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Income under the head Salaries and its computation

Expression Salary
Relationship between Payer and Payee: If this relationship does not exist then income generated will be taxable under other heads. No difference between salaries and wages. Salary from more than one source. Salary from former employer, present employer or prospective employers. Salary income must be real and not fictitious.

Salary under section 17(1)


Under section 17(1), salary is defined to include the following: a. Wages. b. Any gratuity or pension. c. Any gratuity. d. Any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages. e. Any advance of salary. f. Any payment received by an employee in respect of any period of leave not availed by him.

Computation of Salary Income


Basic, DA, Advance Salary, Arrears of Salary, Salary in lieu of notice, fees, commission, bonus and annuity, and remuneration for extra work. Gratuity Leave Encashment Pension Retrenchment Compensation

Place of accrual of salary income


(ii)income which falls under the head Salaries, if it is earned in India. (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India ;] (iii) income chargeable under the head Salaries payable by the Government to a citizen of India for service outside India ;

Who is employee

Who is employer

Where service Is it taxable in India is rendered

Salary

Allowance / Perks No

Indian Citizen Government of Outside India Yes India

NRI

Any

Outside India No

No

Resident and Any ordinarily resident

Anywhere

Yes

Yes

Leave Salary
In case of a Central/State Government employee, any amount received as cash equivalent of leave salary in respect of period of earned leave at his credit at the time of retirement is exempted from tax. In case of leave encashment during continuity of employment it is chargeable to tax irrespective of Government or Non-Government Employees. In the case of a non Government employee leave salary is exempt from tax on the basis of the following rule:-

Leave Salary for Non-Government Employee


Period of earned leave (in number of months) to the credit of the employee at the time of retirement or leaving the job X Average monthly salary. 10 X Average Monthly Salary (For calculations salary includes basic salary and dearness allowance) The amount specified by the Government [i.e.Rs.3,00,000 applicable from April 1, 1998 Leave encashment actually received at the time of retirement

Gratuity (Retirement Benefits)


Any death cum retirement gratuity received by Government employees is wholly exempt from tax. Any gratuity received by an employee covered by the Payment of Gratuity Act,1972 is exempted from the tax on following basis

Gratuity in case of employee covered under payment of gratuity act, 1972 15 days salary(15/26)* X Length of service Rs. 3,50,000 Gratuity actually received

*For calculation purpose salary includes basic salary and dearness allowance

Calculation of Length of Service for employees covered under gratuity act, 1972
26 years, 5 months and 29 days 26 years and 6 months 26 years, 6 months and 1 day 26 years, 11 months and 29 days 26 years 26 years 27 years 27 years

Gratuity in case of employee not covered under payment of gratuity act, 1972 Half months average service(15/30) X Length of service Rs. 3,50,000 Gratuity actually received

*For calculation purpose salary includes basic salary and dearness allowance

Calculation of Length of Service for employees not covered under gratuity act, 1972
26 years, 5 months and 29 days 26 years and 6 months 26 years, 6 months and 1 day 26 years, 11 months and 29 days 26 years 26 years 26 years 26 years

Pension
Pension Uncommuted Pension Status of Employee Government /NonGovernment employee Government employee It is chargeable to tax Chargeable

Commuted Pension Commuted Pension

Fully exempted

Non-Government Fully or partly employee exempted

Pension
In the case of Government employees the entire amount (commuted) is exempt from tax. In the case of non-Government employees the maximum amount exempt from tax is restricted to the commuted value of 1/3rd of pension (gratuity received) In the case of non-Government employees the maximum amount exempt from tax is restricted to the commuted value of 1/2 of pension (gratuity not received)

X retires from Government employee on June 30, 2009. He gets pension of Rs. 20,000 per month up to January 31, 2010. With effect from February 1, 2010, he gets 60 percent of pension commuted for Rs. 10,71,000. He also receives gratuity. Does it make any difference if X is non government employee? Commuted Value - Government Employee Commuted Value of pension Rs.10,71,000 is not taxable. Uncommuted Value Government Employee Uncommuted Value of pension Rs. 20,000 is taxable. (20,000*12) = 2,40,000 (8000*2) = 16,000

Uncommuted Value (Non-Government Employee) 60% commuted value of pension is 10,71,000. Full value of pension is (10,71,000 / 0.6) = 17,85,000. If X receives gratuity then, Amount exempted (1/3 of commuted value of pension i.e. 1/3 x Rs.17, 85,000 = 8,92,500 Commuted pension chargeable to tax as salary (i.e. Rs. 10,71,000 Rs.8,92,500) = Rs.1,78,500

Provident Fund
Employees provident fund may be of the following types:

a. Statutory Provident Fund Government Employee b. Recognized Provident Fund NonGovernment Employee c. Unrecognized Provident Fund.

Statutory Provident Fund

Recognized Provident Fund

Unrecog. Provident Fund Exempt from tax

Employers Exempt from tax contribution to PF Deduction under Available 80cc Interest credited toExempted provident fund

Exempted upto 12% of salary Available

Not Available

Exempted upto 9.5%

Exempted

Lump sum Exempted payment at time of retirement

Exempted in someInterest of cases employees contribution is taxable

Retrenchment Compensation[Sec.10(10B)] Compensation received by a workman at the time of retirement is exempted from tax.

