Tax Aspects of Employee

Compensation Package
Tax Deductions

Taxability of Salary
Income
Any thing received by a person due
to employee-employer relationship
is taxable under a separate head of
Income tax act i.e. Income from
Salary.
Thus income from salary includes
basic salary, all allowances, bonus,
incentives, perquisites,
leave
encashment etc.
Pension received from employer
after retirement is also taxable
under this head.

Taxability of Salary
Income
Tax treatment of employee compensation
package depends upon components of
the package.

This is so because there are special rules

for taxability of different components like
allowances, perquisites etc.

Tax Treatment Of
Allowances

Allowances Exempt Upto

A Certain Limit
If employer does not provide conveyance facility
for travelling between office and residence

An allowance may be granted to meet the cost of

this travelling (Typically called Transport
Allowance)

This allowance is exempt

Upto Rs. 1600 p.m.

For Physically Challenged

employees, it is Rs. 3200
p.m.

Allowances Exempt Upto

A Certain Limit
Any allowance given as

Children Education
Allowance

Children Hostel
Allowance

Is exempt upto
Rs. 1200 p.a. per
child for maximum
2 children

Rs. 3600 p.a. per

child for maximum
2 children

Allowance Which Are

Exempt Upto Actual
Expenditure
If employee has to travel to different
places for performance of official duties
Allowance granted to meet the cost of
such travel (Normally called
Travelling Allowance )
Exempt upto the full amount of travel
expenditure incurred for same
purposes.

Allowance Which Are

Exempt Upto Actual
Expenditure
For lodging and boarding expenses incurred during
official tour
Either an actual
reimbursement may be
granted OR

Employee may be given a

fixed allowance.

This allowance is normally called

Daily Allowance/ Boarding Allowance/Hotel
Allowance.

This allowance is also exempt upto the full amount

of hotel/food expenditure incurred by employee.

Allowance Which Are

Exempt Upto Actual
Expenditure
Allowance granted
to meet the cost of
local conveyance Is exempt upto the
incurred in
amount of actual
performance of
expenditure
official duties
incurred for the
(Normally called
purpose.
Conveyance
Allowance)

Allowance Which Are

Exempt Upto Actual
Expenditure
In educational and research institutes

Allowance granted for encouraging academic, research and

training pursuits (Research Allowance/Academic
Allowance/Teaching Allowance)

Is exempt upto the amount of actual expenditure incurred for the

purpose.

This allowance can be utilised for expenditure like journal

subscription, seminar fees or any other knowledge enhancement
purpose.

Allowance Which Are

Exempt Upto Actual
Expenditure
Helper
Allowance
granted to
meet the
expenditure
on helper
engaged for
help in official
duties.

Allowance Which Are

Exempt Upto Actual
Expenditure
Uniform
Allowance
granted to meet
the expenditure
incurred on
purchase or
maintenance of
uniform for wear
during the
performance of
official duties.

HRA
Exemption

Rent paid
by the
employee
minus
10% of
Basic
salary

50% /40%
of Basic
salary if
house is
situated in
Metro/ Non
Metro
Cities

Actual
amount of
H.R.A.
received.

Lowest of above three is

exempt.
Rent may be paid to anybody.

Lets Calculate.
Basic Pay

1,00,000

H.R.A.

60,000

Rent Paid

40,000

Location

Mumbai

Exempt HRA = 40,000- (10% of 1,00,000)=

30000

Lets Calculate.
Place of
Residence

Delhi

Noida

Mumbai

Salary
p.m.

40000

60000

80000

30000

50000

HRA p.m.

15000

12000

50000

10000

25000

Nil

10000

60000

20000

40000

Rent paid
p.m.

Patna Bangalore

Lets Calculate.
Particulars

Amount received (p.m.) Amount utilised (total)

Basic

1,50,000

H.R.A.

80,000

Transport Allowance

1,000

7,20,000 (house is in
Pune)
10000

Tour & Travelling

Allowance
Uniform Allowance

3,000

38,000

2,000

10,000

300

3,600

Education Allowance
City Compensatory
Allowance
P.F. Contribution @ 10%

2,000
15,000

Taxability Of
Perquisites
Perquisites are
various
facilities provided by the
employer to his employees
at free of cost or at
concessional rates.
Since an employee gets
these
facilities
due
to
employee-employer
relations, their value is
taxed in his hands under the
head salary.

Exempt perquisites
Medical treatment
of
employee/
family
member :

In
any
hospital
maintaine
d by the
employer.

In
any
hospital
maintaine
d
/
approved
by
the
Governme
nt

In
any
hospital
outside
India

Reimburs
e-ment of
Medical
Expenditu
re
upto
Rs. 15000
p.a.

Health
insurance
premium
paid by
employer
on
the
health of
employee.

Exempt perquisites
Any Conveyance facility for
journey between office and
residence.
Telephone
employees.

facility

to

Leave travel
concession
Leave travel concession for
employee and his family is
exempt from tax.
This
exemption
is
available
maximum for
2 journeys
performed in a block of 4
calendar years.
Available in respect of going to
any place in India only. Thus any
facility for going to a place out of
India is totally taxable.

For all these

cases, Family
means :

The
spouse
and children of
the employee
Parents,
brothers
and
sisters,
dependent on
the employee.

