Tax presentation salaries part 2

Taxation of Salaries - 2Section 15 to 17

Vikram Singh Sankhala

Retrenchment compensation

• The least of the following is exempt

– Amount determined under the industrial dispute act

– Actual amount received– Rs 500,000

Retrenchment Compensation in accordance with a scheme approved by the Central Government

• Where the retrenchment compensation is received in accordance with any scheme approved by the Central Government, the entire amount of the retrenchment compensation will be exempt under Section 10(10)B

Question

• Mr.Clever was retrenched from service of UGLY Ltd.

• The scheme of retrenchment is approved by the Central Government.

• Retrenchment compensation received Rs.8 lakhs.

• What is the taxability?

Answer

• When retrenchment compensation is received in accordance with any scheme, which is approved by the Central Government, it is fully exempted from tax.

Question 9

• Mr.Flemming was retrenched from service of “GO SLOW Ltd”.

• Retrenchment compensation received Rs.6,00,000.

• Amount determined under the Industrial Disputes Act, 1948 Rs.4,75,000.

• What is the taxability?

Answer 9

• Taxable Value 1,25,000

Computation of Taxable Retrenchment Compensation

• Particulars• Amount received as Retrenchment Compensation 6,00,000• Less: Exemption u/s 10(10B): Least of the followings:• (i) Actual amount received 6,00,000• (ii) Amount determined under the Industrial 4,75,000• Disputes Act, 1948• (iii) Maximum Limit 5,00,000 • Least is Rs 4,75,000• Taxable Value 1,25,000(6,00,000-4,75,000)

VRS (Voluntary Retirement)

• It is exempt up to Rs 500,000 if VRS is as per prescribed conditions

• It is available to assessee once in a Lifetime.• The Guidelines are given in Rule 2BA.

Provident Fund• Provident Fund scheme is a retirement benefit scheme. Under this

scheme, stipulated sum of money is deducted from the employee’s salary and an equal matching contribution is made by the employer. The contribution is invested in gilt-edged securities and interest is earned thereon. Thus the balance of provident fund consist of:

• Employers contribution• Interest on employers contribution• Employees contribution• Interest on employees contribution

Kinds of Provident Fund• Employees provident fund can be divided into three• Statutory Provident Fund:• It is set up under the provisions of Provident Fund Act, 1925. This fund is

maintained by the Government, semi government organization, local authority, railway, university and recognized educational institutions.

• Recognized Provident Fund:• Generally the Employee's Provident Fund & Miscellaneous Provisions Act,

1952, applies to Recognised PF.• This fund is recognized by the commissioner of Income Tax.• Unrecognized Provident Fund:• If the commissioner of Income Tax does not recognize a provident fund

then it will be under the category of unrecognized provident fund.

Taxability of contribution to Provident fund

Statutory provident Fund

Recognized Provident Fund Unrecognized Provident Fund

Employers contribution to provident fund

Exempt from tax

Exempt upto12% of salary. Excess is taxable

Exempt from tax

Deductions u/s 80C on employees contribution

Available Available Not Available

Interest credited to provident fund

Exempt from tax

Exempt from tax up to 9.5%; excess of interest over this is taxable

Exempt from tax

Lump sum payment at the time of retirement

Statutory provident Fund

Recognized Provident Fund

Unrecognized Provident Fund

Lump sum payment at the time of retirement

Exempt from tax Exempt from tax in some cases.

See Note in next slide

1. Employees contribution exempt

2. Interest on employee contribution taxable under income from other sources

3. Employer’s contribution and interest thereon is taxable under the head income form salaries.

Note– Salary includes basic salary, dearness allowance/ dearness pay, if terms of

employment so provide and commission if received as fixed percentage of turnover achieved by employee.

– The accumulated balance due and becoming payable to an employee participating in a recognized provident fund will be excluded from his total Income in the following cases:

• If he has rendered continuous service with his employer for a period of 5 years or more.

• If the employee is not able to fulfill the conditions of such continues service due to his service having been terminate by reason of his ill health or by reason of the contraction or discontinuance of the employers business or any other reason beyond the control of assessee.

• If on the occasion of his retirement, the employee obtains employment, to the extent the accumulated balance due is transferred to another recognized provident fund maintained by such employer.

Unrecognized Provident Fund (Maturity Benefit)

Maturity Benefit (URPF)

Employer Contribution

Interest on Employer Contribution

Employee Contribution

Interest on Employee Contribution

Taxable under head Salary As “Profit in Lieu of Salary”

Not Taxable Taxable Under head “Other Sources”

Superannuation• a) Superannuation Fund is a scheme of retirement benefits for the employee.• b) These are funds usually established under trusts by an undertaking.• c) The Company pays a upto 15% of basic wages as superannuation contribution. • d) The contribution is invested by the Fund in various securities as per

investment pattern prescribed.• e)Income earned on these investments shall be exempt, if any such fund is an approved

superannuation fund.• f) Interest on contributions is credited to the members account. • g)Normally the rate of interest is equivalent to the PF interest rate.• h)In the case of resignation of the employee, the employee has the

option to transfer his amount to the new employer. If the newemployer does not have a Superannuation scheme, then the employeecan withdraw the amount in the account, subject to deduction of taxand approval of IT department, or retain the amount in the Fund, tillthe superannuation age.

Superannuation schemes can be of two types:

• Defined Benefit (DB):

This defines the amount of benefit that an employee receives at retirement. Actuarial valuation is conducted to determine the funding rate. A pooled fund is maintained for all members of the scheme.

Upon retirement of a member, the amount required to secure the benefit is drawn from the pooled fund. The pooled fund should achieve the required funding level to enable the employer to meet the benefit obligations.

• Defined Contribution (DC):

This defines the annual contribution that the employer will deposit into the scheme for each employee. Contributions are usually fixed as a percentage of the employees’ salary.

Individual employee accounts reflecting the contributions and the interest accumulations are maintained. Upon retirement, the individual account is released to provide funds to secure the benefits under the scheme.

Approved Superannuation fund

• Means a superannuation fund which has been and continues to be approved by the Chief Commissioner or Commissioner of Income Tax in accordance with Rule 2 and Rule 3 contained in part B of the fourth schedule of the Income Tax Act.

