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NEW:Income from salaryProblems,theory and solutions


B.Com
BBM
M.Com
CA
ICWA students

By
Prof.Augustin Amaladas
M.Com., AICWA., PGDFM., B.Ed.

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Employees
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Solved problems Income from


Salary-2008-09 assessment year
Read the concepts
Education for all
From salary slide
By Prof. Mary Amala Shanthi Augustin
Jyoti Nivas College, Bangalore
M.Com.,M.Phil., MBA.,B.Ed.
Jyoti Nivas College, Bangalore
and
Prof. Augustin Amaladas M.Com., AICWA., PGDFM.,B.Ed.
St. Josephs College of Commerce, Bangalore
aug_bang@yahoo.com
09845844319
2

Dedicated to

Prof.Dr. Victor Louis Anthuvan M.Com., Phd.


Prof. and Dean Loyola College of Business
Administration
My Guru in St. Josephs College Trichy, Tamil
Nadu.
I remember you always when ever I take class to
my students.-You are ever great.
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So that Students community can be benefited. Send SMS
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Alternative work is rest

How to study salary?

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aug_bang@yahoo.com

Salary contains many types.


Each type of salary should
Be studied independently.
First understand the
Concepts which are explained in the first set
Under income tax head of my web.

By giving yourself up you will receive

Exercise-1
Mrs. Sneha (Age 49 yrs) is a part time lecturer in a college Chennai
University. The details of her salary and other income for the previous
year 2007-2008 are as follows:

Basic Salary

80,000

Dearness allowance (forming part of salary)

3,600

Education allowance for 2 children (exp being Rs. 900) 5,100


Hostel expenditure allowance for 1 child
(expenditure being 8000)
HRA

7,200
10,400

Remuneration from Bangalore University for


Being as examiner

75,650

Allowance for research which is to be completed during


Dec-April 2008(actual exp being : up to March 31-08
Rs. 2000, during April 08 Rs. 4500 )

8000

She contributes 10% of her salary to a statutory provident fund to


which the college also makes a matching contribution. She gets
reimbursed of Rs. 28000 being exp incurred on medical treatment of
her daughter in a private clinic. The bill for which is paid by the
employer.
During the year she spends Rs. 1000 on purchase of saree for his
wife (out of salary)for year 2007-08 he paid Rs. 8000 as insurance
premium on his life policy for Rs. 60,000 ( date payment 3 April 08)
Compute the total income and tax liability for the assessment year
2008-09.

ANSWER-1
ANSWER-1
Computation
Computationof
ofSalary
Salary
Basic
BasicSalary
Salary
DA
DA
Education
EducationAllowance
Allowance

80,000
80,000
3,600
3,600
5,100
5,100
2,400
2,400

Exemption
2,700
Exemption100
100xx22xx12
12
2,700
(Monthly
(Monthlyfixed
fixededucational
educationalallowance
allowancegiven
givento
toemployee
employeeis
istaxable
taxableexcept
except
Rs.100
Rs.100per
perchild
childper
permonth
monthand
andonly
onlyfor
fortwo
twochildren.
children.IfIfallowance
allowanceis
isnot
not
received
receivedfrom
fromemployer
employernothing
nothingisistaxable.
taxable.Whether
Whetherassessee
assesseespends
spendsor
or
not
notRs.100
Rs.100 (only)
(only)allowed
allowedbecause,
because,ititisisgiven
givennot
notexclusively
exclusivelyto
todo
do
official
officialduty)
duty)
Hostel
HostelAllowances
Allowances
300
300xx12
12
given
givenin
inthe
thenext
nextslide)
slide)

7,200
7,200
3,600
3,600

3,600(see
3,600(seenotes
notes

HRA
5,560
HRAreceived
received10,400
10,4004840
4840
5,560
Least
Leastof
ofthe
thefollowing:
following:Major
Majorany
anyfour
fourcities
citieslike
likeDelhi,
Delhi,Mumbai
Mumbaietc.
etc.(50%)
(50%)
1)
1) 50%
50%of
ofsalary
salaryBasic
Basic++DA
DA
83,600
83,600xx50%
50%

41800
41800

2) HRA received
3) Rent paid- 10% of salary
13,200 8360
(1100 x 12 )
Research Allowances
7000
Less: Exp incurred
6500

1,500

Medical Allowances
Exemption

13,000

28000
15000

Income from salary


Income from other sources
Total Income

10,400
4,840

Answer1.
continues

1,09,960
75,650
1,85,610

See explanation after


The answer in the following slides

10

Exemption under sec 80c


1)
2)

www.augustin.co.nr

10% Provident fund 83600


8,360
(Basic + DA which comes for retirement benefit)
Taxable Income
1,77,250

Tax liability
Taxable Income
Less: Exemption

1,77,250
1,45,000
32,250

Womans tax liability :


145000 150 000
5,000 x 10%
150 000 250,000
27,250 x 20%
Tax payable
Education cess 3%
178.5
Total tax
6128.5

500
5450
5950

11

Explanations to exercise-1
1.Basic salary for the current financial year(previous
year) is relevant and taxable.
2. DA- Dearness allowance given mainly to compensate
the inflation based on Index numbers fully taxable.
3. For the meaning of salary for special computation such
as HRA, Gratuity, Pension etc., Dearness allowance(DA)
is considered to the extent of % comes for retirement
benefit. The words forming part of salary means such
portion comes for retirement benefit.

