What Constitutes Salary Income

8/8/2019 What Constitutes Salary Income

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would be a deciding factor, as the agent is generally not under the complete Control andsupervision of his principal.

That is why even the emoluments received by an Member if Parliament/ M.L.A. are nottaxable under the head "Salary" because of the absence of employer and employeerelationship.

WHAT IS THE PLACE OF ACCRUAL OF SALARY?

The golden rule is that it accrues where the service is rendered. Leave salary paid to aperson employed in India on leave to a foreign country is treated to be the arisen in India.However, if a citizen of India service outside India and receives salary from the of India, itwould be taxable as salary to have accrued in India.

PENSIONS TO BE TAXED AS SALARY?

Pensions are taxed under the head 'Salaries'. The of standard deduction is also available onthem.

IS ADVANCE SALARY TO BE TAXED IN THE YEAR OF RECEIPT?

The I.T. Act contemplates tax on salary which is due, whether paid or not, tax is attractedat the latest possible point of time which is the date when the salary accrues or becomesdue. However, where any salary paid in advance is assessed in the year of payment, itcannot be taxed again when it becomes due. Similarly, if arrears of salary have beenassessed on the 'due' basis in the past, they are not liable to be taxed again when they arepaid.

WHAT IS TAX FREE SALARY AND HOW IS IT TAXED?

When the salary is paid 'tax-free'the employee has to return in his total income the grosssalary, i.e. aggregate of the net-salary received plus the amount of tax paid on his behalf bythe employer. It does not make any difference whether the tax is borne by the employervoluntarily or under a contractual obligation.

IS SALARY PAYABLE FOR LEAVE-PERIOD TO NONRESIDENTS TAXABLE EVEN IFLEAVE IS SPENT OUTSIDE INDIA?

Yes. The salary paid for services rendered in India is regarded as income earned in India,

so as to specifically provide that any salary payable for rest period or leave period which isboth proceeded or succeeded by service in India forms part of the service contract ofemployment will also be regarded as income earned in India and so is to be taxed.

EXEMPTIONS OF INCOME

RELEVANT FOR THE HEAD "SALARIES"


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It is not true that every income received by an employee from his employer is taxable. Anyincome falling within any of the following paragraphs shall not be included in computing theincome from salaries: -

(1) The value of any travel concession or assistance received by or due to an employeefrom his employer or former employer for himself and his family, in connection with hisproceeding

(a) on leave to any place in India or

(b) on retirement from service, or, after termination of service to any place in India isexempt under clause (5) of Section 10 subject, however, to the conditions prescribed in rule2B of the I.T. Rules, 1962.

(2) Death-cum-retirement gratuity or any other gratuity which is exempt to the extentspecified from inclusion in computing the total income.

(3) Any payment in commutation of pension received under the Civil Pension(Commutation) Rules of the Central Government or under any similar schemeapplicable to the members of the Civil/Defense services under the Union/State/LocalAuthority or a Corporation established by a Central, State or Provincial Act.

Payments in commutation of pension received under any scheme of any otheremployer, exemption will be governed by the provisions of Section 10(10A) (ii).

(4) Any payment received by an employee of the Central /State Government, as cash-equivalent of the leave salary in respect of the period of earned leave at his credit at thetime of his retirement on superannuation or otherwise, is exempt. In the case of otheremployees it is subject to a maximum of ten month's leave. This exemption has an overallmax. limit of Rs. 2,40,000 [S.0.1015 (E) dated 27.11.97).

(5) Under Section 10(10B), the retrenchment compensation received by a workman isexempt from income-tax subject to certain limits.

(6) Under Section 10(10C), any payment received by an employee of the notified bodies atthe time of his voluntary retirement or termination of his service, in accordance with any

scheme or schemes ofvoluntary retirement or in the case of public sector company, ascheme of voluntary separation, is exempted to the extent that such amount does notexceed five lakh rupees

(7) Any sum received under a Life Insurance Policy, including the sum allotted by way ofbonus on such policy other than any sum received under sub-section (3) of Section 80DDA.

(8) Any payment from a Provident Fund to which the Provident Funds Act, 1925 (19 of1925), applies.

(9) Under Section 10(13AJ of the Income-tax Act, 1961, any special allowance specificallygranted to an assessee by his employer to meet expenditure incurred on payment of rent(by whatever name called) in respect of residential accommodation occupied by theassessee is exempt from Income-tax to the extent as may be prescribed.

(10) Under section 10(14) exemption of notified allowances is provided. The CBDT hasprescribed guidelines for the purpose of classes (i) and (ii) of Section 10(14) videNotification No.SO617(E) dated 7th July/ 1995 (F.No.l42/9/95TPL)which has been amendedvide Notification SO No.403(E) dated 24.4.2000 (F,No.l42/34/99-TPL).


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11) Under Section 10(15)(iv)(i) of the Income-tax Act, interest payable by the Governmenton deposits made by an employee of the Central Government or a State Government or apublic sector company from out of his retirement benefits, in a notified scheme, is exempt.

(12) Income by way of pension received by an individual or family pensionreceived by any member of the family of an individual who has been in the service of theCentral Government or State Government and has been awarded 'Param Vir Chakra" or"Maha Vir Chakra" or "Vir Chakra" or such notified gallantry award, is exempt.

(13) Under Section 17 of the Act, exemption from tax will also be available, underprescribed conditions, in respect of any medical treatment provided to an employee or anymember of his family or premium paid by the employer in respect of approved medicalinsurance taken for his employees or reimbursement of insurance premium to theemployees for such medical insurance for the employee or his family members.

WHAT ARE PERQUISITES?

A 'perquisite'is defined in the Oxford as 'any casual emolument, or profit attached to anoffice or position in addition to the salaries or wages'. In sunlit words, perquisites are thebenefits in addition to normal salary to which the employee has a right to by virtue his

employment. In simple language, 'perquisites 1 are benefits or amenities provided in kindby the employer free of cost or at a concessional rate. Their value, to the extent these goto reduce expenditure that the employee normally would have otherwise incurred inobtaining these benefits and amenities, is regarded as part of taxable salary. As a goldenrule, the taxable value ofperquisites in the hands of the employee, is its cost to theemployer.

However, there are specific rules for valuation of certain perquisites.

WHO IS A SPECIFIED EMPLOYEE AND WHAT PERQUISITES ARE TAXABLE IN HISHANDS?

The specified employees include the following:-

a) Director employee, whether full time or part time.

b) Employee who is beneficial owner of equity in the employer's company carrying 20% ormore voting power.

c) The employees other than those mentioned above, drawing salary in excess of Rs.24,000 (w.e.f. 13th April 2002 this limit is Rs. 50,000) in monetary terms.

The value of any benefit or amenity granted or provided free of cost or at concessional rates

to these specified persons would be a 'perquisite' taxable in their hands.

WHAT ARE THE OTHER TAXABLE PERQUISITES?

LAW APPLICABLE, AT THE OPTION OF THE ASSESSES, UPTO 30.9.2001.


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The other taxable perquisites which are taxable in a prescribed manner include the foliowing: -

a) Value of rent free accommodation provided to the assessee by his employer.

b) Value of concession in rent of accommodation provided to the assessee by his employer.

c) Amount payable by an employer directly or indirectly to effect an assurance on the life ofthe employee or to effect a contract for an annuity, other than payment made to

recognised provident fund etc.

d) Amount paid by an employer in respect of any obligation which otherwise would havebeen payable by the employee, for example - payment of income-tax.

THE LAW APPLICABLE FOR TAXATION OF PERQUISITES w.e.f. 1.4.2001.

The definition of "perquisite" has been amended to include the value of any prescribedfringe benefit or amenity. The fringe benefits are to be calculated in the manner prescribedin the Income-tax Rules.

It has further been laid down that 'profits in lieu of salary shall include amounts received in

lump sum, in installments or in any manner, even prior to employment or after cessation ofemployment, for the purposes of taxation.

HOW IS RENT FREE UNFURNISHED ACCOMMODATION VALUED ?

LAW APPLICABLE, AT THE OPTION OF THE ASSESSEE, UPTO 30.9.2001.

For the purposes of calculating perquisite value of rent free residential accommodation, theemployees have been classified into three categories as follows: -

y Government employees.y Public Sector or Semi Government employees.y Employees in the private sector.

For the first category of employees, the of the rent free unfurnished Accommodation istaken as the rent payable by such employee in accordance with the Government Rules forallotment of residences to its officers.

In the case of second category of employees, the value of rent free unfurnishedaccommodation is taken at 10% of the salary of the employee for the period during which itis occupied by him. However, where the Fair Rental Value of the accommodation is less than10% calculated above, the Assessing Officer is empowered to restrict the value of theperquisite to such Fair Rental Value.