• Tax Benefits in case of approved superannuation funds

For the Employee• The employee's contribution in the case of Contributory scheme is

allowed as a deduction under Section 80C of the Income-Tax Act. • As per Section 17(2) (v) the contributions paid by the employer are not

treated as perquisites in the hands of the employee concerned. • As per Section 10(25) (iii) of the Income-Tax Act, the income from the

fund is exempt from tax. • Pension/annuity to member is taxable under Section Sec 17(1) (ii) • Under Section 10(13) of the Income-Tax Act, the benefits received are tax

free in case of: – Death of the beneficiary – Commuted value paid on retirement

• Amount received from superannuation fund on resignation before a specified age is not eligible under Section 10(13).

• Payment on Resignation is exempt only if it is after the specified age in the superannuation fund scheme/rules.

For the Employer

• Annual contributions of up to 27 per cent (inclusive of the 12 per cent contribution made towards the provident fund) of the basic salary by the employer are treated as deductible business expense as per Section 36(1) (iv) of the Income Tax Act.

PERQUISITES [U/S 17(2)]

• The term ‘perquisite’ is any casual emolument, fees or profit attached to an office or position in addition to salary or wages.

PERQUISITES [U/S 17(2)]

• The definition of Perquisites in the Income Tax Act, is contained in Section 17(2) and is an inclusive definition.

• It lists out 6 categories that would be included in the definition of the term perquisite.

• The categories are from Section 17(2)(i) to Section 17(2)(vi).• The third category i.e Section 17(2)(iii) is only applicable in

the case of specified employees.• The term ‘Specified Employee’ is defined in Section 17(2)(iii)

Taxability of Perquisites

• For Income Tax purposes, perquisites may be divided into three categories. These are:

1. Perquisites which are taxable in the hands of all categories of employees.

2. Perquisites which are taxable only when the employee belongs to a specified category.

3. Tax free Perquisites

• Perquisites which are taxable in the hands of all employees.

Rent free Accommodation -17(2)(i)

• Rent free accommodation provided by the employer to the Employee.

• Such accommodation may be furnished or unfurnished.

Rent Concession - 17(2)(ii)

• Any concession in the matter of Rent in respect of the accommodation provided or granted by the employer to the employee.

Discharging Monetary Obligation -17(2)(iv)

• Any sum paid by the employer in discharging the monetary obligation of the employee which would otherwise have been payable by the employee eg. The school fees of the children of the employee paid by the employer or the Income Tax of the employee paid by the Employer.

Life assurance or annuity -17(2)(v)

• Any sum payable by the employer whether directly or through a fund (other than recognized provident fund, approved superannuation fund or Deposit linked Insurance fund) to effect an assurance on the life of the assessee or to effect a contract for an annuity.

Any other amenity -17(2)(vi)

• The value of any other fringe benefit or amenity (excluding the Fringe Benefits chargeable to tax ) as may be prescribed.

For Specified Employees -17(2)(iii)

• Perquisites which are taxable only when the employee belongs to a specified category

Specified Employee under Section 17(2)(iii)

• Employee is specified employee if he falls under any 1 of the following 3 categories:

1 He is a director of the company and is also an employee of company

2 He is an employee with substantial interest in the company i.e. he holds 20% or more of the voting power.

3 His income under the head “salaries” excluding non monetary perquisites exceeds Rs.50,000.

Monetary Obligations discharged by the Employer

• If a watchman is engaged by the employee and his wages are either paid or reimbursed by the employer, such facility is a monetary obligation of the employee discharged by the employer.

• Such perquisites are taxable in the hands of all employees.

For Specified employees

• If the watchman is engaged by the employer and the facility is provided to the employee, such perquisite is taxable only in the hands of specified Employees.

Examples of such facilities

• Provision of services of a sweeper, gardener etc.• Supply of gas, electricity or water for Household

consumption.• Provision of free or Concessional educational

facilities for any member of the employee’s household.

• Provision of interest free or concessional loan.• Benefit arising from the use of any movable asset.

Tax free Perquisites

1. Loans to Employees Rule 3(7)(i)

• No value would be charged if such loans are made available for medical treatment in respect of diseases specified in rule 3A of these Rules

• or where the amount of loans are petty not exceeding in the aggregate Rs. 20,000

2. Food and Beverages provided to EmployeesRule 3(7)(iii)

• Free food and non-alcoholic beverages provided by such employer during working hours at office or business premises

• or through paid vouchers which are not transferable and usable only at eating joints,

• to the extent the value thereof in either case does not exceed Rs. 50 per meal

• or to tea or snacks provided during working hours • or to free food and non-alcoholic beverages during working

hours provided in a remote area or an off-shore installation.

3.Gift to Employees under Rs 5,000 Rule 3(7)(iv)

• Where the value of such gift, voucher or token, as the case may be, is below Rs. 5,000 in the aggregate during the previous year, the value of perquisite shall be taken as nil.

4.Use of Laptops and Computers Rule 3(7)(vii)

• The value of benefit to the employee resulting from the use by the employee or any member of his household of laptops and computers belonging to the employer or hired by him.

• However in case of transfer of laptops and computers belonging to the employer, the value of benefit to the employee shall be the amount representing the actual cost of such asset to the employer as reduced by the cost of normal wear and tear calculated at the rate of 50% (Computers and Electronic items) by the reducing balance method..

• in the case of computers and electronic items, the normal wear and tear would be calculated at the rate of 50% and in the case of motor cars at the rate of 20% by the reducing balance method.

• The rate of depreciation in case of transfer of transfer of other assets would be 10% by the reducing balance method.

5. Education Facility Rule 3(5)

• Where the educational institution itself is maintained and owned by the employer

• and free educational facilities are provided to the children of the employee

• or where such free educational facilities are provided in any institution by reason of his being in employment of that employer,

• if the cost of such education or the value of such benefit per child does not exceed Rs. 1,000 p.m.

6.Perquisites provided outside IndiaSection 10(7)

• Perquisites provided by the Government of India, to its employees, who are citizens of India for rendering services outside India, are not taxable.

