Salary under Income Tax

 Salary under Income Tax Act

Basis of Charge

Salary is taxable on due or receipt basis whichever is earlier as per Section 15.

Computation of income under the head "Salaries"

Salary                                             xx

Allowances                                  xx

Prerequisites                              xx

                                                         ____

Gross Salary                            xxx

Less: Deductions under Section 16                               xx

Entertainment allowances deduction [Section 16(ii)]                               xx

Professional tax [Section 16(iii)]                              xx

Income under the head "Salaries"              _______

Note: Professional tax is deductible on a "payment basis". If it is paid by the employer on behalf of the employee, it is first included in gross salary as a prerequisite and then deduction available under Section 16(iii).

Different forms of Salary

Basic Salary                                                          Taxable

Dearness Allowance/pay                                                          Taxable

Advance Salary              Taxable in the Year of Receipt

Leave encashment while in service                                                           Taxable

Salary in lieu of notice                                                           Taxable

Fee and Commission                                                           Taxable

Bonus                 Taxable on a receipt basis if 

not taxed earlier on a  due basis

Annuity from employer                                                           Taxable

Remuneration for extra duties                                 Fully-taxable u/s 15

Salary from UNO                              Not chargeable to tax

Salary @researcher from a SAARC member State                                  Not taxable upto 2  years

Apart from the provisions written above, others include:

Leave encashment at the time of retirement or at the time of leaving  the job

• In the case of Government employees, it is fully exempt from tax.
• In the case of non-Government employees, it is exempt from tax to the extent of the least of the following:
• 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
• 10 months "average salary"
• Amount specified by the Governemnt i.e. Rs. 3,00,000
• Leave encashment actually received at the time of retirement.

Note: 

1. A government employee for this purpose is a Central Government employee or a State Government employee.
2. "Average Salary" for this purpose is to be calculated on the basis of average salary drawn during the period of 10 months immediately preceding the retirement.

Salary to partner

Not chargeable under the head "Salaries" but taxable under the head "Profits and Gains of Business and Profession".

Gratuity

1. In case of Government employee it is fully exempt from the tax.
2. In case of non-Government employee covered by the Payment of Gratuity Act, 1972 it is exempt from tax to the extent of the least of the following:
• 15 days' salary for each year of service (or part thereof exceeding 6 months)
• Rs. 10,00,000
• Gratuity actually received
3. In case of non-Government employees (not covered by the Payment of Gratuity Act) it is exempt from tax to the extent of the least of the following:
• Rs, 10,00,000
• Half month's salary for each completed year of service
• Gratuity actually received

Note: 

"Average Salary" for this purpose is to be calculated on the basis of average salary drawn during the period of 10 months immediately preceding the month in which the employee has retired.

Pension

Uncommuted pension (paid in several separate instalments rather than a single one) is taxable in all cases. Computed pension is fully exempt from tax in the case of a Government employee (i.e. an employee of the Central Government, State Government, local authority and statutory corporation). 

In the case of a non-Government employee, commuted pension is exempt to the extent given below:

• one-third of normal is exempt if the employee receives gratuity
• one-half of the normal pension is exempt from the tax if the employee does not receive gratuity.

Pension under the new pension scheme in the case of a Government employee or any other employee joining on or after January 1, 2004

1. The employer's contribution is first included in the salary and then a deduction is available (to the extent of 10% of the salary) under Section 80CCD.
2. Employee's contribution is deductible under section 80CCD to the extent of 10 % of the salary.
3. When a pension is received out of the aforesaid amount, it will be taxable in the year of receipt.

Annual accretion to the credit balance in recognised provident fund

1. Excess of employer's contribution over 12% of salary is taxable.
2. Excess of interest over notified interest is taxable (notified rate of interest is 9.5%)

Retrenchment compensation

    Exempt from tax to the extent of least of the following:

        a) Amount calculated under Section 25F(b) of the Industrial Disputes Act

        b) An amount specified by the Government i.e Rs. 5,00,000

The compensation received under voluntary retirement scheme (VRS)

Exempt up to Rs. 5 lakh, if a few conditions are satisfied. One of the conditions is the amount payable on account of voluntary retirement or voluntary separation of employee does not exceed:

  a) the amount equivalent to three months' salary for each completed year of service

  b) salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation. Relief under Section 89 is not available.

Apart from this, we see that there are various types of allowances. These are as follows:

City compensatory allowance

This is fully taxable under Section 15.

