SALARY INCOME (Sec15,16 & 17)

What is salary?

Payer & Payee More than one source Foregoing salary is salary income Tax free salary should include the tax paid by the employee

Basis of Charge

There must be an employer-employee relationship. Salary is chargeable to tax when it is due to be paid whether it is paid or not Salary is chargeable to tax when any amount is paid whether it is due or not That is salary is chargeable to tax on due or on receipt basis whichever is earlier. Arrears of salary paid to employee is chargeable to tax.

Salary means Basic salary and allowances Annuity Gratuity Commission Perquisite in lieu of salary Advance salary Employers contribution to PF Leave salary

PENSION
Uncommuted Pension Commuted Pension Commuted Pension

Govt. /Non Govt Taxable Employee Govt. Employee Exempted from Tax Non-Govt. It is fully or partly Employee exempted

COMMUTED PENSION (cont.)

Central /state Govt, With or without Local authority Gratuity employee Gratuity is received Non Govt. Employee
Non Govt. Employee Gratuity is not received

Exempted Fully
1/3 of normal Exempted of normal is exempted

PENSION
1.Pension from UNO 2.Pension received by the family of armed forces 3.Family pension received by family members after the death of employee It is not chargeable to tax
Exempted

Taxable as in the hands of recipient as income from other sources

Pension scheme for employees joining Central Govt. or Other Employees after January 1, 2004

Contribution by Employer is first added to salary and then deduction to the extent of 10% of salary is available u/s. 80CCD Employees contribution to Pension fund is deductible U/S 80CCD to the extent of 10% of salary. When pension is received out of the aforesaid amount , it will be taxable in the year of receipt

Leave Encashment
GOVERNMENT EMPLOYEES GETTING LEAVE ENCASHMENT AT TIME OF RETIREMENT:

Govt employee at that time is exempted from tax.

While leave encashment while in service is taxable

Leave Encashment( cont.)

NON GOVERNMENT EMPLOYEES are chargeable to tax on leave encashment while in service LEAVE ENCASHMENT AT TIME OF RETIREMENT: He is exempted on basis of least of the following: 1. Cash equivalent of leave salary in respect of the period of earned leave at the credit of employee at the time of retirement(which cannot exceed 30 days average salary for every completed year of service) 2. 10 months *average salary 3. The amt. specified by the government Rs.3,00,000 4. Leave encashment actually received at the time of retirement.

HOW TO FIND OUT AVERAGE MONTHLY SALARY?

Salary for this purpose means
1. Basic salary and includes 2. Dearness allowances if terms of employment so provide 3. Commision if it is fixed % based on turnover

It is calculated on the basis of average salary drawn

during the period of 10 months immediately preceding the retirement.( date wise)

Leave travel concession is exempted twice in a block of FOUR years.

It is available to Indian citizen for proceeding on leave for himself and his family. Amount of exemption is the actual fare paid for travel anywhere in India by the economy class airfare of national carrier by shortest route, or first class air conditioned rail fare, or any other mode not exceeding the shortest first class rail fare.

GRATUITY
1. GRATUITY AS RETIREMENT BENEFITS Government employee fully exempt Non-government employee-fully or partially exempt under section 10 Non-government employees not covered by the Payment of Gratuity Act ,1972- fully or partially exempt under section 10

GRATUITY (cont.)

IN CASE OF GOVT EMPLOYEES:

wholly exempt

IN CASE OF NON-GOVT EMPLOYEES COVERED UNDER PAYMENT OF GRATUITY ACT:

15 days salary based on last drawn for each year of service (26 days a month as working days) Rs.10,00,000 gratuity actually received (the least of the above 3 is exempt from tax and the balance is taxable)

GRATUITY (cont.)

how to find length of service -if 6mths or less then ignored else taken as 1 full year what is salary: Salary means last drawn by employee and includes dearness allowance how to determine 15 days salary -calculated by dividing salary last drawn by 26 days

GRATUITY (cont.)

IN CASE OF NON-GOVT EMPLOYEES NOT COVERED UNDER PAYMENT OF GRATUITY ACT:

Half month for each completed year of service Rs.10,00,000 gratuity actually received (the least of the above 3 is exempt from tax and the balance is taxable)

GRATUITY (cont.)

how to find length of service only completed years of service to be considered what is salary: Average salary means the average of the salary drawn by the employee for 10 months immediately preceding the month in which he retires

Provident Fund
Statutory Recognized Public PF PF PF Employees ELIGIBLE FOR DEDUCTION u/s contributio 80C n Employers Exempted upto 12% N.A. contributio n Unrecogni zed PF No deduction u/s 80C No exemption

Interest

Exempted as notified (currently upto 8.5%)

Not taxable

Taxable

Entertainment Allowance

1)

2)
3)

Entertainment allowance : Firstly, to be added to the salary and thereafter deduction is allowed u/s 16. In the case of Govt employees least of the following is exempt: Rs. 5000. 20% of Salary. Entertainment allowance received.

