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Heads of Income: Salary

What is Salary:
Income under heads of salary is defined as remuneration received by an individual for services rendered by
him to undertake a contract whether it is expressed or implied. According to Income Tax Act there are
following conditions where all such remuneration are chargeable to income tax:

• When due from the former employer or present employer in the previous year, whether paid or not
• When paid or allowed in the previous year, by or on behalf of a former employer or present
employer, though not due or before it becomes due.
• When arrears of salary is paid in the previous year by or on behalf of a former employer or present
employer, if not charged to tax in the period to which it relates.

What Income Comes Under Head of Salary:


Under section 17 of the Income Tax Act, 1961 there are following incomes which comes under head of
salary:

1. Salary (including advance salary)


2. Wages
3. Fees
4. Commissions
5. Pensions
6. Annuity
7. Perquisite
8. Gratuity
9. Annual Bonus
10. Income From Provident Fund
11. Leave Encashment
12. Allowance
13. Awards

What is Leave Encashment:


Leave encashment is the salary received by an individual for leave period. It is a chargeable income whether
he is a government employee or not. Under section 10(10AA) (i) there is also a provision of exemption in
case of leave encashment depending upon whether he is a government employee or other employees.

What is Annuity:
It is an annual income received by the employee from his employer. It may be paid by the employer as
voluntarily or on account of contractual agreement. It is not taxable until the right to receive the same arises.
Under section 56, Income Tax Act, 1961 other annuities come under a will or granted by a life insurance
company or accruing as a result of contract which comes as income under from other sources.

What is Gratuity:
It is salary received by an individual paid by the employee at the time of his retirement or by his legal heir in
the case of death of the employee.

What is Allowance:
It is the amount received by an individual paid by his/her employer in addition to salary. Under section 15 of
the Income Tax Act, 1961 these allowance are taxable excluding few condition where they are entitled of
deduction/ exemptions.

Under Income Tax Act following types of allowance are defined

House Rent Allowance:


Under sections 10(13A) of Income Tax Act, 1961 allowance is defined as an amount received by an
employee paid by his/ her employer as a rent of his/her house. It is a taxable income. There is no exemption
in tax if he is living in his own house or house for which he is not paying rent. There are following types of
amount which are exempted from tax:

• Actual house rent paid by that individual


• Rent paid for the accommodation over 10% of the salary
• 50% of the salary if house is placed at Delhi, Mumbai, Kolkata, Chennai or 40% of the salary in it is
placed in any other city

Entertainment Allowance:
It is the amount paid by employer for availing entertainment services. Under section 16(ii) of Income Tax
Act, 1961 it is entitled to deduction in tax from is salary. But in this case deduction is given to his gross
salary which also includes entertainment allowance. Deduction in tax against this allowance can be divided
into two parts :

In case of Government employee entitled to minimum deduction of

• Entertainment allowance received


• 20% of basic salary excluding any other allowance
• Rs. 5000

In case of other employee entitled to minimum deduction of

• (a) Entertainment allowance received


• 20% of basic salary excluding any other allowance
• Rs. 7500
• Entertainment allowance received during 1954-1955

Other Special Allowances

• Children Education Allowance


• Tribal Area Allowance
• Hostel Expenditure Allowance
• Remote Area Allowance
• Compensatory Field Area Allowance
• Counter Insurgency Allowance
• Border Area Allowance
• Hilly Area Allowance

Allowances for there is a provision of exempt in income tax are:

• Allowance given to a citizen of India, who is a government employee, for rendering services outside
India
• Allowances given to Judges of High Courts
• Allowance given Judges of Supreme Court
• Allowances received by an employee of UNO

What is Perquisite
Under section 17(2) of Income Tax Act, 1961 perquisite is defined as:

• Amount paid for the rent-free accommodation provided to the assessee by his employer
• Any concession in the matter of rent respecting any accommodation provided to the assessee by
his employer
• Any benefit or amenity granted or provided free of cost or at concessional rate in any of the
following cases:
1. By a company to an employee, who is a director thereof
2. By a company to an employee being a person who has a substantial interest in the
company
3. By any employer to an employee whose income under the head 'Salaries' exceeds
Rs.24000 excluding the value of non monetary benefits or amenities
4. Any sum paid by the employer in respect of any obligation which, but for such payment,
would have been payable by the assessee
5. Any sum payable by the employer whether directly or through a fund, other than a
recognised provident fund or EPF, to effect an assurance on the life of the assessee or to
effect a contract for an annuity

There are following perquisites which are tax free:

• Medical facility
• Medical reimbursement
• Refreshments
• Subsidised Lunch/ Dinner provided by employer
• Facilities For Recreation
• Telephone Bills
• Products at concessional rate to employee sold by his/ her employer
• Insurance premium paid by employer
• Loans to employees by given by employer
• Transportation
• Training
• House without rent
• Residence Facility to member of Parliament, judges of High Court/ Supreme Court
• Conveyance to member of Parliament, judges of High Court/ Supreme Court
• Contribution of employers to employee's pension, annuity schemes and group insurance

Finance Minister, Shri Pranab Mukherjee said,


I propose to pursue structural changes in direct taxes by releasing the new Direct Taxes
Codewithin the next 45 days and in indirect taxes by accelerating the process for the smooth
introduction of the Goods and Services Tax (GST) with effect from 1st April, 2010. The Direct
Taxes Code, along with a Discussion Paper, will be released to the public for debate. Based on
the inputs received, the Government will finalise the Direct Taxes Code Bill for introduction
in this House sometime during the Winter Session”.
The Government will consider inputs and suggestions received from the public before
finalising the Direct Taxes Code Bill for introduction in Parliament sometime during the
Winter Session.
The current Income-tax Act was enacted in 1961 to replace the earlier Act which had been
legislated before Independence in 1922. More than 50 years have elapsed since the
introduction of the current Income-tax Act. The Government had, therefore, announced its
intention to introduce a revised and simplified Income-tax Bill while presenting the Union
Budget for 2005-06.

Subsequently, work was undertaken on drafting a Direct Taxes Code to replace the current
Income-tax Act, 1961 and the Wealth-tax Act, 1957. In his speech in Parliament on 6th July,
2009, while presenting the Union Budget for 2009-10,
The finance ministry on Wednesday released the draft ofdirect taxcode that seeks to simplify
the current tax provisions.
Formerfinanceminister and now the home minister, P Chidambaram, who had initiated work
on the proposed code during his tenure, said thedirect taxcode was outdated and it needed a
revamp.
Thedirect taxcode would replace the Income Tax Act 1961, Chidambaram said. Adding
thatthe newdirect taxcode would become a law only by 2011, Chidambaram saidthe newtax
codewould be a vast improvement over I-T Act 1961.
Finance Minister Pranab Mukherjee said tax reform is a process, not an event. To moderate
tax rate and simplifytaxlaws

, all direct taxes including FBT and income tax would be brought under one code, he said.
The newcode is aimed at eliminating the scope of litigation as far as possible, Mukherjee
said, adding thatthe governmentwill have informed discussion with stakeholders on thetax
code.
Finally The finance ministry on Wednesday (Today) released the draft of direct taxcode that
seeks to simplify the current tax provisions.

The direct tax code would replace the Income Tax Act 1961, Chidambaram said. Adding
that the new direct tax code would become a law only by 2011, Chidambaram said the
new tax code would be a vast improvement over I-T Act 1961.
Finance Minister Pranab Mukherjee said tax reform is a process, not an event. To moderate
tax rate and simplify tax laws, all direct taxes including FBT and income tax would be
brought under one code, he said. The new code is aimed at eliminating the scope of litigation
as far as possible, Mukherjee said, adding that the government will have informed discussion
with stakeholders on the tax code.