House Rent Allowance

Exempt from tax to the extent of the least of the following:

a) 50% of the salary in Delhi, Bombay, Calcutta, Madras or 40% of salary in other cases

b) house rent allowance

c) the excess of rent paid over 10% of the salary

Entertainment Allowance

This allowance is first included in salary and thereafter a deduction is allowed. In the case of Government employees, the least of the following is exempt from tax:

a) Rs. 5000

b) 20% of salary

c) entertainment allowance

Children Education Allowance

It is exempt from tax to the extent it does not exceed Rs. 100 per month per child for a maximum of two children (actual expenditure is not taken into consideration)

Hostel Expenditure Allowance

It is exempt from tax to the extent it does not exceed Rs. 300 per month  per child for a maximum of two children (actual expenditure taken into consideration). Exemption is in addition to the exemption available in the case of children education allowance.

Transport Allowance

It is given to an employee to meet his expenditure for the purpose of commuting between office and residence. It is exempt up to Rs. 1600 per month (actual expenditure is not taken into consideration). The exemption is Rs. 3200 per month in the case of an employee who is blind or deaf or dumb or orthopedically handicapped. 

            In the case of serving as Chairman and members of UPSC, transport allowance is exempt without any monetary ceiling. 

Allowance for transport employees

It is given to an employee to transport undertaking to meet their personal expenditure during duty performed in the course of running of such transport from one place to another place. The amount is exempt to the extent it does not exceed:

a) 70% of the allowance

b) Rs. 10000 per month, whichever is lower (actual expenditure is not taken into consideration)

Tribal area allowance

Exempt up to Rs. 200 per month in some cases.

Travelling allowance, conveyance allowance, helper allowance, research allowance, uniform allowance

These allowances are given to meet specific expenditures in the performance of duties of an office. An exemption is available to the extent the amount is utilized for the specific purpose for which the allowance is given.

Transfer allowance

It is exempt from tax to the extent expenditure is incurred in connection with the transfer packing and transportation of personal effects on transfer from one place to another place.

Tiffin Allowance: Taxable

Fixed Medical allowance: Taxable

Allowance received by a teacher/ SAARC member State: Not taxable upto 2 years

Sumptory allowance to serving Chairman/ members of UPSC: Not chargeable to tax

Allowance to retired Chairman and retired member of UPSC

An allowance (subject to a maximum of 14000 per month) for defraying the service of an orderly and for meeting expenses incurred towards secretarial assistance in contract basis, is not chargeable to tax.

Prerequisites

Rent Free unfurnished house

In the case of Government employees; i.e. Central Government employee, State Government employee or a Government employee on deputation to a public undertaking if the house is allotted by the Government. Taxable value is the license fees of the house as per house allotment scheme of the Government. 

        In the case of non-Government employees:

    If the house is owned by an employer: Taxable value is 15% of the salary of the employee of the relevant period (7.5% if the population is 10 lakh or less or 10% if the population is above 10 lakh but not more than 25 lakh.

    If a house is taken on lease by an employer:  Taxable value is either 15% of the salary, lease rent, whichever is lower.

Rent-free furnished house

The value of 'furniture' will be added to the value of the rent-free unfurnished house computed above. Value of furniture is 10% per annum of the cost of furniture to the employer or rent paid/ payable of the furnishing by the employer, as the case may be.

Concession in rent

The value of the prerequisite in respect of a rent-free furnished/ unfurnished house will be calculated as given above. From the amount, so calculated, the rent charged by an employer shall be deducted. The balance (if it is positive) is taxable value of the prerequisite in respect of concession in rent.

Rent-free/ concessional furnished/ unfurnished house in special cases

• Not chargeable to tax if provided in a "remote area"

• Hotel accommodation/ guest house accommodation provided to an employer is taxable at the rate of 24% of the salary of the relevant period or hotel tariff, whichever is lower.

• Further, if an employer is transferred and a housing facility is provided to him at the new location (he has yet to vacate a house given at the old location), for a period of 90 days immediately after being transferred to only one house (at the option of the employee at the old location or new location) is chargeable to tax.

• Prerequisite in respect of rent-free furnished/ unfurnished house is not taxable if provided to a High Court Judge, Supreme Court Judge, Union Minister, Leader of Opposition in Parliament, an official in Parliament and serving Chairman/ members of UPSC.

Free domestic servants

Actual expenditure of the employer (as reduced by any amount paid by the employee) is a taxable prerequisite in the hands of an employee.

Gas, electricity or water supplied after purchasing from outside agency

Actual amount spent by the employer (as reduced by any amount recovered from the employee) is taxable prerequisite in the hands of an employee.

