Income from Salaries

Definition of Salary [Sec 17(1)]

1) Wages 2) 3) 4) 5) 6) Any annuities (even from ex-employer) or pension Any gratuity Any fees and commissions, perquisites (received in kind), profits in lieu of salary Advance of salary Any accretion to recognized provident fund to the extent of following
employers contribution in excess of 12% of salary Interest on balance in PF in excess of 9.5%

7) Accumulated transferred balance form unrecognized PF ac to a recognized PF ac to the extent it is chargeable 8) The contribution paid by employer under notified pension scheme 80CCD Place of accrual same place where services are rendered (if a non-resident is paid outside India for service rendered in India, it will be deemed as salary in India.
However, salary to Indian national by Govt. of India even for services rendered outside is deemed as to accrue/arise in India. Exemption is provided u/s 10(7) for allowances and perks in such a case.

Definition of Salary (Sec 15)

Employer and employee relationship is imp (partner is not an employee) Employer includes present, former and prospective employer There is not diff between salary and wages Salary foregone before it accrues is not taxable but not otherwise Director of a Co. is not an employee however commission paid to MD is salary and single premium annuity policy is chargeable as salary Amount received by college lecturer to correct answer sheets from a university is not salary as he is employee of college and not of university. It will be taxed as income from other sources. If this lecturer receives salary from college for academic and non-academic work will be taxed under income from salaries A MP or MLA is not an employee of Govt. of India Advocate General is not an employee of Govt. Judges have no employer but they are constitutional functionaries and mtheir income is taxable as salary. If more than one employer Mr. A works at two places as a part time employee. His salary from both the places will be taxed under Income from Salary Salary received from United Nations not taxed in India

Definition of Salary (Sec 15)

If no intention to pay agreement between school and teacher to pay salary but by another agreement identical sum has to be returned then this doesnt constitute as salary this is not real but fictitious. Actual intention to pay is important Surrender of salary Surrender to central govt. either by govt. employee or private employee not taxable Gift by employer taxable as salary City compensatory allowance fully tatxable

Pension
Pension from former employer
Pension received by person who was employee is taxed as salary After death of employee, pension received by spouse is taxed as income from other sources as there is no employer employee relationship

Pension received outside India by an employee who rendered services in India is taxable in India to all assesses (resident, not ordinarily resident and non-resident). Place of accrual of salary is imp from India or outside India

Leave encashment
Not related to casual leave Taxable if in service (same for govt. or non-govt. employees) If received at the time of retirement
Govt employees exempted Non Govt. employees (including local authorities and corporation) least of the following is exempt out of leave cash received
10 months average salary (basic + DA (only what comes for retirement) + fixed % of commission on sales) immediately before retirement Amount specified by Govt. (350,000) Actually received 30 day for every completed year (if more than 30 then based on service rules) leave availed leave encashed while in service) * average salary

For average salary do not consider fixed amount of commission on sales and fixed % of commission on purchase

Gratuity
Govt Employee (Central + State + local authority) Non-Govt. Employee covered under gratuity act (Including statutory corporation) Non-Govt. Employee not covered under gratuity act (Including statutory corporation)

Average Salary - NA

Average Salary last drawn Basic + DA

Average Salary Basic + DA (for retirement) + fixed % of commission on sales No. of days in a month 30 days

No. of days in a month - NA

No. of days in a month 26 days

Received while in service is fully taxable

Received while in service is fully taxable

Received while in service is fully taxable

Received at retirement - EXEMPT

Received at retirement least of following is exempt 1) 15/26* last Basic + DA * No. of years of service (above 6 months considered as one year) 2) 350,000 3) Actual received Note: if he worked more than one co. collectively more than 6 months equals to 1 year

Received at retirement - least of following is exempt 1) 15/30*average salary of last 10 months (Basic +DA+%commission) * no. of fully completed years 2) 350,000 3) Actual received Note: Fraction of the year is not considered

Commuted pension [Sec 17(1)(ii)]

