-: SALARY:-

Meaning of SALARY {Section 17(1)}:-

Salary, in simple words, means remuneration of a person, which he has received from his employer for rendering services to him. But receipts for all kinds of services rendered cannot be taxed as salary. The remuneration received by professionals like doctors, architects, lawyers etc. cannot be covered under salary since it is not received from their employers but from their clients. So, it is taxed under business or profession head. In order to understand what is included in salary, let us discuss few characteristics of salary. Characteristics of Salary 1. The relationship of payer and payee must be of employer and employee for an income to be categorized as salary income. For example: Salary income of a Member of Parliament cannot be specified as salary, since it is received from Government of India which is not his employer. 2. The Act makes no distinction between salary and wages, though generally salary is paid for non-manual work and wages are paid for manual work. 3. Salary received from employer, whether one or more than one is included in this head.

The term SALARY is defined u/s 17(1) as to include the following: 1. Wages. 2. Any Annuity or Pension. 3. Any Gratuity. 4. Any Fees, Commission, Perquisites or Profits in lieu of or in addition to any salary or wages. 5. Any Advance of Salary. 6. Any payment received in respect of any period of leave not availed by the employee. 7. Taxable value of cash allowances

Basis of Charges {Section 15}:-

Salary income is charged to tax on due or receipt basis, whichever is earlier. Any salary paid in arrears which is taxed on due basis (in the yr. of accrual) it cant be taxed again on receipt basis (in the yr. of actual receipt). Tax Treatment of different form of SALARY:Advance Salary {Section 17(1) V}: Salary cant be taxed twice i.e. where any salary paid in advance is taxed on receipt basis (in the yr. of receipt) it cant be taxed again on the due basis (in the yr. in which it becomes due). Arrear of Salary: Arrear of Salary received by an assessee is charged to tax on receipt basis (if it was not taxed earlier on due basis). Salary in Lieu of notice period Salary in lieu of notice period is generally taxable u/s 15 on receipt basis. Salary to Partners Any salary, bonus, commission or remuneration received by a partner from his firm is taxed as business income and not as salary income. Fees & Commission: Fees & Commission paid to an employee are taxed as salary income. Overtime Payment: Overtime payment is a taxable salary income. Annuity {Section 17(1) (ii)}: Annuity received from present employer will be taxed as salary. Bonus: Bonus is taxed in the year of receipt, it is not taxed on due basis. Salary from UNO Salaries, emoluments & pension paid by UNO to its officials are exempt from tax. 2

TAXABLE VALUE OF ALLOWANCES

Allowance is a fixed monetary amount paid by the employer to the employee (over and above basic salary) for meeting certain expenses, whether personal or for the performance of his duties. These allowances are generally taxable and are to be included in gross salary unless specific exemption is provided in respect of such allowance. For the purpose of tax treatment, we divide these allowances into 3 categories: I. Fully taxable allowances II. Partially exempt allowances III. Fully exempt allowances

I. FULLY TAXABLE ALLOWANCES

This category includes all the allowances, which are fully taxable. So, if an allowance is not partially exempt or fully exempt, it gets included in this category. The main allowances under this category are enumerated below: (i) Dearness Allowance and Dearness Pay As is clear by its name, this allowance is paid to compensate the employee against the rise in price level in the economy. Although it is a compensatory allowance against high prices, the whole of it is taxable. When a part of Dearness Allowance is converted into Dearness Pay, it becomes part of basic salary for the grant of retirement benefits and is assumed to be given under the terms of employment. (ii) City Compensatory Allowance This allowance is paid to employees who are posted in big cities. The purpose is to compensate the high cost of living in cities like Delhi, Mumbai etc. However, it is fully taxable. (iii) Tiffin / Lunch Allowance It is fully taxable. It is given for lunch to the employees.

(iv) Overtime Allowance When an employee works for extra hours over and above his normal hours of duty, he is given overtime allowance as extra wages. It is fully taxable. (v) Fixed Medical Allowance Medical allowance is fully taxable even if some expenditure has actually been incurred for medical treatment of employee or family.