Free education facility

Expenditure relating to providing training to the employees is not taxable. If the education facility is provided to the family members of the employee, expenditure incurred by the employer is the taxable value of prerequisite. If education facility is provided to the family members in an education in a similar institute in or near the locality is taxable. 

        Upto Rs. 1000 per month per child is not taxable if the employer provides an education facility to the children of an employee in an educational institution owned/ maintained by the employer.

Leave travel concession (LTC)

Only 2 journeys in a block of 4 years is exempt (however, a carry over concession is available). An exemption is based upon actual expenditure relating to travel fare only in respect of the shortest route from the place of origin to the farthest point. 

Employee's obligation met by the employer

Taxable in all cases

Interest-free/ concessional loan

Find out the maximum outstanding balance on the last day of each other. It shall be multiplied by SBI landing rate on the first day of the previous year. Amount recovered from the employee on account of interest is deductible. Prerequisities is not taxable if the aggregate amount of original loan does not exceed Rs. 20,000. Moreover, if the loan is given by employer for medical treatment (given in rule 3A) of the employee or his family members, it is not chargeable to tax.

Use of employer's movable assets

10% per annum of the actual cost of assets to the employer or hire charges as reduced by any amount recovered from the employee, is a taxable prerequisite in the hands of the employee.

Sale of movable assets

The actual cost to the employer minus normal wear and tear minus sale consideration paid by the employee is taxable (normal wear and tear for each year of the use is calculated as follows - computer/ electronic items: 50% by reducing instalment method; car, 20% by reducing instalment method; any other asset at 10% of the cost.

Medical facilities

The prerequisite in respect of medical facility provided by an employer in the following hospital/clinic is not chargeable to tax - hospital owned/ maintained by the employer, hospital of the Central Goverment/ State Government/ local authority, private hospital if it is recommended by the Government for the treatment of Government employees, specified medical facility (given in rule 3A) in a hospital approved by the Chief Commissioner.

Medical insurance premium paid or reimbursed by the employer is not chargeable to tax.

Any other expenditure incurred or reimbursed by the employer for providing medical facility in India is not chargeable to tax up to Rs. 15,000 in aggregate per assessment year (fixed medical allowance is fully chargeable to tax.)

Expenditure incurred or reimbursed by the employer for providing medical  facility in India is not chargeable to tax in the hands of employee if it does not exceed amount permissible by RBI under the foreign exchange regulations. Travelling expenditure for going outside India for medical treatment purposes is generally chargeable to tax.

Motor car

Car owned or hired by an employer, expenses incurred by employer and used for partly official and partly personal purposes

Rs. 1800 per month/ Rs. 2400 per month for car and Rs. 900 per month for driver. Expenditure recovered from the employee is not taxable.

Car owned or hired  by the employer, expenses incurred by employer and used wholly for personal purposes

Entire expenditure incurred by the employer including depreciation at the rate of 10% per annum of the actual cost of the car, is taxable in the hands of the employer. Expenses recovered from employees are deductible.

Car owned or hired by employer, used for partly official and partly personal purposes, expenses for private purposes incurred by employee

Rs. 600 per month/ Rs. 900 per month for car and Rs. 900 per month for driver. Expenditure recovered from employee is not deductible.

Car owned by employee, expenses incurred by employer and used for partly official and partly personal purposes

Actual expenditure incurred by the employer minus expenditure pertaining to official use minus anything recovered from employee is taxable in the hands of the employee. Expenditure pertaining to official use can be calculated as per the logbook of the car.

Alternatively, expenditure pertaining to official use can be calculated at the rate of Rs. 1800 per month/ Rs. 2400 per month for car and Rs. 900 per month for drivers.

Conveyance facility when not taxable

Conveyance facility between office and residence is not chargeable to tax in the case of any employee of any organisation. Moreover, conveyance facility to a High Court Judge, Supreme Court Judge and serving Chairman of UPSC, is not chargeable to tax.

Free transport

Taxable as a perquisite in the hands of an employee on the basis of value at which the employer offers such benefit to the public as reduced by any amount recovered from the employee (tax-free perquisite in the hands of employees of railways/ airlines).

Lunch, refreshments, etc.

Food and non-alcoholic beverages are provided in working hours in remote areas or in an off-shore installment. It is fully exempted from tax.

        Lunch, refreshment is provided in working hours at any other place. Cost of the employer in excess of Rs. 50 per meal (as reduced by the amount recovered from the employee) is taxable value of prerequisite in the hands of the employee (tea and snacks in working hours is tax-free prerequisite).