In the case of third category of employees, the value of rent free unfurnishedaccommodation is taken 10% of salary plus excess of Fair Rental Value over 60% of salary,if the property is located in the four metros. In any other place, the value will be taken as10% of salary plus excess of Fair Rental Value over 50% of salary.



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Under the new Rule 3, for purposes of valuation of perquisite of accommodation, employeesare of two categories only- Union. & State Govt. employees and Others.

WHAT IS THE NEW DEFINITION OF "SALARY' FOR THIS PURPOSE ?

The definition of "salary' for calculating perquisite value is the same as per earlier Rules.The only change is that, medical allowances and reimbursement for treatment of seriousillnesses as prescribed in provision below Section 17 (2) (vi) have now been excluded.

For the purpose of calculating the perquisite, 'salary' includes basic salary or wages, D.A.,Bonus, Commission, Fees, taxable allowances as well as payments made by the employer(like Income-tax, electricity, gas etc.).

WHAT IS FAIR RENT?

'Fair rent'is the rent which a similar accommodation is able to get in the same locality orthe Municipal value of the accommodation, whichever is higher.

Where the accommodation is hired by the employer, it is the actual rent paid for theaccommodation.

Where it is ownedby the employer, maintenance expenses of garden and salary of thegardener, if borne by the employer, are also to be taken into account.

HOW IS RENT FREE FURNISHED ACCOMMODATION VALUED?


Where the accommodation is furnished, the perquisite value of unfurnished accommodation

is increased in all the above three categories by the actual hire charges for the furniture or10% per annum of the original cost of furniture, if it is owned by the employer.

HOW IS A RESIDENCE, PROVIDED AT CONCESSIONAL RATES, VALUED?


First, the perquisite value of the accommodation is determined in the above manner as if itwas provided free of rent. From the amount so, determined, a deduction is made of the rentactually paid by employee. The balance amount is the perquisite value to "be added to thetaxable salary.


Now, under the newly notified Rules, the value of residential accommodation provided bythe employer to the employee during the previous year relevant to the A.Y. 2002-03 shallbe determined on the basis provided

in the Table below:-


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CircumstancesWhere theaccommodation isunfurnished

Where the accommodation isfurnished

(1) (2) (3) (4)

1. Where the accommodationis provided by Union orState Government to their

employees either holdingoffice or post in connectionwith the affairs of Union orState any body orUndertaking under thecontrol of suchGovernment ondeputation.

License fee determinedby Union or Stategovernment in respect

of accommodation inaccordance with therules framed by thatgovernment [minus] therent actually paid by theemployee.

The value of perquisite as percol. (3) [plus] 10% perannum of the cost of furniture

(including TV sets, radio sets,refrigerators, other householdappliances, air plants or otherequipment) or if such furnitureis hired, the actual hirecharges payable for the same[minus] charges paid orpayable for it by theemployee.

2. Where the accommodationis provided by any otheremployer and

[i]] 10% of salary incities having populationexceeding four lacs as

per 1991 census;

ii) 7.5% of salary inother cities.

The value of perquisite as percol. (3) and

[plus]

10% per annum of the cost offurniture (including televisionsets, radio sets, refrigerators,other household appliances,air conditioning plant orequipment or other similarappliances or gadgets)orif such furniture is hired, bythe actual hire chargespayable for the same

[minus]

any charges paid or payablefor the same by the employee

(a) where theaccommodation is ownedby the employer or

In respect of the periodduring which the saidaccommodation wasoccupied by theemployee[minus] therent, if any actually paidby the employee

(b) where theaccommodation is takenon , on lease or rent bythe employer

Actual lease rental paidor payable by theemployer or 10% ofsalary which ever islower [minus] the rent,if any, actually paid byemployee.

3. Where the accommodationis provided by the

employer 4Tspecified inSI.No. (1) or (2) above ina hotel (except where theemployee is given suchaccommodation for aperiod not Exceeding inaggregate 15 days on histransfer from one place toanother)

Actually paid byemployee.

24% of salary paid or payable

or

the actual charge paid orpayable to such hotel,whichever is lower, for theperiod during which suchaccommodation is provided[minus] the rent, if any,actually paid or payable by the


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employee

However, nothing contained in this sub-rule would be applicable to any accommodationlocated in a 'remote area 1 provided to an employee working at a mining site or an onshoreoil exploration site, or a project execution site or an accommodation provided in an offshoresite of similar nature.

Also, where on account of his transfer from one place to another, the employee is provided

with accommodation at the new place of posting while retaining the accommodation at theother place, the value of perquisite shall be determined with reference to only one suchaccommodation which has the lowervalue with reference to the Table above for a periodnotexceeding 90 days and thereafter the value of perquisite shall be chargedfor both suchaccommodations as per the above Table.

HAS THE SCOPE OF THE WORD "ACCOMMODATION" BEEN WIDENED ?

Yes. The scope of the word "accommodation" has been widened by clarifying that itincludes a house, flat, farm house, hotel accommodation, guest house, a caravan, mobilehome, ship etc. However, the value of any accommodation located ' in a remote area'

provided to an employee working at a mining site or an on-shore oil exploration site or aproject execution site or an accommodation provided in an offshore site will not be treatedas a perquisite. A project site for the purposes of this sub-rule means a site of project uptothe stage of its commissioning.

WHAT DOES REMOTE AREA MEAN ?

A remote area means an area located at least 40 kilometers away from a town having apopulation not exceeding 20,000 as per the latest published all India census. Off-shore sitesof similar nature do not have to meet any requirement of distance.

ARE FREE EDUCATIONAL FACILITIES TAXABLE AS A PERQUISITE?


The basic rule is that any expenditure incurred by the employer in providing educationalfacilities to any family member of the employee normally is a perquisite.

Where the educational institution is run by the employer, the value of this perquisite is thecost ofeducation in a similar institution in or around the same locality.

THE LAW APPLICABLE FOR TAXATION OF PERQUISITES W.E.F. 1.4. 2001.

Under the new rules, free or concessional education shall be valued in a manner assumingthat such expenses are borne by the employee, and would cover cases where an employermay be running, maintaining or directly or directly financing the educational institution. Anyamount paid by the employee for such facilities or services shall be deducted from theabove amount. However where such educational institution itself is maintained and ownedby the employer or where such free educational facilities are provided in any institution byreason of his being in employment of that employer, the sub-rule shall not apply if the costof such education or such benefit per child does not exceed Rs. 1000 p.m.


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IS PERQUISITE VALUE OF MOTOR CAR PROVIDED FOR OFFICIAL USE CHARGEABLETO TAX?

No. As per chart given below:-

Circumstances Engine Cubic capacitydoes not exceed 1.6 litres.

Engine Cubic capacityexceeds 1.6 litres.

If motor-car is used wholly andexclusively in the performance ofhis official duties.

No value if specifieddocuments are maintained

by the employer.

No value if specifieddocuments are

maintained by theemployer.

WHAT IS PERQUISITE VALUE OF MOTOR CAR PROVIDED FOR PERSONAL USE?


Usually, where the car is owned or hired by the employer, the perquisite value isdetermined as the expenditure inferredby the employer on the maintenance and running of

the motor car, including emoluments, if any, of the driver and for the normal depreciationattributable to the use of the car for theprivate purposes of the employee.

LAW APPLICABLE FOR TAXATION OF PERQUISITE OF MOTOR CAR W.E.F. 1.4.2001.

Circumstances Engine Cubic capacitydoes not exceed 1.6 litres

Engine Cubic capacity exceeds 1.6litres.

If car is used exclusivelyfor private or personalpurposes of theemployee or anymember of hishousehold & the runningand maintenance aremet or reimbursed bythe employer

Actual amount ofexpenditure incurred bythe employer on therunning and maintenanceof motorcar

(+)

remuneration, if any,paid by the employer tothe chauffeur

(+)

depreciation of the carand

(-)

any amount charged bythe employer for such

Actual amount of expenditureincurred by the employer on therunning and maintenance ofmotorcar

(+)

remuneration, if any, paid by theemployer to the chauffeur

(+)

depreciation of the car and

(-)

any amount charged by theemployer for such use by theemployee


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use by the employee

IF ON THE BASIS MENTIONED ABOVE, DETERMINATION OF THE PERQUISITE VALUE OFCAR PRESENTS ANY PRACTICAL DIFFICULTY, WILL THE PERQUISITE BE COMPUTED?


The perquisite value, will be determined as under:-

Value of perquisite per calendar month upto 30.9.01

Where the horsepower ofthe car does not exceed 16or the cubic capacity of theengine does not exceed1.88 litres

In the caseof other cars

1 . Where the car is owned or hired by theemployer and all expenses on itsmaintenance and running are met orreimbursed to assessee by employer.employee's private or personal expenses areborne by the employee.

