for the same rent but rent his own house in Pune?

• E) Suppose he stays in a rented house upto December in Mumboi by paying same rent and taken a rented house in Pune from 1st January for a rent of Rs.10,000.

• Note:-Each question has to be approached independently keeping the base same for all questions.

59

Answer-HRA• A) Rented house in Pune:

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

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


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

60

Answer-HRA• A) Rented house in Mumboi

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

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


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

61

C) Stayed in Mumboi in own house

• The entire rent allowance received is fully taxable as he stays in own house in Mumboi.

• There fore Rs.1,44,000 is fully taxable.• D) It does not make any difference with answer

C as he stays in a rented house in Mumboi, the answer ‘A’is applicable.-See the answer A.The house rented in Pune and rent receivable comes under the head income from House property.

62

E. Up to December in Mumboi in a rented house and thereafter in Pune in a rented house

• Exempted HRA in Mumboi Nine months • Meaning of salary:Rs.26,000• HRA received Rs.1,08,000• Least of the following is exempted:• 1. 50% of salary=26000 x50% x9 Rs.1,17,000• 2. Rent paid – 10% of salary Rs.1,11,600• [(15000-10% x26000) x 9] 3.Actually received 1,08,000The least is 1,08,000. There fore for the 9 months entire HRA is

exempted. Nothing is taxable.Exempted HRA in Pune :-Next slide

63

3 Months HRA in Pune in a rented house

• Meaning of salary:Rs.26,000

• HRA received Rs.36,000

• Least of the following is exempted:

• 1. 40% of salary=26000 x40% x3 Rs.31,200

• 2. Rent paid – 10% of salary Rs.22,200

• [(10000-10% x26000) x 3]

3.Actually received 36,000

The least is Rs.22,200 which is exempted. There fore for the3 months the taxable HRA is Rs.13,800[ 36000-22200]

Therefore HRA taxable for the previous year is Rs. 13,800.

64

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 employeeCentral and State government employees

**Salary excludes any allowanceBenefit or other perquisites

65

Special allowances[10(14)]

Not directly relate toOfficial duty

(General)

For official duties (after Reaching office)

1.Official travel/transferAllowance to meet the cost2.Conveyance allowance

to meet customers3.daily allowance on official

Tour/journey4.Helper allowance to carry

Official documents5. Research allowance

6. Uniform allowance to do Official duty

To beSpent Fully OtherWise, amount

notSpent

taxable

See in the Next slide

66

Not directly relate toOfficial duty

(General)

1.Allowance for transport employees

2.Children education allowance

&70% of allowance

Or Rs. 6000 per month whichever is lower exempted

Rs.100 per month per 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 border area allowances

Rs. 800 per month.

If handicapped person Rs.1600 per month is exempted.

Depends on altitude/Place

They are fixed.Whether spent Or not.Excess

Taxable as they Are not givenFor official

Duty

67

ExerciseParticulars No. of

Children/Name

Amount received from employer

Exempted from tax Chargeable to 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)=84000

Whichever 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

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Tiffin allowance, fixed medical allowance

• Any amount received in cash is always taxable before the expenditure incurred.

[email protected]

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Exercise• Salary income and various allowances: Compute the gross salary of Mr.

Amal for the assessment year 2008-09on 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 three children

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

• 7. Tribal area allowance – Rs. 500 per month in Bihar

• 8. Travelling allowance – Rs. 12000(However actual expenditure was only Rs. 8000 for official duties

• 9. Conveyance allowance –Rs. 500 per month(the whole amount spent for official duties)

• 10. Transport allowance- Rs. 18,600

• 11. Overtime allowance-Rs. 4000

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Answer:• Computation of gross salary of Mr. Amal for the assessment year 2008-09:

» 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. Tribal area allowance – (Rs. 500-200) x 12 3,600

• 8. Travelling allowance – (Rs. 12000-8000) official duties 4,000

• 9. Conveyance allowance –Rs. 500 –500) 12 Nil

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

• 11. Overtime allowance-Rs. 4000 4,000

• Gross salary 1,81,400

Children education –Rs. 100 per month per child for two children allowed.Hostel expenditure Rs. 300 per child per month for two children allowed

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Let us have a short break

For middle and below class family god has given brain. Brain Is your wealth. How to develop your brain???

72

Study dailyCollect information and????