Instead of receiving monthly pension some portion of regular pension can be accumulated and can be received (after retirement / voluntary retirement) as lumpsum is known as commuted pension Govt. employee (Central+State+Local authority+Corporation) EXEMPT Non Govt. employee - above the following is limit is taxable
If gratuity received 1/3rd of regular pension can be commuted which is not taxable If gratuity not received of regular pension can be commuted which is not taxable

Note: remaining pension regularly received is taxable Pension Scheme (after 1st Jan 2004)
Applicable for those who join after 1st Jan 2004 Contribution made by employer taxable Employer and Employees contribution to the extent of 10% (Salary+DA for retirement) is deductible in savings u/s 80CCD. Beyond 10% is not deductible When pension received fully taxed

Diff forms of Salary

Retrenchment Compensation [Sec 10(10B)] Least of following is exempt
Amount calculated as per Industrial Dispute Act 15 days Salary for every completed year and fraction beyond 6 months 5,00,000 notified by Govt. Amount received Note: if approved by Govt. under any scheme then such amount is fully exempt

Profits in lieu of Salary from present or former employees Sec17(3)

Termination of employment Modification of terms & conditions of employment Any payment from PF / keyman insurance policy including sum allocated as bonus on such policy Any payment from prospective employer before joining or after cessation from former employer

Remuneration for extra duties taxed as salary Voluntary Retirement Scheme [Sec 10(10C)] max 5,00,000 exempt given
Same employee can not be reemployed in same co. of any co. under same management

Provident Fund (PF)

Particulars Who maintains Statutory PF Govt. & Semi-govt. Recognized PF Private establishment having 20 or more employees Similar contribution by employer and employee Un-recognized PF Not recognized by commissioner of IT Act Employer contributes but there is not separate account of the employee Only when employer transfers his ac to employee's ac or converted to recognized PF is taxable More than 12% of salary and 9.5% interest is taxable Covered u/s 80C as savings Public PF Personal savings in post office by self employed etc. By employee (not employer)

Who contributes

Similar contribution by employer and employee

Employers contribution

EXEMPT

More than 12% of salary and 9.5% interest is taxable Rest exempt

NA

Employees contribution

Covered u/s 80C as savings

Covered u/s 80C as savings

Covered u/s 80C as savings

Note: Salary includes Basic + DA + fixed % of commission on sales

House Rent Allowance [10(13A)]

Exemption will be least of
50% of salary (if house in Mumbai, Delhi, Kolkata and Chennai) and 40% of salary for other places Rent Paid minus 10% of salary Actual allowance paid

Salary = Basic + DA for retirement There will be no exemption if the house is self owned or if he pays no rent and hence HRA becomes taxable Calculate claim monthwise if any change in salary or HRA or rent paid during the previous year Place of work not imp but place of house is imp for 50% or 40%

Computation of Salary
Salary is taxable on due or receipt whichever is earlier
Advance salary received or salary for the last month not received is taxed in the current previous year Loan/advance against salary is not taxable even if it is subsequently recovered from salary

If employer pays tax, then salary of employee = Net salary received + tax paid by employer Following deductions (Sec 16) from gross salary to be made
Entertainment allowance only for Govt. employees (not exempt but allowed as deduction) to the extent of least of following
Rs. 5,000 1/5 of Basic Salary Actual amt received

Profession Tax
Tax on employment under Article 276(2) of the Constitution of India

Special Allowance [10(14)]

For Official duties (after reaching office) - to be spent fully otherwise amt not spent is taxable
Official travel / transfer allowance to meet cost Conveyance allowance to meet customers Daily allowance on official tour Helper allowance to carry official documents Research allowance Uniform allowance to do official duty

Not directly related to official duties following allowed (even if not spent) excess is taxable
Transport allowance 70% of allowance or 6000 pm whichever is lower is exempt Children education allowance Rs. 100 pm per child max 2 kids. If in hostel extra Rs. 300 pm (Training is not an allowance/perk, Payment of school fees is perk) Traveling allowance to commute from home to office Rs. 800 pm (for Handicap 1600 pm) Backward area allowance Depends on altitude/place Medical allowance and Tiffin allowance taxable if not spent