Rs.600 upto 30.9.01(Rs.300 upto 2.6.95)

Rs. 800 upto30.9.01(Rs.400 upto2.6.95)

2.Where the car is owned or hired by theemployer but the running & maintenanceexpenses for the employee's private orpersonal are borne by the employee

Rs.200 upto 30.9.01(Rs.100 upto 2.6.95)

Rs 300 upto30.9.01(Rs.150 upto2.6.95)

Under the new Rules, w.e.f. 1.4.2001, the calculation of Value of Perquisite per calendarmonth of car, if used partly in the performance of duties & partly for private or personalpurposes of his own or any member of his household is determined as given here-in-below:-

CircumstancesEngine Cubic capacity does notexceed 1.6 litres.

Engine Cubic capacity exceeds1.61t.

(i) maintenance andrunning are met orreimbursed by theemployer.

Rs.1200 (plus Rs.600, if chauffeuris also provided to run the car).

Rs.1600 (plus Rs.600, ifchauffeur is also provided torun the car).

(ii) maintenanceand running forsuch private orpersonal use arefully met by theassessee

Rs.400 (plus Rs. 600, if chauffeur isprovided by the employer to run thecar).

Rs.600 (plus Rs.600, ifchauffeur is also provided torun the car).


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HOW WILL THE PERQUISITE BE COMPUTED WHERE THE EMPLOYEE OWNS AMOTOR CAR BUT THE ACTUAL RUNNING & MAINTENANCE CHARGES (INC1UDINGREMUNERATION OF THE CHAUFFEUR, IF ANY) ARE MET OR REIMBURSED TO HIMBY THE EMPLOYER?

The perquisite value in such case will be determined as under:-

Circumstances Engine Cubic capacitydoes not exceed 1.6 lt

Engine Cubic capacityexceeds 1.6 It.

(i) such reimbursement is for theuse of the vehicle wholly andexclusively for official purposes.

No value if specifieddocuments aremaintained by theemployer.

No value if specifieddocuments are maintainedby the employer.

(ii) such reimbursement is for theuse of the vehicle partly forofficial purposes & partly forpersonal or private purposes ofthe employee or any member ofhis household.

Subject to the provisionscontained in clause (B) ofthis sub-rule, the actualamount of expenditureincurred by the employer

(-)

Rs.1200 (plus Rs.600, ifchauffeur is also providedby the employer to runthe car).

Subject to the provisionscontained in clause (B) ofthis sub-rule, the actualamount of expenditureincurred by the employer

(-)

Rs. 1600 (plus Rs.600, ifchauffeur is also providedby the employer to runthe car).

HOW WILL THE PERQUISITE BE COMPUTED WHERE THE EMPLOYEE OWNS ANYOTHER AUTOMOTIVE CONVEYANCE BUT THE ACTUAL RUNNING MAINTENANCE

CHARGES ARE MET OR REIMBURSED TO HIM BY THE EMPLOYER?

The perquisite value, will be determined as under:-

Circumstances Cubic capacity of enginedoes not exceed 1.6 litres.

Engine Cubic cap. exceeds 1.6litres

(i) where suchreimbursement is for theuse of the vehicle wholly &exclusively for officialpurposes. No value ifspecified documents aremaintained by theemployer. Not applicable

No value if specifieddocuments are maintainedby the employer.

Not applicable

(ii) such reimbursement isfor the use of the vehicle

Subject maintenance of specified documents by theemployer, the actual amount of expenditure incurred by the


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partly for official purposesand partly for personal orprivate purposes of theemployee.

employer (-) Rs. 600.

HOW IS PERQUISITE VALUE CALCULATED FOR USE OF CAR FOR PRIVATE

PURPOSES, PROVIDED AT CONCESSIONAL RATES?

As per the old andthe new rules, firstly, the value of the perquisite has to be arrived at asgiven above and then from the amount so determined, deduction is made from the actualamount paid by the employee for private use of the car. The balance is the perquisite valuein this case.

WHAT IS THE LAW APPLICABLE W.E.F. 1.4.2001 WHERE SECOND ANDADDITIONAL CARS ARE PROVIDED BY EMPLOYER?

Such other cars shall be deemed to be for personal use and the value of perquisite shall be

computed accordingly. Where fuel and upkeep cost of the employees, car is borne orreimbursed by the employer, the amount reasonably attributable to business use is not tobe charged as perquisite. For this, user details in the form of log books; odometer readingsetc. should be maintained.

AS PER NEW RULES WHAT IS THE DOCUMENTATION THAT NEEDS TO BEMAINTAINED FOR CLAIMING HIGHER AMOUNT OF OFFICIAL USE IN RESPECT OFCARS?

For claiming higher amount of official use in respect of reimbursement of car expenses orwholly official use of car provided by an employer, the following details and documents need

to be maintained:-

i) the employer has maintained complete details of journeys undertaken for official purposewhich may include date of journey, destination, mileage and the amount of expenditureincurred thereon;

ii) the employee gives a certificate that the expenditure on claimed trips was incurredwholly and exclusively for the performance of his official duty;

iii) the supervising authority of the employee, wherever applicable, gives a certificate to theeffect that the expenditure was incurred wholly and exclusively for the performance ofofficial duties.

ARE THE RULES OF VALUATION FOR EMPLOYEE OWNED CARS BE TAKEN TO APPLYTO CONVEYANCE ALLOWANCE REGULARLY PAID OR PAYABLE TO THE EMPLOYEE?

No, these rules of valuation for employee owned cars should not be taken to apply toconveyance allowance regularly paid or payable to the employee under terms ofemployment or otherwise. The conveyance allowance is a cash disbursement and is to be


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taxed separately as an allowance subject to the provisions contained in Section 10(14). Thepresent rules provide for the computation of value of perquisite where the expenses on therunning or maintenance of employee owned car is met or reimbursed by. the employer.

WHAT IS THE MOST IMPORTANT CHANGE TO BE KEPT IN MIND WHILECALCULATING THE PERQUISITE VALUE OF CARS?

One of the most important changes incorporated is in the cubic capacities of motorcars.

Previously, the cubic capacities of small motorcars was specified as not exceeding 1.88 litreswhereas now the limit is 1.6 litres.

WHAT IS PERQUISITE VALUE OF FREE SUPPLY OF GAS, ELECTRICITY AND WATERFOR HOUSE-HOLD CONSUMPTION?

LAW APPLICABLE, AT THE OPTION OF THE ASSESSEE, UPTO 30.9.2001.

In case the supply is made from resources owned by the employer, the perquisite value is'Nil'. Where the supply is taken from third party, the perquisite value would be the expensesincurred by the employer.

In case the supply is partly for official and partly for private purposes, the perquisite value isits actual cost to the employer or 6.25% of salary, whichever is Less,


For free supply of gas, electricity and water for household consumption the old rules alreadyprovide that the amount paid by the employer to the agency supplying the amenity shall bethe value of perquisite. However, when the supply is made from employer's own resources,the value of perquisite was taken as Nil. The separate provision in the old rules of valuationat 6.25% of salary of the taxpayer for part official use is discontinued. Under the new ruleseven where the supply is made from the employer's own resources, the manufacturing cost

per unit incurred by the employer would be the value of perquisite. Any amount paid by theemployee for such facilities or services is reduced from this amount.

WHAT IS THE VALUE OF PERQUISITE OF HOUSEHOLD SERVANTS PROVIDED BYTHE EMPLOYER?

LAW APPLICABLE, AT THE OPTION OF THE ASSESSES, OTTO 30.9.2001.

The perquisite value w.e.f. 2.6.95 is taxed as:-

When employer reimburses

salary of servant engaged byemployee

When servant is provided

by employer

1. Gardener, sweeper andwatchman.

100% salary taxable. Rs. 120 p.m. Per person.

2. Any other servant. 100% salary taxable. 100% salary taxable.


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THE LAW APPLICABLE FOR TAXATION OF PERQUISITES W.E.F, 1.4. 2001.

Value of free service of all personal attendants including a sweeper, gardener, or watchmanis to be at actual costto the employer. Where attendant(s) is provided at the residence ofemployee, full cost will be taxed as perquisite in the hands of employee irrespective ofdegree of personal service rendered to him. Any amount paid by the employee for suchfacilities shall be reduced from the above amount.

IF THE EMPLOYER GIVES OPTION TO ITS EMPLOYEE 'TO BUY ITS SHARES, IS IT A

TAXABLE PERQUISITE?

Prior to 1.4.2001, stock options were taxed at two stages i.e., as perquisite (on the amountrepresenting the difference between the exercise price and the fair market value on the dateof exercise), and as capital gains.

With effect from 1.4.2001 (relevant to assessment year 2001-2002) onward, stock optionsissued as per guidelines of the Central Government are to be taxed only once, at the time ofsale, as capital gains. In cases, where perquisite has been assessed with reference toexercise of the option by the employee under Section 17(2), the fair market value at thetime of exercise of the option shall be the cost of acquisition of share for working out thecapital gains. The relevant guidelines of the Central Government have been issued videN

otificationN

o.l021(E) dt. 1.10.2001. Stock options not in conformity with the aboveguidelines-(non-qualified stock options) shall continue to be taxed at both the stages.