73

Pass on such good information to Others at free of cost.

You are born in this worldOnly to give.

Do you get happiness by receiving?

74

By giving you receive including knowledgeThis is the base of double entry book keeping

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Perquisites

• Casual emolument or benefit attached to an office or position in addition to salary or wages

• Something that benefits a man by going into his own pocket

• Whether perquisites should be given in Kind?

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Perquisites

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

• What are the conditions to be fulfilled to become a perks?

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1.Allowed byEmployer to

Employee4.Personal advantage

To theemployee

5. Derived by Virtue of

Employer’sauthority

3.DirectlyDepend

upon service

2.Allowed duringContinuance

Of employment

ConditionsTo become perquisites

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Other conditions

• Employer and employee relationship should exist at any point of time-need not be an employee now.

• Legal origin is important-Un authorized advantage taken by employee without employer’s authority will not become perquisites.

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1.Rent freeAccommodation

ProvidedBy employer

4.Personal Obligations of

EmployeeMet by

employer

5. Funds paidBy employer

Other thanRPF/Insurance

fund

3.value of Benefits provided

Like furnitureIn the accommodation2.concessional

Accommodation Provided

By employer

PerquisitesIncludes

6.Fringe BenefitsAllowed

To employees Of Other

Than companies

Accommodation Related(1-3)Including sweeper,gardener,watchman,gas,

electricity,

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Perquisites Taxable in the hands of employee

In the hands of employee

Category-A1. (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 servants and depentant, parents, spouse and children(need not be dependent)

5. (L)eave travel concession beyond 2 travels in a block period

Short form(RSGEL)

1 to 5 taxable only to Specified Employee

Category –B

1.Car given by employer

2. Transport facility given by transport undertakings except Railway and airlines.

( only to Specified Employee)

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•Special items in computation perquisites

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Rent Free accomodation(RFA) • Company’s House given at free of cost or

rented by company given to employee at free/cocessional rent.

• Includes: house, flat, farm house, carvan(people go by camel place to place), mobil home,ship, floating structure-like boat.

• Step1. Unfurnished AccomodationCentral or

State Governmentemployees

Private employees

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1.Central or state government employee-RFA

• License fee of flat determined by central government is perquisites in the hands of employee.

• Fair market value of rent is not important

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RFA-Government employee-Exercise

• Exercise:- Mr. X is working in Central government service given rent free accommodation in an government 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:-next page

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Answer-RFA

• Fair rent is not considered. The license fee Rs. 3,000 is taxable in the hands of Specified employee.

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2. Private Employees(RFA)

• It depends on Population of the city where accommodation provided.

Exceeding population25 lakhs

Population beyond 10 lakhs-Up to25 lakhs

Population Upto10 lakhs

OwnedBy

employer 15%of salary

or amount paid By companyTo outsiderWhichever

Is lower

RentedBy

company

OwnedBy

employer

Rented OwnedBy

employer RentedBy

company15% of salary

10% ofsalary

7.5% ofSalary

Population as per 2001 census

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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 to employee it is 15% of salary or rent paid by employer whichever is less taxable for specified employees irrespective of the type of city.

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If Furniture provided by employer

If owned

10% of original Cost of furniture

If rented

Actual hire charges

payable

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Meaning of salary for RFA

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

• Excludes all *perquisites and *DA which will not come under retirement purpose

• If any allowance is exempted ( like HRA(partly), children educational allowance upto Rs.100 Per month or transport allowance up to Rs. 800 per month etc.) to the extent exempted is not included in the meaning of salary but balance is included in the meaning of salary.

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Exercise-RFA

• Value of rent free accommodation : Preetham is sales manager of a private company and for previous year 2007-08,he received the following emoluments(amts in Rs)

• Basic Salary 248000• Bonus 16000• Dearness allowance(50% forming part of salary) 60000• Project allowance 15000• Commission on sales 16000• City compensatory allowance 25000• Medical allowance 12000• Employer contribution to recognized provision fund 20000• Salary pertaining the year 2008-09 has been received in advance 20000• • He has been provided with a rent free accommodation in Bangalore owned 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.•

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• He has been provided with a rent free accommodation in jaipur owned by the employer. The population of jaipur may be assumed to be 15lakhs as per 2001 census

• Determine : a) Meaning of salary for RFA

• b)the taxable value of the perquisite in respect of rent free accommodation.