7. Medical Treatment Proviso (1) to Section 17(2)

• Any medical treatment provided to an employee or any member of his family in any hospital maintained by the employer


• ii) any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family—

• (a) in any hospital maintained by the Government or any local authority or any other hospital approved by the Govern ment for the purposes of medical treatment of its employees;

• (b) in respect of the prescribed diseases or ailments, in any hospital approved by the Chief Commissioner having regard to the prescribed guidelines :

• Provided that, in a case falling in sub-clause (b), the employee shall attach with his return of income a certificate from the hospital specifying the disease or ailment for which medical treatment was required and the receipt for the amount paid to the hospital;]

7. Health Insurance Premium paid by the EmployerProviso (3) to Section 17(2)

• (iii) any portion of the premium paid by an employer in relation to an employee,

• to effect or to keep in force an insurance on the health of such employee

• under any scheme approved by • the Central Government • [or the Insurance Regulatory and Development

Authority]

7. Health Insurance Premium reimbursed by the Employer - Proviso (4) to Section 17(2)

• (iv) any sum paid by the employer in respect of any premium paid by the employee

• to effect or to keep in force an insurance on his health or the health of any member of his family

• under any scheme • approved by the Central Government • [or the Insurance Regulatory and Development

Authority]


• (v) any sum paid by the employer in respect of any expenditure actually incurred by the employee

• on his medical treatment or treatment of any member of his family

• [other than the treat ment referred to in clauses (i) and (ii)];

• so, however, that such sum does not exceed [fifteen] thousand rupees in the previous year.


• (vi) any expenditure incurred by the employer on—• (1) medical treatment of the employee, or any member of the family of

such employee, outside India;• (2) travel 21[and] stay abroad of the employee or any member of the

family of such employee for medical treatment;• (3) travel and stay abroad of one attendant who accompanies the patient

in connection with such treatment,• 22[subject to the condition that—• (A) the expenditure on medical treatment and stay abroad shall be

excluded from perquisite only to the extent permitted by the Reserve Bank of India; and

• (B) the expenditure on travel shall be excluded from perquisite only in the case of an employee whose gross total income, as computed before including therein the said expenditure, does not exceed two lakh rupees;]

Foreign Medical Facility

• Expenditure incurred by the Employer on medical treatment outside the country, of the employee or any member of the employee shall be excluded to the extent it is permitted by the Reserve Bank of India.

• However the cost of travel of the employee/ any member of his family and his one attendant shall be excluded only for those employee whose gross total income excluding such traveling expenditure does not exceed Rs. 200,000/-.

8. Employer’s Contribution

• Contribution of employers to employee's pension, superannuation fund, provident fund, Health Insurance Scheme.

9. Motorcar and Conveyance facilityExplanation to Section 17(2)(iii)

• Use of any vehicle • provided by a company or an employer • for journey by the assessee from his residence to his

office or other place of work, • or from such office or place to his residence, • shall not be regarded as a benefit or amenity granted

or provided to him free of cost or at concessional rate

10. Hotel AccommodationExplanation 1(d) to Section 17(2)(ii)

• Hotel accommodation up to 15 days on transfer.

11. Accommodation in 'remote area'

• Accommodation provided in a 'remote area'

– to an employee working at a mining site – or an onshore oil exploration site, – or a project execution site – or an accommodation provided in an offshore site

of similar nature.

12. Judges of Supreme Court/High Court

• Rent free official Residence and Conveyance Facilities provided to judges of High Court or Supreme Court is not a taxable perquisite.

13. Officers of Parliament

• Rent free furnished Residence (including maintenance thereof) provided to an officer of the parliament, a Union Minister or Leader of the opposition in Parliament, is not a Taxable Perquisite.

Valuation of Perquisites

Meaning of ‘Salary’

• For the purposes of Valuation of Perquisites, ‘Salary’ includes the pay, allowances, bonus or commission payable monthly or otherwise or any monetary payment, by whatever name called, from one or more employers, but does not include:

– Dearness Allowance or Dearness pay unless it enters into the computation of superannuation or Retirement Benefits of the employee concerned.

– Employer’s contribution to the Provident Fund account of the Employee.

– Allowances which are exempt from the payment of Tax.– Value of Perquisites

Valuation of rent-free unfurnished accommodation

Central and State Government Employees

• The value of such accommodation provided to Central and State Government employee

• is equal to the license fee, • which would have been determined by the

central or state government.

Valuation of Rent Free Unfurnished Accommodation (private sector)

Population of city as per 2001 census where accommodation is provided

Where the accommodation is owned by the employer

Where the accommodation is taken on lease or rent by the employer

Exceeding 25 lakhs 15% of salary in respect of the period for which the accommodation is occupied by the employee

Lower of amount of lease rent paid/ payable or 15% of the salary

Exceeding 10 Lakhs but not exceeding 25 lakhs

10% of salary in respect of the period for which the accommodation is occupied by the employee


Any other 7.5% of salary in respect of the period for which the accommodation is occupied by the employee


Exception to accomodation rules

• It is not applicable to an accomodation 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 accomodation , only one will be taxed for 90 days. (the lesser of the two will be taxed till 90 days). Beyond that both will be taxed)

• Valuation of rent-free furnished accommodation

Accommodation is not in a hotel

• Find out the value of the perquisite on the assumption that the accommodation is unfurnished.

• Valuation of furniture is done:– 10% per annum of the original cost of the

furniture if the furniture is owned by the employer

– actual hire charges payable, if furniture is hired by the employer.

Accommodation in a hotel

• The perquisite is valued at the lower of the two amounts:– 24% of salary paid or payable for the period

during which such accommodation is provided in the previous year.

– Actual charges paid or payable by the employer to the hotel.

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

Question 11• Mr. Kushal submits the following information regarding his salary income which he

gets from ABC Ltd. • Basic salary Rs.15,000 pm; • D.A. 40% of basic salary( forming part of retirementbenefits);• City Compensatory Allowance Rs.300pm; Children Education Allowance Rs.400pm(

for 3 children); Transport allowance Rs.1,000 p.m.;• He is also entitled to HRA of Rs.6,000 p.m. from 1.4.2008 to 31.8.2008. He was

paying a rent of Rs.7,000 p.m. for a house in Delhi. From 1.9.2008 he was provided with an accommodation by the company for which the company was paying the rent of Rs.5,000 pm. The company charged him Rs.1,000 pm as rent for the accommodation.

