Salaries Meaning, Incomes treated as salary, Basis of charge of salary, Scope of income from salary, Profits in lieu of salary, Leave encashment, LTC, RPF, Super Annuation Fund Pension and gratuity Different type of allowances and their tax treatment,

Planning as regard to allowances so as to save tax. Different type of perquisites and their tax treatment,

Planning as to perquisites so as to save tax.

Meaning Income under the head salary comprises of remuneration in any form (including perquisites) received by an employee from employer Any salary due from an employer/ former employer in P.Y. whether paid or notAny salary paid or allowed to him in P.Y. by or on behalf of an employee or a former employee though not due or before it becomes due to himAny arrears of salary paid or allowed to him in P.Y. by or on behalf of an employee or a former employee if not charged to income tax for any earlier previous year

Characteristics of Salaries Relationship of Employee and employerSalary from more than one employer Salary from present, past or prospective employer Tax free salary: upon which tax is deducted, paid by employee from his own

(tax will be calculated gross salary: on amount of full salary received by employee + tax paid by employer on behalf of employee) Salary received as a member of parliament (not salary will come under other sources)Receipts from persons other than employer (under other sources)Place of accrual of salary incomeDeductions made by employer Salary or pension received by UNO employeesSalary as partner (under B& P)

Characteristics of SalariesPayments received by legal heirs of deceased employee (O/S)Payment made after cessation of employment (under head salaries even if it is capital receipts)Voluntary foregoing of salary by an employee: application of salaryPrevious year for salary: April to MarchTaxability of salary on due or receipt whichever is earlier basis Salary grade/ pay scale Advance salary received Arrears of salary received Salary in lieu of notice

Computation of Salary Salary + Allowances + Perquisites + Profit in lieu of salary

Less: Entertainment allowances [16(ii)] and Tax on employment/ Professional Tax [16(iii)]= Income under the head Salaries

MEANING OF SALARY

Salary under the Act is defined U/s 17(1), which includes the following:-Wages;Any Annuity or Pension;Any Fees, Commission, Perquisites or Profits in Lieu of salary;Any Gratuity;Any Advance of Salary;Any payment received by an employee in respect of any period of leave not availed by him, known as leave encashment;Transferred balance in a recognized provident fund to the extent it is taxable;Contribution made by central govt. to the account of an employee under the pension scheme U/s 80 CCD;

Provident Funds (P.F.)Statutory Provident Fund (S.P.F.): started in the year 1925, this was started to promote the savings amongst government employees, it is maintained by government as well as non government departments e.g. railways, RBI, Colleges, universities, local bodies, insurance companies etc. Recognized Provident Fund (R.P.F.): It is the fund which is recognized by Commissioner of Income Tax. This is maintained generally by Industries, business houses and banks etc. Unrecognized Provident Fund (U.R.P.F.): It is not recognized but both employees as well as employers contributes towards it Public Provident Fund (P.P.F.): This fund was introduced specially for Salaried persons but now it is sort of the fund in which investment is done from savings point of view.

Treatment of Provident Funds

Particulars S.P.F. (for Govt. or semi govt. employees)R.P.F. (For Private Sector)U.R.P.F. (For Private Sector)Employees own contributionFully Qualifies for deduction u/s 80CFully Qualifies for deduction u/s 80CDoes not Qualifies for deduction u/s 80CEmployers contributionFully exempted Taxable= Amount contributed by employer less 12% of salary Ignore for the time being Interest credited to Accumulated Balance Fully exempted Excess over 9.5% interest is taxableIgnore for the time being

Refund/ Transferred balance of U.R.P.F.Fully exemptedExempted in all cases except when employee leaves service of his own accord before completion of 5 years continuous service. In such case the amount which has not been charged to tax is added in salary In case of refund taxable portion is added in Salary Income of the year. Entitled to relief u/s 89(1). In case of transferred balance amount which would have been taxable had the fund been RPF is added in salary. Taxable portion= Employers contribution + Interest on part. Interest on employees own contribution is taxable under the head from Other Sources

AllowancesCash along with salaries paid by employer to employee Three Categories of Allowances:

Fully Exempted AllowancesFully Taxable AllowancesPartially Taxable Allowances

Allowances Fully Exempted Allowances:

Foreign allowance given by Government to its employees posted abroadHouse Rent Allowance given to judges of High Court and Supreme Court Sumptuary allowance given to Judges of High court and supreme court

Allowances Fully Taxable Allowances:

- Dearness allowance/ Additional Dearness Allowance/ High Cost of living Allowance= amount paid to employees to bear rise in prices and to compensate the loss. The amount of D.A. which enters into pay for services benefits and retirement benefits is known as Dearness PayCity/ Capital Compensatory Allowance: given to compensate for the high cost of living in a particular big city in India Lunch AllowancesTiffin Allowances Marriage Allowance Family Allowance Deputation Allowance

