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Income from Salaries

shiba p. padhi, FCMA

Basics • Tax – Meaning, Types, Union/State/Concurrent Lists

• PY & AY

• Persons

• Assessee

• Income & Receipts

• RS

• Taxable income and Tax Liability

• Heads of Income & GTI

• Tax, Surcharge & Cess

• ITRs

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Essential norms of salary

• Relationship between payer & payee

• Employer? (former, present, prospective)

• Salary & wages – conceptually not different

• Salary from more than one source

• Taxable on ‘received’ or ‘due’ basis, whichever is early (Sec.15)

• Foregoing of salary (taxable as it is application of income)

• Salary paid tax-free is perquisite

• Salary income must be real and not fictitious (teacher salary &

donation)

• Payment received in capacity other than employee (Commission by

a Director, MP, Lecturer for setting question paper) 7/23/2013 3

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Essential norms of salary

• Salary includes –

wages, annuity, pension, gratuity, fees, commission, perquisite, advance of salary, leave encashment, contribution to PF in excess of 12%, contribution by CG under a pension scheme

• Voluntary surrender of salary – exempted

• Place of accrual

• Any salary, bonus, commission or remuneration, by whatever name

called, due to or received by, a partner of a firm from the firm shall

not be regarded as salary (B/P)

• Salary received from UNO – not taxable

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Basis of Charge u/s 15

• Any salary received/due from an employer/ former employer, whether actually paid or not

• Any salary paid or allowed by or on behalf of an employer, though not due or before it became due

• Any arrears of salary paid or allowed, if not charged to tax for any earlier P.Y.

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Fully taxable items under salary : -

Basic salary, DA, DP, Advance salary, Arrear salary, Leave encashment while in service, salary during notice period, Fees and commission, Bonus, uncommutted pension, annuity, remuneration for extra duties, Profits in lieu of salary,

Items for which conditions apply : -

Leave encashment upon retirement/death/resignation, Gratuity, Commuted Pension, Pension under NPS, Annual accretion to the credit balance in RPF, Retrenchment compensation, VRS,

Salary which is not taxable under this head : -

Salary to partners

Salary which is exempt : -

UNO (even Pension after retirement)

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How salary is computed?

Rs.

Income from salaries (Basic+DA+DP etc.) xxxx

Add: Taxable Allowances xxxx

Add: Taxable value of Perquisite xxxx

Gross Salary xxxx

Less: Deduction u/s 16

a. Entertainment allowance xxxx

b. Professional Tax xxxx xxxx

Income from Salaries xxxx

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For the purpose of taxation of

different receipts

CG/ SG employees

Employees of LA Employees of Statutory

Corporations

Leave encashment

Govt.

Non Govt.

Non Govt.

Gratuity

Govt.

Govt.

Non Govt.

Commuted Pension

Govt.

Govt.

Govt.

Other employees are always Non Govt.

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Leave Encashment

Encashment during the period of service-

Fully Taxable, but can claim relief U/s 89(1)

Encashment at the time of Retirement, Resignation or Death

A. Government Employees - Fully Exempted

B. Non-Govt. Employees – Conditions applied

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Leave Encashment to Non-Govt. Employees

1) Actual amount received, or

2) 10 x Avg. monthly salary, or

3 Amount calculated as per Income Tax Rules, max. 30 days for a year, or

4) Amount specified by the Govt.-

• After 1-4-98 Rs. 3,00,000/

WHICHEVER IS LESS, IS EXEMPT FROM TAX

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Leave Encashment to Non-Govt. Employees

Salary includes- Basic pay + Dearness

All.,( if terms of employment provides

or forms part of retirement benefit )

+ Commission,( on fixed % of Turn-

Over (TO) achieved by the employee)

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Other Points

• Leave encashment to Legal heirs not taxable

• Relief u/s 89 available

• Avg. salary of last 10 months before retirement

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Gratuity

1) Govt. employees and Local authority- Fully Exempt

2) Employees covered under The payment of Gratuity Act 1972-

a. Actual amount received, or

b. 15 or 7 days salary (x) Completed years of service (if more than 6 months, consider it complete year), or ( 15/26)

c. Rs. 10,00,000/-

(WHICHEVER IS LESS, IS EXEMPT FROM TAX)

Salary includes- Basic pay + Dearness Allowance (100%)

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Gratuity to any other employee

a. Actual amount received, or

b. ½ months Average salary (x) Actual Completed

year of services (if not completing the year, i.e.