Taxable Perquisites
Following

are some of the

important perquisites taxable in
the hands of employees-

Residential
Accommodation
Residential

accommodation
provided to the employee by his
employer is taxable as follows :

Residential Accommodation
Where employer is the owner of
accommodation and accommodation
is situated in a city :

having
having
population
In any
population
between other place
of + 25
10 to 25
:
lacs :
lacs:
7.5% of
15% of
Salary
10% of
Salary
Salary

Residential Accommodation

Where employer himself

has
taken
the
accommodation on lease/
rent (in any city)
15% of Salary OR
rent
payable by the employer
whichever is lower

Taxability of ESOP
Granti
ng

Sale

Vestin
g

Exerci
se

Taxability of ESOP
In Income tax, ESOPs
are taxed at two stages
At
Exercis
e

At sale

Salary
Incom
e

Capital
Gains

Taxability of ESOP
The taxable amount of ESOP for
salary purpose is
the fair market value of the shares on
the date on which the option is exercised
by the employee
as reduced by
the amount recovered from the
employee in respect of such shares.

Taxability of ESOP
The taxable amount of ESOP for
Capital Gains purpose is
Sale price

as reduced by
the fair market value of the shares on
the date on which the option is exercised
by the employee

Interest free or Concessional

Loans
Loan given by the employer to
employee or his family member,
generates taxable perquisite in the hands
of employee as follows :
Simple interest calculated at the rate
charged by State Bank of India for the
loan of same purposes
Less
Interest actually paid by the employee

Car for official + personal

use
Car + Running Exp.

Other Perquisites
Contribution
to the
to an
extent
approved
superannua it
tion fund by excee
the
ds Rs.
employer is
1,00,0
taxable,
00 p.a.

Other Perquisites
Apart

from above, any obligation

of
employee
paid
by
the
employer is also a taxable
perquisite for all employees.
Taxable value is cost borne by
employer.

Treatment of P.F.
Contribution
Amount withdrawn from P.F.

Deduction From Salary

Any

professional tax paid by

employee during the previous
year is allowed as deduction from
Salary.

Reconciliation of CTC and Take

Home
CTC

xxx

Tax Deductions

Tax Deductions
From the income of the tax payer, certain
tax deductions are allowed.
These deductions are very good tool of tax
planning and one may substantially
reduce his/her tax liability by taking full
advantage of these deductions.
Broadly these deductions relate with
following areas-:

Tax Deductions-Purpose
Deductions for
investments made
by tax payers

Deductions for
encouraging savings
in the economy

Deductions against
medical nature
expenditure incurred
by tax payers.

Deductions for
Donations

Deduction to
handicap persons.

Sec. 80C - Insurance

Policies
Premium

paid on Life Insurance

Policy of self, spouse and children
is a tax deductible payment.
Amount
receive
back
from
insurance policy is fully tax freewhether received at the time of
maturity
of policy or death of
insured.
The amount of this premium
should not exceed 10% of Sum
Assured.

Sec. 80C-Other Investment

Options
Schem R.O.I.
e

Lock In

Tax Status

P.P.F.

15 Years

Interest is
Tax Free
Interest
taxable at
the slab
rate

8.6%

N.S.C. 8.1%

6 Years

Sec. 80C
Subscription
to
National
Savings Certificate.
P.F. Contributions
Subscription to units
notified scheme of
Mutual Fund (ELSS)

of a
any

Sec. 80C
Tuition fees
to any university,
college, school or other educational
institution situated within India for
the purpose of full-time education of
2 children of individual.
Repayment of Housing Loan

Sec. 80C
Term Deposit with a bank for a
minimum period of 5 years.
Subscription to notified bonds of
NABARD.
Deposit in Senior Citizen Savings
Scheme.
Five year Post Office Time Deposit

80CCD
Deposit

by the individual in his

account
under
National
Pension Scheme is eligible for
deduction under this section upto
10% of salary.
However amount received back
from NPS is taxable on receipt.

Maximum Limit
Aggregate of all
the
payments
mentioned earlier (except employer
contribution to NPS) is eligible for
deduction subject to maximum Rs.
150000.
For
contribution
in
NPS,
an
additional deduction of Rs. 50000
is available.

RGESS
Investment
in
listed
equity
shares/Approved MF in accordance
with Rajiv Gandhi Equity Saving Scheme
is eligible for deduction u/s. 80CCG.
Deduction amount
invested maximum

is
Rs.

50% of amount
25000.

The taxpayer should be a new equity

investor.
G.T.I. should be upto Rs. 12,00,000

Mediclaim Premium (Sec. 80D)

Mediclaim Premium and
Exp. On Preventive
Checkup
Self, Spouse and
Dependent
Children : Max Rs.
25000

Health

Parents : Max Rs.

25000 (30000 if
parents age more
then 60)

Other Deductions

Rs.
75000/1250
00

Exp.
on
maintena
nce
of
handicap
dependen
t relative

Other Deductions

Rs.
40000/600
00

Exp. On
treatme
nt
of
certain
disease
s

Other Deductions

Actual
amount
fully
allowed
Maximum
for 8 years

Interest
on
Higher
Educati
on Loan

Other Deductions

Excess
of
Rent
over
10%
of
income Max.
Rs.
24000
p.a

Rent
paid for
resident
ial
house
(if
no
HRA is
receive
d)

Donations :
Donation
to National Importance
Funds (notified by central govt.) :
100% of donated amount.
Donation to recognized charitable
organization : 50% of donated
amount.
Donation to political parties : 100%
of donated amount.

Interest on Housing Loan

Apart from deductions mentioned
earlier, interest on housing loan can
be claimed as set off from salary
income as follows :

Loan
taken
for
purchase/constructio
n
of
residential
house : Max. Rs.
200000

Loan
taken
for
repairing
of
residential house :
Max. Rs. 30000

Above 2 can not be

clubbed together.

Interest from Savings Bank

[80TTA]
An Individual taxpayer is
allowed a deduction upto
Rs.10,000.

...for interest on savings

Bank accounts with a Bank
or Post office .

Deduction for Handicap Persons:

Sec. 80U

Any person who is

suffering from
Permanent Physical
Disability or from
Mental Retardation

.is allowed as
deduction of Rs.
75000/125000 from
his Gross Total
Income.