• Compute gross salary for the a.y.2009-10.

Answer 11

• Total Income from Salary = 2,99,575

Computation of Income from Salary

• Particulars• Basic salary 15,000 x 12 = 1,80,000• D.A. (40% of 1,80,000) = 72,000• City Compensatory Allowance (fully taxable) (300 x 12) = 3,600• House Rent Allowance = (April to August 2008)• Actual amount received ( 6,000 x 5) = 30,000• Less: Exemption u/s 10(13A) Rule 2A, Least of the followings:• (a) Actual amount received 30,000• (b) 50% of salary 52,500• (c) Rent paid – 10% of Salary• [ 7,000 x 5 – 10% of 1,05,000] = 24,500• Least of these is =24,500 • Taxable Amount = 5,500

Note• Salary for HRA (5 months)• Basic salary : 15,000 x 5 = 75,000• D.A. = 40% of 75,000 = 30,000• Total = 1,05,000• Children Education Allowance- Actual amount received (400 x 12 x 3) = 14,400• Less: Exemption u/s 10(14) @ Rs.100 per month per child subject to a maximum of

2 children (100 x 12 x 2) = 2,400• Taxable = 12,000• Transport Allowance• Actual amount received ( 1,000 x 12) = 12,000• Less: Exemption u/s 10(14) @ Rs.800 p.m. (800 x 12) = 9,600• Taxable = 2,400• Gross Income from Salary u/s 17(1) = 2,75,500(1,80,000+ 72,000+ 3,600+ 5,500+

12,000+ 2,400)

• Add: Value of Unfurnished accommodation u/s 17(2) rule 3(1) explanation 1• Assuming Population exceeding 25 lakhs (as accommodation provided in a Metro

city)• 15% of salary for 7 months (September 2008 to March 2009)• Salary = Basic pay + DA (forming part of retirement benefits) +• all other taxable allowances• = [(15,000 × 7) + (40% of 1,05,000) + (300 × 9)+ {(400×9×3) –• (100 × 9 × 2)}+ {(1000 – 800) × 9}]= 1,60,500 • Perquisite = 24,075• Total Income from Salary = 2,99,575 (2,75,500+ 24,075)

Question 12

• Mr.Sambhu was provided an accommodation in a hotel by his employer for 22 days before providing him a rent free accommodation which is owned by the employer.

• The hotel charges paid Rs.6,000. • Salary for the purpose of accommodation for the period of 22

days is Rs.11,000. • His employer has charged Mr. Sambhu Rs 1000/- for the

accommodation.• Compute the value of accommodation.

Answer 12

• Taxable value of perquisite 1,640

Computation• In case of accommodation provided to the assessee on account of

transfer, which is exceeding 15 days cumulatively, such shall be taxable as a perquisite.

• The company recovered Rs.1,000 from the employee. • Compute taxability.• Lower of the following:• (i) 24% of salary paid/payable= 24% of 11,000 = 2,640• (ii) Actual charges paid/payable = 6,000 • Least is 2,640• Less Amount paid or payable by the employee 1,000• Taxable value of perquisite 1,640

Question 13

• Value of unfurnished accommodation (computed) Rs.50,000.

• Cost of furniture provided by the employer Rs.80,000.

• Hire charges of furniture provided in the accommodation Rs.500 p.m.

• Amount recovered from employee Rs.200 p.m. • Compute taxability.

Answer 13

• Value of Furnished Accomodation = 61,600

Computation

• Value of Furnished Accomodation (provided at Concessional rates)

• Particulars• Value of unfurnished accommodation as above 50,000• Add: Value of Furniture provided:• • 10%p.a. of original cost of such furniture 8,000• • If hired from third party, then Actual hire charges 6,000• Less: Any charges paid or payable by the employee (200 x 12)

=(2,400)• Value of Furnished Accomodation = 61,600(50,000+ 8,000+

6,000 - 2,400)

Question 14• Mr.Ritesh is provided with an accommodation in Kolkata since April 2008. • Salary Rs.40,000 p.m. • Cost of furniture provided Rs.80,000. • On 1st September, 2008, following a promotion with a increase in Salary

by Rs.15,000, • he was transferred to Jharkhand (population less than 25 lakhs but more

than 10 lakhs),• and was also provided an accommodation there. • Mr.Ritesh was allowed to retain the Kolkata accommodation till March,

2009. • Compute taxability.

Answer 14

• Total Value of Taxable Perquisite 1,25,750

Computation

• Phase 1: Value of Furnished Accommodation (Kolkata) (April to September 2008)

• Value of unfurnished accommodation (15% of 40,000 × 6 months) 36,000

• Add: Value of Furniture provided:• @10%p.a. of original cost of such furniture• (10% of 80,000 x 6 months) 8.000• Value of Furnished Accommodation 44,000

Phase 2 and 3• Phase 2: Valuation of accommodation (October 2008 to December 2008)• (a) For the first 90 days of transfer: Where accommodation is provided

both at existing place of work and in new place, the accommodation, which has lower value, shall be taxable.

• Phase 3:• (b) After 90 days: Both accommodations shall be taxable.• Computation for the first 90 days of transfer: (October 2008 to December

2008)• Lower of:• (i) Value of accommodation at existing place of work• (ii) Value of accommodation at new place

Phase 2 – Lower Taxable• Value of accommodation at existing place of work (Kolkata)• 15% of salary for 3 months (i.e. 90 days) = 15% of 55,000 x 3

months =24,750• Add: Cost of furniture provided: 10% of 80,000 x 3 months

=24,000• Total Value of Perquisite 48,750• Value of accommodation at new work place(Jharkhand)• 10% of salary for 3 months (i.e. 90 days) = 10% of 55,000 x 3

months = 16,500• Therefore, the assessee shall be assessed to tax on Rs.16,500

(being the lower)

Phase 3- Both Taxable

• Phase 3: Valuation of accommodation (after 90 days) (January 2009 to March 2009)

• For Kolkata accommodation: 15% of 55,000 x 3 months = Rs.24,750

• Add: Cost of furniture provided: 10% x 80,000 x 3 months = Rs.24,000

• Total value of perquisite Rs.48,750• For Jharkhand accommodation: 10% of 55,000 x 3 months =

Rs.16,500• Total = Rs.48,750+ Rs.16,500 = Rs 65,250

Total Value of Taxable Perquisite

• Total value of perquisite:• Particulars Taxable value of• perquisite• Phase 1: Accomodation in Kolkata 44,000• Phase 2: Accomodation in Jharkhand (being the lower during

90 days) 16,500• Phase 3: Accomodation in Kolkata 48,750• Phase 3: Accomodation in Jharkhand 16,500• Total Value of Taxable Perquisite 1,25,750• (44,000+16,500+48,750+16,500)

Perquisite of Motor Car

Perquisite in respect of motor car is taxable only when the employer is not liable to fringe benefit tax (like sole proprietor, charitable institutions, etc) Private company employees will not pay any tax.

