Income from Salary

IMP POINTS
Section 15 Employer and employee relationship is very important to determine the income as Salary. If More than one employer-Salary from each source is taxable under the head salary Example: Mr. A works in two places part time job. Income is calculated under the head salary in both the places.

Basis of Charge Sec 15 Whether salary taxed on payment or due basis?

Salary is taxable on due or receipt basis whichever

earlier Advance salary received or salary of the last month not received is taxed in the current previous year Example: April 2009 salary received in March 2009taxable in the previous year 2008-09 itself as it is received in 2008-09 period(receipt or due which ever is earlier) March 2009 salary received in April 2009-taxable in the previous year 2008-09 only(receipt or due which ever is earlier)

Salary under section 17(1)

Wages Any annuities or pension Any gratuity Any fees, commission Perquisites( received in kind) Profit in lieu of salary Advance of salary Any accretion(addition) due to contribution and interest on

provident fund paid out of the employers contribution. The contribution paid by employer under notified pension scheme

Different forms of salaryRetirement benefits

1. Leave encashment salary
2.Gratuity 3.Pension 4.Retrenchment compensation 5.Provident Fund [Examination point of view these five items are

very important]

Leave encashment
For every completed year of service employee is entitled to receive a certain number of days of paid leave.Employee either can take leave or en cash it while in service or after retirement.
Note: Any thing received while in service is normally taxable. After retirement there are some concessions given.

1.Leave encashment
1.Received while in Service Fully taxable(government or Non government employee) Received At the time of retirement

Government Employees-Exempted

Central/ State govt. Employees(2)

Non government employee (including local authority and corporation employees) (see next slide)

Non-government employee (including local authority and corporation employees)

*Average salary Basic + % DA comes only for retirement +fixed % of commission on

sales.

Note: Immediately before the The retirement

Least of the following Exempted out of leave cash received

a) 10 months average salary* b) Amount specified by the government-3,00,000

c) Actually received at the time of retirement

d) [Period of leave on 30 days basis for every completed year of service( -) leave availed while in service(-)leave encashed while in service] x (average salary)*

Exercise-1
X an employee of the central government receives

Rs.4,00,000 as cash equivalent to leave credit to his salary on 1st Feb. 2009X after his retirement. a)How much is taxable? b)Suppose X is a private employee and received Rs.15000 as salary and served 20 years and taken 3 months leave while in service at the time of retirement?

Answer
a) after the retirement leave encashment by government

employee is not taxable. b)If he is a private employee the least of the following is exempted from the amount received Rs.4,00,000 1.Actually received-Rs.4,00,000; 2.10 months average salary=15000 x 10=1,50,000; 3.Maximum limit=Rs.3,00,000 4. One month for completed year of service(-)leave availed while in service(-)leave en cashed while in service x *(average salary) = 20months-3month-0 months*(15,000)=2,55,000 How much is exempted? How much is taxable? The lowest of all four is Rs.1,50,000 is exempted from Rs.4,00,000 Therefore taxable leave encashment is Rs.2,50,000. (Rs.4,00,000-1,50,000)

Gratuity
1.Government Employee(Central,Sta te and local authority employees)(three) 2.Average salary: Not necessary
3.No of days in a month-Not necessary

Non Government employee under the payment of gratuity Act. Including statutory corporation Average salary:last drawn includes Basic+DA
No of days in a month-

Non Government employee under not covered under the payment of gratuity Act. Including statutory corporation Average Salary: Basic +DA comes for retirement +Fixed % of commission on sales No of days in a month-

26 days only

30 days only
Received while in service is fully taxable Received Gratuity at the time of retirement: Least of the following is exempted(next page)

4..Received while in Received while in service is service is fully taxable fully taxable Received Gratuity at the 5.Received Gratuity time of retirement: at the time of Least of the following is retirement exempted Exempted see in the next page.