House Rent Allowance

The least of the following is exempt from tax: 1. 50% of Salary where the assessee lives in Mumbai, Delhi ,Chennai & Calcutta and 40% in other cases 2.Actual HRA received 3.Excess of rent paid over 10% of Salary. (Salary for HRA means basic salary, commission if based on fixed percentage of sale & DA ,if it is part of retirement benefits)

Allowances:

Medical expenses: Exempted when it is a reimbursement of actual expenses upto Rs.15000 Beyond this limit, it is taxable. Fixed Medical allowance is taxable. City compensatory allowance is taxable in all cases Children education allowance-Exempt upto Rs. 100 p.m. per child, for maximum of 2 children.

Allowances:

Hostel expenditure allowance Exempt upto Rs. 300 p.m. per child, for maximum of 2 children. Transport allowance given to meet his expenditure for commuting between office and residence- Exempt upto Rs. 800 p.m. (Rs. 1600 p.m. in case of blind or handicapped employee.). In case of serving chairman and member of UPSC Totally exempt. Allowance for transport employees Exempt upto 70% of the allowance or Rs. 6000 p.m., whichever is lower. Tribal Area allowance is exempt upto Rs. 200 p.m.

Allowances:

Foreign allowance Exempt if paid outside India by the Govt to Indian Citizens for renderring services outside India. Tiffin allowance Taxable. Transfer allowance -Exempt to the extent incurred in connection with transfer, packing and transportation of personal effects from one place to another

Allowances(cont.)

Tea & snacks during office hours are not charged to tax as perquisite while free meals in excess of Rs50 per meal is a perquisite Servant allowances: It is taxable

PERQUISITES
It means any benefit in addition to salary and wages. Any sum paid by the employer which otherwise would have been payable by the employee. Eg. Rent free house accommodation, car, amenities provided free of cost, concessional interest on housing loan, etc The benefit should be from the employer to be charged as salary It could be in cash or kind It should have a legal origin

SPECIFIED EMPLOYEE

A director is a specified employee An employee who holds 20% or more voting power (called substantial interest) Where an employee is drawing salary of more than Rs.50,000 per year (without considering non monetary benefit and exemptions like HRA.

Rent Free Unfurnished Accomodation

Classified as Central & State Government Employees Private Sector Employees

Central & State Govt. Employees

Accomodation provided to MPs, judges of High court & Supreme Courts, employees who are in Govt. service being provided accomodation by virtue of their employment is exempted from any tax Taxable value is license fees of the house as per the house allotment scheme of the government.

Valuation of Rent Free Unfurnished Accommodation (private sector)

Population as per 2001 census Above 25 lakhs Between 10- 25 lakhs Property owned by Employer Leased or rent

15% of salary for the Amount of lease rent period or 15% of salary, whichever is lower 10% of salary for the Same as above period 7.5% of salary for the Same as above period

Any other

Meaning of salary for House accomodation

Salary includes - basic salary - DA (if terms of employment provide) - bonus, commission, fees - all other taxable allowances - any monetary payment chargeable to tax, but not monetary payments in the nature of perquisite

Exception to accomodation rules

It is not applicable to an accomodation located in a remote area (40 kms from town) and in a mining, project, oil exploration site Hotel accomodation or Guest house accomodation provided to an employee is taxable at the rate of 24% of salary of the relevant period or hotel tariff whichever is lower. Hotel accomodation for 15 days in aggregate in a previous year can be provided immediately after transfer at the new location as a tax free perquisite. Where on account of transfer, an employee is given two accomodation , only one will be taxed for 90 days. Beyond that the lesser of the two will be taxed.

Furnished accomodation
Step 1: Find out the value of the accomodation without the value of the furniture Add 10% of the value of furniture if owned by employer or actual hire charges when hired ( Furniture includes TV, fridge, radio and any household appliances)

Accomodation at a concessional value

Value is determined as follows: Find out the value of accomodation as if it is not provided at a concession Deduct the value of rent charged from the employee

Perquisite of free domestic servants

When servants are engaged by employee and reimbursed by employer, taxable in all cases (to the extent of reimbursed value). Servant allowances (sweeper, gardner, watchmen, home attendant) are always taxable. Gardners salary paid by employer will not be considered separately taxable in case rent free house provided to an employee is owned by employer.

Valuation of gas, electric energy or water supply

Actual amount spent by the employer as reduced by amount recovered from employee, is taxable.

Perquisite of Motor Car

1.Car is owned by Employee 2. Car is owned or hired by Employer a) Expenses met by Employer b) Expenses met by Employee

Motor car perquisite

a) b)

Car owned by Employee Expenses met by Employee No Tax Expenses met or reimbursed by Employer - Used for Official purpose only-No tax - Used for private purpose-actual expenses less recovery taxable -Partly used for private purpose (cont. next slide)

Motor car perquisite( Cont.)

