INCOME UNDER THE HEAD “SALARIES”

(Sec 15,16 & 17)

Pushpendra Sharma S 42S Vijay Bhaskar S 49VS Arun Kumar S 66

What is salary? Employer and Employee relationship May be more than one source Foregoing salary is salary income Tax free salary should include the tax paid

by the employee

Key Determinants Place of accrual: Salary will be deemed to

accrue or arise where services are rendered Sec 10(7): For Government employees (Indian

citizens) any perquisites or allowance received outside India, shall be exempt

Surrender of Salary to Central Govt: No Tax Forgoing of Salary: Taxable in the hands of

employee

EMPLOYER AND EMPLOYEE RELATION

The relationship of a master and servant, distinctly different from that between a principal and agent

Degree of control of the employer over the employee would be a deciding factor as agent is generally not under the complete control and supervision of his principal

Emoluments received by MP/ MLA not taxable under the head "Salary" due to absence of employer and employee relationship

Basis of Charge (Sec 15) Salary is chargeable to tax when it is due to

be paid, whether it is paid or not Salary is chargeable to tax when any amount

is paid, whether it is due or not Arrears of salary is chargeable to tax in the

year in which these arrears are paid or allowed to the employee

Salary includes- wages any annuity or Pension any gratuity any fees, commission, perquisites profits in lieu of salary any advance of salary Employers contribution to RPF in excess of 12% and

interest credited in excess of 9.5% Leave salary

House Rent AllowanceThe least of the following is exempt from tax:

1. 50% of Salary where the assessee lives in Mumbai, Delhi ,Chennai & Calcutta and 40% in other cases

2. Actual HRA received

3. Excess of rent paid over 10% of Salary.

(Salary for HRA means basic salary , commission if based on fixed percentage of sale & DA ,if it is part of retirement benefits)

Remember acronym B+C+D

Allowances Conveyance: Exempted upto Rs.800 per month if used for travel

between home and place of work (in special cases Rs1600 per month) Medical expenses: Exempted when it is a reimbursement of actual

expenses upto Rs.15000. Beyond this limit, it is taxable. Fixed Medical allowance is taxable City compensatory allowance is taxable in all cases Tiffin allowance: It is fully taxable Tea & snacks during office hours are not charged to tax as perquisite

while free meals in excess of Rs 50 per meal is a perquisite Servant allowances: It is fully taxable Gifts: Perquisite in respect of gift where it is below Rs.5000, the value

is taken as nil

PENSION1.Pension from UNO – Is not chargeable to tax

2.Pension received by the family of armed forces Is not chargeable to tax

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

Taxable in the hands of recipient as income from other sources

Uncommuted Pension Govt/Non Govt Employee Taxable

Commuted Pension Govt Employee Exempt

Commuted Pension Non Govt Employee Fully/Partly Exempt

COMMUTED PENSION (cont.)Central /state Govt,

Local authority employee

Non Govt. Employee

Non Govt. Employee

With or without Gratuity

Gratuity is received

Gratuity is not received

ExemptedFully

1/3 of normalExempted

½ of normal is exempted

Pension Scheme for Employees joining Central Govt. or Other Employers after January 1, 2004 Contribution by Employer is added to salary Employers contribution along with the

Employees contribution to Pension fund is deductible U/S 80CCD

GOVERNMENT EMPLOYEES GETTING LEAVE ENCASHMENT AT TIME OF RETIREMENT:

Govt employee at that time is exempted from tax.

Leave encashment while in service is taxable

Leave Encashment

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

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

Leave Encashment (cont.)

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

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

HOW TO FIND OUT AVERAGE MONTHLY SALARY?

Leave travel concession (LTC) is exempt twice in a block of FOUR years.