• 1. Meaning of salary:-

• All Cash salary received or recivable in hand including taxable allowances 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 Per month or transport allowance up to Rs. 800 per month etc.) are not included in the meaning of salary.

•

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Meaning of salary-Exercise

• 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. Hence advance salary for 2008-09 shall not be taken in account.

• 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.

•

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Exercise• Value of free rent accommodation : sri Mohan is purchase manager of a private

company and for previous year 2007-08 he received the following emoluments-• • Basic Salary 120000• Bonus 16000• Dearness allowance(50% forming part of salary)

60000• Project allowance 15000• Commission on purchase 16000• City compensatory allowance 25000• Medical allowance 12000• Employer contribution to recognized provision fund 20000• Salary pertaining the year 2008-09 has been received in advance 20000• • He is also in part employment with B ltd and is receiving salary of Rs 80000 P.A.

he has been provided with a rent free accommodation in Mysore owned by the employer. The population of Mysore may be assumed to be 15 lakhs as per 2001 census. Determine taxable salary

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solution• Computation of taxable salary of Sri Mohan for assessement Year 2008-09• • Basic Salary 120000• Bonus 16000• Dearness allowance(50% forming part of salary) 60000• Project allowance 15000• Commission on purchase 16000• City compensatory allowance 25000• Medical allowance 12000• Employer contribution to RPF in excess of 12% of salary 2000• [20000- 12% of (120000+ 50% of 60000)]• Salary from B ltd 80000• Advance of salary 20000• Value of housing facility[10% of (120000+16000+30000+ 31400• 15000+16000+25000+12000+80000)] • • Taxable Salary 397400

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Exercise• Value of concessional accommodation: Sri Basant is purchase manager of a private

company and for the previous 2007-08 he received the following emoluments-

• Basic Salary 240000

• Bonus 32000

• Dearness allowance(50% forming part of salary) 120000

• Project allowance 30000

• Commission on purchase 32000

• City compensatory allowance 50000

• Medical allowance 24000

• Employer contribution to recognized provision fund 40000

• 2 months salary for year 2008-09 has been received in advance 20000

•

• What would be the value of accommodation if the employer charges rent of Rs 2000 p.m. in the following independent cases:

• (a) The accommodation is provided in Hyderabad where popln as per 2001 census exceeds 25 lakh

• (b) The accommodation is provided in Alwar where popln as per 2001 census exceeds 18 lakh

• (c) The accommodation is provided at Tumkore (popln less than 10 lakhs)

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Solution

• Soln: The valuation of accommodation provided at concessional rent shall be as under-

• • Place of accommodation Value of perquisite• Hyderabad 15% of salary less rent recovered = Rs 70200-

24000=Rs46200• Alwar 10% of salary less rent recovered = Rs 46800-

24000=Rs22800• Tumkore 7.5% of salary less rent recovered =Rs 35100-

24000=Rs11100• • Salary = 240000+32000+60000+32000+30000+50000+24000 = Rs 468000 •

• Any rent collected by employer from employee, such amount is deductible from taxable perquisite.

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Furnished accommodation in hotel

• 24% of salary paid or payable only for the period accommodation provided

• Or

• Actual charges paid or payable by the employer to such hotel

• Whichever is lower

• Exceptions:-1.The above rule is not applicable if such employee stays less than 15 days in the previous year and

• 2.Accommodation given only he is transferred to such new place

• Both the conditions should be fulfilled

• Note:-Any amount collected from employee is deductible from such calculations

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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 the employer.

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Monthly Fixed Education allowance

• Training of employees is not perquisites• Fixed educational allowance

Rs.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 taxable to the employee

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Payment of school fees and re-imbursement of school fees

• Taxable as perquisites fully

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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 the

near locality (minus )Rs. 1000(minus) amount recovered.

Example:- Employer pays Rs. 1500 per month to the school selected by employee for three children and one grand children.How much is taxable perquisites?

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Education facility to relative’s children

• Cost to the employer in such similar institution minus amount recovered

• Important Note: Only for own children exemption of Rs. 1000 allowed. But for the relative’s children such deduction is not allowed.

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Answer- Educational facility

• 3 x 1000= 3000 exempted

• 500 x 3 + 1500= 3000 taxable

• Note: Number of children is not limited to two

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Scholarships

• Scholarship given by employer company is not taxable as perquisites.