12

4. If the words forming part of salary is missing or simply


given DA with out mentioning the words forming part of
salary then do not take it for the meaning of salary for special
computation such as HRA, gratuity, Pension etc. But to
compute salary entire DA to be taken.
5. The word allowance means fixed monthly payment is made
to employee either to do exclusively official duty or other than
official duty. If such fixed monthly or annual allowance given
to do official duty the expenditure incurred for such allowance
is deducted from such allowance.(Uniform allowance, research
allowance, conveyance allowance to do official travel etc.)
Unused official allowance is taxable.
explanations
13

explanations

**6. If allowance given not exclusively for official


duty then the allowance is fully taxable unless some
exemption given under Income tax.(such as
Educational allowance, Medical allowance, Hostel
allowance).
7. Educational allowance given per month to
employee. It is given not exclusively to do official
duty. Therefore how much spent by employee is not
important. But Rs. 100 per month per child for two
children allowed exemption.
8. Hostel allowance for the children is allowed Rs.
300 per children for maximum two children only.
Since only one child is given hostel allowance Rs.
300 per month is allowed for the period such
allowance given.
14

9. HRA- is an allowance given monthly based on


basic and types of city. First calculate the meaning
of salary for HRA allowance exemption. Salary=
basic + DA which is part of salary +Fixed % of
commission on sales( not on purchase or not of
fixed monthly commission)
Read: www.augustin.co.nr under incometaxsalary-theory.
10. Salary for the calculation of exemption on HRA=Rs.
80,000(Full Basic) + 3600(here full DA) +0 (commission on
sales)= 83,600.
Explanations
Read carefully. Other problems can be worked out well unless you
Understand the explanations given above/next slides
15

11. Research allowance given at a time to employee for


official purpose. He is expected to spend and produce bills
for such expenditure. It is not necessary that such
expenditure to be spent during the previous year. If it is
spent for the purpose given before filing of return in the
assessment year all expenditure up to allowance given is
exempted. Balance is taxable. If assessee spent more than
what was given, the amount provided by employer is
exempted.
12. Medical allowance given monthly not exclusively to
do official duty. Therefore the amount spent by assessee is
not important. If such amount spent in private clinic Up
to Rs. 15,000 is allowed. Beyond it is taxable. If employer
pays directly to recognised or approved hospital entire
amount is exempted.(Bill should be produced otherwise it
is fully taxable)
16

13. Whenever the act says any one of the following is


exempted it means that the actual amount received from
employer is one of the item to be considered for
exemption.
14. Statutory Provident fund(State and Central
government employees local authorities, railway,
Bangalore other universities) can be statutory fully
exempted.Since he is working in a college he comes under
Recognised provident fund therefore such fund never
exceeds 12% of salary and interest accrued should not
exceed 9.5%

While reading above you have to


Read word by word carefully to understand the meaning
17

15. Valuation of answer scripts of Bangalore university


comes under income from other sources as there is no
employer and employee relationship.
16. Employees contribution to Recognised provident
fund is a personal saving which can be claimed u/s
80C.
17. The savings such as statutory PF, Insurance,
repayment of principal housing loan come under
Section 80C. All savings should not go beyond
Rs.1,00,000.
18.Purchase of saree is a personal expenses which was
not paid by employer and can not be deducted from
taxable income.
18

Exercise-2:
Mr.Ajith is an 36yrs an employee of a co-operative society
in Gurgaon. His basic salary for the previous year 2007-08 is
Rs.6750/month and he gets dearness allowance of
Rs.500/month(30% of of it forms part of salary for
computation of retirement benefit). Besides he also gets
bonus of Rs.700/month and Rs.200/month as medical
allowance. His employee contributes Rs.11286 to a
recognized provident fund to which X also makes a matching
contribution. X gets an interest free loan(repayable within
8yrs) of Rs.95000 from the employer for purchasing a
house(SBI rate 10.75%). Besides, he gets Rs.12,47,660 as
interest on company deposits from a private sector
undertaking. Determine taxable income and tax liability of X
for the assessment year 2008-09
Solution next slide..

19

www.augustin.co.nr

Working notes Exercise-2

1. Meaning of Salary for Recognised provident fund


Basic +DA which comes for retirement benefit only
6750 +(30% x 500)=Rs.6,900 per month
6900 x 12= Rs.82,800 annual salary for RPF calculation
Employers contribution can not exceed 12% of salary=12% x
82800=9936 per annum.
RPF by employer exceeds 12% of salary by Rs.1350[11286-9936]
2. Employees contribution to RPF is a saving therefore Rs. 11286
saved for future comes under Section 80C along with other
savings.Total of all savings u/s 80C can not exceed Rs.1,00,000.
2. Interest on interest free loan is taxable to the extent of SBI
interest rate.