(vi) Entertainment Allowance for non Government employees is fully taxable

II. PARTIALLY EXEMPT ALLOWANCES

This category includes allowances which are exempt upto certain limit. For certain allowances, exemption is dependent on amount of allowance spent for the purpose for which it was received and for other allowances, there is a fixed limit of exemption. (i) House Rent Allowance (H.R.A.) An allowance granted to a person by his employer to meet expenditure incurred on payment of rent in respect of residential accommodation occupied by him is exempt from tax to the extent of least of the following three amounts: a) House Rent Allowance actually received by the assessee b) Excess of rent paid by the assessee over 10% of salary due to him c) An amount equal to 50% of salary due to assessee (If accommodation is situated in Mumbai, Kolkata, Delhi, Chennai) Or an amount equal to 40% of salary (if accommodation is situated in any other place). Salary for this purpose includes Basic Salary, Dearness Allowance (if it forms part of salary for the purpose of retirement benefits), Commission based on fixed percentage of turnover achieved by the employee. If an employee is living in his own house and receiving HRA, it will be fully taxable. Illustration 1: Mr. X is employed in A Ltd. getting basic pay of Rs.20, 000 per month and dearness allowance of Rs.7, 000 per month (half of the dearness allowance forms part of salary for the purpose of retirement benefits). The employer has paid bonus @Rs.500 per month, Commission @1% on the sales turnover of Rs.20 lakhs, and house rent allowance of Rs.6, 000 per month. X has paid rent of Rs.7,000 per month and was posted at Agra. Compute his gross salary for the assessment year 2011-12? Solution: Computation of Gross Salary Amount / Rs. Basic Salary (Rs.20,000 x 12) Dearness Allowance (Rs.7,000 x 12) Bonus (Rs.500 x 12) Commission (1% of Rs.20,00,000) House Rent Allowance(Rs.6,000 x 12 Rs.53,800) Gross Salary:

2,40,000 84,000 6,000 20,000 18,200 3,68,200

Amount of HRA exempt is least of 3 amounts: 1. 40% of Salary (Rs.2,40,000 + Rs.42,000 + Rs.20,000) = 2. Actual HRA received (Rs.6, 000 x 12) = 3. Rent paid [Rs.7, 000 x 12 Rs.30, 200 (10% of salary)] = Amount of HRA exempt is = Rs. 53,800 (ii)Travelling Allowance (iii)Conveyance Allowance (iv)Daily Allowance (v)Helper Allowance (vi)Research Allowance (vii)Uniform Allowance

120800 72,000 53,800

The above mentioned allowances are given to meet specific expenditure in performance of duties of an office . Exemption is available to the extent the amount is utilized for the purpose for which the allowance is given. Allowance Amount of Exemption (viii)Allowance For Transport 70 % of allowance received Employee whichever is less (ix)Children Education allowance (x)Hostel Expenditure Allowance (xi) Transport Allowance Rs. 800 per month & 1600 per month in case of an employee, who is blind, orthopaedically handicapped.

or 6000 per month

Rs. 100 per month per child up to max. of two children.

Rs. 300 per month per child up to max. of two children.(actual expenditure is not considered)

(xii)Entertainment Least of the following is exempted: Allowance A) Rs. 5000 (Govt.employees) B) 20% of salary c) Entertainment allowance This allowance is first included in salary income under

the head Salary & thereafter deduction is given

III Fully exempt allowances (i) Transfer allowance It is exempt from tax to the extent expenditure is incurred in connection with transfer , packing and transportation of personal effects on transfer from one place to another place. (ii) Foreign allowance It is exempt from tax if paid outside India by the Government of India to an Indian citizen for rendering services outside India.

Gratuitous Payment: Any lump sum & any ex gratia payments made gratuitously or by way of compensation or otherwise to a widow/legal heirs of an employee, who dies while still in service will not be taxable Compensation received at the time of Voluntary Retirement or Separation Any compensation received at the time of voluntary retirement or separation is exempt from tax, if the following conditions are satisfied: 1) An employee of public sector Company, at the time of voluntary separation. 2) Compensation received in accordance with the scheme of voluntary retirement or separation, which is framed in accordance with prescribed guidelines. 3) Maximum amount of exemption is Rs. 5, 00,000. Perquisites {Section 17(2)}:Accommodation: Rent free unfurnished house 1. In case of Central and state Govt. employee taxable value is license fees of the house as per the scheme of the Govt.