Finance Minister on Wednesday commenced essential tax reforms through a draft code that
intends at toning down income tax rates.

So I am giving New Income Tax slab under New Direct Tax code 2009. However, it is
proposed right now, and if it gets approval it will be applicable to A.Y. 2011-2012.

Income Tax Slab Under New Direct Tax


Code 2009 applicable for A.Y. 2011-12
Individual Male
Up to Rs. 1,60,000 NIL
Rs.1,60,001 – Rs.10,00,000 10%
Rs.10,00,001 -Rs. 25,00,000 20%
Above Rs. 25,00,001 30%
Individual Female
Up to Rs. 1,90,000 NIL
Rs.1,90,001 – Rs.10,00,000 10%
Rs.10,00,001 -Rs. 25,00,000 20%
Above Rs. 25,00,001 30%
Individual Senior Citizens
Up to Rs. 2,40,000 NIL
Rs.2,40,001 to Rs. 10,00,000 10%
Rs.10,00,001 to Rs. 25,00,000 20%
Above Rs. 25,00,001 30%
www.etaxindia.org
Now there is a notice, this draft Tax code will be debated in parliament in the winter session,
and if it gets the approval it will be implemented for assessment year 2011.
So at the present time See Income Tax Slab for the current Years

Direct Taxes Code and we the people


August 21st, 2009
Source based taxation is a process in which the income tax is calculated on the basis of the source of
income whereas residence based taxation calculates income on the basis that individuals are taxable in the
country or tax jurisdiction in which they are residing.
What does the proposed Direct Taxes Code hold for the common man? A look at visible effects and
implications of the proposals on our monies.
The draft of the Direct Taxes Code bill 2009 and the Discussion paper have been made public recently. In
the words of the Finance Minister “the thrust of the code is to improve the efficiency and equity of our tax
system by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding
the tax base”. A very valuable input from the Finance Minister has been “It will specially meet the aspirations
of our young and professionally mobile population. So what exactly is all the excitement about and will it
really “change” things as they are?
What does it say about income tax rates?
The most remarkable point which would be a great cheer for all individuals is the revision in the income tax
rates. The change is not only in terms of the slabs but also the simplicity in calculations. The Code proposes
to create 4 slabs for the sake of income tax calculations.
For Men
Slab 1: Total income is lesser than Rs 1, 60,000/-
The income tax for the above slab is proposed to be nil. This is what currently exists and hence does not in
any way change anything for individuals earning below 1.6 Lakhs
Slab 2: Income is between 1, 60,001/- and Rs 10, 00,000/-
This is the most drastic change proposed. The tax for the above slab is proposed to be 10 percent of the
amount by which the total income exceeds 1, 60,000/-. Meaning, if your income is 5, 72,000/- then, the
income tax would be 10% of (Rs 5, 72,000-Rs 1, 60,000/-). Although for individuals who were earlier earning
between 1.6 lakh to 3 lakh this does not bring about any change, it brings great cheer for individuals earning
between 3-5 lakh as they straight away save 10% of any income that exceeds 3 lakh but is lesser than 5
lakhs. Today they have to pay 20% on this amount!
For individuals who are today earning above 5 lakhs, this would bring even more cheer as they save a flat
Rs 20,000,plus 20% of any amount above 5 lakh and lesser than 10 lakhs!
Example: Ram’s income today is Rs 7, 00,000/-
Income tax as per present rates = 1, 18,450 (excluding surcharges and any cess)
Income if new code comes into effect=54,000/- a saving of Rs 61000/-
Slab 3: Income is between 10,00,001 and 25,00,000
The code proposes the income tax for this slab to be Rs 84,000/- (10% of 8,40,000/-) plus 20% of any
amount above 10,00,001 but lesser than 25,00,000. This would also bring about happy tidings for people
who are currently earning above 10 lakh as they save around Rs 1,00,000/- plus 10 percent of any income
which exceeds 10,00,000/-
Slab 4: Income exceeds 25,00,000/-
The code proposes the income tax for this slab to be Rs 3,84,000/- plus 30% of any amount exceeding Rs
25,00,000/-. People currently earning above 25,00,000 would expect savings of over 40% of their current tax
liabilities.
Away with “assessment and previous year”
The new code has proposed to do away with the concept of using “previous year” to denote the year in
which you earned the money and “assessment year” the year in which you pay the self assessment tax and