• 1.Car is owned by Employee• 2. Car is owned or hired by Employer a) Expenses met by Employer b) Expenses met by Employee

Motor car perquisite

• Car owned by Employeea) Expenses met by Employee - No Taxb) Expenses met or reimbursed by Employer - Official purpose only No tax - Used for private purpose-actual expenses

less recovery taxable -Partly used for private purpose (cont. next

slide)

Motor car perquisite( Cont.)

Car owned by employee (cont.)-Partly used for private purpose 1) Find actual expense incurred by employer2) Less amount used for official purpose

ie.Rs.1200 upto 1.6lts engine capacity & Rs.1600 above 1.6 lts. Add Rs 600 pm if Chauffeur is also provided.

3) Balance is the value less if any recovered from employee

Car owned by employee (cont.)

• However in case the actual expenses on running and maintenance is more than Rs 1200/1800(upto 1.6 ltrs) or 1600/2200 (above 1.6 ltrs), he can claim such actual amount of expenditure as deduction by maintaining the following documents:– The employer should maintain complete details of journey

undertaken for official purpose which may include date of journey, destination, mileage and the amount of expenditure incurred thereon.

– The Employer should give a Certificate that the expenditure was incurred wholly and exclusively for the performance of his official duty.

2.When Car is owned or hired by Employer

• A. Expense by employer a) Used only officially No tax

b) Partly official & partly personal- -sum of Rs.1200 upto 1.6 ltrs engine capacity -sum of Rs.1600 beyond 1.6 ltrs capacity

Plus Rs 600 in case Chauffeur is provided by Employer

Wholly used for personal- all expense paid by employer

• Actual amount of expenditure incurred by the employer on the running and maintenance of motor car during the relevant previous year

• including remuneration, if any, paid by the employer to the chauffeur

• as increased by the amount representing normal wear and tear of the motor car (which will be 10% of the cost of motor car)

• and as reduced by any amount charged from the employee for such use.

2.When Car is owned or hired by Employer (cont.)

• B. Expense and Maintenance by Employee a) Wholly used for personal- 10% of cost for wear

and tear

b) Partly official and partly personal- -sum of Rs.400 upto 1.6 ltrs engine capacity -sum of Rs.600 beyond 1.6 ltrs capacity and Rs.600 for chauffeur

Valuation of perquisite in respect of free domestic servant

• The value of benefit to the employee (or any member of his household) resulting from the provision by the employer for services of a – sweeper, – a gardener, – a watchman – or a personal attendant,

• shall be the actual cost to the employer, that is, the total amount of the salary paid or payable by the employer (or any other person on his behalf) for such services as reduced by the amount paid by the employee for such services.

Valuation of perquisite in respect of gas, electricity or water provided free of cost

• This perquisite is taxable • in the hands of specified employees only • provided the connection is in the name of

employer. • If in the name of employee • then the employer would be paying on behalf

of the employee • and is taxable in all cases.

ValuationMode of valuation If purchased from outside If supplied by the

employer from own sources

Cost to employer (A) Amount paid /payable by the employer to the outside agency

Manufacturing cost per unit incurred by the employer

Sub: Amount recovered from the employee (B)

Recovery from the employee


Taxable Value of perquisite (A-B)

Balancing amount Balancing amount

Valuation in respect of free education

• This perquisite is taxable in the hands of a specified employee only

• and only in those cases where the educational institute is owned and maintained by the employer

• or where such education facility is provided in any institute

• by reason of employee’s employment with the employer.

Where the education facility is provided to employees children

Different Situations Amount chargeable to tax

Where the cost/ value of benefit does not exceed Rs. 1000 per child per month

NIL

Where such amount exceeds Rs. 1000/- Cost of education in a similar instituted in a similar locality – Rs 1000 – amount recovered by employee

Where education facility is provided to other members of the household

Different Situations Amount chargeable to tax

Where education facility is provided to other members of the household

Cost of education in a similar instituted in a similar locality – amount recovered by employee

Payment or Reimbursement of Fees

• If the fee is paid by the employer • for employees children • then there is no exemption available

– for both specified and non-specified employees.

• Similarly reimbursement of school fees is also taxable – in the hands of both specified and non-specified

employees.

Interest on Loans

• The value of the benefit to the assessee • resulting from the provision of interest-free or concessional loan for any purpose • made available to the employee or any member of his household during the

relevant previous year • by the employer or any person on his behalf • shall be determined as the sum equal to the interest computed • at the rate charged per annum by the State Bank of India • as on the 1st day of the relevant previous year in respect of loans for the same

purpose advanced by it • on the maximum outstanding monthly balance • as reduced by the interest, if any, actually paid by him or any such member of his

household.

Exceptions

• No value would be charged if such loans are made available for medical treatment in respect of diseases specified in rule 3A of these Rules

• or where the amount of loans are petty not exceeding in the aggregate Rs. 20,000.

Valuation in respect of providing use of movable assets

• The value of benefit to the employee resulting from the use by the employee (or any member of his household)

• of any movable asset (other than car, computer and laptop) • belonging to the employer • shall be determined at 10% per annum of the actual cost of

such asset. • It is taxable in the hands of all employees i.e. specified and

non specified. • The taxable amount shall be reduced by the amount, if any,

recovered by the employee.