20

Basic Salary
(6750*12)
81000
Dearness Allowance (500*12)
6000
Bonus
(700*12)
8400
Medical Allowance
(Fixed)
(200*12)
2400
Excess of contribution to provident fund by
Employer[11286-(12% of 12*(6750+30% of 500)] 1350
(see note in the previous slide)
Interest on interest free loan
(95000*10.75%)
10213
NET SALARY
Add: income from other sources
TOTAL INCOME
Deduction U/S 80C:
Taxable salary
ROUNDED OFF

109363
1247660
1357660
11,286
13,46,374
13,46,370

21

Computation of Tax Liability


Net Taxable Income
1,10,000-1,50,000= 40000*10%=
150,000-250,000= 100000*20%=
250 & above=10,96,370 x 30%=
Add: surcharge of 10%
Add: 3% educational cess (on 3,88,202)
Rounded off
(nearest to 10 rupee)

13,46,370
4000
20000
328,911
352,911
35291
388,202
11646
3,99,848
3,99,850
22

Exercise-3
Mrs. X was born on July 1, 1940, She is Deputy Manager in a
company in Mumbai. She is getting a monthly salary and
dearness allowance of Rs.45000 and Rs.12000 respectively.
She also gets a house rent allowance of Rs.6000/month.
She is a member of recognized provident fund wherein she
contributes 15% of her salary and half dearness allowance.
Her employer also contributes an equal amount.
She is living in the house of minor son in Mumbai
During the previous year 2007-08, her minor son has earned
an income of Rs.30000(computed) as rent from a house
property, which had been transferred to him by Mrs.X
without consideration a few years back
During the pre-year 2007-08 she sold Government of India
23

Capital Indexed Bonds for Rs.150000 on Sep 30, 2007, which


she purchased on July 1, 2002 for Rs.80000
Her employer gave her an interest free loan of Rs.150000 on
Oct 1, 2007 to one of her sons wife for the purchase of an
Alto Maruthi Car. Nothing has been repaid to the company
towards loan.
During the pre-year 2007-08 she paid Rs.15000 by cheque to
GIC towards Medical Insurance Premium of her dependent
mother.
Compute the taxable income and tax liability of Mrs..X for the
assessment year 2008-09

24

Solution-3
Solution-3

Salary
540000
Salary(45000*12)
(45000*12)
540000
Dearness
144000
Dearnessallowance
allowance(12000*12)
(12000*12)
144000
House
72000
Houserent
rentallowance(6000*12)
allowance(6000*12)
72000
(fully
(fullytaxable
taxableasasshe
sheisisnot
notstaying
stayingininaarented
rentedhouse)
house)
Employers
Employerscontribution
contributiontotorecognized
recognizedPF
PFinin
excess
excessofof12%
12%ofofsalary
salary
[(15%-12%
18360
[(15%-12%)of
)ofRs.6,12,000]
Rs.6,12,000]
18360
(45000*12+1/2
(45000*12+1/2ofof12000*12)-meaning
12000*12)-meaningofofsalary
salaryfor
forRPF
RPF
Interest
Interestfree
freeloan[8%
loan[8%ifif150000
150000from
fromOct
Oct1,1,2007
2007
totoMarch
6000
March31,
31,2008]
2008]
6000
GROSS
780360
GROSSSALARY
SALARY
780360
Less:
nil
Less:standard
standarddeduction
deduction
nil
Income
780360
Incomefrom
fromsalary
salary
780360

25

solution-3-continues

Computation of total taxable


income
1.Income from salary
780360
2.Income from house property (deemed income of
transferor if property was transferred to minor for
inadequate consideration u/s 64)
30000
3.Long term capital gains[150000-(80000*555/447)]
index cost of acquisition to be used
51387

Taxable income

8,61,747

26

GROSS TOTAL INCOME


861747
Less: deduction
Under section 80C:
1.Employees contribution to Recognised provident fund is
saving. Therefore it comes under section 80C
[15% of(45000*12+1/2 of 12000*12)]
91800
2. Under section 80D (Medi claim insurance )
15000
NET INCOME ROUNDED OFF
754950
Tax on 51387@ 20%
How ever tax liability cannot exceed
10% of (150000-80000)
Tax on balance
TOTAL

7000
156569
163569
27

Add: surcharge
TOTAL
Add: education cess[2% of 163569]
Add: secondary and higher education cess
[1 % of 163569]
TOTAL TAX LIABILITY ROUNDED OFF

nil
163569
3271
1636
168480

Note: it is assumed that SBI lending rate for similar loan is 8%

28

Special
allowances[10(14)]
For official duties (after
Reaching office)

1.Official travel/transfer
Allowance to meet the cost
2.Conveyance allowance
to meet customers
3.daily allowance on official
Tour/journey
4.Helper allowance to carry
Official documents
5. Research allowance
6. Uniform allowance to do
Official duty

Not directly relate to


Official duty
(General)
To be
Spent
Fully
Other
Wise,
amount
not
Spent
taxable

See in
the
Next
slide
29

Not directly relate to


Official duty
(General)
1.Allowance for
transport
employees
2.Children
education
allowance

3. Traveling
allowance to
commute from
home to office
4. Other border
area allowances

&70% of allowance
Or Rs. 6000 per
month whichever is
lower exempted
Rs.100 per month
per child max.two
children.If in hostel
Rs.300 extra per
child for two
children
Rs. 800 per month.
If handicapped
person Rs.1600 per
month is exempted.
Depends on
altitude/Place

They are fixed.