Non Government employee under the payment of gratuity Act. Including statutory corporation

Non Government employee under not covered under the payment of gratuity Act. Including statutory corporation

The Least of the following is The least of the following is exempted from gratuity received: exempted from gratuity received: 1.(15/26) x (last salary drawn 1.(15/30) x (10 preceding months average salary) x (number of )x (number of years of service ) fully completed years of service) ie.Basic+DA Basic + % DA comes for (No commission please) retirement + Fixed Percentage of Year= above 6 months is commission on sales considered as one year. 2. Rs.3,50,000 2.Rs.3,50,000 3. Gratuity actually received 3.Gratuity actually received Note: Note: Fraction of the year is not If he worked more than one company collectively more than 6 months equal to considered

Pension
Regular pension received by the employee himself ( not dead )after the retirement is taxable as salary. Family pension(after the death of husband/wife) received by wife/husband comes under income from other sources as there is no employer and employee relationship after the death of husband who

was an employee.
Standard deduction is available ie. 1/3 rd of family pension or 15,000 whichever is lower is deductible from family pension.

Commuted pension-Sec.17(1)(ii)
Instead of receiving monthly pension some portion of

regular pension can be accumulated and can be received at the time of retirement a lump sum is known as commuted pension. 1. In case of Government employee-Exempted after retirement. Government employee means:-Central, state,local authority and corporation employees(totally 4) 2.Non Government If gratuity received Maximum 1/3 of the regular pension is not taxable. If gratuity is not received of the regular pension is not taxable. Note: above those limits are taxable for non government employees

Example commuted pension

Mr. X receives pension every month Rs.10,000. He wants to commute some portion of the

pension. ? How much can he commute if A) he is a state government employee B) he is a Bangalooru development authority employee. C) He is receiving gratuity from Karnataka Government. D) He is an employee of Shanthi Ltd.

Answer for commuted pension

A,B and C all are government employees therefore any amount of pension commuted are exempted . It is because government never exceeds the statutory limit of 1/3 or depends on the situation. D) If he an employee of Shanthi ltd. Max.1/3 if he receives gratuity ie 1/3(10,000)=Rs.3333 If he does not receive gratuity he can commute of pension ie. (10,000)=Rs.5,000. Note:remaining pension regularly received (after commutation)is taxable.

Pension scheme-(after 1st Jan 2004)

Applicable for those join after 1st Jan 2004 Contribution made by employer taxable Employer and employees contribution to the extent of 10% is deductible as saving U/S80CCD. Beyond 10% is not deductible. When pension received fully taxed in the hands of recipient Salary=Basic +DA if it comes for retirement benefit Example-next page

Annuity[17(1)(ii)]
Annual payment constantly paid by employer to

employee. It is a yearly grant. Even paid voluntarily it is taxable Annuity received from ex employer is taxed as profit in lieu of salary-taxed as salary.

Profit in lieu of salary

In connection with termination of employment If company wants a manager to quit immediately as per the

service rules he is paid a lump sum immediately. Such compensation is treated as salary. The compensation can be received from present or former employer.

Salary received from a United Nations organisation Not taxable in India as per sec 2 of the United
Nations (Privileges and Immunities) Act,1947. Pension also exempt

VRS[10(10C)] Voluntary Retirement scheme

Maximum amount of exemption is Rs.5,00,000.

Conditions: The same employee can not be re-employed in the same or any other company comes under the same management. As per prescribed guidelines Government services

Allowances City compensatory allowance

Fully taxable as salary
Compensation for higher cost of living in cities

Tiffin allowance, fixed medical allowance

Any amount received in cash is always taxable before the expenditure incurred

House rent allowance(10[13A])

Exemption will be lowest of (a) 50% of salary where residential accommodation is in Mumbai, Kolkata, Delhi or Chennai and 40% of at other place (b)(Rent paid minus 10% of salary) (c) Actual allowance paid.

There will be no tax exemption if the residential

accommodation is self occupied (not taken house for rent by employee or employee has not paid any rent for residential accommodation used by him [section 10(13A) of Income Tax Act and rule 2A]
Salary means basic plus DA (if forming part of retirement benefits) plus commission (if fixed as a percentage of turnover).

House rent allowance

Important points: 1.It is advisable to calculate claim month wise if any

changes in salary or house rent allowance or rent paid or place of stay during the previous year. 2. Salary to be estimated on due basis when you calculate the meaning of salary Place of work is not important but the place of accommodation taken is important either to claim 50% or 40% depends on type of city. After receiving rent allowance either he stays in his own house or rent accomodation is not taken rent allowance for such period is taxable.

Exercise-1
Mr. X works in Mumbai but stays in Pune and receives house

rent allowance of Rs.12,000. He pays Rs. 15,000 per month as rent.His Basic is Rs.20,000, DA-30% which will come for retirement purpose. A)Compute taxable House rent allowance if he has taken a rented house in Pune. B) If he stays in Mumbai and pays the same rent.