2. In case of any other employee

Population of the Nature of Accomodation. city Owned by the Taken on lease by the Employer Employer Exceeding 25 Lakh 15 % of Salary Lower of a) 15% of Salary or b)lease rent paid/payable by the employer Same as above

Between 10 - 25 10 % of Salary Lakh Less than 10 Lakh 7.5 % of Salary

Same as above

Note: Salary for this purpose 1. Basic Salary 2. D. A. , if part of the salary for computing retirement benefits 3.Bonus 4.commission 5.fees 6.taxable allowances

Rent free furnished house Particulars Value As per Rent free house as computed above Add: (a)10% Per annum of the original cost of furniture to the employer XXXX Amount XXXX

(b)actual hire charges payable if the furniture is hired by the employer Value of the furnished house XXXX

Value of accommodation provided at concessional rent: Step1 Find out the value of perquisite on the assumption that no rent is charged by the employer Step2 From the value so arrived at , deduct the rent charged by the employer from the employee Exemptions 1. Rent free official residence provided to a judge of a High Court or of the Supreme Court is exempt from tax 2. Rent free furnished residence provided to an official of Parliament , a Union Minister or a leader of Opposition in Parliament is exempt from tax. Illustration 1:X is in employment with ABG Ltd.and is posted in Chennai. During the previous year 2010-11 ,he receives following emoluments: Basic salary Bonus and commission City compensatory allowance Entertainment Allowance 92000 9000 8000 9000

In addition the employer has provided a rent free unfurnished flat (lease rent paid by the employer is 69000).Determine the taxable value of the perquisite in respect of rent free flat for the assessment year 2011-12? Solution: Salary for the purpose of computation of taxable value of rent free flat would be as under: Basic salary Bonus and commission 92000 9000

City compensatory allowance Entertainment Allowance Salary for computation of value of perquisite

8000 9000 118000

Valuation of Perquisite = Rs.17700( being 15% of salary or lease rent whichever is lower) Illustration 2: X joined a company in Bangalore on June 2010 and was paid the following emoluments and allowed perquisites as under: Basic pay Rs.25000 per month, Dearness Allowance 10000 per month , (100% of D.A. is forming part of the salary for computing retirement benefits) Bonus 50000 p.m. Perquisites: Furnished accommodation owned by the employer and provided free of cost. Value of furniture therein Rs.300000. Compute the income of X under the head Salaries for assessment year 2011-12 Solution: Computation of salary income: Basic pay (25000x10) D.A. (10000x10) Bonus(50000x10) Value of rent free accommodation(Note 1) Gross salary 250000 100000 500000 152500 1002500

Note 1: Salary for the purpose of valuation of rent free house is Rs. 850000 (250000+100000+500000).Taxable value of the perquisite is Rs.127500 (850000x15%) .Value of furniture added 25000 (being 10% of 300000x10/12)

Perquisite in respect of Medical Facilities:

Medical Facilities in India Hospital (including Nature of Expenditure clinic, dispensary or Medical Facilities nursing home) made available to employees their family members 1. Maintain by employer 2. Maintain by- Central / State Govt. - Local Authority - Any other person but approved by the Govt. for the treatment of its employees 3. Approved by the Chief Commissioner having regard to the prescribed guidelines For treatment of prescribed diseases given in rule 3A (2) Incurred or reimbursed by employer Not Chargeable to tax (No Monetary Ceiling) Any Incurred by employer Incurred or reimbursed by employer Is it chargeable to tax

Not Chargeable to tax (No Monetary Ceiling) Not Chargeable to tax (No Monetary Ceiling)

Any

4. Health insurance None policy (I.e. group medical insurance premium for employees or medical insurance premium for employees & family members) 5. Maintained by any other person (for example a private clinic) Any

Medical insurance premium paid or reimbursed by the employer

Not Chargeable to tax (No Monetary Ceiling)

Incurred or reimbursed by employer

Not Chargeable to tax up to 15000 in aggregate per A.Y.