Whether spent
Or not.Excess
Taxable as they
Are not given
For official
Duty
30

Perquisites
The term perquisites has been defined by section 17(2) under
different clauses as including the following itemsa.
Rent- free house [section 17(2)(i)]
b.
Concession in the matter of rent [section 17(2)(ii)]
c.
Any benefit in the case of a specified employee [section 17(2)
(iii)]
d.
Expenditure on meeting employees obligation [section 17(2)(iv)]
e.
Any sum to effect an assurance on the life of an employee
[section 17(2)(v)]
f.
The value of any other fringe benefit or amenity as may be
prescribed[ section 17(2)(vi)]

31

Perquisites with respect to movable assets-computation


Valuation of perquisite in respect of movable asset sold by an employer to
its employer [Rule-3 (7)(viii)]
If the sale price is less than the written down value (calculated as per
method and rate mentioned below) then the differences would be treated as
perquisite and the taxable in the hands of all employees.
Rates and methods of depreciation for the different types of assets are as
follows:

Types of asset

Rate of
depreciation

Method of
deprecation

# Electronic items/
computer

50%

Reducing
balance

Motor car

20%

Reducing
balance

Any other

10%

Straight line
32

# Eectronic items means: data storage and handling device like


computer , digital diaries and printer. They do not include house hold
appliances like washing machines, micro wave oven , mixers, etc.
Mathematically taxable
perquisites is as under:
Original cost employer

xxxxx

Less: accumulated depreciation as per specified rate foe


each completed during which such asset is used by the
employer

xxxxx

Written down value

xxxxx

Less: amount charged fro employee

xxxxx

Value of perquisite is positive

xxxxx

33

Exercise-1Allowances

Salary income and various allowances: Compute the gross salary of Mr.
Amal for the assessment year 2008-09on the basis of the following
information:
1. Basic pay Rs. 8,000 per month
2. DA 40% of basic pay
3. City compensatory allowance-10% of basic pay
4.Medical allowance Rs.800 per month
5. Children educational allowance- Rs. 200 per month for three children
6. Hostel expenditure allowance-Rs. 400 per child per month for 2 children
7. Tribal area allowance Rs. 500 per month in Bihar
8. Traveling allowance Rs. 12000(However actual expenditure was only
Rs. 8000 for official duties
9. Conveyance allowance Rs. 500 per month(the whole amount spent for
official duties)
10. Transport allowance- Rs. 18,600
11. Overtime allowance-Rs. 4000

34

Exercise-2(perquisites)
Mr. Deepak an employee in a company , gets a basis salary of Rs 10,000 per
month is employer has provided him the following facilities:a. He has been provided a credit card. Annual fee of such card is Rs 8,000
which is incurred by employer. The card is used for office as well as
personal purpose
b. His employer is a corporate member of a club of which initial fees is Rs.
1,00,000 and annual expenditure of Rs. 30,000 paid by the employer. The
membership is enjoyed by Mr. Deepak
c. He has been given a gift voucher of Rs. 13,500
d. He has been provided the of laptop used for office as well as personal
purpose. The cost of the asset Rs.1,20000.
e. In his office chamber , AC machine has been installed for 30,000
f. Calculate gross salary of Mr. Deepak for the assessment year 2008-09

35

computation of gross salary of Mr. Deepak for the


assessment yr 2008-09
particulars

employee

Basic salary

Solution-6
Amount
1,20,000

Credit card(perquisites becomes fringe benefit if


it falls under B category of perquisites-therefore
taxable in the hands of company employer. If he
is not a company employer, it is taxable I the
hands of employee.)

exempted

Nil

Club membership fee(taxable to company


employer)

exempted

Nil

Gift voucher is equal to cash gift (taxable to


company employer)

exempted

Nil

Laptop facilities
A.C machine facility

Exempted
Used for office
purpose

Nil

Gross Taxable salary

1,20,000

36

Exercise-9
Mrs. Sneha (Age 49 yrs) is a part time lecturer in a college Madras University.
The details of her salary and other income for the previous year 2007-2008 are
as follows:

Basic Salary

80,000

Dearness allowance (forming part of salary)

3,600

Education allowance for 2 children (exp being Rs. 900) 5,100


Hostel expenditure allowance for 1 child
(exp being 50000)
HRA

7,200
10,400

Remuneration from Bangalore University for


Being as examiner

75,650

Allowance for research which is to be completed during


Dec-April 2008(actual exp being : up to March 31-08
Rs. 2000, during April 08 Rs. 4500

8000

37

She contributes 10% of her salary to a statutory provident fund to


which the college also makes a matching contribution. She gets
reimbursed of Rs. 28000 being exp incurred on medical treatment of
her daughter in a private clinic. The bill for which is paid by the
employer.
During the year she spends Rs. 1000 on purchase of saree for wife
for year 2007-08 he paid Rs. 8000 as insurance premium on his life
policy for Rs. 60,000 ( date payment 3 April 08)
Compute the total income and tax liability for the assessment year
2008-09.