Allowances
CCA, Tiffin Allowance, Fixed Allowance, Servant Allowance HRA Entertainment Allowance Special Allowance Foreign Allowance Any Other Cash Allowance Medical

Other Allowances
Tiffin Allowance Fixed Medical Allowance Servant Allowance Transport Allowance Washing Allowance Dating Allowance Stitching Allowance

City Compensatory Allowance


It is always taxable.

House Rent Allowance


Exemption in respect of house rent allowance is regulated as follows: 1. An amount equal to 50% of salary*, where residential house is situated in Metros and an amount equal to 40% of salary where residential house in non metros. 2. HRA received 3. Excess of rent paid over 10% of salary *Salary for calculation means basic salary, dearness allowance and commission.

Entertainment Allowance
1. a deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee who is in receipt of a salary from the Government, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less;]

Transport Allowance
It is exempted upto Rs. 800 per month (Rs.1600 per month in the case of an employee who is blind or handicapped)

Definition of Perquisites
Perquisites are benefits or amenities provided in kind by the employer free of cost or at a concessional rate.

Perquisites
Rent-free Accommodation Concession in Rent Gas, Electricity and Water Supply Free Education Free Domestic Servant Movable assets Interest-free or concessional loan

Perquisites and Specified Employee


The specified employees include the following:a) Director employee, whether full time or part time. b) Employee who is beneficial owner of equity in the employer's company carrying 20% or more voting power. c) The employees other than those mentioned above, drawing salary in excess of Rs. 24,000 (w.e.f. 13th April 2002 this limit is Rs. 50,000) in monetary terms.

Valuation of Rent Free Accommodation


In case of Government employees value of the perquisites will be equal to the licence fee which would have been determined by the Central Govt. In case of Private Sector employees value of the perquisites would depend upon salary of the employee.

Population of city as Where the accomdn. per 2001 census Is owned by the where employer accommodation is provided Exceeding 25 lakh 15% salary

Where the accomodation is taken on lease or rent by employer

Amount of lease rent paid or 15% of salary, whichever is lower

Exceeding 10 lakh but not 25 lakh

10% salary

Same as above

Any other

7.5% salary

Same as above

Valuation of rent free furnished accomodation


Case 1: A furnished accommodation (not being a hotel accommodation) Case 2: Accommodation provided in hotel

A furnished accommodation (not being in a hotel)


Step 1: Find out value of the perquisite on the assumption that the accommodation is unfurnished. Step 2: To the value so arrived at, add value of furniture. Value of the furniture for this purpose is as follows: a. 10 per cent per annum of the original cost of furniture, if furniture is owned by the employer. b. Actual hire charges payable (whether paid or payable), if furniture is hire by the employer

A furnished accommodation in a hotel


1. 24% of salary paid or payable for the period during which such accommodation is provided in the previous year. 2. Actual charges paid or payable by the employer to such hotel.

Exception
Condition 1: Not chargeable to tax if provided in a remote area Condition 2: Hotel Accommodation for 15 days (in aggregate in a previous year) can be provided immediately after transfer at the new location. Condition 3: If it is provided to a High Court Judge, Supreme Court Judge, Union Minister, Leader of Opposition in Parliament and an Official in Parliament.

Valuation of accommodation provided at concessional rent [sec. 17(2) (ii)]


Step 1: Find out the value of perquisite on the assumption that no rent is charged by the employer. Step 2: From the value so arrived at, deduct the rent charged by the employer from the employee.

Amount spent for providing free education facilities to, and training of the employee, is not taxable. Fixed Education Allowance given in cash by the employer to meet the cost of education of the family members of the employee is exempt from tax to the extent of Rs. 100 per month per child (up to maximum of two children). Moreover, any allowance granted to an employee to meet hostel expenditure of his child is exempt from tax to the extent of Rs. 300 per month per child for a maximum of two children. School fees of the family members of the employees, paid by the employer directly to the school, is taxable as a perquisite in all cases. Reimbursement of expenditure incurred for the education of the family members of the employee is taxable as perquisite in all cases.

Different Situation a. Where education facility is provided to the employees children: 2. Where cost of education does not exceed Rs.1000/3. It exceed Rs.1000/b. Where educational facility is provided to member of family.

Amount chargeable to tax

---Nil--Amount excess than Rs.1000/Actual cost of education in vicinity institution minus amount recovered from employee

Exception: Not taxable if employee is a non-specified.

Valuation of perquisite in respect of free domestic servants


Value of free service of all personal attendants including a sweeper, gardener, or watchman is to be at actual cost to the employer. Where attendant(s) is provided at the residence of employee, full cost will be taxed as perquisite in the hands of employee irrespective of degree of personal service rendered to him. Any amount paid by the employee for such facilities shall be reduced from the above amount. Exception: Not taxable if the employee is a non-specified employee.

Valuation of perquisite in respect of gas, electricity energy or water supply


Mode of Valuation Purchased by employer from outside Supplied by employer Manufacturing cost per unit

Step 1- Find out Amount payable cost to the by the employer employer Step 2 Amount Recovered from recovered from an employee employee

Recovery from an employee

Exception: Not taxable if the employee is non specified.