Answer-HRA
A) Rented house in Pune: Since salary, place of stay, HRA and rent paid are same

throughout the year we can calculate for the whole financial year. House rent Allowance received (12,000x12) Rs.1,44,000 Least of the following is exempted: 1.40% of salary*=26000 x 12 x40% 1,24,800 2.Rent paid-10% of salary* 1,48,800 [(15000-10% x26000) x 12] 3.Actually received 1,44,000 The Least is Rs.1,24,800 which is exempted out of HRA received.There fore taxable HRA is Rs.19,200 ie (1,44,0001,24,800)

*Salary means: 20,000+(30% x20,000)=26,000

Answer-HRA
b) Rented house in Mumbai Since salary, place of stay, HRA and rent paid are same

throughout the year we can calculate for the whole financial year. House rent Allowance received (12,000x12) Rs.1,44,000 Least of the following is exempted: 1.40% of salary*=26000 x 12 x50% 1,56,800 2.Rent paid-10% of salary* 1,48,800 [(15000-10% x26000) x 12] 3.Actually received 1,44,000 The Least is Rs.1,44,000 which is exempted out of HRA received.There fore taxable HRA is Zero ie (1,44,000-1,44,000)

*Salary means: 20,000+(30% x20,000)=26,000

Entertainment allowance[16(ii)]
In case of *government employees:Least of the following is deductible: 1. Rs. 5,000; 2. 20% of salary**; 3.Amount of entertainment allowance granted during the previous year. Non government employees are not exempted
*Government employee Central and State government employees

**Salary excludes any allowance Benefit or other perquisites

Special allowances[10(14)]
For official duties (after Reaching office)

Not directly relate to Official duty (General) To be Spent Fully Other Wise, amount not Spent taxable

1.Official travel/transfer Allowance to meet the cost 2.Conveyance allowance to meet customers 3.daily allowance on official Tour/journey 4.Helper allowance to carry Official documents 5. Research allowance 6. Uniform allowance to do Official duty

See in the Next slide

Not directly relate to Official duty (General)

1.Allowance for transport employees 2.Children education allowance &70% of allowance Or Rs. 6000 per month whichever is lower exempted Rs.100 per month per child max.two children.If in hostel Rs.300 extra per child for two children Rs. 800 per month. If handicapped person Rs.1600 per month is exempted. Depends on altitude/Place

3. Traveling allowance to commute from home to office 4. Other border area allowances

They are fixed. Whether spent Or not.Excess Taxable as they Are not given For official Duty

Amount spent or not, exemptions are given

Exercise
Chargeable to tax
(200 x2 x12+300 x12=8400 (100 x2 x12 +400 x12)=7200

Particulars

No. of Amount Children/ received Name from employer

Three Three 300 PM per child 400 per child per month

Exempted from tax

1.Educational allowance 2.Hostel expenditure 3. Transport allowance from house to office or vice-versa 4.Transport company employee daily allowance 5. -DO-

100 x2 x12=2400 300 x2 x12=7,200(limited to two children 800 x12=9600

-------

12000-9600=2400

12000 70%(72000) or 6000 per 72000-50,400=21600 month which ever is lower=50,400 6000 x 12=72000 or 70%(1,20000)=84000 1,20,000-72000=48000 Whichever is lower

72000

1,20,000

Exercise
Salary income and various allowances: Compute the gross salary of

Mr. Amal for the assessment year 2009-10on the basis of the following information: 1. Basic pay Rs. 8,000 per month 2. DA 40% of basic pay 3. City compensatory allowance-10% of basic pay 4.Medical allowance Rs.800 per month 5. Children educational allowance- Rs. 200 per month for three children 6. Hostel expenditure allowance-Rs. 400 per child per month for 2 children 7. Transport allowance- Rs. 18,600 8. Overtime allowance-Rs. 4000

Answer:

Computation of gross salary of Mr. Amal for the assessment year

2009-10:

Taxable allowances

1. Basic pay

Rs. 8,000 x 12 96,000 . DA 40% of basic pay(8000 x 40% x12) 38 400 3. City compensatory allowance-10% x 8000 x12 9,600 4.Medical allowance Rs.800 x 12 9,600 5. Children educational allowance-[ (Rs. 200-100)2 x 12+ 200 x 12] 4,800 6. Hostel expenditure allowance-(Rs. 400-300) 2 x 12 2,400 7. Transport allowance- Rs. 18,600-(800 x 12) 9,000 8. Overtime allowance-Rs. 4000 4,000 Gross salary 1,73, 800

Children education Rs. 100 per month per child for two children allowed. Hostel expenditure Rs. 300 per child per month for two children allowed

Perquisites
Casual emolument or benefit

attached to an office or position in addition to

salary or wages Something that benefits a man by going into his own pocket Whether perquisites should be given in Kind?