Mode of ValuationPerquisite in respect of use of movable asset

Perquisite in respect of use of movable asset

Mode of Valuation Owned by employer Taken on hire by employer

A. Find the cost to the employer

10% p.a of actual cost Amount of rent paid or payable

B. Amount recovered from the employee



Taxable Value of perquisite (A-B)

Balancing amount (if positive)


Valuation in respect of Transfer of movable AssetPerquisite in respect of transfer of movable asset

Perquisite in respect of transfer of movable asset

Perquisite in respect of transfer of movable asset

Mode of Valuation *Electronic Items/ computers

Motor car Any other asset

Find out the cost to the employer (A)

Actual cost to the employer



Normal wear and tear for completed years for which the asset was used by the employer for his business. (B)

50% for each completed year by reducing balance method

20% for each completed year by reducing balance method

10% for each completed year of actual cost.

Amount recovered by the employee (C)

Paid by employee for acquiring such asset



Taxable Value (A-B-C)




*Note: Electronic Items refer to data storage and handling devices like computer, digital diaries and printers. They do not include household appliances.

Valuation of Medical Facilities

• Fixed medical Allowance is always chargeable to tax. • But Medical expenditure reimbursed in excess of Rs. 15,000 is

chargeable to tax. • The following are the exemptions to the rule that is in the

following cases there is no monetary ceiling:– In employer hospital– government hospital– Expenditure in case of specified treatment– Health insurance premium– Medical facilities outside India

Question 15• Calculate the perquisite value of the expenditure on medical treatment, which is

assessable in the hands of an employee of a company, inclusive of the conditions to be satisfied:

• Gross total income, inclusive of salary Rs.2,00,000• (a) amount spent on treatment of the employee’s wife in a hospital maintained by

the employer Rs.20,000• (b) amount paid by the employer on treatment of the employee’s child in a

hospital Rs.14,000• (c) medical insurance premium reimbursed by the employer on a policy covering

the employee, his wife and dependent parents Rs.7,000• (d) (i) amount spent on medical treatment of the employee outside India

Rs.2,50,000(the whole of such expenditure is permitted by RBI)• (ii) amount spent on travel and stay abroad Rs.90,000• (e) amount spent on travel and stay abroad of attendant Rs.60,000

Answer 15(a)

• Amount spent on treatment of the employee’s wife in a hospital maintained by the employer Rs.20,000

• Nil Fully exempted

Answer 15(b)

• (b) amount paid by the employer on treatment of the employee’s child in a hospital Rs.14,000

• Nil Not taxable: • since the amount = Reimbursement of

expenses incurred is less than Rs.15,000

Answer 15(c)

• (c) medical insurance premium reimbursed by the employer on a policy covering the employee, his wife and dependent parents Rs.7,000

• Nil Not taxable: • since medical insurance premium paid

premium referred to u/s 80D is paid on the employee and members of his family

Answer 15(d)• (d) (i) amount spent on medical treatment of the employee

outside India Rs.2,50,000(the whole of such expenditure is permitted by RBI)

• (ii) amount spent on travel and stay abroad Rs.90,000• (e) amount spent on travel and stay abroad of attendant

Rs.60,000• Medical treatment outside India Nil - the whole of such

expenditure is permitted by RBI• Amount spent on travel and stay abroad • Nil Not taxable: as the Gross total income for the employee

does not exceed Rs.2,00,000

Question 16• Mr.E is employed with N Ltd. he also gets the services of sweeper and

watchman. Determine his gross salary in the following cases:• 1) His salary is Rs.4,200 pm. Employer provides the services of sweeper

and watchman. He pays them Rs.600 pm and Rs.500pm;• 2) His salary is Rs.4,200 pm. Sweeper and watchman are engaged by N at

the rates given in clause(1) above but their wages are reimbursed by the employer;

• 3) His salary is Rs.4,210 pm. Employer provides the services of sweeper and watchman at the above rates but he recovers from N Rs.200 pm and Rs.300 pm respectively.

• E has paid employment tax of Rs.400.

Answer 16

• Case (1) Case (2) Case (3)• [Ref.Sec.17(2)(iv), [Ref.Sec.17(2)(iii)Rule 3(3)]• Basic Salary 50,400/ 50,400 /50,520• Wages of sweeper Sec.17(2)(iii) not taxable /7,200/ 4,800• Wages of watchman Sec.17(2)(iii) not taxable /6,000 /2,400• Gross salary 50,400/ 63,600/ 57,720• Salary 50,000/63,200/57,320

Case (1)

• Case (1): He is a non-specified employee. Perquisites provided by employer u/s 17(2)(iii) are not

• chargeable to tax:• Salary: 4,200 × 12 = 50,400• Less: Professional tax paid u/s 16(iii) = 400• Monetary income not exceeding Rs.50,000 = 50,000• Hence Gross Salary = Rs 50,400• Income under the head ‘Salary’ = Rs 50,000.

Case (2)

• Case (2): If the facility is engaged by the employee but reimbursed by the employer,

• it is an obligation of employee, • discharged by employer u/s 17(2)(iv), • it is always taxable.• 50,400+7200+6000• = Rs 63,600• Less Employment Tax 400• = Rs 63,200

Case (3)

• Case (3): He is a specified employee, as his monetary income, chargeable under the head “salaries”

• exceeds Rs.50,000.• Gross salary; 4,210 × 12 = 50,520• Less: Professional tax paid u/s 16(iii) = 400• Monetary income exceeding Rs.50,000 Rs.50,120• 50,520+4800+2400• =Rs 57,720• Less Employment Tax 400• = Rs 57,320

Question 17• G Ltd. provides electricity to its employee, P. Annual consumption as per

meter reading comes to 2,250 units. Determine the value of the perquisite in the following cases:

• 1) Electricity meter is in the name of P and the rate of electricity is Rs.3 per unit

• 2) Electricity meter is in the name of G Ltd. the rate of electricity is Rs.3 per unit.

• 3) G Ltd. is a power-generating company. Manufacturing cost is 90 paise per unit but supplied to public @ Rs.2 per unit. However, it charges 30 paise per unit from employees.

• Monthly salary of P is Rs 5000/-

Solution: With reference to Rule 3(4)

• 1) Perquisite value of free electricity is Rs.6,750 (2,250 x 3 ).

• As the electric meter is in the name of the employee, it is his obligation to pay the bill.

• However, as the bill has been paid by the employer, it is an obligation of employee, discharged by the employer.