38

ANSWER-9
ANSWER-9
Computation
Computationof
ofSalary
Salary
Basic
BasicSalary
Salary
DA
DA
Education
EducationAllowance
Allowance
Exemption
Exemption100
100xx22xx12
12

80,000
80,000
3,600
3,600
5,100
5,100
2,400
2,400

2,700
2,700

7,200
7,200
Hostel
HostelAllowances
Allowances
300
300xx12
12

3,600
3,600

HRA
HRAreceived
received10,400
10,4004840
4840
Least
Leastof
ofthe
thefollowing
following
1)1) 50%
50%of
ofsalary
salaryBasic
Basic++DA
DA
83,600
83,600xx50%
50%

41800
41800

3,600
3,600
5,560
5,560

39

2) HRA received
3) The excess of Rent paid 10%
1100 x 12 = 13,200 8360

10,400
4,840

Research Allowances
Less: Exp incurred

7000
6500

1,500

Medical Allowances
Exemption

28000
15000

13,000

Income from salary


Income from other sources
Total Income

1,09,960
75,650
1,85,610

40

Exemption under sec 80C


1) 10% Provident fund 83600

8,360

Taxable Income

1,77,250

Tax liability
Taxable Income
Less: Exemption

145 150
150 250
Taxable income

1,77,250
1,45,000
32,250
5000 x 10%
2,7250 x 20%

500
5450
5950

41

Exercise-10
Mr. Manoj an employee in a HUF, gets a basic salary of Rs 10,000 per
month.The employer has further provided him in following
facilities
a. He has been provided a credit card. Annual fee of such card is Rs
8,000 which is incurred by employer. The card is used for office as
well as personal purpose
b. his employer is a corporate member of a club of which initial fees
is Rs. 1,00,000 and annual expenditure of Rs. 30,000 paid by the
employer. The membership is enjoyed by Mr. Deepak
c. He has been given a gift voucher of Rs. 13,500
d. He has been provided the of laptop used for office as well as
personal purpose. The cost of the asset Rs.1,20,000.
e. In his office chamber , AC machine has been installed for 30,000
f. Calculate gross salary of Mr. Deepak for the assessment year
2008-09

42

Solution-10
computation of gross salary of Mr. Deepak(Not
employee) for the assessment yr 2008-09
particulars

a company

Details

Amount

Basic salary

1,20,000

Credit card(B category-perquisites)- Taxable


taxable to employee)

8000

Club membership fee(taxable to


employee)

Taxable

30,000

Gift voucher

taxed

13500

Laptop facilities
A.C machine facility

Exempted
Nil
Used for office or
private purpose
Gross Taxable
salary

1,71,500

43

Exercise-11
Value of rent free accommodation : Sri Radheshyam is sales
manager of a private company and for previous year 2007-08,he
received the following emoluments (amts in Rs)
Basic Salary
248000
Bonus
16000
Dearness allowance(50% forming part of salary)
60000
Project allowance
15000
Commission on sales
16000
City compensatory allowance
25000
Medical allowance
12000
Employer contribution to recognized provision fund
20000
Salary pertaining the year 2008-09 has been received in advance
20000
He has been provided with a rent free accommodation in Jaipur
owned by the employer. The population of Jaipur may be assumed
to be 15lakhs as per 2001 census
44
Determine the taxable value of the perquisite in respect of rent free

Solution: 11
The valuation of rent free accommodation shall be 10% of the
salary i.e. 10% of
(248000+ 16000+30000+15000+16000+25000+12000)=Rs 36200
Note: Salary shall be taken on basis for the period for which
accommodation has been provided. Hence advance salary for
2008-09 shall not be taken in account.

45

Exercise-12(Value of free rent accommodation )

Sri Mohan is purchase manager of a private company and for previous year
2007-08 he received the following emolumentsBasic Salary
120000
Bonus
16000
Dearness allowance(50% forming part of salary)
60000
Project allowance
15000
Commission on purchase
16000
City compensatory allowance
25000
Medical allowance
12000
Employer contribution to recognized provision fund
20000
Salary pertaining the year 2008-09 has been received in advance
20000
He is also in part employment with B ltd and is receiving salary of Rs 80000
P.A. he has been provided with a rent free accommodation in Jaipur owned by
the employer. The population of Jaipur may be assumed to be 15 lakh as per
2001 census. Determine taxable salary.

46

Solution-12
Computation of taxable salary of Sri Mohan for assessment Year
2008-09
Basic Salary
Bonus
Dearness allowance(50% forming part of salary)
Project allowance
Commission on purchase
City compensatory allowance
Medical allowance
Employer contribution to RPF in excess of 12% of salary
[20000- 12% of (120000+ 50% of 60000)]
Salary from B ltd
Advance of salary
Value of housing facility[10% of
(120000+16000+30000+ 15000+16000+25000+12000+80000)]

Taxable Salary

120000
16000
60000
15000
16000
25000
12000
2000
80000
20000
31400
397400
47

Exercise-13
Value of concessional accommodation:
Mr.Tim is purchase manager of a private company and for the previous 2007-08 he
received the following emolumentsBasic Salary
240000
Bonus
32000
Dearness allowance(50% forming part of salary)
120000
Project allowance
30000
Commission on purchase
32000
City compensatory allowance
50000
Medical allowance
24000
Employer contribution to recognized provision fund
40000
2 months salary for year 2008-09 has been received in advance
20000
What would be the value of accommodation if the employer charges rent of Rs 2000
p.m. in the following independent cases:
The accommodation is provided in Mumbai where popln as per 2001 census exceeds
25 lakh
The accommodation is provided in Alwar where popln as per 2001 census exceeds 18
lakh
The accommodation is provided at Chomu (popln less than 10 lakh).