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Medical facilities outside India Perquisite not chargeable to tax 1. Medical treatment of employee or any member of family of such employee outside India 2. Cost on travel of the employee/any member of his family & one attendant who accompanies the patient in connection with treatment outside India 3. Cost of stay abroad of the employee or any member of the family for medical treatment & cost of stay of one attendant who accompanies the patient in connection with such treatment. Condition to be satisfied Expenditure shall be excluded from perquisite only to the extent permitted by the RBI Expenditure shall be excluded from perquisite only in the case of an employee whose gross total income, as computed before including therein the expenditure on traveling, doesn't exceed 200000 Expenditure shall be excluded from the perquisite only to the extent permitted by the RBI

Perquisite in respect of motor car

No. Circumstances Engine<= 1.6 c.c. 1. Car is owned or hired by the employer and running & maintenance expenses are met or reimbursed by employer(a)is used wholly & value of perquisite NIL exclusively in the performance of his official duties (b) is used exclusively for the private or personal purposes of employee or any member of his household Actual amount of expenditure incurred by the employer + remuneration of driver , if any,+10% of actual

Engine>1.6cc

Value of perquisite NIL

Actual amount of expenditure incurred by the employer + remuneration of driver , if any,+10%

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cost of car of actual cost of car Less any amount Less any amount charged from employee charged from employee

(c)is used partly for Rs. 1800/-per month + Rs.2400/-p.m. + Rs. official duties and partly Rs. 900 p.m. if driver is 900 p.m. if driver is for personal purposes also provided also provided 2. Car is owned or hired Rs.600/-p.m. + 900p.m. Rs.900/-p.m. + by the employer, used if driver is also provided 900p.m. if driver is partly for official duties also provided and partly for personal use and running & maintenance expenses for such personal use are fully met by employee

3.

Where the employee owns car but the actual running and maintenance charges(including remuneration of driver,if any) are met or reimbursed by the employer and,(a)Such reimbursement Value of Perquisite NIL is for the use of car wholly & exclusively for official purposes

Value of Perquisite NIL

(b)car is used partly for The actual amount of The actual amount of official purposes and expenditure incurred by expenditure incurred partly for personal use employer by employer (Less:Rs.1800p.m. (Less:Rs.2400p.m. Rs.900p.m.if Rs.900p.m.if driver is provided) driver is provided) However in this case, if actual expenses on running and maintenance for official purpose is more than However in this case, if actual expenses on running and maintenance for official purpose is

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Rs. 1800/ 2700(including driver sal.) he can claim such actual amount as deduction

more than Rs. 1800/ 2700(including driver sal.) he can claim such actual amount as deduction

In the case of any other automotive conveyance provided by the employer the value of perquisite shall be as follows upon the usage indicated below: a) private purpose b) partly private purpose c)wholly purposes for running and maintenance expenses Actual expenditure incurred by the employer as reduced by an amount of Rs.900/official Perquisite value is NIL

Value of any benefit or amenity, any sum paid by the employer in respect of any obligation of the employee All employees are taxable ,if the employer pays any sum towards any expenses such as usage of gas, electricity , water supply or salary to domestic servants on behalf of the employee .That is the obligation of employee is met by the employer. Alternatively the employer may provide to the employee any benefit or amenity such as gas, water supply, electricity, salary to domestic servants,etc. then only specified employees will be taxable . If an employer pays or reimburses telephone bills/ mobile phone charges of employee there will be no taxable perquisite. Specified Employees The following are the Specified Employees: 1. 2. A director employee of employer company,or An employee who has substantial interest (20% voting right) in the employer company, or An employee (not covered by above) whose income under the head salaries ,excluding the value of all non- monetary benefits and amenities , exceeds Rs.50000/-

3.

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While computing the limit of Rs.50000, the following are deducted /excluded a) all non monetary benefits; b) monetary benefits which are exempt under sec 10; c) deduction u/s 16(ii) ,& (iii) i,e.,deduction for entertainment allowance and profession tax

Perquisite in respect of interest free or concessional loan The value of benefit to the employee on account of interest free or concessional loan for any purpose made available to him or any member of his household shall be determined as follows : Step 1) Maximum outstanding monthly balance x interest rate of SBI =interest for each month (A) Step 2) interest actually recovered from employee(B) Step 3) (A)-(B) is taxable value of this perquisite Perquisite will not be taxable where the amount of original loan does not exceed in the aggregate Rs.20000/Illustration: 1.) Y is employed by B Ltd. He takes a personal loan of Rs.25000 from B LTD. at a interest rate of 7% per annum (SBI rate is 16%) Value of Perquisite 25000x (16-7)%= 2250 2.) X is employed by A Ltd. On June1,2010 the company gives him an interest free housing loan of Rs. 100000. Loan is repayable after 10 years.(SBI rate 8%) 100000x( 8-0)% for 10 months=8000x10/12=6667