Allowances Fully Taxable Allowances:

Wardenship Allowances Non Practicing AllowancesProject Allowances Overtime Allowances Fixed Medical Allowance Entertainment Allowance for non government employeesWater and electricity allowances Servant allowance

Allowances Partially Taxable Allowances:

House Rent Allowances: Taxable= Actual- ExemptedWhichever is less from the following is exempted: - 50% of Salary (in case of metropolitan cities) or 40% of Salary (in case of other cities) or- Actual Rent paid- 10% of salary- Actual HRA received Salary= Basic Salary + Dearness Pay + Commission on TurnoverWhen HRA will be fully taxable:If employee is living in his own houseIf he is living in a house for which he is not paying rent If rent paid does not exceed 10% of salary

AllowancesPartially Taxable Allowances:

Entertainment Allowances:It is fully taxable in case of non-government employees It will be firstly added in the total income of government employee then whichever is less from the following is allowed as deduction u/s 16 (ii): 20% of Salary Or Actual amount received as entertainment allowances Or Rs. 5,000 Salary= only basic salary

AllowancesPartially Taxable Allowances:

The exemption of allowances depends upon actual expenditure:Actual allowances received- actual expenditure (amount spent)= TaxableTraveling Allowances Conveyance allowances Daily allowances Helper allowances Academic Research allowances Uniform allowances

Allowances Partially Taxable Allowances:

When the exemption does not depends upon the expenditure:Special compensatory allowances/ Hill Area Allowances/ Snow bound area/ High Altitude allowances/ Uncongenial Climate allowance = Amount exempted varies from Rs. 300 p.m. to Rs. 7,000 p.m. Boarder Area/ Remote area/ Difficult Area/ Disturbed Area Allowances = Amount exempted varies from Rs. 200 p.m. to Rs. 1,300 p.m. Compensatory Field area allowances= Exempted upto Rs. 2,600 p.m.Compensatory Modified Field area allowances= Exempted upto Rs. 1,000 p.m.Counter Insurgency Allowances= Exempted upto Rs. 3,900 p.m.Highly active field area allowance= Exempted upto Rs. 4,200 p.m.

Allowances Partially Taxable Allowances:

When the exemption does not depends upon the expenditure:Underground Allowance given to coal mine workers= Exempted upto Rs. 800 p.m.Island Duty Allowance given to armed force posted in Andaman & Nicobar and Lakshdweep group of Islands= Exempted upto Rs. 3,250 p.m. Transport Allowance= exempted upto Rs. 800 p.m. but in case of handicapped Rs. 1,600 p.m. (in case of both government and private concern)Tribal Area Allowances = Amount exempted Rs. 200 p.m.Running Flight Allowance= person is moving from one place to another but not in respect of daily allowance= exempted upto 70% of such allowance or Rs. 6,000 p.m. whichever is less

Allowance Partially Taxable Allowances:

When the exemption does not depends upon the expenditure:Children Education Allowance: exempted upto Rs. 100 p.m. per child for maximum two children onlyHostel expenditure Allowance: exempted upto Rs. 300 p.m. per child for maximum two children onlyDomestic servant Allowance: Fully taxable

Perquisites Exempted for all employees Taxable for all employeesTaxable only for specified employees

Perquisites: Exempted for all employeesFree medical facilities or reimbursement of medical expenditure:

Allowed for treatment of self, wife, dependent children, dependent parents and dependent brother and sisters If treatment has been taken from hospital maintained by employer, central govt., state govt., local authority, approved by chief commissioner= Fully exempted If treatment is taken from private or unrecognised hospital= upto Rs. 15,000 exemptedMedical treatment is taken from outside India: if treatment of employee or any member then expenses paid or reimursement= fully exemptedExpenses of stay of patient and one attendant= fully exempted= if the total income of employee does not exceeds Rs. 2,00,000

Perquisites: Exempted for all employeesFree refreshment supplied by employer to its employees during office hours Free meals given to remote area Free recreational facilities Telephone including mobiles given by employer to facilitate the business of employer Free education (does not exceeds Rs. 1,000 p.m. per child)Cost of refresher course Rent free accommodation to high court or supreme court judgesGoods sold by employer to his employee at concessional rateFree ration to armed forces Perquisites provided to employees posted abroad

Perquisites: Exempted for all employeesRent free house to an officer of parliament, union minister, leader of opposition in ParliamentConveyance facilities to high court or supreme court judges Free conveyance provided by employer to employee for going to or coming from place of employment Amount contributed by employer towards pension or deferred annuity scheme Employers contribution to staff group insurance schemeComputers, laptops given to an employee for official or personal useTransfer of moveable asset which is used by employer for 10 years