WHAT IS THE PERQUISITE FOR USE BY THE EMPLOYEE OF AN ASSET OWNED BYTHE EMPLOYER?

This perquisite is to be charged at the rate of 10% of the original cost of the asset asreduced by any charges paid for such use. However, Computers and laptops are exemptFurther, the value of perquisite for an asset used for income for more than ten years wouldbe taken as Nil.

IS AN AMOUNT SPENT ON MEMBERSHIP FEE BY THE EMPLOYER ON THEMEMBERSHIP OF THE EMPLOYEE IN A PROFESSIONAL INSTITUTION A TAXABLEPERQUISITE?

Yes. It is a taxable perquisite.

AS PER NEW RULES WHAT IS THE POSITION OF CLUB EXPENSES BORNE BY THEEMPLOYER?

Club expenses of employees borne by employers are already charged as perquisite by virtue

of Section 17(2)(iv). To formalize the issue, now it has been specified that annual andperiodical club fees paid by the employer is chargeable as a perquisite. However to ensurethat basic facilities for the health and recreation of employees are not hit, health clubs,sports facilities etc provided uniformly to all classes of employees by the employer at theemployer's premises are exempt. Where such expenses on entertainment including mealsare for purposes of business and proper records for the same are maintained, no perquisitewould arise.


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AS PER NEW RULES WHAT IS THE POSITION OF INITIAL ONE TIME DEPOSITS ORFEES FOR CLUB MEMBERSHIPS?

The initial one time deposits or fees for corporate or institutionalmembership, where thebenefit does notremain with a particular employee after cessation of employment, areexempt.

AS PER NEW RULES WHAT IS THE POSITION OF CREDIT CARD EXPENSES BORNE

BY EMPLOYERS?

Credit card expenses of employees both business and personal, are often borne byemployers. Such credit card payments would ordinarily be chargeable to tax as a perquisite.However, these expenses are often incurred to entertain customers and clients for thepurposes of business. Therefore where such expenses on entertainment including meals arefor purposes of business and proper records for the same are maintained no perquisitewould arise.

AS PER NEW RULES WHAT DOCUMENTATION IS TO BE MAINTAINED BYEMPLOYERS FOR CREDIT CARD / CLUB EXPENSES BORNE BY THE EMPLOYERS TO

BE EXEMPT IN THE HANDS OF THE EMPLOYEE?

For credit card and club expenses to be exempt for business purposes, the followingdocumentation needs to be maintained:

(a) Complete details in respect of such expenditure maintained by the employerincluding the date of expenditure and the nature of expenditure;

(b) It is certified by the employee that such expenditure was incurred whollyand exclusively for the performance of official duty;

(c) Supervising authority of the employee, wherever applicable, gives a certificate for such

expenditure to the effect that the same was incurred wholly and exclusively for theperformance of official duties;

(d) Where an employee incurs expenditure on entertainment and claims thesame to have been incurred wholly and exclusively in the performance of his duties,details of such entertainment expenses including the nature and purpose ofentertainment andpersons entertained.

SOME VEHICLE IS SOLD BY EMPLOYER TO ITS EMPLOYEE, IS IT A TAXABLEPERQUISITE?

LAW APPLICABLE, AT THE OPTION OF THE ASSESSES, UPTO.9.2001. is a taxableperquisite only when the vehicle is sold below the market price. The difference betweenthe target price and the sale price would be the taxable


Often an employee or member of his household benefits from the transfer of movable asset(not being shares or Securities) at no cost or at a cost less than its market .Value from the


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employer. The difference between the cost of the movable asset (not being shares orsecurities) and the sum, if any, paid by the employee, Shall be taken as the value ofperquisite. In case of a movable asset, which has already been put to use, the original costshall be reduced by a sum of 10% of such original cost for every completed year of use ofthe asset.

AS PER NEW RULES DO ELECTRONIC GADGETS GET SPECIAL TREATMENT IF SOLDTO EMPLOYEE?

Yes. Owing to a higher degree of obsolescence, in case of computers and electronicgadgets, the value of perquisite shall be worked out by reducing 50% of the actual cost bythe reducing balance method for each completed year of use. Electronic gadgets in this casemeans data storage and handling devices like computer, digital diaries and printers. They donot include household appliance (i.e. white goods) like washing machines, microwaveovens, mixers, hot plates, ovens etc. In case of cars, similarly, the value of perquisite shallbe worked out by reducing 20% of its actual cost by the reducing balance method for eachcompleted year of use.

ARE GIFTS MADE IN KIND BY EMPLOYER TAXABLE PERQUISITES?


Yes. The perquisite value would be the market price of the gifted article.


It is customary in India, as it is in other parts of the world, to provide presents directly orindirectly in the form of vouchers or tokens to employees on social and religious occasionslike Diwali, Christmas, New Year, the anniversary of the organization etc. Such gifts uptoRs.5000 in the aggregate per annum would be exempt, beyond Rs.5,000 it would be taxedas a perquisite. However, gifts made in cash or convertible into cash, like gift cheques etc.

do not fall in the purview of this rule.

AS PER NEW RULES WHAT IS THE PERQUISITE IF THE EMPLOYEE AVAILS OF FREEOR CONCESSIONAL JOURNEYS IN THE CONVEYANCE(S) OWNED BY THEEMPLOYER'S BUSINESS FOR TRANSPORTATION?

Under the old rules where an employee avails of free or concessional journeys inconveyance owned by the employer's undertaking for the purpose of transport ofpassengers or goods, the value of perquisite was taken as Nil. However, under the newrules the value at which such benefit or amenity is offered by such undertaking to thepublic, the value of perquisite shall now be taken as such value as reduced by any amount

actually paid by the employee. The conveyance may be owned, leased or made available byany other arrangement by the undertaking.

However Journeytickets for leave travel, tours andtransfers which are already exemptunder Sections 10(5) and 10(14) would continue to be exempt

AS PER NEW RULES WHAT IS THE PERQUISITE IF EMPLOYEE AVAILS OF INTERESTFREE OR CONCESSIONAL LOANS?


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It is common practice to provide interest free or concessional loans to employees. The valueof such perquisite would be the excess of interest payable at prescribed interest rate overinterest, if any, actually paid by the employee.

The prescribed interest rate now is 10% p.a. for loans for housing/conveyance and 13%p.a. for other loans.

Perquisite value would be calculated on the basis of the maximum outstanding monthlybalance by the simple interest method. Such housing or conveyance loans must be for

'acquiring capital assets' i.e., house or conveyance, as the case may be, and not for repairsthereof, however extensive they may be.

For valuing perquisites under this rule, any other method of calculation and adjustmentotherwise adopted by the employer shall not be recognised for purposes of this rule.

IS THE PERQUISITE AVAILING OF INTEREST FREE OR CONCESSIONAL LOANSEXEMPT IN ANY CASE?

Yes, small loans upto Rs.20,000 in the aggregate are exempt. Loans for medical treatmentspecified in Rule 3A are also exempt, provided the amount of loan for medical

reimbursement is not reimbursed under any medical insurance scheme. Where any medicalinsurance reimbursement is received, the perquisite value at normal rates shall be chargedfrom the date of reimbursement on the amount reimbursed, but not repaid against theoutstanding loan taken specifically for this purpose.

WHAT IS THE POSITION OF LOANS OUTSTANDING AS ON 1 st APRIL, 2001?

It has been specifically clarified that the above sub-rule shall also apply to loans outstandingas on 1 st April, 2001, (if the new rule is applied from that date) or 1 st October, 2001 (ifthe new rule is applied from that date).

AS PER NEW RULES WHAT IS THE PERQUISITE IF EMPLOYEE IS PROVIDED WITHVACATION AND HOLIDAY FACILITIES?

The value of such perquisite shall be the expenditure incurred by the employer. This wouldalso apply to official tours extended as a vacation and family members accompanyingtaxpayers on official tours. However leave travel as per Section 10(5) and enjoyment ofholiday home facilities available uniformly to all classes of employees would remain exempt.

AS PER NEW RULES WHAT IS THE PERQUISITE IF EMPLOYEE IS PROVIDED WITHFREE MEALS?

The scheme of free meals as a staff welfare measure had been recognized and wasadmissible upto Rs.35 for each meal. The new rule does not treat as perquisite free meals ifthe cost per meal does not exceed Rs.50

Where any amount is recovered from the employee, such amount shall be reduced from thevalue of perquisite. Such free or subsidised meal should, however, be provided at officepremises or through non-transferable vouchers meant for only meals during working hours.


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Tea or similar non-alcoholic beverages and snacks - in the form of light refreshments duringworking hours are not charged as perquisite.