48

Solution: 13
The valuation of accommodation provided at concessional rent
shall be as under-

Place of accommodation

Value of perquisite

Mumbai

15% of salary less rent recovered


= Rs 70200-24000=Rs46200

Alwar

10% of salary less rent recovered


= Rs 46800-24000=Rs22800

Chomu

7.5% of salary less rent recovered


=Rs 35100-24000=Rs11100

49

PRACTICAL QUESTIONS-concept based questions. Some


basic questions.
1. In the return for the assessment year 2008-09. B claimed deduction from his
income from salary of a sum paid by him to his ex-wife by way of alimony to
her and maintenance expenses to their minor son. On 7th January,2004 by
agreement with his employers, B had agreed to creation of a first charge on
his salary in favour of his ex-wife for the payment of monthly sum. What is the
effect of this charge and the alimony payment on the taxable income in the
hands of B?

ANS: Taxable in the hands of assessee as the income is


applied.Personal commitment (as per the law) it is taxable in
the hands of B only.

50

How do deal with the following situation ?


2. Basu, M.D of a company is entitled to commission on sales as per the
service agreement entered into. A part of the commission is converted into
a purchasing a single premium deferred annuity policy from LIC of India.
Basu claims that the commission diverted to secure the deferred annuity
cant be taxed in his personal assessment.
Answer:- It is an application of income. Any income received by employee
from employer is treated as salary. The diversion of salary to meet
personal.
3. Sham is a whole time employee as a development officer in LIC of India. He
receives incentives bonus based on quantum of business procured in the
year. He claims that incentives bonus cant be wholly included as his
income and he should be allowed deduction for expenses incurred in
procuring the business.

Answer:- Latest change in the meaning of salary is that any


amount received (whatever name used ) by employee from
employer is taxable as salary. Therefore it comes under 51
salary

3. Dearness allowance @ 60% of basic pay ( 50%of which forms part


of salary for retirement benefits ) .
Answer:- Full DA fully taxable. But meaning of salary for HRA, RFA,
Pension- 50% of DA is considered.

4. He was allowed (basic pay + DA) for 4 months in march 2008 in


advance.
Answer:- Four months salary taxable. Even advance salary received is taxable
in the year of receipt.Salary is defined as receipt or due whichever is earlier is
taxable. Therefore it is taxable in the assessment year 2008-09.

5. Bonus Rs.5,000 p.m.


Answer:- Fully taxable because salary includes bonus and received
from employer by employee.
6. Research allowance Rs.10,000 p.m. amount expended for research
Rs.7,500 p.m.
Answer:- Research allowance given to meet exclusively for official purposes.The
52
amount not spent is taxable.There fore Rs. 2,500 is taxable.

7. Residential accommodation at Jaipur ( population exceeding 10


lakhs but not exceeding 25 lakhs ).

Answer:
If Residential accomodation owned by employer- Maximum 10% of
salary- amount collected by employer from employee is taxable.
(Meaning of salary is that all cash salary belongs to current previous
year and all taxable allowances and DA which comes for retirement
purposes. It excludes all perquisites and all allowances not received in
cash.)

8.The company had a gas-manufacturing unit. Rahul was provided 10


gas cylinders during the year free of cost. The cost per cylinder to the
company was Rs.165.
Answer:
The cost to the employer is taxable to the specified employee.Here
165 x 10 =1650 is taxable

53

9) He was allowed free use of 1 laptop ( actual cost Rs. 40,000 ), 1 motorcar ( actual
cost Rs.4 lakhs ) and 1 digital video camera ( actual cost Rs.60,000 ). The motorcar
was acquired by the company on 01-01-2005 and was sold to Mr. Rahul on 16 - 12 2007 at Rs.2,00,000.
Answer:
Lap top is not taxable perquisites.
Car use= Rs.1200(Car)+600(Driver) taxable in the hands of company employer as
Frindge benefit. Other than company employer employee is taxed as perquisites.
Digital camera is for entertainment. Therefore 10% of the value is perquisites to
employees.
Motor car sold 20% depreciation for each completed years to be provided on
WDV ie 2 years fully completed.WDV value=1,28,000. If sold less than this value it
is a perquisites to employees.
Note: car, food per meal exceeds Rs.50, club , credit card,company tour, stay in a
hotel or resorts- If company employer they are treated as Fringe benefits .
Therefore they are taxable to company employer.

54

10) He was given club facility for which employer incurred a


cost of Rs.75,000 during the year.
Answer:
***If he is a company employee it is not taxable to
employee. It is taxable to employer as Fringe Benefit
.Other than company employee it is taxable in the hands of
employee as perquisites.
11) He was given gifts worth Rs.10,000 on the occasion of
diwali.
***Gifts given in kind exceeds annually Rs. 5000 taxabe
not to company employee. But taxable to employer as
fringe benefits. Other than company employee it is taxable
in the hands of employee as perquisites.

