Income from Salaries

shiba p. padhi, FCMA

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Basics
Tax Meaning, Types, Union/State/Concurrent Lists PY & AY Persons Assessee Income & Receipts RS Taxable income and Tax Liability Heads of Income & GTI Tax, Surcharge & Cess ITRs

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Essential norms of salary

Relationship between payer & payee Employer? (former, present, prospective) Salary & wages conceptually not different Salary from more than one source Taxable on received or due basis, whichever is early (Sec.15) Foregoing of salary (taxable as it is application of income)

Salary paid tax-free is perquisite

Salary income must be real and not fictitious (teacher salary &
donation)

Payment received in capacity other than employee (Commission by

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a Director, MP, Lecturer for setting question paper)

Essential norms of salary

Salary includes

wages, annuity, pension, gratuity, fees, commission, perquisite, advance of salary, leave encashment, contribution to PF in excess of 12%, contribution by CG under a pension scheme
Voluntary surrender of salary exempted Place of accrual
Any salary, bonus, commission or remuneration, by whatever name called, due to or received by, a partner of a firm from the firm shall not be regarded as salary (B/P) Salary received from UNO not taxable

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Basis of Charge u/s 15

Any salary received/due from an employer/ former employer, whether actually paid or not Any salary paid or allowed by or on behalf of an employer, though not due or before it became due

Any arrears of salary paid or allowed, if not charged to tax for any earlier P.Y.

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Fully taxable items under salary : Basic salary, DA, DP, Advance salary, Arrear salary, Leave encashment while in service, salary during notice period, Fees and commission, Bonus, uncommutted pension, annuity, remuneration for extra duties, Profits in lieu of salary, Items for which conditions apply : Leave encashment upon retirement/death/resignation, Gratuity, Commuted Pension, Pension under NPS, Annual accretion to the credit balance in RPF, Retrenchment compensation, VRS,

Salary which is not taxable under this head : Salary to partners Salary which is exempt : UNO (even Pension after retirement)

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How salary is computed?

Rs.

Income from salaries (Basic+DA+DP etc.) Add: Taxable Allowances Add: Taxable value of Perquisite Gross Salary
Less: Deduction u/s 16 a. Entertainment allowance b. Professional Tax xxxx xxxx

xxxx xxxx xxxx xxxx

xxxx xxxx

Income from Salaries

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For the purpose of taxation of different receipts Leave encashment

Gratuity Commuted Pension

CG/ SG employees

Employees of LA

Employees of Statutory Corporations Non Govt.

Non Govt. Govt.

Govt.
Govt. Govt.

Non Govt.
Govt. Govt.

Other employees are always Non Govt.

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Leave Encashment
Encashment during the period of serviceFully Taxable, but can claim relief U/s 89(1) Encashment at the time of Retirement, Resignation or Death A. B. Government Employees - Fully Exempted Non-Govt. Employees Conditions applied

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Leave Encashment to Non-Govt. Employees

1) Actual amount received, or

2) 10 x Avg. monthly salary, or

3 Amount calculated as per Income Tax Rules, max. 30 days for a year, or

4) Amount specified by the Govt. After 1-4-98 Rs. 3,00,000/ WHICHEVER IS LESS, IS EXEMPT FROM TAX

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Leave Encashment to Non-Govt. Employees

Salary includes- Basic pay + Dearness All.,( if terms of employment provides or forms part of retirement benefit ) + Commission,( on fixed % of TurnOver (TO) achieved by the employee)

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Other Points
Leave encashment to Legal heirs not taxable
Relief u/s 89 available

Avg. salary of last 10 months before retirement

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Gratuity
1) Govt. employees and Local authority- Fully Exempt

2) Employees covered under The payment of Gratuity Act 1972a. b. c. Actual amount received, or 15 or 7 days salary (x) Completed years of service (if more than 6 months, consider it complete year), or ( 15/26) Rs. 10,00,000/-

(WHICHEVER IS LESS, IS EXEMPT FROM TAX) Salary includes- Basic pay + Dearness Allowance (100%)

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Gratuity to any other employee

a. Actual amount received, or b. months Average salary (x) Actual Completed year of services (if not completing the year, i.e. 12 months/365 days, than do not consider the year) c. Rs. 10,00,000/-

(WHICHEVER IS LESS, IS EXEMPT FROM TAX)

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Gratuity to any other employee

Average salary = Average of last 10 months Salary includes- Basic pay + Dearness All.,(if terms of employment provides or forms part of retirement benefit) + Commission,( on fixed % of Turn-Over (TO) achieved by the employee)

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Other Points
Gratuity received from more than one employer
Gratuity received in earlier years Basis of gratuity calculation do not matter