12 months/365 days, than do not consider the

year)

c. Rs. 10,00,000/-

(WHICHEVER IS LESS, IS EXEMPT FROM TAX)

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Gratuity to any other employee

Average salary = Average of last 10 months

Salary includes- Basic pay + Dearness All.,(if terms

of employment provides or forms part of

retirement benefit) + Commission,( on fixed % of

Turn-Over (TO) achieved by the employee)

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Other Points…………

• Gratuity received from more than one employer

• Gratuity received in earlier years

• Basis of gratuity calculation do not matter

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Pension

A. Un-Commuted Pension, i.e., Periodical Pension- Fully Taxable

B. Commuted pension-

i. Govt. Employee / Local Authority / State Corporation Employee

Commuted pension = Exempted

Monthly pension = Taxable

ii. Other Employees -

Employees who receives Gratuity = 1/3rd of the pension is

allowed for commutation which is exempt and if it exceeds 1/3rd ,

Taxable

Employees who does not receives Gratuity = 1/2 of the pension

is allowed for commutation which is exempt and if it exceeds

1/2, Taxable

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VRS

1) Actual Amount received or;

Employee must have completed 10 years of service or 40

years of Age, or;

2) 3 months salary (x) Completed years of service or

3) Amt. of salary (x) Balance months of service left before the date

of his Retirement on superannuation,

4) Rs. 500,000/-,

(WHICHEVER IS LESS, IS EXEMPT FROM TAX)

Salary includes- Basic pay + Dearness All.,( if terms of employment

provides or forms part of retirement benefit ) + Commission,( on

fixed % of Turn-Over (TO) achieved by the employee)

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Retrenchment Compensation

i. Actual Amount received or;

ii. 15 days Average pay (x) Completed year of service

(if more than 6 months, consider complete year) or;

iii. Rs. 5,00,000/

(WHICHEVER IS LESS, IS EXEMPT FROM TAX)

Average pay means the last pay received, therefore,

15 days Avrg. Pay = Amt. x 15 days

26 days

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FULLY TAXABLE ALLOWANCES 1. Dearness Allowance or Additional Dearness Allowance or

Dearness Pay,

2. City Compensatory Allowance,

3. Tiffin Allowance,

4. Meal Allowance,

5. Refreshment Allowance,

6. Dinner Allowance,

7. Health Allowance,

8. Medical Allowance, irrespective of exp. incurred,

9. Telephone Allowance,

10. Holiday Allowance,

11. Employees Education Allowance,

12. Special Qualification Allowance,

13. Over-time Payment,

14. Servant allowance,

15. Warden allowance,

16. Non-practicing Allowance.

17. Family Allowance

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PARTLY TAXABLE ALLOWANCES Exempt upto Actual expenditure

1) Travelling Allowance

2) Daily Allowance, on transfer

3) Conveyance Allowance

4) Helper Allowance

5) Academic Allowance/Research Allowance

6) Uniform Allowance

7) Transfer Allowance

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PARTLY TAXABLE ALLOWANCES 8. Children Education Allowance: - Exempt upto actual amount

received per child or Rs.100/- p.m. per child for max. 2

children’s,

9. Hostel Allowance: - Exempt upto actual amount received per

child or Rs.300/- p.m. per child for max. 2 children’s

10. Underground allowance to employees working in coal mine,

is exempt upto Rs.800 p.m. or Rs.1,600/- pm. (blind/PH)

11. Tribal Area allowance – Exempt upto Rs. 200 p.m.

12. Transport Allowance – Exempt upto Rs. 800 p.m.

13. Allowance for Transport Employees – 70% of such allowance

or Rs.10,000/- p.m, whichever is lower

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HRA House Rent Allowance U/s 10(13A) & Rule 2A: -

(i) Actual H.R.A. received, or

(ii) Rent paid in excess of 10% of salary, or

(iii) An amount equal to: - A. Mumbai, Delhi, Kolkata & Chennai = 50% of Salary

B. In other cities = 40% of Salary

(

WHICHEVER IS LESS, IS EXEMPT FROM TAX)

Salary includes- Basic pay + Dearness All., if terms of employment provide & to the extent it is part of Retirement benefit + Commission, on fixed % of Turn-Over (TO) achieved by the employee

Where the employee has not actually incurred expenditure on payment of rent or stays in his own house, no exemption of H.R.A. shall allowed.

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Entertainment Allowance

In case of CG/SG employees:

a. Rs.5,000/-

b. 20% of basic salary

c. Amount of EA granted during the PY

(WHICHEVER IS LESS, IS EXEMPT FROM TAX)

- First include EA under salary income and then deduction

- Salary excludes any allowance/benefits

- Actual exp. not material

No exemption in case of Non-Govt. employees

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Perquisites which are taxable in the hands of

all categories of employees

1. Rent free accommodation provided by the employer to the

employee. Such accommodation may be furnished or

unfurnished.

2. Any concession in the matter of rent in respect of the

accommodation provided or granted by the employer to the

employee.

3. Any sum paid by the employer in discharging the monetary

obligation of the employee which otherwise would have

been payable by the employee e.g. the school fees of the

children of the employee paid by the employer or the

Income-tax of the employee paid by the employer.

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Perquisites which are taxable in the hands of

all categories of employees

4. Any sum payable by the employer whether

directly or through a fund (other than R.P.F.,

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.

5. The value of any other fringe benefit or amenity

(excluding the Fringe benefits chargeable to tax

under chapter XII-H) as may be prescribed.