Also, meals in, remote areas as prescribed and similar off-shore sites as specified, shall beexempt.

However, provision of free meals by the employer in excess of Rs.50 would be treated asperquisite, as reduced by recoveries made from the employee.

AS PER NEW RULES WHAT WOULD BE THE PERQUISITE OF A BENEFIT OR AMENITYNOT INCLUDED IN THE RULES?

A benefit or amenity not included in the rules shall be valued at the cost to the employerwhere the employer pays for the benefit or amenity. Otherwise, it would be valued at theamount the employee would pay to acquire such benefit or amenity from the market. But,the benefit of conveyance to and from residence to place of work, periodicals and journalsrequired for discharge of work and expenses on telephones, including a mobile phone, shallnot be perquisite.

THE NEW RULES HAVE BEEN MADE EFFECTIVE FROM 1.4.2001 ALTHOUGH THEWERE ONLY NOTIFIED THROUGH NOTIFICATION NO. 313 DATED 25.9.2001. ISTHIS IS NOT INEQUITABLE?

No. While this Rule comes into force with effect from the 1 st day of April, 2001 it has beenprovided that the employee may, at his option, compute the value of perquisites madeavailable to him or any member of his household for the period beginning on 1 st day ofApril, 2001 and ending on 30th day of September, 2001 in accordance with the Rules, asthey stood prior to this amendment. Therefore, the employer has to obtain a declarationfrom each employee as to the option he wants to follow for purposes of tax deduction atsource.

However, administrative circulars and instructions relating to perquisites failing under thepurview of Rule 3 issued before the adoption of the new rules, shall stand superseded ormodified, as the case may be.

CAN AN EMPLOYEE EXERCISE OPTION FOR USING THE OLD OR NEW RULES FORTHE PERIOD DIFFERENTLY IN RESPECT OF DIFFERENT PERQUISITES?

No. It should be noted that the option to the taxpayer of using the old or new rules for theperiod specified above shall be applied uniformly in respect of all perquisites, in case of aparticular taxpayer. In other words, one cannot selectively value a particular perquisite bythe old rule and another one by the new rule.

WHAT ARE THE CONDITIONS FOR MEDICAL FACILITIES TO QUALIFY AS TAX FREEPERQUISITES?

Section 17 of the IT Act, exempts from tax :-


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However, the allowance referred to in (b) above should not be in the nature of a personalallowance granted to the assessee to remunerate or relating to his office or employmentunless such allowance is related to his place of posting or residence.

Earlier the exempt allowances were being specified through notifications issued by theCentral Government. With effect from 1.7.95, the details of allowances exempt is given inthe Income Tax Rules.

The following allowances are exempt to the extent and subject to the conditions indicated in

the Rules :-

a) Any allowance for meeting the cost of travel on tour or on transfer.

b) Any allowance, whether granted on tour or for the period of journey in connection withtransfer (including any sum paid in connection with transfer, packing and transportation ofpersonal effects on such transfer).

c) Any allowance granted to meet the expenditure incurred on conveyance in performanceof duties of an office/employment of profit. Provided free conveyance is not provided by theemployer.

d) Any allowance granted to meet the expenditure incurred on a helper where he isengaged for the performance of duties of any Office/employment of profit.

Any allowance granted for encouraging academic research in educational and researchinstitutions.

Any allowance for Purchase or maintenance of uniform for wear during the performance ofduties of an office/employment of profit.

ARE THE ABOVE ALLOWANCES TO BE ACTUALLY SPENT TO AVAIL OF THE EXEMPTION?

Yes, certainly. Any allowance (mentioned above) received but not actually spentwill be

taxable.

If ARE THERE ANY ALLOWANCES, WHICH ARE ONLY : exempt when received at aparticular place(s) ;pr area(s)? and do they have any upper ceilings : for exemption?

For the new amended Rules contain other allowances also .which are exempt (subject toceilings) in particular area(s) only. These special allowances are :-

i) Any special Compensatory Allowance, in the nature ofComposite Hill Compensatoryallowance or High Altitude, Allowance or Uncongenial Climate Allowance or Snow BoundArea Allowance or Avalanche Allowance;

ii) Any special Compensatory Allowance given which is in the nature of border areaallowance or remote area allowance or difficult area allowance or disturbed area allowance;

ii) Tribal Area Allowance;

iii) Allowance granted to an employee working in any transport system to meet his personalexpenditure during his duty performed in the course of running of such transport from oneplace to another place, provided that such employee is not in receipt of daily allowance;


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iv) Children Education Allowance;

v) Any allowance granted to an employee to meet the hostel expenditure of his child;

vi) Compensatory Field Area Allowance;

vii) Compensatory Modified Field Area Allowance;

viii) Any Special allowance, in the nature of counter insurgency allowance granted to the

members of armed forces operating in areas from their permanent locations for a period ofmore than 30 days.

It may be noted that the Dearness Allowance and City Compensatory Allowance granted toan employee are not covered by the Amended Rules. So, these allowances will clearly bepartof income and will have to be taken into account in the computation of income for thepurposes of deduction of tax at source.

The reimbursement of tuition fee is also not exempt.The transport allowance granted to anemployee to meet his expenditure for the purpose of commuting between the place of hisresidence and the place of duty is exempt to the extent of Rs. 800 per month videNotification S.O.No. 395(E) dated 13.5.98.

HOUSE RENT ALLOWANCE

The exemption from tax with regard to HRA is restricted to the least of the followingamounts:-

(i) Actual amount of H.R.A.

The amount by which actual rent paid by the employee exceeds 10% of his salary; and

ii) 50% of salary if the rented house is situated at Delhi, Bombay, Kolkata or Chennai, or40% of the salary in the case of other cities.

In simpler terms, the whole of H.R.A. is exempt from tax only if it is not in excess of 50% inthe 4 metropolitan cities, and 40% in the case of other cities, and further if the rent paid ismore than the total of H.R.A and 10% of the "salary. Otherwise, the excess has to be addedto the taxable income.

IN THE CASE OF EMPLOYEE RESIDING IN HIS OWN HOUSE, IS THE H.R.A EXEMPT FROMTAX ?

No. As he is not paying any rent, so exemption from tax with regard to H.R.A. is restricted

to 'Nil'. IF AN EMPLOYEE IS RESIDING ALONG WITH HIS PARENTS IN A HOUSEFOR WHICH NO RENT IS PAID BY HIM, WILL H.R.A. RECEIVED BY HIM BE TAXABLE?

Yes. The entire H.R.A. would be taxable f6r the same reason as given above. FOR THISPURPOSE WHAT DOES "SALARY" MEAN?

"Salary" includes dearness allowance, if the terms of employment so provide, but excludesall other allowances and perquisites.


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IS RENT RECEIPT COMPULSORILY GIVEN TO DDO?

No. It has been decided as an administrative measure that salaried employees drawinghouse rent allowance upto Rs.3,000 pm will be exempted from giving rent receipt to DDO.But in the regular assessment of the employee, the Assessing Officer is free to makeenquiry or request proof of payment of rent by assessee.

ARE THERE ANY OTHER ALLOWANCES WHICH GET SPECIAL TREATMENT UNDER THEI.T. ACT ? Yes. There are other payments e.g. leave travel concession etc., made by the

employer which get special tax treatment.

LEAVE TRAVEL CONCESSION

WHAT ARE THE LIMITS OF EXEMPTION IN L.T.C. is granted to an employee in connectionwith the journey on leave by him or his family. It is exempt from income tax within certainlimits as under : -

(a) Where journey is performed by rail; railway-fare in Second AC class by shortest route todestination.

(b) Where places of origin and destination are connected by rail but the journey isperformed by any other mode then Second AC class fare by shortest route to the place ofdestination.

(c) Where place of origin of journey and destination, or part thereof, are not connected byrail and journey is performed by any other transport; then

(i) If a recognised public transport system exists between such places the first class ordeluxe class fare of such transport by shortest route, or,

(ii) If in other case, Second AC class fare for the distance of the journey by the shortestroute, as if the journey has been performed by rail.

Exemption will, in no case exceed actual expenditure incurred in the performance ofjourney.

Leave Travel Concession Rules have been amended on the recommendation of the Fifth PayCommission to extend the facility of travel by air economy Y- Class to certain categories ofemployees of the Central Government with effect from 1st October, 1997.

Consequently, where the journey is performed on or after 1st October, 1997 by air, anamount not exceeding the air economy fare of the National Carrier by the shortest route tothe place of destination.

Also, where the entitlement was previously for air-conditioned Second Class Rail fare, it hasbeen upgraded to air-conditioned First Class Rail fare. [l.T. (First Amendment) Rules 1998,O.O.I. Gazette Notification No. S.O. 34(E) dt.

12th Jan. 1998; CBDTF.No. 142/85/97-TPL No. 105021].