Perquisites: Exempted for all employeesAccident Insurance premiumInterest free loan (if loan does not exceeds Rs. 20,000= Fully exempted, in case more than Rs. 20,000= for treatment of notified illness, if the rate charged by employer is equal or higher than rate charged by SBI= fully exempted)Income tax on perquisites paid by employerAny unauthorised use of a benefit

Perquisites: taxable for all employees Rent Free Accommodation: Valuation of Unfurnished Accommodation:

For Government employees:Taxable= License fees fixed by Government For Non- Government employees:If House is owned by the employer= Taxable=

If Population is less than 10 lakhs= 7.5% of SalaryIf Population is more than 10 lakhs but less than 25 lakhs= 10% of SalaryIf Population is more than 25 lakhs= 15 of SalaryIf House is hired by the employer= Taxable=

Actual rent paid by employer or 15% of salary= WEL= Taxable

Perquisites: taxable for all employeesRent Free Accommodation:Valuation of Furnished Accommodation:

Value of unfurnished accommodation +10% of actual cost of furniture (if owned by employer) or hire charges (if hired by employer)(in case of govt. as well as non govt. employees Salary in case of Rent free accommodation:

Basic salary, wages, dearness pay, commission, bonus, fees, commission, value of all taxable allowances, all monetary payments, leave encashment of salary Salary does not includes:D.A., any allowance exempted, employers contribution to PF, Value of perquisites, income tax of employees if paid by employer

Perquisites: taxable for all employeesConcessional Rent Accommodation

Value of Rent free accommodationLess: Rent paid by EmployeeIf the employee is living in more than one accommodation then for first 3 months the value of lower accommodation is taxable but after three months value of both such houses will be taxable.Hotel Accommodation:

If for less than 15 days= Fully ExemptedIf more than 15 days= 24% of salary x no of days more than 15 days/ 365 days orActual bill WEL = Taxable

Perquisites: taxable for all employeesObligation of employee met by employerAny amount of LIC premium paid by employer during life of employeeValue of specified security or Sweat equity shares transferred Contribution to approved Superannuation fund of employee in excess of Rs. 1,00,000Interest free loan or concessional loanTraveling, touring, accommodationGift or voucher or token facilityCredit card facilityClub facilityUse of moveable assets and transfer of moveable assets

Perquisites: taxable for specified employees only Specified employee:He is director of the company orHe has substantial interest of the company (hold atleast 20% voting shares of the co.) orHis monetary salary is more than Rs. 50,000 p.a.

Perquisites: taxable for specified employees onlyPerquisites of Motor car:(i) Motor car is owned or hired by employer and its running and maintenance expenses are met or reimbursed by employer:Car is fully used in the performance of official duties of the employee= Value of perk= NilCar is used for the private, personal or family purposes of the employee= Value of perk= actual expenses incurred by the employer on running and maintenance of car + salary of driver + normal wear and tear of car (10% of cost of car)- any amount charged by employer from employee (any amount paid or re-imbursed by employee)

Perquisites: taxable for specified employees onlyMotor car is owned or hired by employer and its running and maintenance expenses are met or reimbursed by employer: (c) Car is used partly in the performance of duties and partly for private or personal purposes:The expenses on maintenance and running are met or re-imbursed by employer: if engine does not exceeds 1.6 lts= Rs. 1800 p.m.; if engine exceeds 1.6 lts= Rs. 2400 p.m.The expenses on running and maintenance for private or personal use are fully met by employee himself= if engine does not exceeds 1.6 lts= Rs. 600 p.m.; if engine exceeds 1.6 lts= Rs. 900 p.m.If driver is also provided by employer to run motor car= Rs. 900 p.m. will be added in both the cases

Perquisites: taxable for specified employees onlyMotor car is owned but its running and maintenance expenses are met or reimbursed by employer: Car is being used wholly or solely for official purposes= Value of perk= NilCar is being used partly for official purposes and partly for personal or private purposes: taxable value of perk=

Actual amount of expenditure incurred by employer less: 1800 p.m. in case of small car/ 2400 p.m. in case of big car less: 900 p.m. for driver

Perquisites: taxable for specified employees only(iii) Where the employee owns any other automotive conveyance but the actual running and maintenance expenses are met or reimbursed by employer: Employees conveyance is being used only for official purposes= Value of perk= Nil but the proper log book is to be maintained. Employers Conveyance is being used partly for official purposes and partly for personal or private purposes of the employees: taxable value of perk=

Actual amount of expenditure incurred by employer less: 900 p.m. for driver Proper log book is to be maintained.