• It is always taxable u/s 17(2)(iv).

Case 2

• 2) Perquisite value of free electricity will be Rs.6,750.

• It shall be assessed to tax, • since the employee is a specified employee as

per Sec.17(2)(iii) – Annual Salary more than Rs 50,000.

Case 3

• 3) Perquisite value of electricity supplied • = 2,250 ( 0.90 – 0.30) • = Rs.1,350

Question 18• Determine the value of education facility in the following cases:• 1) Three children of G, an employee of S Ltd., are studying in a school, run

by S Ltd. • School fees is Rs.2,500 pm and hostel fees is Rs.2,000 pm. • But the employer recovers only Rs.600 pm and Rs.500 pm respectively. • However, a similar school or a hostel around the locality charges Rs.1,800

pm and Rs.1,200 pm respectively.

• 2) The employer has also reimbursed the school fees of Rs.1,200 pm of his nephew, fully dependent on him after the death of his brother.

Answer 18

• Total value of taxable perquisite 75,600

Computation of taxable value of education facility [As per Rule

3(5)]• Taxable value of perquisite• 1)(a) School fees of his children, studying in a school run by

employer:• (Rs.1,800 x 3 x 12) – (1,000 x 3 x 12) – (600 x 3 x 12) 7,200• (b) Hostel fees: (2,000 x 3 x 12) – (500 x 3 x 12) 54,000• 2) School fee of nephew (1,200 x 12) 14,400• Total value of taxable perquisite 75,600

Question 19

• Mr. Z is the manager of F Ltd. his son is a student of Amity International School.

• School fees of Rs.4,000 pm and hostel fees of Rs.3,000 pm., are directly paid by F Ltd. to the school but it recovers from Z only 30%.

• Z also joins an advanced course of Marketing Management for 4 months at IIM, Ahmedabad, fees of the course, Rs.2,50,000 is paid by F Ltd.

• Determine the perquisite value of the education facility.

Answer 19


Computation of taxable value of education facility [As per Rule 3(5)]

• (1)(a) School fees of his children, studying in a school run by employer:

• (Rs.4,000 x 12) - (1,200 x 12) 33,600• (b) Hostel fees: (3,000 x 12) – (900 x 12) 25,200• 2) Fees paid for Marketing Management course for

Mr.Z ( it is a fully exempted perquisite) Nil – (Employer liable to FBT – Employee Welfare)


Question 20

• Mr.D takes interest-free loan of Rs.2,50,000 on 1.11.08 from his employer to construct his house. The loan is repayable in 50 monthly installments from January 2008. Compute the value of interest free loan. SBI Lending rate 8.5% p.a. (for housing loans not exceeding 5 years).

Answer 20

• Perquisite value of interest-free loan:• = Rs.8,642

Computation of taxable value of Loan provided by employer [As per Rule 3(7)(i)]

• Time period during which loan remains outstanding Balance on the last• day of the month• November 2,50,000• December 2,50,000• January 2,45,000• February 2,40,000• March 2,35,000• Total 12,20,000• Perquisite value of interest-free loan:• 12,20,000 x 8.5% x 1/12 = Rs.8,642

Question 21

• Mr.C is an accountant of D Ltd. He gets salary of Rs.25,000 pm. He has purchased motor car and washing machine from the company on 1 February 2009. Particulars of cost and sale price of the two assets are given below:

• Year of Purchase/ Particulars of the Asset/ Purchase Price(Rs)/ Sale price(Rs)

• 01.07.2005 /Motor car/ 2,50,000/ 85,000• 15.09.2004/ Washing Machine /10,000/ 5,000• Compute the taxable value of perquisites for the assessment

year 2009-10

Answer 21

• Taxable value of perquisite 43,000 /1,000• Total = Rs 44,000

Computation of taxable value of perquisites on transfer of moveable assets[As per Rule 3(7)(viii)]

• Motor car (Actual Cost) 2,50,000• Date of Purchase 01.07.2005• Less: Depreciation @ 20% on WDV from 01.07.2005 to

30.06.2006 50,000• WDV 2,00,000• Less: Depreciation @ 20% on WDV from 01.07.2006 to

30.06.2007 40,000• WDV 1,60,000• Less: Depreciation @ 20% on WDV from 01.07.2007 to

30.06.2008 32,000• WDV 1,28,000

Washing Machine• Washing Machine (Actual Cost) 10,000• Date of Purchase 15.09.2004• Less: Depreciation @ 10% on SLM from 15.09.2004 to 14.09.2005 1,000• WDV 9,000• Less: Depreciation @ 10% on WDV from 15.09.2005 to 14.09.2006 1,000• WDV 8,000• Less: Depreciation @ 10% on WDV from 15.09.2006 to 14.09.2007 1,000• WDV 7,000• Less: Depreciation @ 10% on WDV from 15.09.2007 to 14.09.2008 1,000• WDV 6,000

Taxable value of perquisite

• Particulars Motor Car / Washing Machine• WDV on the Asset 1,28,000 / 6,000• Less: Amount recovered from employee• 85,000 / 5,000• Taxable value of perquisite 43,000 /1,000• Total = Rs 44,000

Illustration 22 : (based on different allowances

received by employee)• From the following particulars, compute gross salary of Mr X for the assessment

year 2009-10. He is employed in textile industry in Mumbai at a monthly salaryof Rs.4000. He is entitled to commission of 1% on sales achieved by him, whichwere Rs.10 lakh for the year.In addition, he received the following allowances from the employer during theprevious year:1. Dearness Allowance Rs.2000 per month which is granted under terms ofemployment and counted for retirement benefits.2. Bonus Rs.320003. House Rent Allowance Rs.1000 per month (Rent paid for house inMumbai Rs.1200 per month)4. Entertainment Allowance Rs.1000 per month5. Children Education Allowance Rs.500 per month6. Transport Allowance Rs.1000 per month7. Medical Allowance Rs.500 per month8. Servant Allowance Rs.200 per month9. City Compensatory Allowance Rs.300 per month10. Research Allowance Rs.500 per month (amount spent on researchRs.3000)

Answer 22

• Gross Salary: 152,800

• Solution:Computation of Income from Salary of Mr. X for the Assessment Year 2009-10