Valuation of perquisite in respect of gas, electricity energy or water supply

Employees obligation met by employer [sec. 17(2) (iv)]


Amount paid by an employer in respect of any obligation which otherwise would have been payable by the employee is taxable in all cases.

Valuation of perquisite in respect of interest free loan or loan at concessional rate of interest
Step 1: Find out the maximum outstanding monthly balance Step 2: Find out rate of interest charged by the State Bank Of India. Step 3: Calculate interest for each month of the previous year on the outstanding amount mentioned in Step 1 at the rate of interest given in Step 2. Step 4: From the total interest calculated for the entire previous year under Step 3, deduct interest actually recovered, if any, from the employee during the previous year. Step 5: The balancing amount is taxable value of the perquisite.

When loan is not chargeable to tax


Exemption 1: If loan is made available for medical treatment in respect of diseases specified in rule 3A. Exemption 2: Where the amount of original loan (or loans) does not exceed in the aggregate Rs. 20000

Mode of valuation Step 1: Find out cost to employer

Computers/ Laptops/ Cars Nil

Owned by employer 10%per annum of actual cost

Taken on hire by employer Amount of rent paid or payable

Step 2: Less: Nil Amt. recovered from employee Taxable value Nil of perquisite

Recovery from Recovery from the employee the employee

Balancing Amount

Balancing Amount

*All the above perqs are taxable to employer as fringe benefit tax.

Valuation of perquisite in respect of lunch / refreshment


Anything which costs to the employer in excess of Rs.50 per meal minus amount recovered from an employee equal to balancing amount is taxable. Tea or snacks in working hours provided to an employee not taxable. Food and non-alcoholic beverages provided in working hours in remote area is not taxable.

Valuation of perquisite in respect of gift, voucher or token


1. Gifts made in cash or convertible into money (like gift cheques) are taxable. 2. Gifts up to Rs.5000 in aggregate per annum would be exempted.

Valuation of perquisite in respect of credit card


Step 1: Find out expenditure incurred by the employer in respect of credit card used by the employee. Step 2: Less: Expenditure on use for official purposes. Step 3: Less: Amount recovered from the employee.

Other Valuations
Valuation of perquisite in respect of free transport. Valuation of perquisite in respect of travelling, touring, accomodation.

Valuation of the perquisite in respect of movable assets sold by an employer to employees at a nominal price

Mode of valuation Electronic items

Motor cars

Any other asset

Step1: Find out Actual cost to the Actual cost to the Actual cost to the cost of the asset employer employer employer to employer Step2: Less: 50% for each Normal wear and completed year tear for completed years Step3: Less: Amt. Consideration recovered from recovered from employee the employee Step4: Taxable Balancing value of the perq Amount 20% for each completed year 10% for each completed year

Consideration recovered from the employee Balancing Amount

Consideration recovered from the employee Balancing Amount

Where car is owned by the employee


A. When car expenses are met by the employee Not taxable. B. When maintenance or running expenses are met or reimbursed by the employer. c. If the car is used for official purpose Not taxable. d. If the car is used wholly for private purposes (Actual expenditure amount recovered) e. If the car is used partly used for official purposes and partly for private purposes (actual expenditure amount used for official purpose* amount recovered from an employee) *A sum calculated at the rate of Rs.1200 per month where the cubic capacity of the engine does not exceed 1.6litres(1600cc) and Rs.1600 if it exceeds 1.6litres and Rs.600 if chauffeur is provided

When car is owned or hired by employer


A. When maintenance and running expenses are met or reimbursed by employer. a. If the car is used wholly for official purposes Exempted. b. If the car is used for private purposes of the employee. Step 1: Find out actual expenditure incurred by the employer (i.e expenditure on running and maintenance including remuneration of the chauffeur plus normal wear and tear of the car @10% per annum) Step 2: Find out the amount recovered from the employee. Balancing amount is taxable value of the perquisite.

c. If the car is used partly for official and partly for private purposes of the employee or any member of the household. A sum calculated at the rate of Rs.1200 per month where the cubic capacity of the engine does not exceed 1.6litres(1600cc) and Rs.1600 if it exceeds 1.6litres and Rs.600 if chauffeur is provided Note: In this case nothing is deductible in respect of any amount recovered from the employee.

When maintenance and running expenses are met by the employee


a. If the car is used for official purpose Not taxable. b. If the car is used for private purpose Step 1: Find out actual expenditure incurred by the employer (i.e expenditure on running and maintenance including remuneration of the chauffeur plus normal wear and tear of the car @10% per annum) Step 2: Find out the amount recovered from the employee. Balancing amount is taxable value of the perquisite.

c. If the car is used partly for official and partly for private purposes of the employee or any member of the household. A sum calculated at the rate of Rs.1200 per month where the cubic capacity of the engine does not exceed 1.6litres(1600cc) and Rs.1600 if it exceeds 1.6litres and Rs.600 if chauffeur is provided Note: In this case nothing is deductible in respect of any amount recovered from the employee.