file your return. The new proposal is to use the simpler terminology of Financial Year (FY). For example if
you earned income in FY09-10 then, your pay advance tax in FY09-10 and any balance tax and returns in
FY10-11.
Source of income defined:
The income is proposed to be bifurcated into “special sources” and “ordinary sources”. The special sources
include items like lotteries, games and non residents etc which will be charged on the basis of a rate
schedule. Thus while calculating the total income we will have to add total income from ordinary sources and
total income from special sources.
Source based versus Residence based taxation:
Source based taxation is a process in which the income tax is calculated on the basis of the source of
income whereas residence based taxation calculates income on the basis that individuals are taxable in the
country or tax jurisdiction in which they are residing.
The debate has been for long on which methodology to use. The new code proposes to use residence
based taxation for residents and source based taxation for non-residents. It states “a resident in India will be
liable to tax on his worldwide income and a non-resident will be liable to tax in India only in respect of
receipts in India. What this means is that if you have been out of India for more than 183 days you would be
treated as a non-resident and you need not pay tax on income which has already been taxed in the country
where you get the income from and also if it’s not taxed there. But, in case of residents the income which
has not been taxed in another country will be taxed in India upon repatriation.
Capital gains
The new code proposes two important ideas.
1. The concept of long term and short-term defined by the period of holding of a capital asset will be
removed. Instead, for any capital asset which is transferred, to get a gain , anytime after one year
from the end of the financial year in which it was acquired, the cost of acquisition and cost of
improvement wil be adjusted on the basis of cost inflation index to reduce the inflationary gains?
2. The base date for calculation of cost of acquisition of a capital asset has been proposed to be
shifted from 01-01-1981 to 01-04-2000. This would be a big disadvantage to people who had
brought the assets very long ago. The reason is that you would have brought it for very low prices
but the capital gains will be calculated based on the price of the asset on 01-04-2000.
The above discussions are some of the very visible proposed changes in the Direct Taxes Code which
would affect individuals. The idea behind the whole exercise is for the public to give their feedback regarding
their views before the discussion document is presented to the parliament.
If you have any comments/suggestions you could mail to the IT department at: directtaxescode-
rev@nic.in and hopefully the Finance Minister might consider it important to be a part of the new code!

The finance ministry in consultation with tax experts is drafting the new Direct Tax Code which

will be introduced in 2008. It will be placed for discussion in the monsoon session of

Parliament and replace the existing Income Tax Act which has become so complicated with the

amendments made every year that it could only be comprehended by tax professionals and

practitioners.

The main objective of drafting the new code is to make the law simple and easy for taxpayers

while bringing in major policy changes regarding corporate taxation, non resident taxation,

SEZ exemption, EET method of taxation and many more. The powers of CBDT will also be

restructured making it a policy making board in alignment with the tax boards of countries like

UK, US and Australia. The whole emphasis would be to make the new code short and light by

removing redundant provisions and complex tax jargon.


The income tax system has been in existence since time immemorial. Even Manusmriti and

Arthshastra have mention of it. However, in modern India the Income tax came into existence

in 1860 and since then many Acts have been implemented, the most important being Income

Tax Act, 1961.

While the government efforts to make the tax laws simple and taxpayer-friendly are certainly

commendable, only time will reveal how successful the new tax code will be in meeting its

objective. But going by the track record (recently the new complicated ITR forms), one really

doubts whether the benefits will flow to the tax professionals or the tax payers.