55

12) He was allowed free use of mobile phone for which


employer incurred Rs. 50,000 during the year.
Answer:
Mobil phone and lap top expenditure met by employer are
exempted to employee and also to employer. However they
can be treated as company expenditure while calculating
income from business.
13) The employer contributed Rs 25,000 to an approved
superannuation fund.
Answer:
Special fund is taxable to employer as Fringe benefit.

56

14) A contribution of 14% of salary was made to recognized


provident fund by the employer and employee both. Interest
of Rs. 20,000 @ 10% was credited to the fund.
Interest excess over 9.5% is taxed to employee=20000
x.05/10=1000.
Employers contribution over 12 % of salary is taxed to
employee
Employees contribution comes under section 80C
15) The employer paid Rs.1,000 professional tax and
Rs.10,000
Professional tax paid by employer is added to salary in order
to compute actual salary.But later professional tax is
deducted from salary.
57

16) On Mr. Rahuls eldest son getting first rank in the school,
the employer gave scholarship of Rs.2500 p.m. to Rahuls
eldest sonAnswer:
Not taxable as it is given not in the capacity of employer and
employee relationship but as a meritorious student.The
scholarship is available to any one who gets first rank.

aug_bang@yahoo.com

58

17.

Rs.2,50,000 on 01 - 09 - 2007 for medical treatment Of his father for disease


specified in Rule 3A. The employer charged interest @ 5% ( interest rate
of SBI is 12.75% ). He was reimbursed Rs.2,50,000 on 01 - 12 - 2007 by an
Insurance company under a medical insurance scheme and he repaid
Rs.1,50,000 out of this to the employer on 28 - 01 - 2008.
18) Rs.20,000 interest - free for purchase of a digital investor on 01 - 05 2007 ( SBI rate12.75%).
This loan was paid back on 15 08 - 2007.
Answer:- Loan upto Rs. 20,000 from employer the interest is not taxed in
the hands of employee.
If loan is taken on specified deceases more than Rs. 20,000 the interest on
such loan also exempted.
19. Rs.10,00,000 interest free loan on 01 - 04 - 2007 for MBA course of his
spouse in UK ( SBI rate 9.25% ).
The first installment of Rs.1,00,000 in respect of this loan was paid on 01 01 - 2008.
Answer:- Interest free loan interest as per SBIs rate is calculated and
taxed in the hands of all employees.

59

20) Spend Rs.2,500 for traveling from Jaipur to Shimla by train


( 1st class ). Expenses incurred. he is also allowed free food
worth Rs.3,000.

Answer:-Since he travels for official duty all expenses are


allowed including food.
If he goes on leave travel allowance travel allowance is not
taxable. But food expenses met by employer is taxable in the
hands of employees.
21) He took a loan of Rs.40,000 @ 12% from RPF for purchase
of a bike ( SBI rate is 12.75% ).
Answer:The difference of 0.75% is taxable in the hands of employee as
this perquisites comes under A category.
You are required to compute income under the head Salaries
of Mr. Rahul
for assessment year 2008 20009, given that M/S Ram Ltd. Is
60
an employer liable to pay Fringe Benefit Tax.

Discuss profits in lieu of salary

Help others in studies. Help those who are in need including


Your knowledge.
61

Problem 4
State giving reasons whether the following are true or false:
1.
Profits in lieu of salary is taxable under the head Income from
other sources.
2.
Compensation payable to an employee on termination of service
is capital receipt. It is, therefore, not chargeable to tax.
3.
Compensation for voluntary retirement [to the extent it is not
exempt under section 10(10C)] is treated as profits in lieu of
salary.
4.
Employers contribution to unrecognized provident fund is
taxable as profits in lieu of salary in the year in which
contribution is made by the employer.
5.
Bonds received on Keyman insurance policy taken by the
employer and assigned in favour of the employee is taxable under
the head income from other sources.
6.
Overtime allowance is taxable as profits in lieu of salary

62

***ExerciseDuring the previous year 2007-08, X is paid Rs. 60,000 as basic salary; Rs. 12,000
as dearness allowance (17% of which is part of salary for computing
retirement benefits); Rs. 6,000 as commission(i.e Rs. 500 per month); Rs.
24,000 as bonus of 2002-03; Rs. 6,600 as education allowance for one child;
Rs. 14,000 as uniform allowance (amount utilised for purchasing uniform
for official purpose:16,000); Rs. 10,000 as medical allowance; and Rs.
18,000 as conveyance allowance (Rs. 6,000 for official purpose and
Rs.12,000 for personal purpose).
What will be the amount of salary for the purpose of
1.
The valuation of the perquisite in respect of rent free house.
2.
Finding out how much entertainment allowance is deductible if he is paid
entertainment allowance.
3.
Determinig exemption in respect of house rent allowance if it is paid to him.
4.
Calculating exemption in respect of gratuity paid to him under the payment
of gratuity Act 1972 if he retires on 31-3-2008.