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WILL THIS CHANGE APPLY ONLY TO GOVERNMENT EMPLOYEES OR DOES IT APPLYALSO TO EMPLOYEES OF OTHER SECTORS ?

The change applies to all employees.

HOW MANY TIMES CAN EXEMPTION BE CLAIMED ?

The assessee can claim exemption in respect of two such journey(s) in a block of 4 years.

For this purpose, the first block of 4 years was calendar year 1986-89. For a block of 4years, the journey performed in the first year following that block year is also eligible forexemption. Also, such journey will not be taken into account for determining the taxexemption for the succeeding block.

TO QUALIFY FOR EXEMPTION IS IT NECESSARY TO PERFORM ACTUAL JOURNEY ?

Yes, certainty. In case the L.T.C. is encashed without actually performing the journey theentire amount received by the employee would be taxed in his hands.

WHAT IS THE DEFINITION OF FAMILY FOR THIS PURPOSE?

For this purpose "family" means:-

(i) The spouse and children of the individual; and

(ii) The parents, brothers and sisters of the individual or any of them, wholly or mainlydependent on the individual.

HAS ANY CHANGE BEEN MADE IN RULES FOR EXEMPTION OF L.T.C. TO DENY THISBENEFIT TO LARGE FAMILIES?

Yes. Exemption of L.T.C. shall notbe available to more than two surviving children of anindividual after 1 st October 1998. However, this shall not apply in respect of children bornbefore 1.10.98 and also in case of multiple births after one child. If an employee has before1.10.98 even five children or more, exemption would still be available to all children.However, if an employee begets a third child after 1.10.1998, the L.T.C. for the third childwill not be exempt.

PAYMENTS OF PROFIT-IN-LIEU OF SALARY

The definition of PROFIT-IN-LIEU OF SALARY is an inclusive one and includes the

following:-

(a) The amount of compensation due to or received by an assessee from his employ Orformer employee at or Inconnection with the termination/or the modifications of the termsand conditions if employment.

(b) Contribution by employer to employee's Provident Fund in excess of 12% of salary ofthe employee.


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(c) Interest credited on the Provident Fund balance of the employee in so far as it exceedsthe rate fixed by the Central Government.

TAXATION OF AMOUNTS RECEIVED UNDER V.R.S.

IS COMPENSATION RECEIVER IN CONNECTION WITH THE TERMINATION OFEMPLOYMENT TAXABLE ?

Normally, it is taxable as profit-in-lieu-of-salary. However, Under the existing provisionscontained in clause (IOC) of section 10, any amount received by an employee of a publicsector company- any other company or an authority established under a Central, State orProvincial Act or a local authority or a co-operative society or a university or an IndianInstitute of Technology or a notified institute of management, at the time of his voluntaryretirement is not included in computing his total income. The exemption is available foramounts upto rupees five lakhs but only if the payment is in accordance with a voluntaryretirement or separation scheme as per the prescribed guidelines.

IS COMPENSATION RECEIVED BY A DIRECTOR UNDER INDUSTRIAL DISPUTE ACT,

EXEMPT?

Retrenchment compensation received by the Director under the Industrial Dispute Act orunder such similar Acts, Laws, Rules etc. to the extent the compensation does not exceed,the amount payable u/s 25F(b) of the Industrial Disputes Act, 1947. It, therefore, meansthat the compensation should not exceed the amount calculated @15 days wages for everycompleted year of continuous service, subject to a max of Rs. 50,000 . The CentralGovernment has the powers to enhance the ceiling/limit of such compensation or to relaxthe limit in deserving cases.

DOES NOT THIS EXEMPTION EXTEND TO COMPENSATION PAID BY NEW

MANAGEMENT?

This exemption also is extended to the compensation paid at the time oftransferof theUndertaking by the new owner or management resulting in interruption of service ormodification in the terms of service. The exemption also extends to the compensation paidat time of closing down of an industrial undertaking.

HAS THE EXEMPTION OF AMOUNT RECEIVED UNDER V.R.S NOW BEEN EXTENDEDTO CENTRAL AND STATE GOVERNMENT EMPLOYEES?

Yes. The exemption of amount received under V.R.S. is extended to employees of theCentral Government w.e.f. Assessment Year 2002-2003 and State Government employeesw.e.f. Assessment Year 2001-2002.

IF THIS EXEMPTION HAS BEEN ALLOWED TO ANY EMPLOYEE FOR ANYASSESSMENT YEAR CAN IT BE ALLOWED IN ANOTHER ASSESSMENT YEAR ALSO?

No. It shall be allowed to him only once in a life time.


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'GOLDEN HANDSHAKE'

WHAT ARE THE GUIDELINES FOR EXEMPTION FROM TAX OF COMPENSATIONRECEIVED OR 'GOLDEN HANDSHAKE 1 GIVEN TO AN EMPLOYEE UNDER A SCHEMEOF VOLUNTARY RETIREMENT?

The guidelines for bestowing the exemption from tax on the Golden Handshake are givenherein below:-

1. VRS applies to an employee of the company who has completed 10 years of serviceor 40 years

2. It applies to all employees and executives (excluding directors).3. It has been drawn to result in overall reduction in the existing strength of the

employees of the company.

4. Vacancy caused by the VRS is not to be filled up. 5. The retiring employee is not to be employed in other business belonging to the same

management.

6. The amount should not exceed Rs. 5 lacs.7. The employee has not Availed in the past the benefit of any other voluntary scheme.

The above guidelines are to be strictly followed, and in case, the payment on account ofvoluntary retirements are not strictly made as per the prescribed guidelines, the paymentwill not be exempt.

IN THE AMOUNT OF GOLDEN HANDSHAKE, WHETHER THE ENTIRE AMOUNTRECEIVABLE OR ONLY THE EXCESS OF THE AMOUNT ABOVE Rs. 5 LACS, IS TO BESUBJECTED TO INCOME-TAX ?

Only the amount representing the excess andabove the limit of Rs. 5 lacs is to be subjectedto Income-tax.

IS THE 'GOLDEN HANDSHAKE' RECEIVABLE BY AN EMPLOYEE OF A COMPANYWHICH HAS BEEN SET UP LESS THAN 10 YEARS AGO, EXEMPT?

No. The scheme is applicable to the employees who have completed 10 years of service witha company, so it will not be exempt.

CAN SUCH SCHEME ONLY BE DRAWN BY LOSS MAKING COMPANIES?

The guidelines require that the scheme should result in overall reduction in the existing

strength of the employees of the company. Therefore, the Scheme can be drawn even bythe profitmaking companies.

WHETHER INCOME TAX EXEMPTION OF GOLDEN HANDSHAKE IS AVAILABLE WHENTHE AMOUNT PAYABLE IS IN ADDITION TO NORMAL RETIREMENT BENEFITS LIKEP.F., GRATUITY, PENSION ETC. UNDER THE TERMS GOVERNING EMPLOYMENT?


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Yes. The provisions governing exemption of Golden Handshake are separate from theprovisions which govern taxation of provident Fund, Gratuity, Pension etc.

WHETHER ANY TDS HAS TO BE MADE FROM GOLDEN HANDSHAKE?

No. If all specified conditions are satisfied the employer need not deduct the TDS from theGolden Handshake.

HAS THERE BEEN ANY REGENT CHANGE IN THE GOLDEN HANDSHAKE SCHEME?

Yes, w.e.f. 1.4.2001, the words "termination of his service" have been added to the wordVoluntary retirement' and in the case of a public sector company 'a scheme of voluntaryseparation' have been added.

ENCASHMENT OP EARNED LEAVE

As the name suggests, it is the amount received by the employee for the leave period notavailed by him.

IS ENCASHMENT OF EARNED LEAVE EXEMPT AT THE TIME OF RETIREMENT?

Yes, subject to certain limits, if it relates to a Government employee his retirement fromservice on superannuation or otherwise, it is fully exempt.

In the case of other employees, the exemption from Income-tax is in respect of encashmentof upto the maximum of 8 months earned leave calculated at the average of Jast 10month's salary. There is also maximummonetary limitwhich is Rs. 1,35,360 for a personretiring on or after 1.7.95.

This limit is applied on the aggregate amount of such payments received from, two or moreemployers, whether received in the same year or in different years.

IS ENCASHMENT OF LEAVE DURING THE EMPLOYMENT ALSO EXEMPT?

No. Encashment of leave at anytime during the employment is taxable in full.

TAXATION OF COMMUTATION OF PENSION

WHAT IS THE AMOUNT OF EXEMPTION OF COMMUTATION OF PENSION?

In the case of Government employees the entire amount is exempt from tax. However, inthe case of non-Government employees the maximum amount exempt from tax is restrictedto the commuted value of I/3rd of pension where the employee also received gratuity.Commuted value of 50% of pension is, however, exempt.