Perquisites
Need not be in kind.It can be in cash.

What are the conditions to be fulfilled to become

a perks?

Conditions To become perquisites 1.Allowed by Employer to Employee 4.Personal advantage To the employee

3.Directly Depend upon service 2.Allowed during Continuance Of employment 5. Derived by Virtue of Employers authority

Other conditions
Employer and employee relationship should exist

at any point of time-need not be an employee now. Legal origin is important-Un authorized advantage taken by employee without employers authority will not become perquisites.

Perquisites Includes 1.Rent free Accommodation Provided By employer

Accommodation Related(1-3) Including sweeper,gardener,watchman,gas, electricity,

4.Personal Obligations of Employee Met by employer

6.Fringe 3.value of Benefits Benefits provided Allowed Like furniture 5. Funds paid To employees Of Other 2.concessional In the accommodation By employer Than Accommodation Other than companies Provided RPF/Insurance By employer fund

Perquisites Taxable in the hands of employee

In the hands of employee

1. 2. (R)ent free or concessional rent accommodation (S)weeper in the house, gardener, watchman, personal attendant Free/concessional (g)as,electricity,water etc (E)ducational facility to employees family members including servants and depentant, parents, spouse and children(need not be dependent) (L)eave travel concession beyond 2 travels in a block period

3.
4.

5.

Category B 1.Car given by employer 2. Transport facility given by transport undertakings except Railway and airlines. ( only to Specified Employee)

Short form(RSGEL)

Special items in computation perquisites: Rent Free accomodation(RFA)

Companys House given at free of cost or rented

by company given to employee at free/cocessional rent. Step1. Unfurnished Accomodation

Central or State Government employees

Private employees

1.Central or state government employee-RFA

License fee of flat determined by

central government is perquisites in the hands of employee.

Fair market value of rent

is not important

RFA-Government employeeExercise
Exercise:- Mr. X is working in Central government

service given rent free accommodation in an government apartment at free of cost. The license fee prescribed by government is Rs.3000 but fair rental value of the house is Rs. 10,000. How much is taxable? Answer: Fair rent is not considered. The license fee Rs. 3,000 is taxable in the hands of Specified employee.

2. Private Employees(RFA)
It depends on Population of the city where

accommodation provided.
Population as per 2001 census

Exceeding population Population beyond 25 lakhs 10 lakhs-Up to25 lakhs Owned Owned By By employer Rented employer By company 10% of
15% of salary salary

Population Upto 10 lakhs

Rented
15%of salary

or amount paid
By company To outsider Whichever Is lower

Owned By employer
7.5% of Salary

Rented By company

Explanation to the diagram

1.If house property is owned by employer depends on the population of the city percentage differs. Big city it is 15% of salary, medium city it is 10% and small city it is 7.5% of salary for accommodation with out any facility like furniture. If house is rented by employer given to employee it is 15% of salary or rent paid by employer whichever is less taxable for specified employees irrespective of the type of city.

If Furniture provided by employer

If rented Actual hire charges payable

If owned

10% of original Cost of furniture

Meaning of salary for RFA

All Cash salary received or recivable in hand(

including taxable allowances) by the employee himself. Excludes all *perquisites and *DA which will not come under retirement purpose If any allowance is exempted ( like HRA(partly),

children educational allowance upto Rs.100 Per month or transport allowance up to Rs. 800 per month etc.) to the extent exempted is not included in the meaning of salary but balance is included in the meaning of salary.