Perquisites: taxable for specified employees onlyPerquisites of free domestic servants= Value of perks= (Amount spent by employer- amount charged/ recovered by employer from employee)Perquisites in respect of free supply of Gas, Electricity or water supply = Value of perks= (Amount spent by employer- amount charged/ recovered by employer from employee)Free educational facilities to children of employees household:

If payment of reimbursement of fees of school, college etc. = taxable Providing free educational facilities in a school or college maintained by employer: more than Rs. 1,000 p.m. taxable Facilities of free or concessional private journey to an employee by the employer engaged in the carriage of passengers or goods

value of perks= Normal frieght charges chargeable from public- amount chargeable from employee Medical facilities= fully taxable

Profits in lieu of salary Leave Travel Concession

The amount actually used= Exempted; In case journey is by Air= air economy fair of the national carrier by shortest route to the place of JourneyIn case journey is by other than Air= Air conditioned first class rail fare by the shortest route to the place of destinationIn case place is not connected by rail: If recognised transportation system exists = fare of first class fare by the shortest route to the place of destinationIf recognised transportation system does not exists = fare of first class air conditioned fare by the shortest route to the place of destination, if the journey is supposed to be covered by rail Assessee + spouse + two children

Profits in lieu of salaryDeath cum retirement gratuity: it can be given

At the time of leaving the jobAt the time of death Govt. Employees: Fully exemptedNon- Govt. Employees: Received- exempted= taxableIf it is covered under Payment of Gratuity Act, 1972Rs. 10,00,000Or Actual ReceivedOr Monthly Salary last drawn x 15 days/ 26 days x no of years of service (Rounded off years)WEL= Exempted If it is covered under Payment of Gratuity Act, 1972Rs. 10,00,000Or Actual ReceivedOr Monthly Salary last drawn x 15 days/ 30 days x no of years of service (Completed years)WEL= ExemptedSalary= BP + DP + C

Profits in lieu of salaryPension

(i) Un commuted Pension:Fully Taxable in case of Govt. and Non- Govt. Employees (ii) Commuted Pension:Govt. Employees= Fully exempted Non Govt. Employees: (a) Receiving Gratuity also: = 1/3 x Amount of commuted pension x reverse of portion commuted= exempted (b) Not receiving Gratuity: = 1/2 x Amount of commuted pension x reverse of portion commuted= exempted

Profits in lieu of salaryLeave encashment:

Govt. employees: fully exemptedNon- govt. employees: Actual OrRs. 3,00,000 Or 10 months average salary OrSalary x (Months for which Leave is due months for which leave has been taken) WEL= Exempted, rest taxable Salary: Basic salary + DP + C

Profits in lieu of salaryCompensation on termination of employment

Actual amount received Or Rs. 5,00,000Or 1/ 2 x salary x no of years (rounded off)WEL= Exempted, Rest taxable Salary= BP + DP+ C

Profits in lieu of salaryVoluntary Retirement

Exemption allowed to any employee whether government or non government Rs. 5,00,000 or Actual or 3 x salary x completed no of years or No of months remaining in the service if retirement not taken x average salaryWEL= Exempted, rest taxableSalary= BP+ DP+ C

Hints for Tax Planning It should be ensured that, under the term of employment the DA should be part of employment purposes; that will reduce the tax liability e.g. Contribution of employer to RPF, Gratuity and HRA etc.The commission should be paid on Fixed percentage of Turnover (as per the case held in Supreme Court) that will reduce the tax liability in case of HRA, Entertainment Allowances, Gratuity etc.

Hints for Tax Planning As uncommuted pension is taxable to all (Government as non- Government Employees) so it should be preferred that pension should be commuted, For Government Employees it is fully exempted and in case of non- Government Employees it is partly exemptedIf a person who is working under a firm in which he is member of RPF, if he wants to leave the firm before the expiry of 5 years then he should join the firm in which he can become the member of RPF, only then the accumulated balance from the former employer will be exempted

Hints for Tax Planning Since the contribution of employer towards the RPF is exempted upto 12%, the employer can raise the benefit towards employee upto 12% in this way his tax liability will not increase While medical allowances payable in cash are taxable, but the ordinary free medical facilities are not taxable, so the medical facilities should be provided instead of fixed medical allowances

Hints for Tax Planning The incidence of tax on retirement, gratuity, commuted pension are less if these are paid in the beginning of the year. So there should be mutual arrangements among both employees and employer that it should be paid in the beginning of the year.An employee can claim for the benefit of relief if payment made towards URPFPension received in India by a non-resident assessee from abroad is taxable in India. If he wants to get the exemption it should be firstly received there then remitted to India, it will be exempted then

Hints for Tax Planning Leave travel concession is exempted if it is taken as per provisions so try to follow that to get exemption Computers, laptops given to an employee for official or personal use, Transfer of moveable asset which is used by employer for 10 years= exempted, so take after appropriate time to get benefitSince Salary in case of Rent free accommodation:

Basic salary, wages, dearness pay, commission, bonus, fees, commission, value of all taxable allowances, all monetary payments, leave encashment of salary So it would be advantageous if an employee will go for perquisites instead of allowances, that will reduce the value of RFA.