TAXATION OF GRATUITY AT RETIREMENT


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WHAT IS THE AMOUNT OF EXEMPTION OF GRATUITY RECEIVED AT THE TIME OFRETIREMENT?

Gratuity is a payment in return of service and it is taxable as contractual salary. However,the I. T. Act exempts gratuity from Income-tax, subject to limits.

In case of Government employees, the whole of the death-cum-retirement gratuity isexempt from tax.

In the case of Industrial Workers, any gratuity received byan employee drawing monthlysalary (not exceeding Rs.2,500) only the feast is exempt:-

(a) 5 days salary (7 days in the case of seasonal employment) for each completed year ofservice or in excess of 6 months.

(b) Rs. 50,000 .

(c) The amount of gratuity actuallyreceived.

In other cases, the exemption is available in respect of amount of gratuity actuallyreceived.

IF GRATUITY IS RECEIVED FROM MORE THAN ONE EMPLOYER IN THE SAME YEAR,WHAT WILL BE THE CEILING?

The Ceiling of Rs.3,50,000 would apply to aggregate of gratuity from one or moreemployers in the same year in case of retirement or death etc. occurring after 24.9.97 Priorto that date, ceiling was Rs.2,50,000.

IF THE GRATUITY IS RECEIVED FROM DIFFERENT EMPLOYERS IN DIFFERENTYEARS WILL THE CEILING BE DIFFERENT?

No. The ceiling will stillbe Rs,3.5 lakhs or Rs.2.5 lakhs as specified in the preceding

paragraph.

EMPLOYER'S CONTRIBUTION TO PROVIDENT FUND

The annual contribution of employer to the balance in a employees' account in a recognisedfundis exempt to the extent it does notexceed the limit as given below: ~

(i) The employer's contribution should not exceed 12% of the employee's salary (excludingallowance and perquisites but including D.A if it forms the part of salary as per termsof/employment). If it exceeds, the excess over 12% is taxed.

(ii) Interest on the accumulated balances should not be paid at a rate higher than 12% perannum. Such interest in excess of this exempted limit forms part of the employee's salary,and the deduction under section 80-L is also not allowable in respect of such interest.

HAS THERE BEEN A CHANGE IN RATE OF EMPLOYEE'S CONTRIBUTION TO HISPROVIDENT FUND?


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Yes. After 22nd September 1997 it has been raised upto 12% (previously 10%) by theEmployee's Provident Fund 85 Misc. Provisions [Amendment Ordinance, 1997 (17 of 1997)].

EMPLOYER'S CONTRIBUTION TO SUPERANNUATION FUND

HAS THERE BEEN A CHANGE IN RATE OF DEDUCTION ALLOWED ON ACCOUNT OFINITIAL CONTRIBUTION THAT AN EMPLOYER MAY MAKE FOR PAST SERVICES OFEMPLOYEE ?

Yes. Upto 21st Sept. 1997 the tax deductible contribution by an employer wasupto 25% of the annual salary of the employees. Now this limit has been increased to 27%of the employee's salary for each year. [I.T. (Second Amendment) Rules 1998, G.O.I.Gazette Notification No. S.O. 50(E) dt. 16th Jan. 1998; CBDT F.No. 142/79/97-IPL No.105071.

HAS THERE BEEN A CHANGE IN RATE OF ANNUAL CONTRIBUTION TO APROVIDENT FUND BY EMPLOYEE AND EMPLOYER?

Yes. After 22 nd September 1997, the annual contribution by an employer and employee(taken together) to a superannuation fund in respect of any particular employee shall not

exceed 27% (previously 25%) of his salary, for each year.

ESOPs OR SWEAT EQUITY

ESOPs or SWEAT EQUITY is the stuff that has made crorepatis of even car-drivers inCompany(s) like Infosys. These are relatively new in India but gradually becoming the mostfavoured portion of remuneration in private Company (s).

WHAT ARE ESOPs?

ESOPs or "Employees Stock Options Plans" is the generic term for a basket of instruments

and incentive schemes that find favour with the new upward mobile salary class and whichare used to motivate, reward, remunerate and hold on to achievers.

ESOPs are generally granted in the from of directly allotted shares, debentures or warrants,stock options etc. These ESOPs can have numerous variations/ alternative options.Thecharacteristic facet of these ESOPs is that the compensation gets linked with the increase inthe price of the shares of the Employer Company or rather the net worth ofCompany.

VARIETY OF ESOPs

First variety of ESOPs is the scheme under which the employee is directly allotted shares by

the Company either at market price or at a concessional price. Source of purchase may beown funds of the employee or loan(s) from the Company / Banks / Financial Institutions.

Second Variety is when the employee has the 'option' to acquire the shares, debentures orwarrants of the Company at a price that may be the market price or lower than that. Afterthat there is a waiting period or Vesting Period when the employee has to wait to exercisehis option. After this is the 'Exercise-Period' during which the employee can exercise theoption to seek allotment of shares.


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There may also be a 'Lock-in Period' during which the employee can not sell these shares.

Third Variety may be 'Stock Appreciation Rights'. A specified number of shares arenotionally allotted to him at a certain price. At the end of a specified period, the price of theshares is noted and if the price has increased then the difference is paid to him by theCompany.

Another Variety may be 'staggered options' available to the employee over a period of time.

WHAT IS A STOCK OPTION?

It is a right, but not compulsion. The option-holder may or may not acquire the shares ofthe Company during a Specified period at pre-determined price, irrespective of the market-price at the time of giving the Stock option by the Company or at the time of exercise of theoption by the employee.

There are so many factors to determine the employee's decision. The employee ultimatelymay not exercise his option.

WHAT IS SWEAT EQUITY?

'Sweat Equity' means equity shares issued by the company to employees or directors at adiscount or for consideration other than cash for making available know how in the nature ofintellectual property rights or value additions, by whatever name called.

WHO CAN ISSUE SWEAT EQUITY?

All Company(s), whether private, public, listed or not-listed can issue Sweat Equity Shares,

WHAT IS THE DIFFERENCE BETWEEN 'SWEAT EQUITY' AND 'ESOPs?

There may be no difference as the objective of both is to remunerate the employee. SweatEquity is only for issue-of shares, debentures or warrants at a discount or even nilconsideration. ESOPs are incentive scheme(s) to motivate and retain productive employees.

CAN 'SWEAT EQUITY' BE ISSUED FOR FREE?

The Law has not set any limit on the rate of discontent for issue of shares to employees.

WOULD THE BENEFIT TO THE EMPLOYEE ON ACCOUNT OF FREE OR CONCESSIONALALLOTMENT OR SHARES, DEBENTURES OR WARRANTS BE NOT TAXED AS

PERQUISITES?

Yes and no, both! For A.Y. 2000-01, the difference between the market value and the costof acquisition of such shares, debentures or warrants was taxable as perquisites. However,for A.Y.2001-02 and subsequent year(s), the Law stands modified and such benefit(s) arenot to be taxed as perquisites. Mere grant of stock options or even exercise of such stockoptions whereby shares are in fact allotted does not attract tax as perquisite(s). They are tobe taxed only once when sold, as capital gains.


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BUT WHAT SHALL BE THE COST OF THE SHARES IF THE TAX HAD BEEN LEVIED ASPERQUISITE AT THE TIME OF EXERCISE OF OPTION?

In case where tax has been levied as perquisite at the time of the exercise of the option bythe employees, its fair market value at the time of exercise of option shall be the cost of theshare for working out the capital gain. This amendment is w.e.f. 1.4.01 and, applies inrelation to the A.Y. 2001-2002 and subsequent years.

DOES IT MEAN THAT TRANSFER OF CAPITAL ASSETS RECEIVED AS ESOPs or

SWEAT EQUITY WOULD NOT ATTRACT CAPITAL GAINS TAX?

No. Now w.e.f. 1.4.2001 i.e. for A.Y. 2001-02 and subsequent year(s), even when suchshare(s), debenture(s) or warrant(s) (received as ESOPs/Sweat Equity) are transferredunder a gift or an irrevocable trust, the transaction will be a taxable transfer. The transferconsideration will be the market value of such assets minus the cost paid by the employee,if any.

AT WHAT RATE IS THE LONG TERM CAPITAL GAINS IN RESPECT TOGDRs ISSUED TO EMPLOYEES UNDER ESOPQ TAXABLE?

On Income by way of dividends or long term capital gains Global Depository Receipts(GDRs) of an Indian company purchased by a resident employee of such company engagedin information technology software and/or services, as per a notified ESOP, is taxable @10% u/s 115 ACA.

DO THESE PROVISIONS EXTEND TO SUBSIDIARY COMPANIES, OTHERKNOWLEDGE BASED INDUSTRIES?