Exercise-RFA
Value of rent free accommodation : Preetham is sales manager of a private company and for previous year 2007-08,he received the following (amts in Rs) Basic Salary 248000 Bonus 16000 Dearness allowance(forming part of salary) 30000 Project allowance 15000 Commission on sales 16000 City compensatory allowance 25000 Medical allowance 12000 He has been provided with a rent free accommodation in Bangalore owned by the employer. The population of Bangalore may be assumed to be 50 lakhs as per 2001 census Determine the taxable value of the perquisite in respect of rent free accommodation.

 He has been provided with a rent free accommodation in jaipur owned by the employer. The population of jaipur may be assumed to be 15lakhs as per 2001 census Determine : a) Meaning of salary for RFA b)the taxable value of the perquisite in respect of rent free accommodation. C) Calculate total taxable Salary

Solution:
a) Meaning of salary:-

All Cash salary received or recivable in hand including taxable

allowances by the employee himself. Excludes all *perquisites and *DA which will not come under retirement purpose

Any allowance is not taxed( like HRA(partly),

children educational allowance upto Rs.100 Per month or transport allowance up to Rs. 800 per month etc.) are not included in the meaning of

b)The valuation of rent free accommodation shall be: 15% of the salary i.e. 15% of (248000+ 16000+30000+15000+16000+25000+12000)=Rs 54,300 Note: Salary shall be taken on basis for the period for which accommodation has been provided. Employers contribution does not come to the assessee in cash as it is paid directly to the department. That is why I have mentioned the meaning of salary is cash salary received by the assessee himself.

C) Calculate total taxable Salary Basic Salary Bonus Dearness allowance(forming part of salary) Project allowance Commission on sales City compensatory allowance Medical allowance

248000 16000 30000 15000 16000 25000 12000 54300 416300

Rent free accommodation Total Taxable Salary

Perquisites Domestic servants, free supply of gas, electricity etc

Sweeper, gardener watchman personal assistant paid

by employer is perquisites to the extent of cost to the employer.

Monthly Fixed Education allowance

Training of employees is not perquisites Fixed educational allowance

Rs.100 per child per month is exempted per child. Maximum two children.Beyond is taxable Hostel Rs.300 per month per child exempted.Maximum two children.Beyond it is taxable to the employee

Payment of school fees and reimbursement of school fees

Taxable as perquisites fully

Education facility to children(own) in their own school or any other school/college

If less than Rs. 1000 per month exempted If exceeds Rs. 1000 per month cost of education in similar institution in the near locality (minus )Rs. 1000(minus) amount recovered. Example:- Employer pays Rs. 1500 per month to the school selected by employee for three children and one grand children.How much is taxable perquisites?

Leave travel concession for Family

Any place in India Only travel short route permissible Two Journey in four block period allowed. If Journey is not taken place with in two years, in the very next year if used it can be claimed. Flight- economy class fair allowed(not taxable). Train-Air conditioned first class fair allowed(Not taxable) Note:- Only Journey expenditure is exempted. Two children only who are born after 1st October 1998

Employees obligation met by employer either giving money or reimbursed is taxed in the hands of employee(17(2)(iv))

Example:1.Domestic servants salary reimbursed by employer. 2.Gas connection in the name of the employee but monthly gas bill paid by employer-Taxable to all employee whether specified or not. 3.If gas connection in the name of the company then there is no obligation to employer. Such perquisites is taxable in the hands of Specified employee.

Valuation of Interest free/concession loan

Difference between SBI interest rate on 1st day of the previous year-rate of interest charged by company from employee. SBI rate:on 1st April 2007 are:- Housing loan more than 5 years-10.75%, Upto 5 years10.25%,educational loan upto 4 lakhs-11.5%, above 4 lakhs-13.25% Exceptions- see in the next slide

Example
X is employed by A Ltd. on 1st June 2007, he has taken

interest free Housing loan of Rs. 14,00,000.How much is taxable? Ans:Lending rate upto 5 years is 10.25% per annum 10.25% x 14,00,000=1,19,583 is taxable. Suppose the interest charged by the company from assessee is 6%, then how much is taxable? =(10.25%-6%) x 14,00,000=Rs59500 taxable

Perquisites in respect of movable assets given to an employee for personal use.

10 % of Original cost of such asset purchased by

employer(- )reimbursed by employee If taken on rental basis by employer: Rent payable(-)reimbursed by employee Note: It is not on WDV value

Medical facilities
Medical facilities availed in employers hospital, is not

taxable If private Up to Rs.15000 is not taxable if reimbursed to specified employees.