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Pension
A. Un-Commuted Pension, i.e., Periodical Pension- Fully Taxable B. Commuted pension-

i. Govt. Employee / Local Authority / State Corporation Employee Commuted pension = Exempted
Monthly pension = Taxable

ii. Other Employees Employees who receives Gratuity = 1/3rd of the pension is allowed for commutation which is exempt and if it exceeds 1/3rd , Taxable Employees who does not receives Gratuity = 1/2 of the pension is allowed for commutation which is exempt and if it exceeds 1/2, Taxable

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VRS
1) Actual Amount received or; Employee must have completed 10 years of service or 40 years of Age, or; 2) 3 months salary (x) Completed years of service or 3) Amt. of salary (x) Balance months of service left before the date of his Retirement on superannuation, 4) Rs. 500,000/-, (WHICHEVER IS LESS, IS EXEMPT FROM TAX) Salary includes- Basic pay + Dearness All.,( if terms of employment provides or forms part of retirement benefit ) + Commission,( on fixed % of Turn-Over (TO) achieved by the employee)

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Retrenchment Compensation
i. ii. Actual Amount received or; 15 days Average pay (x) Completed year of service (if more than 6 months, consider complete year) or; iii. Rs. 5,00,000/
(WHICHEVER IS LESS, IS EXEMPT FROM TAX) Average pay means the last pay received, therefore, 15 days Avrg. Pay = Amt. x 15 days 26 days
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FULLY TAXABLE ALLOWANCES

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.
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Dearness Allowance or Additional Dearness Allowance or Dearness Pay, City Compensatory Allowance, Tiffin Allowance, Meal Allowance, Refreshment Allowance, Dinner Allowance, Health Allowance, Medical Allowance, irrespective of exp. incurred, Telephone Allowance, Holiday Allowance, Employees Education Allowance, Special Qualification Allowance, Over-time Payment, Servant allowance, Warden allowance, Non-practicing Allowance. Family Allowance
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PARTLY TAXABLE ALLOWANCES

Exempt upto Actual expenditure

Travelling Allowance
Daily Allowance, on transfer Conveyance Allowance Helper Allowance Academic Allowance/Research Allowance Uniform Allowance Transfer Allowance

1)
2) 3) 4) 5) 6) 7)

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PARTLY TAXABLE ALLOWANCES

8. Children Education Allowance: - Exempt upto actual amount received per child or Rs.100/- p.m. per child for max. 2 childrens, 9. Hostel Allowance: - Exempt upto actual amount received per child or Rs.300/- p.m. per child for max. 2 childrens 10. Underground allowance to employees working in coal mine, is exempt upto Rs.800 p.m. or Rs.1,600/- pm. (blind/PH) 11. Tribal Area allowance Exempt upto Rs. 200 p.m. 12. Transport Allowance Exempt upto Rs. 800 p.m. 13. Allowance for Transport Employees 70% of such allowance or Rs.10,000/- p.m, whichever is lower

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HRA
House Rent Allowance U/s 10(13A) & Rule 2A: (i) Actual H.R.A. received, or (ii) Rent paid in excess of 10% of salary, or (iii) An amount equal to: A. B. Mumbai, Delhi, Kolkata & Chennai = 50% of Salary In other cities = 40% of Salary

( WHICHEVER IS LESS, IS EXEMPT FROM TAX) Salary includes- Basic pay + Dearness All., if terms of employment provide & to the extent it is part of Retirement benefit + Commission, on fixed % of Turn-Over (TO) achieved by the employee Where the employee has not actually incurred expenditure on payment of rent or stays in his own house, no exemption of H.R.A. shall allowed.
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Entertainment Allowance
In case of CG/SG employees: a. Rs.5,000/b. 20% of basic salary c. Amount of EA granted during the PY (WHICHEVER IS LESS, IS EXEMPT FROM TAX) First include EA under salary income and then deduction Salary excludes any allowance/benefits Actual exp. not material

No exemption in case of Non-Govt. employees

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Perquisites which are taxable in the hands of all categories of employees

1. Rent free accommodation provided by the employer to the employee. Such accommodation may be furnished or unfurnished. 2. Any concession in the matter of rent in respect of the accommodation provided or granted by the employer to the employee.

3. Any sum paid by the employer in discharging the monetary obligation of the employee which otherwise would have been payable by the employee e.g. the school fees of the children of the employee paid by the employer or the Income-tax of the employee paid by the employer.
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Perquisites which are taxable in the hands of all categories of employees

4. Any sum payable by the employer whether directly or through a fund (other than R.P.F., Approved Superannuation Fund or Deposit Linked Insurance Fund) to effect an assurance on the life of the assessee or to effect a contract for an annuity.

5. The value of any other fringe benefit or amenity (excluding the Fringe benefits chargeable to tax under chapter XII-H) as may be prescribed.

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