• Basic Salary 48,000Dearness Allowance 24,000Commission 10,000Bonus 32,000

• House Rent Allowance(Rs.1000 x 12 – Amount exempt Rs.6200)*5,800

• Entertainment Allowance 12,000

• Children Education Allowance(Rs.500 x 12 – Amount exempt Rs.100 x 2 x 12)3,600

• Amount of HRA exempt is least of 3 amounts

• a) 50% of Salary (Basic Salary + DA granted under terms of employment + Commission based on percentage of turnover – Rs.48,000 + Rs.24,000 + Rs.10,000 = Rs.82,000) = Rs.41,000

• b) Actual HRA received : Rs.1000 x 12 = Rs.12,000

• c) Rent paid (Rs.1200 x 12) – 10% of Salary (Rs.82,000) Rs.14,400 – Rs.8,200 = Rs.6,200

• Transport Allowance(Rs.1000 x 12 – Amount exempt Rs.800 x 12)2,400

• Medical Allowance (fully taxable) 6,000Servant Allowance (fully taxable) 2,400

• City Compensatory Allowance (fully taxable) 3,600

• Research Allowance(Rs.500 x 12 – Amount exempt Rs.3000)3,000

• Gross Salary: 152,800

Question 23• X, is employed at Delhi as Finance Manager of R Ltd. • The particulars of his salary for the previous year 2008-09 are as under: • Basic Salary Rs.16,000 p.m.. • Dearness allowance Rs.12,000 p.m. • Conveyance Allowance for personal purpose Rs.2,000p.m.; • Commission @2% of the turnover achieved which was Rs.9,00,000 during

the previous year and the same was evenly spread. • HRA Rs.6,000 pm. The actual rent paid by him Rs.5,000 pm for an

accommodation at till 31.12.08. • From 1.1.08 the rent was increased to Rs.7,000 pm. • Compute taxable HRA.

Answer 23

• Taxable HRA 35,550 from April to December 2008

• Taxable HRA 5,850 from January to March, 2009

Solution

• Note: If there is an increase in rent paid, it is advisable to calculate the exemptions separately based on the time period.

• Rent before • and after increase.

April to December 2008• Salary for HRA (for 9 months)= Basic Pay + DA(considered for retirement benefits)

+ Commission (if received as a fixed percentage on turnover as per terms of employment)

• = (16,000 × 9) + (12,000 × 9) + (2% of 9,00,000 × 9/12) = 2,65,500• Taxable HRA: (April to December 2008). Total time=9 months• Particulars:• Amount received during the financial year for HRA 54,000• Less: Exemption u/s 10(13A) Rule 2A. Least of the followings:• (a) Actual amount received 54,000• (b) 50% of Salary 1,32,750• (c) Rent paid less 10% of Salary 18,450 18,450• [5,000 × 9 – 10% of 2,65,500]• Taxable HRA 35,550 from April to December 2008

January to March, 2009• Salary for HRA (for 3 months)= Basic Pay + DA(considered for retirement

benefits) + Commission ( if received as a fixed percentage on turnover as per terms of employment)

• = (16,000 x 3) + (12,000 x 3) + (2% of 9,00,000 x 3/12)=88,500• Taxable HRA: Particulars:• Amount received during the financial year for HRA 18,000• Less: Exemption u/s 10(13A) Rule 2A. Least of the followings:• (a) Actual amount received 18,000• (b) 50% of Salary 44,250• (c) Rent paid less 10% of Salary• [7,000 × 3 – 10% of 88,500] 12,150 12,150• Taxable HRA 5,850 from January to March, 2009

Question 24• Z is employed in A Ltd. As on 31.3.09, • His basic salary Rs.6,000 p.m. • He is also entitled to a dearness allowance of 50% of basic salary. 70% of

the dearness allowance is considered for retirement benefits. • The company gives him HRA Rs.3,000pm. • With effect from 1/1/09 he receives an increment of Rs.1,000 in his basic

salary. • He was staying with his parents till 31.10.2008. • From 1.11.08 he takes an accommodation on rent in Delhi and pays

Rs.2,500 pm as rent for the accommodation. • Compute taxable HRA for the assessment year 2009-10.

Answer 24

• Taxable HRA 27,280

Computation

• Salary for the purpose of HRA • shall cover the time period for which the

assessee, who is in receipt of HRA, • resided in a rented accommodation • and the rent paid by such assessee, is more

than 10% of salary.

Salary for HRA (for 5 months)

• Salary for HRA (for 5 months)= Basic Pay + DA(considered for retirement benefits) + Commission ( if received as a fixed percentage on turnover as per terms of employment)

• Basic Pay = (5,000 × 2) + (6,000 × 3) = 28,000• DA = 50% of Basic Pay x 70% forming part of

retirement benefits• [ 50 % x 28,000 x 70%] = 9,800• Total Salary for HRA 37,800

Taxable HRA

• Particulars• Amount received during the financial year for HRA (3,000 ×

12) 36,000• Less: Exemption u/s 10(13A) Rule 2A.• Least of the followings:• (d) Actual amount received 36,000• (e) 50% of Salary 18,900• (f) Rent paid less 10% of Salary• [2,500x 5 – 10% of 37,800] 8,720 8,720• Taxable HRA 27,280

Questions for Revision

• Discuss the different kinds of Provident funds and tax treatment of the following for the different Provident Funds:– Employers contribution to provident fund– Interest credited to provident fund– Lump sum payment at the time of retirement– Deductions u/s 80C on employees contribution

•


• What is an approved superannuation fund ? What are the tax benefits in case of an approved superannuation fund ?

• What is a Perquisite ? Give three examples of fully taxable perquisites ?

• What is a specified employee with regard to Perquisites ? Give some examples of perquisites that are taxable only in the hands of specified employees ?


• Give five examples of tax free perquisites?• How is Rent free unfurnished accomodation

valued as a perquisite ? What is the position in case the accommodation is furnished ?

• Discuss the valuation of perquisite in case of free educational facility provided by the employer ? What is the position in case the fees are paid or reimbursed by the employer ?


• Discuss the valuation of perquisite in case of use of movable assets ? What would be the valuation in case of transfer of the asset ?

• The End

Tax presentation salaries part 2

Economy & Finance

Transcript of Tax presentation salaries part 2