Perquisites [10(14)]
Received in CASH or KIND Following conditions to be satisfied
Allowed by employer to employee Allowed during continuance of employment Directly depend upon service Personal advantage to the employee Derived by virtue of employers authority Even if received from former employer

Legal origin is imp unauthorized advantage taken by employee w/o employers authority is not a perk Perk includes
Rent free / concessional accomodation provided by employer (including sweeper, watchman, gardener, gas, electricity) Value of benefits provided like furniture in acco Personal obligation of employee met by employer Funds paid by employer other than recognized PF/insurance fund Fringe benefits

Taxation of Perquisites
Rent Free Acco (RFA)
Central/State Govt Employees: Licensee fee of flat determined by Govt. (fair rent not relevant) Private employees
If rented by company 15% of salary or amt paid whichever is lower If owned by employer
Population more than 25lacs: 15% of salary Population between 10 and 25 lacs: 10% of salary Population upto 10 lacs: 7.5% of salary

Salary means all cash salary including taxable allowances, excludes perks and DA not for retirement

Furniture
If owned: 10% of original cost If Rented: Actual hire charges

Furnished Acco in Hotel

24% of salary paid or payable only for period acco provided Actual amt paid Exempt if employees stays less than 15 days and acco given only when he is transferred to a new location

Taxation of Perquisites
Education to employer's children in school/college owned by employee
If less than Rs. 1000: EXEMPT If more than Rs. 1000: cost of education in similar institution in near locality minus 1000 minus amount recovered Only for own children (as many), grand children and children of relatives not allowed

Scholarship given by employer company is not taxable as perk

It should not be related to employment

Leave Travel concession (expense related to only travel)

Any place in India Short routs of travel allowed 2 journey in 4 year block period If journey not claimed in within 2 years, it can be claimed in next 2 years Flight economy class fair Train AC first class Max 2 children born after 1998 (twins/triplets are treated as one)

Taxation of Perquisites
Amt payable by employer on life of employee is taxable except if:
Recognized PF Approved superannuation fund Group Insurance, ESI Fidelity guarantee scheme

Valuation of Interest free/concession loan

Diff between SBI interest rate on 1st date of previous year and interest charged Exceptions
Aggregate Loan is less than Rs. 20,000 Taken for specified medical treatement

Movable asset given for personal use

10% of original cost paid by employer minus recovered from employee If taken on rental basis: rent payable minus recovered from employee

Sale of company asset at nominal value

Difference between WDV based on depreciation for every completed years and amount charged. (Electronics/Computer 50%, Car 20%, Others - 10%)

Taxation of Perquisites
Medical facility
Medical facilities availed in Employers hospital /Govt. hospital /hospitals recognized by IT Dept. If private upto Rs. 15000 not taxable if reimbursed to specified employees If bill is issued in name of employee but paid by employer: taxable for all employees Family means spouse, children, parents, brothers, sisters who are wholy or mainly dependent on him

Medical facilities outside India

Medical treatment expense: to the extent of RBIs permission is not taxable Travel: employee+relative / one attendant exempt provided cost doesnt exceed Rs. 200,000 Expense on stay of one relative / attendant allowed to the extent of RBIs permission

Car of employee but expense met by employer

Exclusively for private fully taxable Exclusively for official not taxable Partly for private / partly official -

Taxation of Perquisites
Car of employee but expense met by employer
Exclusively for private fully taxable Exclusively for official not taxable Partly for private / partly official: following allowed, excess is taxable
Upto 1.6 litres 1200 pm + 600 pm if driver paid More than 1.6 litres 1600 pm + 600 pm if driver paid

Car owned / hired by employer

Exclusively for private: all expense borne by employer +10% dep on original cost/hire charges Partly for private / partly official:
Upto 1.6 litres 1200 pm + 600 pm if driver provided More than 1.6 litres 1600 pm + 600 pm if driver provided

Nothing is deductible if all expense is recovered from employee