• Note:- It should not be related to his/her employment.

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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 itcan 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.(Twins or triplets are treated as one)

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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. Such perquisites is taxable in the hands of Specified employee.

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Amount payable by employer for fund on life of employee

• Taxable to all employees

• Exception:1. RPF,

• 2. approved superannuation fund

• 3. Group Insurance,ESI

• 4. Fidelity Guarantee scheme

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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 more than 5 years-10.75%, Upto 5 years-10.25%,educational loan upto 4 lakhs-11.5%, above 4 lakhs-13.25%

• Exceptions- see in the next slide

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Example

• X is employed by A Ltd. on 1st June 2007, he has taken interest free Housing loan of Rs. 14,00,000.How much is taxable?

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Answer

• 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 from assessee is 6%, then how much is taxable?

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Answer

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

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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

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Perquisites by sale of company asset at nominal rate

• Electronics and computers- Calculate WDV at 50% depreciation for every fully completed years and compare with amount charged. If WDV is more there is perquisites.

• Note: 1. WDV method only• 2. Fully completed years of individual asset only It

is not financial year. Fraction of the year is ignored.• What % of depreciation on Motor car?

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Motor car transferred?

• 20% depreciation under WDV for completed year of service.

• Other assets?

• 10% on ORIGINAL value of asset.

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Exception on Interest on loan

• 1. Loan(s) less than Rs.20,000(in aggregate of original loan ) and

• 2.Taken for specified medical treatment.

• Amount reimbursed from medical insurance scheme is not considered.

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Medical facilities

• Medical facilities availed in employer’s hospital, government hospital or hospitals recognised by Income tax department is not taxable.( No limit for specified diseases.

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

• If bill is issued in the name of employee but paid by employer then it is taxable in all types of employees.

• Family means: spouse, children, parents, brothers, sisters who are wholly or mainly dependent on him/her.

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Medical facilities outside India

• Medical treatment expenditure To the extent of RBI’s permission is not taxable.

• Travel:employee+relative or one attendant-exempted provided cost does not exceed Rs.2,00,000.

• Stay for one relative/one attendant expenditure – allowed to the extent of RBI’s permission.

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Motor car – belong to Employeebut expenditures met by employer

• Exclusively used for private – Fully taxable.• Exclusively used for official- Not taxable.• Partly used for business partly for private and

difficult to identify:-• Calculation of perquisites:-1.6 litres car• Actual expenditure incurred by employer• Less:Rs.1,200 per month +600 per month if driver

is paid.(This is assumed that it is incurred for official purpose)

• If no driver-Rs. 600 per month is not applicable.

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Motor car-Owned /Hired and maintained by employer by employer-

• Used for private purpose:-(All expenditure met by employer + 10% depreciation

on original cost are perquisites) or higher chargesPartly for private partly for oficial:Up to 1.6 litres-1200(car) +600(if Driver provided) per month-taxable.If more than 1.6 litre:-1600 (car) + 600(If driver provided) per month is

taxable.Note: Nothing is deductible when recovered from the

employee

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Motor car-Owned /Hired by employer but maintained by employee

ExpenditureIncurred byemployer

orHire charges +

10% on originalCost of car incurred

by employer

Used wholly for personal purpose

Note:- if recovered by employer it is deductible

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Motor car-Owned /Hired by employer maintained by employee

• Used Partly for private partly for official-difficult to identify:-

• If 1.6 litres cubic capacity- Rs.400Per month(Car) + 600 per month(if driver provided)----Taxable

• If above 1.6 litres cubic capacity:

• Rs.600 per month(car) +Rs.600per month(if driver provided) taxable.Note: amount recovered from employee is not deductible

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Other than car like two wheelerowned by employee but maintained by

employer• Partly for office and partly for private-if

difficult to measure:• Expenditure incurred by employerLess: Rs.600 per month or higher sum for

official purpose as per log book if maintained

Less: Amount recovered from employee balance is taxable in the hands of assessee.

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Higher claim on car

• Conditions:• 1.Complete detail of journey for official

purpose to be maintained• 2.Certified by employer that the

expenditure was incurred wholly and exclusively for official purposes.

• Ref: Income tax by Dr. Singhania-page 147-149 39th edition.

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Perquisites-carOwned by employee

Re imbursed by employer

Income From Salary

Business

Transcript of Income From Salary