Travelling, touring, accommodation 

When such a facility is available uniformly to all employees

Taxable as a prerequisite in the hands of an employee on the basis of actual expenditure of the employer as reduced by any amount recovered from the employee. 

When such facility is not available uniformly to all employees

Taxable as a prerequisite in the hands of an employee on the basis of value at which such facilities are offered by the other agencies to the public as reduced by any amount recovered from the employee.

Gift, voucher or token

Taxable as a prerequisite in the hands of an employee on the basis of the actual expenditure of the employer (gift may be either to employee or any member of his household). Gift-in-kind up to Rs. 5000 per annum is exempt.

Credit card

Expenditure incurred by the employer minus expenditure pertaining to official use minus anything recovered from the employee, is taxable.

Club

Expenditure incurred (including annual or periodical fees) by the employer minus expenditure pertaining to official use minus anything recovered from the employee, is taxable. A health club/ sports club facility given uniformly to all employees on the employer's premises, is not taxable. The initial one time deposits or fees for corporate or institutional membership, where benefit does not remain with particular employee after cessation of employment, are exempt.

Specified security or sweat equity shares allotted on or after April 1, 2009

The fair market value of shares/ securities on the date on which option is exercised by the employee is taxable in the hands of the employee. The amount, if any, recovered from the employee is deductible.

Employer's contribution towards approved superannuation fund

Amount in excess of Rs. 1.5 lakh per assessment year is taxable in the hands of employees.

Residential telephone to retired UPSC chairman

Value of a residential telephone free of cost and the number of free calls to the extent of Rs. 1500 per month (over and above the number of free calls per month allowed by the telephone authorities) is not taxable.

Any other facility

Taxable as a perquisite in the hands of an employee on the basis of actual expenditure of the employer as reduced by any amount paid by the employee.

Employee's Provident Fund

These are of three types. These are:

Statutory Provident Fund

Deduction under Section 80C on employee's contribution is available. All other contributions/ interest/ lump sum payment except from tax.

Recognised Provident Fund

Deduction under Section 80C on employee's contribution is available. Excess of employer's contribution over 12% of salary is taxable (exempt up to 12% of salary). Excess of interest over 9.5% is taxable. Lump-sum payment at the time of retirement is exempt in certain cases.

Unrecognised Provident Fund

Deduction under Section 80C on employee's contribution is not available. Employer's contribution and interest are exempt from tax. Lump-sum payment (except employee's contribution) at the time of retirement taxable.

Deduction under Section 80C

Upto Rs. 1,50,000.

Meaning of 'salary for different calculations

For the purpose of calculating 

(a) house rent allowance

(b) gratuity (not being gratuity under the Payment of Gratuity Act)

(c) leave encashment at the time of retirement

(d) NPS 

(e) employer's contribution towards recognised provident fund, not chargeable to tax

        For these purposes, "salary" means basic salary, dearness allowance/ pay if part of salary for computing all retirement benefits and commission (if paid as a percentage of turnover achieved by an employee).

For the purpose of calculating gratuity received under the Payment of Gratuity Act, 1972, not chargeable to tax: For this purpose, "salary" means basic salary and dearness allowance whenever dearness allowance is paid.

For the purpose of calculating the prerequisite value of rent-free/ concessional house: For this purpose, "salary" means basic salary, dearness allowance/ pay if part of salary for computing all retirement benefits, bonus, commission, salary, dearness allowance/ pay if part of salary for computing the retirement benefits etc.

        However, "salary" does not include tax-free allowance, the value of the prerequisite, retirement benefits and employer's contribution towards provident fund.

Conclusion

From the above discussion, we see that there are various provisions regarding capital gains. The Act is beautifully crafted in a very meticulous manner. However, we see that there is enough scope for improvement related to the legal loopholes. We should make the provisions related to reduction of tax evasion. With the collective action by all the stakeholders, one day India will be a global power, overtaking America!

Je te le donna... Adious!

Addendum 

Difference between Gratuity and Pension

A Gratuity is a lump-sum compensation given by the employer or owner. It is a mark of gratitude to the employee’s service, whereas pension is a regular compensation made by the state-owned or government to people after their formal retirement, to widows, and disabled or accessible people. It is submitted earnings of individual’s services in the past. Gratuity is subordinated or bound by the Payment of Gratuity Act, while pension directed or administered under the Employees’ Pension Scheme. For gratuity to become suitable, responsible service of 5 years is obligatory, and as for pension, it’s ten years. Gratuity funded in a lump sum whereas pension payments funded in installments.

Allowance and Prerequisites: Allowances are cash-based benefits. However, prerequisites are non-cash based allowance.