Yes. With effect from 1.4.02, i.e, in relation to the A.Y. 2002-2003 and subsequent years,this concessional rate of taxation now extends to income in respect of GDRs purchased byemployees of companies engaged in other knowledge based sectors also, viz.,

entertainment service Pharmaceuticals, bio-technology industry or service as may benotified. The concessional rate of taxation also applies to income from the GDRs purchasedby employees of subsidiary companies, whether domestic or foreign, of the abovecompanies.

WHAT IS THE POSITION OF TDS IN THE YEAR SUCH ESOPs OR SWEAT EQUITY AREGIVEN/ALLOTTED BY THE COMPANY?

When w.e.f 1.4.01 the Income Tax Act, 1961 does not consider concessional allotment ofshare(s), debenture(s) or warrant(s) be treated as perquisites so the question of deductingTDS is extraneous for A.Y, 2001-02 and subsequent year(s).

THE DEDUCTIONS FROM SALARY INCOME UNDER SECTION 16

The following deductions are available from salary income:-

1. Standard deduction.2. Deduction for professional or employment tax3. Deduction of entertainment allowance.


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STANDARD DEDUCTION

For A.Y. 1998-99, Standard deduction of a sum equal to 33-1/3% of the salary or Rs.20,000whichever is less, was allowed to an individual having income from salary.

Then w.e.f. 1-4-99 this limit of Standard deduction for assessees having salary income uptoRs. 1,00,000 was increased from Rs.20,000 to Rs.25,000, However, the benefit of standarddeduction to assessees having salary income of more than Rs. 5,00,000 was withdrawn.

This implies that an assessee earning salary income between Rs. 1 lac and Rs.5 lacs willonly be entitled to a Standard deduction of a sum equal to 33-1/3% of the salary orRs.20,000 whichever is less.

IS STANDARD DEDUCTION ALLOWABLE TO PENSIONERS?

Yes. The standard deduction is also allowable to pensioners.

DEDUCTION FOR PROFESSIONAL OR EMPLOYMENT TAX

Professional tax or employment tax, levied by a State Government is eligible as a deduction.The amount so paid can be deducted from the taxable salary.

ENTERTAINMENT ALLOWANCE

Upto A.Y. 2001-02 Entertainment allowance is first , included in the employee's salaryand then exemption is allowed as given here-in-below:-

(a) In the case of Government employee the least of

(i) Rs.5000 or,

(ii) 20% of salary (exclusive of any other allowance), is allowable as a deduction.

(b) In the case of non-Government employees least of thefollowing : -

(i) Entertainment allowance regularly received from his present employer from a date priorto 1.4.1955 or,

(ii) A sum equal to 1/5th of salary (exclusive of any other allowance, benefit or perquisite)or,

(iii) Rs.7,500, is allowed as a deduction.

HAS THERE BEEN A CHANGE IN ALLOWABILITY OF ENTERTAINMENT ALLOWANCE?

Yes. With effect from 1 st April, 2002, i.e. in relation to the assessment year 2002-2003 andsubsequent years, this provision relating to deduction of entertainment allowance standsomitted in the case of employees in continuous employment since the 1 st April, 1955 undersection 16.


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RELIEF ON ARREARS OF SALARIES

IS THERE A RELIEF AGAINST HIGHER TAX RATES WHEN SALARY IS PAID INARREARS OR IN ADVANCE?

Yes. If because of Payment of salary in arrears or in advance, or payment of compensationor provident Fund or gratuity etc., an assessee's income becomes assessable at a higher,

rate in a particular year than at which it would otherwise have been assessed, the AssessingOfficer is bound by Section 89(1) to grant relief as prescribed. This enables the assessee topay the tax at lower rates.

WHO WOULD GRANT RELIEF TO PENSIONERS U/S. 16, 88, 88B AND 88C?

The deductions from the amount of pension of standard deduction under section 16 and thetax rebate U/S 88B will be allowed by the DDO/Bank, before making payment to pensioner.For rebate under section 88 on account of contribution to Life Insurance, Provident Fund,NSC etc., if the pensioner furnishes the relevant details to the banks, the tax rebate willalso be allowed. Necessary instructions were issued by the Reserve Bank of India to the

Banks vide RBFs Pension Circular (Central Series) No. 7/C. D. R./ 1992 (Ref. Co. DGBA: GA(NBS) No. 60/GA. 64 (11 CVL)-91/92) dated the 27th April, 1992, and, they must befollowed by all the Banks, which have been entrusted with the task of payment of pensions.

WHICH FORM IS SPECIFIED FOR CLAIMING RELIEF u/s 89 (1)?

Yes, it is Form No. 10E

WHICH RULE IS RELEVANT FOR DETERMINATION OF RELIEF U/S 89(1)?

The relevant rule for determination of relief u/s 89(1) is Rule 21A of the I.T. Rules 1962.

HOW IS THE RELIEF U/S 89(1) COMPUTED?

It is computed as per following steps; -

1. Salary of current year it arrears + advances A

2. Tax on (A) at current rates B

3. Current Salary (i.e) Others excluded C

4. Tax on (C) at current rates D

5. Deduct: [D (-) B] E

6. Add arrears to total income of year to which it relates F

7. Tax on (F) at rates of that year G

8. Total income of that year (-) arrears H

9. Tax on (H) at rates of that year


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10.Extra tax for that year : [G (-) I}

11.Relief: {E (-) J}

12.Tax payable for the current year {B (-) Relief}

WHERE THE PAYMENT IS NOT IN THE NATURE OF SALARY PAID IN ARREARS ORIN ADVANCE OR GRATUITY OF PAST SERVICES OR COMPENSATION RECEIVED ATOR IN CONNECTION WITH THE TERMINATION OF EMPLOYMENT OR INCOMMUTATION OF PENSION WILL RELIEF U/S 89(1) BE APPLICABLE?

Yes. Even in such a case, as per Rule 21A(6), the CBDT may, having regard to thecircumstances of the case, allow such relief as it deems fit. Aggregate salary of theemployee who is or has been in receipt of salary from more than one employer.

The employee furnishes to the chosen employer details of the income under the head'Salary' due/received from the former/other employer and also tax deducted at source therefrom in writing and duly verified by him and by the former/other employer. Then thepresent employer will deduct tax at source on the both salary(s).

IS IT NECESSARY THAT DEDUCTIONS AND REBATES CLAIMED SHOULD HAVE BEENMADE OUT OF INCOME CHARGEABLE TO TAX?

Yes. Absolutely. It is to be strictly noted that deductions rebates under Chapter VI-A of theIT Act, 1961 are allowed only if the investments/payments are made out of the incomechargeable to tax of the financial year relevant to the assessment year under consideration.

IF THE TAX PAYER ALSO ENJOYS INCOME UNDER OTHER HEADS OF INCOMES /SOURCES, SHOULD THE EMPLOYER DEDUCT TDS ON SUCH OTHER INCOME(S)?

Not necessarily. An option to be is given U/S 192(2B) which enables a tax payer to furnishdetails of income under any head other than Salaries and to get TDS thereon.

The employer shall take such other income and tax, if any, deducted at source from suchincome, into account for the purpose of computing tax deductible under section 192 of theIncome-tax Act. From 1.8.98 the DDO's have been empowered to take into account the lossif any under the head "Income from House Property" for making deduction of Income-TaxU/S 192(1).

IF THE SALARY IS BEING PAID IN FOREIGN CURRENCY WHAT WOULD BE ITSTAXABLE VALUE?

For the purpose of TDS on salary payable in foreign currency, the value in rupees shall becalculated at the prescribed rate of exchange, for each such payment.

CAN TDS BE MADE AT A LOWER RATE OR NO DEDUCTION BE MADE ALTOGETHER?

Yes. Section 197 enables the tax payer to make an application in Form No. 13 to hisAssessing officer. In the absence of such a certificate from employee, the employer shoulddeduct income tax on the salary payable at normal rates (Circular No. 147 dated 28-10-1974).


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IF THE EMPLOYER DOES NOT ISSUE A TDS CERTIFICATE, IS THERE A REMEDY?

Yes. .As per Section 203, every person responsible for TDS must furnish a certificate to thepayee that tax has been deducted and to specify the amount so deducted. This TDScertificate, must be furnished within one month from the end of the relevant financial year.Even the banks deducting tax at the time of payment of pension or bank-interest arerequired to issue such certificates. This certificate is to be issued on the tax deductor's ownstationary.

If he fails to issue the TDS certificate to the tax payer concerned, he will be liable to pay, byway of penalty, under section 272A, a sum @ Rs.100 for every day during which the failurecontinues. However, the penalty shall not exceed the amount of tax deductible.

IS THE LIABILITY OF THE EMPLOYER TO DEDUCT AND PAY TAX U/S 192(1)ABSOLUTE AND WHAT IF HE FAILS TO DO SO?

Yes. Such liability is absolute and any failure would attract interest liability as well as otherpenal provisions. (CBDT F. No. 237/4/75-A/ PAC 11/23.11.76.]

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What Constitutes Salary Income