Car owned by employee (cont.) -Partly used for private purpose
Find actual expense incurred by employer 2) Less amount used for official purpose ie.Rs.1800 p.m. upto 1.6 lts engine capacity & Rs.2400 p.m. above 1.6 lts. Additionally, Rs. 900 p.m. shall be taxable towards salary of Chauffer. 3) Less if any recovered from employee. Balance is taxable
1)

2.When Car is owned or hired by Employer

a) b)

c)

A. Expense by employer Used only officially -No tax Wholly used for personal- all expense paid by employer are taxable including depreciation @10% p.a. of the actual cost of car. Partly official & partly personal-sum of Rs.1800 upto 1.6 ltrs engine capacity and Rs.900 for chauffeur -sum of Rs.2400 beyond 1.6 ltrs capacity and Rs.900 for chauffeur

2.When Car is owned or hired by Employer (cont.)

B. Expense & maintenance by Employee Used only officially, not perquisite so no tax Wholly used for personal- (Expenditure borne by employer in the form of wear tear @10% of cost for OR Hire charges) Partly official & partly personalSum of Rs.600 upto 1.6 ltrs engine capacity and Rs.900 for chauffeur sum of Rs.900 beyond 1.6 ltrs capacity and Rs.900 for chauffeur

Other Perquisites
Free education facility: Expenditure related to training to employees is not taxable Expenditure related to education to the family members of the employee, it is taxable. Education in an institution maintained by the employer: Taxable upto the reasonable cost of education in a similar institute in or near the locality. Education provided to the children of the employee in an educational institute maintained by the employerExempt upto Rs. 1000 per month per child

Other Perquisites(Contd..)

Employees obligation met by the employer: Taxable in all cases Interest free or concessional loan: Taxable only when the amount of loan exceeds Rs. 20,000 and it should not have been given for medical treatment of the employee or his family members. In other cases, it is taxable as under: The maximum outsanding balance on the last day of each month is to be multiplied with SBI landing rate on the first day of the previous year; any amount recovered from the employee is to be deducted

Use of employers movable asset

10% per annum of the actual cost of asset to the employer or hire charges as reduced by any amount recovered from the employee is a taxable perquisite . Exception: Use of laptop or computer.

Sale of employers movable asset

Actual cost to the employer Less: Normal wear and tear Less: Sale consideration paid by the employee is taxable Normal wear and tear for each year of use is to be calculated as under: Computer and electronic items: 50% by WDV Car: 20% by WDV Any other asset:10% of cost

Medical facilities (In India)

Medical facility provided by an employer in an hospital owned or maintained by the employer: Not chargeable to tax Medical facility provided by an employer in a Government hospital, approved hospital(when certain conditions are fulfilled) or private hospital(if recommended by Government for medical treatment of Government employees): Not chargeable to tax Medical insurance premium paid or reimbursed by the employer: Not chargeable to tax

Contd..

Any other expenditure is not chargeable to tax upto Rs. 15,000 in aggregate per assessment year (fixed medical allowance is fully chargeable to tax) Medical facility (Outside India): Expenditure on medical treatment (including boarding and lodging) are not chargeable to tax if it does not exceed the amount permitted by RBI under foreign exchange regulations.Travelling expenditure for going outside India are chargeable to tax

Other Perqusites

Conveyance facility :Taxfree in the hands of High court, Supreme Court Judges and serving chairman/members of UPSC. Gifts: Perquisite in respect of gift where it is below Rs.5000, the value is taken as nil Credit Card:Expenditure incurred less that incurred for official purpose less anything recovered from the employee is taxable

Other Perqusites(Contd..)

Club facility: Expenditure incurred less that incurred for official purpose less anything recovered from the employee is taxable. Health club/Sports club facility given uniformly to all emplyees in employers premises is not taxable Sweat equity shares: Fair market value of shares on the date on which the option is exercised after deducting any anount recoered from the employee is the taxable value

Deductions from salary

Standard Deduction- No deduction is available now. Professional Tax paid in this year Entertainment allowance: available only for Government employee.

Tax planning in respect of managerial remuneration

Factors to be taken care of while deciding the amount of salary to be paid : Employers interest and Employees interest The interest of the employer is considered when the remuneration paid to the employees is fully deductible to the employer while calculating its business income The interest of the employee is considered when the remuneration received by the employees is taxable at a minimum possible extent.

Hence the remuneration planning should be done in a way that employer gets maximum deduction and employees has to pay less tax. Less basic and more allowances and perquisites should be paid. Following further points needs to be taken care of : Dearness Allowance should always be considered under terms of employment, since it will minimize the tax incidence on house rent allowance, gratuity ,etc.

Commission should be paid as a fixed percentage of turnover, since then only the commission will be considered for calculating salary and tax will be reduced Uncommuted pension is always taxable, commuted pension is taxfree hence the employee should opt for commuted pension. Pension first received in foreign country and later on remitted to India is exempt

The employee should ensure that the new employer maintains a recognized provident fund account since then only the accumulated balance will be transferred to the new employer. Employer should increase the PF contribution upto maximum exemption available to the employees i.e. 12% of the salary Employees should take medical facilities rather than medical allowance

Employees should take the benefit of Leave Travel Concession Since salary includes basic, allowances, bonus and commission, employees should take more perquisites rather than taxable allowances. This will help in reducing the valuation in case of rent free house.