63

answer-1
1 .Meaning of salary for Rent Free
Accommodation(RFA): Basic(annual)
60000
DA(17%)(retirement benefit-cash)
2040
Commission(Cash)
6000
Bonus(2003-04) cash received but not
belong to the current previous year
-----Educational allowance(Cash but taxable)
(Rs.100 per month exempted)(Rs.6600-1200)
5,400
Uniform allowance to do official work(spent fully)
------Medical allowance(Monthly fixed)(cash)
18,000
Conveyance allowance( Personal-cash)
12,000
-Total (meaning of salary for RFA)

1,03,440

Cash salary
Belong to
Current
Previous
Year
And cash
Allowances
Which are
Taxable are
Considered.
No perquisites
No non-cash
Salary which
Are deposited
Directly to third
Party.
64

RFA important questions to


calculate the meaning of salary
Four questions:
Step 1: Does such salary belong to current previous year?
If yes go to step 2
Step 2: Is it received in cash? (go to step-3)
Step-3: Is such cash allowance received by employee himself (not directly deposited by
employer to some funds) belong to current previous year taxable?

Step 4: How much DA will come for retirement benefit?

Step 3 value + step 4= meaning of salary for RFA

65

Question No.2
Entertainment allowance received by all
employees taxable under the head salary
first. Later for government employees, the
amount received or Rs. 5000 whichever is
less deducted u/s 16.

66

Question no.3.
For HRA the meaning of salary
Basic + which will come for retirement +
fixed % of commission for those months
HRA allowance given
Basic
60,000
DA(Retirement benefit)
2,040
Commission
Nil
Meaning of salary for HRA 62,040
67

Question-4
Meaning of salary for Gratuity under the
payment of gratuity act
Salary last drawn equal to meaning of
salary given in question no.3
Meaning of salary= 62,040.

68

Problem - self practice


X resigns from his service on April 30, 2007 to start a business and
receives Rs. 86,000 being accumulated balance of recognized
provident fund which represents Rs. 38,000 as contribution of
employer, Rs. 3,000 as interest thereon, Rs. 40,000 as his own
contribution and Rs. 5,000 as interest thereon. Discuss whether Rs.
86,000 is taxable if he had joined the employer on
1-4-2004.
1-4-1997
1-4-2004 but not resign on 30-4-2007 on completion of special
assignment for which he was appointed

69

Answer
Nothing is taxable for RPF.Dates are not
important too.
The dates may be relevant only for New
pension fund created on 1-4-2004.

70

I request you to send SMS to your friends and


relatives in our country or other countries it is a great
help that you show to India related to this web
site.You can tell all employees to read so that they can
compute tax liabilities without any bodys help.
www.augustin.co.nr is your free web for commerce
and management.
My beloved wife Prof. Shanthi Augustin and myself
thank you for your support.

Work hard and sincere to you whatever you do.


71

Exercise:First work out by your self and check the answer later

Mrs. X (age 51 years) is a part time lecturer in a private college Delhi


owned by A ltd. During the year 2007-2008, she gets basic salary of Rs.
12300 up to June 30, 2007 and Rs 12700 afterwards. Besides, she gets 30
percent of basic salary as house rent allowance, Rs. 1630 per month as
dearness allowance ( 71 % of it forms part of salary for computation of
retirement benefits) and Rs. 500 per month as conveyance allowance which
is entirely used for personal purposes. On July 10, 2007, the employer
transfers a music system to Mrs. X on her completing 10 years of service
(cost of music system purchased on September 1, 2006: Rs 22470) for Rs
7500. She is member of statutory provident fund to which both employer
and employee contribute @ 12% of basic salary. Apart from the
maintaining contribution, she makes an additional contribution of Rs 600
per month to the provident fund. During the previous year 2007-08, Rs
65698 is paid to her for checking answer sheets of different universities.
Determine the taxable income and tax liability of Mrs. X for the assessment
year 2008-09 on the assumption that she pays rent of Rs. 4000
.

72

Solution:
Basic salary (i.e., [Rs. 12300 * 3] + [Rs. 12700 * 9])
House rent allowance (i.e., 30%of Rs 151200)
Less: exempt
Dearness allowance (i.e., Rs 1630* 12)
Conveyance allowance (i.e., Rs 500 * 12)
Employers contribution to statutory provident fund
Sale of movable asset (Rs 22470 Rs 7500)
Gross salary
Less: deduction
Net salary
Income from other sources
Gross total income
Less: deduction under section 80C
Net income round off

151200
45360
31488

13872
19560
6000
nil
14970
_____
205602
nil
______
205602
65698
______
271300
25344
______
245960
______

73

Notes:
Conveyance allowance utilized for personal purposes is
not exempt from tax.
Deduction under section 80C is computed as under:
Minimum contribution to provident fund
(12 % of Rs 151200)
18144
Add: additional contribution (600 * 12)
7200
Total
25344

74

Tax on net income


19692
Add: surcharge
nil
Tax and surcharge
19692
Add: education cess [2% of tax and surcharge]
394
Add; secondary and higher education cess [1%}
197
Tax payable (rounded off)
20280Notes:
It is assumed that the salary falls due on the last day of each month.

Exemption in respect of house rent allowance is determined as follows:

Up to June
30, 2007

from July
1, 2007

50% of salary
House rent allowance
Excess of rent paid (Rs 4000) over 10% of salary

13457
_______
6729
3690
2654

13857
_______
6929
3810
2614

Amount exempt from tax (being the least)

______
2654

Salary for computation (i.e., basic salary + 71% of


Dearness allowance) (per month)

_______
2614

75

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By Professors Mrs.Shanthi Augustin& Mr. August
www. Augustin.co.nr
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Our Email.
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76