Perquiste in respect of use of movable assets If any movable asset provided by the employer is used by the employee or any member of his household , then valuation of perquisite will be as under:

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1). Asset is owned by the employer then 10% per annum of actual cost of the asset. 2) Asset hired by the employer then hire charges incurred by the employer. Nothing is chargeable if laptop or computer is provided Motor cars are also not covered here as there are specific provisions for them, as discussed earlier. Perquisite in respect of Educational facilities 1) Amount spent on training of employees is exempt from tax. 2) School fees of family members of employees paid/reimbursed by the employer is taxable as a perquisite in all cases. 3) Education facility in employers institute: Provided to employees children a) cost of education does not exceed Taxable amount is NIL Rs.1000 p.m. per child ( no restriction on number of children) b) amount exceeds Rs.1000 p.m. per Cost of such education in a similar child institution in the locality(-)1000p.m. (-) amount paid by the employee Provided to member of Household Cost of such education in a similar (other than Children) institution in the locality(-) amount Grand children , dependent Brother/ paid by the employee sister included as member of household

Employees Provident Fund Statutory PF 1)Employers Not treated as contribution to PF income of the year in which contribution is made 2)Interest credited Not taxable to PF Recognised PF Not treated as income up to 12 % of salary . Excess over 12 % is taxable In excess of 9.5% upto 31/8/201 and 8.5% thereafter is UnrecognisedPF Not treated as income of the year in which contribution is made Interest on own contribution is taxable under

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taxable 3)Amount recd. On retirement Fully exempt Exempted if employee renders continuous service for a period of 5 years with his employer

income from other sources Employer,s contribution and interest on such contribution are fully taxed as salary

Retirement Benefits
(A) Gratuity Government employee Any death cum retirement gratuity received is wholly exempt Employee under Gratuity act 1972 Least of the three is exempt: a) Rs. 10,00,000 b) 15 days salary (out of 26 days) based on last drawn salary for each completed year of service or part of the year in excess of 6 months c) gratuity actually received Salary for this purpose means Basic sal. and D.A. Employee not under Gratuity Act 1972 Least of the three is exempt: a) Rs. 10,00,000 b) half months salary (on the basis of last 10 months avg immediately preceding the month in which any such event occurs) for each completed year of service ( fraction to be ignored) c) gratuity actually received. Salary for this purpose means Basic Sal.,D.A. if provided by terms of employment and commission as a % of Turnover achieved by the employee

It may be noted that Gratuity received during the period of service is always taxable . (B) Pension

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1) Uncommuted pension is taxable as salary in hands of Government and non Government employees.

2) Commuted Pension Government employee Wholly exempt Employee receives gratuity 1/3 of the amount of commuted pension is exempted Employee doesnt receive gratuity of the commuted pension is exempted

Uncommuted pension refers to pension periodically received by the employee. Commuted pension means lump sum amount . Illustration A retires from Govt. service on 30/6/2010 and gets pension of rs. 3000p.m. upto 31/1/2011. With effect from 1/2/2011 he gets 1/3 of his pension commuted for Rs. 120000. Taxable pension i) Uncommuted pension before the date of commutation (3000x7) ii) Uncommuted pension after the date of commutation (3000x2x2/3) iii)Commuted pension (120000 is totally exempted) Taxable pension includible in salary 21000 4000 NIL 25000

COMPUTATION OF TAXABLE SALARY PARTICULARS Salary/ wages(including advance salary) Taxable pension Taxable gratuity Taxable leave salary Fees, commission,Bonus Taxable allowances Taxable perquisites Employers contribution exceeding 12% of salary Rs. Rs. xxx xxx xxx xxx xxx xxx xxx xxx

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Interest Credited to RPF in excess of specified rate Gross Salary Less: Deductions u/s16: Entertainment allowance(govt. employees) Profession tax Taxable Salary

xxx xxx xx xx

xxx xxx

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