LTC is available to an Indian citizen for proceeding on leave for himself and his family (family includes spouse, children, dependent parents ,brother and sister)

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

The current block is Jan 1,2010 – Dec 31,2013

GRATUITY1. GRATUITY WHILE IN SERVICE IS FULLY

TAXABLE

2. GRATUITY AS RETIREMENT BENEFITS Government employee –fully exempt Sec 10(10)(i) Non-government employee covered under Payment of

Gratuity Act, 1972- partially exempt under section 10 (10)(ii)

Non-government employees not covered by the Payment of Gratuity Act ,1972- partially exempt under section 10(10)(iii)

GRATUITY (cont.) IN CASE OF GOVT EMPLOYEES:

wholly exempt ( Gratuilty limit is Rs 10 lacs)

IN CASE OF EMPLOYEES COVERED UNDER PAYMENT OF GRATUITY ACT: 15 days salary based on last drawn for each year of service (26 days a month

as working days) gratuity actually received The least of the above (not exceeding Rs.10 lacs) is exempt from tax.

IN CASE OF EMPLOYEES NOT COVERED UNDER PAYMENT OF GRATUITY ACT: Half month's average salary for every completed year of service. (Average

salary means the average of the salary drawn by the employee for 10 months immediately preceding the month in which he retires) days a month as working days)

gratuity actually received The least of the above (not exceeding Rs.10 lacs) is exempt from tax.

GRATUITY (cont.)

how to find length of service -6 months or less then ignored, More than 6 months taken as 1 full year

what is salary: Salary means last drawn by employee and includes dearness allowance

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

Provident Fund Statutory Recognised Public Unrecognised PF PF PF PFEmployees Eligible for No deduction Contribution Deduction U/S 80C U/S 80CEmployers Contribution Exempted N.A. No exemption upto 12%Interest Exempt as notified No tax Taxable 9.5%

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

Perquisites taxable (Category A)Perquisites taxable in the hands of all employees (whether fringe benefit tax payable or not by employer) Furnished /Unfurnished house without rent or at a

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

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

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

Perquisites taxable (with or without FBT)

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

Interest free loan (exempted : Loan not exceeding Rs.20000, or loan for medical treatment)

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

Perquisites taxable (Category B)

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

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

3. Traveling touring accomodation4. Free Food & Beverage (Rs.50 within office hours

exempt)5. Gift voucher beyond Rs.50006 Club Membership & credit Card

SPECIFIED EMPLOYEE

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

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

Rs.50,000 per year ( without considering non monetary benefit and exemptions like HRA) but , since the minimum exemption limit is Rs.1,60,000, practically all tax payers are specified employees.

Rent Free Unfurnished Accomodation Classified as Central & State Government

Employees Private Sector Employees

Accommodation provided to MPs, judges of High court & Supreme Courts, employees who are in Govt. service and to whom accommodation is provided by virtue of their employment , is exempted from any tax

Central & State Govt. Employees

Valuation of Rent Free Unfurnished Accommodation (private sector)

Population as per 2001 census

Property owned by Employer

Leased or rent

Above 25 lakhs

15% of salary for the period

Amount of lease rent or 15% of salary

Between

10- 25 lakhs

10% of salary for the period

Same as above

Any other 7.5% of salary for the period

Same as above

Meaning of salary for calculating the value of Rent Free Accommodation Salary includes – - basic salary - DA ( if terms of employment provide) - bonus, commission, fees - all other taxable allowances - any monetary payment chargeable to tax, but

not monetary payments in the nature of perquisite

Exception to accomodation rules It is not applicable to an accommodation

located in a remote area (40 kms from town) and in a mining, project ,oil exploration site

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

Furnished accomodation Step 1: Find out the value of the

accomodation without the value of the furniture

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

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

Furnished accomodation in a HotelIt Includes accommodation in a motel, guest

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

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

when an employee is transferred)

Accomodation at a concessional value

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

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

employee

Perquisite of free domestic servants When servants are engaged by employee and

reimbursed by employer, taxable in all cases When engaged by employer only specified

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

accomodation , they are not valued separately

Valuation of gas, electric energy or water supply All assesses are taxable except non specified

employees

Deductions from salary Standard Deduction- No deduction is

available now. Professional Tax paid in previous year Entertainment allowance: available only for

Government employees