Chapter 4. INCOME FROM SALARY
(Sec. 15 – Sec. 17)
SUMMARY OF SECTIONS
Sec.
Sec.
Sec.
Sec.
Sec.
Sec.
Sec.
15 – Basis of charge
16 – Deduction allowed
17(1) – Salary
17(2) – Perquisites read with Rule 3
17(3) – Profit in lieu of salary (Deemed salary).
10 – Exempt.
89 – Relief.
Concept 1: Sec.15 Basis of charge
Income is taxable under the head IFS only if there is an employer – employee relationship.
(Contact of service) between payer & payee.
Once this relationship is established then anything receive from employer is taxable as
Salary on “Due or Receipt basis” whichever is earlier.
Employer – Employee relationship
Situation
Whether as IFS or Not ?
•
Part time job
IFS
•
Salary of working partner from partnership
PGBP
firm
•
Salary of MP/MLA/MLC
•
Income of college professor from College
IFOS
o
Salary from college
IFS
o
Examination fee from college
IFS
o
Examination fee from ICAI
•
Salary forgone
•
Salary surrendered
IFOS
IFS
Exempt
Net Basic Salary
It is a salary after certain compulsory deductions. Various deductions shall be added back to the
Net Salary and the gross amount shall be chargeable to tax.
1|Page
BY CA RAM PATIL
❖
Concept 2 : Computation of income from salary
Particulars
Amount
Amount
1. Basic salary
xxx
2. Dearness allowance/Dearness pay
xxx
3. Advance salary
xxx
(Advance against salary – Not taxable)
xxx
4. Arrears of salary
xxx
5. Commission/Incentives
xxx
6. Bonus
xxx
7. Employer contribution to PF
xxx
8. Allowance
xxx
Less : Exemptions u/s 10
xxx
9. Perquisites u/s 17(2)
xxx
10. Gratuity
xxx
11. Pension
xxx
12. Leave encashment
xxx
13. VRS compensation
xxx
14. Retrenchment compensation
xxx
GROSS SALARY
XXX
Less : Deduction U/S 16
16(ia) Standard deduction
(50000)
16(ii) Entertainment allowance
(xxx)
16(iii) Professional tax/Employment tax
(xxx)
NET SALARY
❖
(xxx)
XXX
Concept 3 : Year of tax
Grade of salary as on 01.01.2013 (Date of join)
20,000 – 1,000 – 25,000 – 2,000 – 40,000
e.g. 1 :
01.01.2013 = 20,000 pm
01.01.2014 = 21,000 pm
01.01.2015 = 22,000 pm
01.01.2016 = 23,000 pm
01.01.2017 = 24,000 pm
01.01.2018 = 25,000 pm
01.01.2019 = 27,000 pm
01.01.2020 = 29,000 pm
01.01.2021 = 31,000 pm
2|Page
BY CA RAM PATIL
➢ Salary become Due on Last Day (Generally)
➢ Taxable period = April 2020 – March 2021
01.04.2020 (29,000 * 9 months)
01.01.2021 (31,000 * 3)
= 2,61,000 + 93,000
= 3,54,000
31.03.2021
➢ Exceptionally, Salary becomes Due on first Day of each month.
01.04.2020 (29,000 * 10 months)
01.01.2021 (31,000 * 2)
31.03.2021
= 2,90,000 + 62,000
= 3,52,000
Concept 4
Advance Salary
Taxable
On Due or Receipt basis (Whichever is earlier).
Concept 5
Arrears Salary : It means salary under dispute or increase of salary retrospectively.
Taxable in the year of receipt subject to sec. 89 relief
Concept 6
Commission
Fixed % base on turnover
Other Commission
Turnover Commission
Monthly Commission
Taxable
Concept 7
Bonus / Ex gratia
Taxable
Taxable
Concept 8
On receipt basis
ALLOWANCES
Fixed monthly payment
Employer
Monetary
Employee
For private / Official use
use
3|Page
BY CA RAM PATIL
Part A: Taxable Allowances:
•
•
•
•
•
•
•
•
•
Dearness allowance
Entertainment allowance
House rent allowance
Medical allowance
Marriage allowance
Family allowance
City compensatory allowance
Overtime allowance
Project allowance, etc.
Note: Dearness allowance
D.A. as per terms
Of Employment
D.A. forming part of
Retirement Benefit
Any other D.A.
D.A. not forming part of
Retirement Benefit
D.A(T)
D.A (NT)
Taxable
Taxable
Part B: Exempt Allowances:
(a) Exempt upto Income tax limit (Actual expenditure is Irrelevant)
Children education allowance = ₹ 100 p.m. p.c.
Children hostel allowance = ₹ 300 p.m. p.c.
Underground allowance(mines) =₹ 800 p.m.
Tribal area allowance = ₹ 200 p.m.
Transport allowance [H to O] = ₹ 3200 p.m. [HC/D/D/B]
Transport allowance to transport Sector employee = 70% of amount received or
Rs. 10,000 p.m. (whichever is Lower)
4|Page
BY CA RAM PATIL
# P.m.p.c; Per month per child
# HC/D/D/B : Handicapped, Deaf, Dumb, Blind
(b) Exempt upto Actual expenditure
C - Conveyance
U - Uniform
T – Travel/Tour
H – Helper
R - Research
D - Daily
(c) Fully Exempt allowances
•
•
•
•
Allowance to UNO employee
Allowance to UPSC member
Foreign allowances to Govt. employees working outside India
Sumptuary allowance given to High court/Supreme court Judges
Note 1
An employee, being an assessee, who opts for the provisions of section 115BAC would be entitled for
exemption only in respect of travelling allowance, daily allowance and conveyance allowance.
Note 2
An employee, being an assessee, who opts for the provisions of section 115BAC would be entitled for
exemption only in respect of transport allowance granted to an employee who is blind or deaf and
dumb or orthopedically handicapped with disability of the lower extremities of the body to the
extent of Rs. 3,200 p.m.
5|Page
BY CA RAM PATIL
Note: Entertainment Allowance
Step 1 : Taxable to all (Govt. / Non – govt employees)
Step 2 : Deduction U/S 16 (Only to Govt. employees)
Deduction
1/5 * Basic Salary
Actual entertainment allowance received
Maximum ₹ 5,000 p.a.
(Lower)
Note: House Rent Allowance (HRA)
HRA Received
Exemption u/s
10(13A)
(a) 40% / 50% of Salary
(b) HRA Received
(c) Rent paid (-) 10% of Salary
TAXABLE HRA
xxx
xx
xx
xx
(xxx)
XXX
# Salary = Basic salary + DA (T) + Turnover commission for Relevant period.
• 50% for Metro cities [Mumbai, Delhi, Chennai, Kolkata]
• 40% for Non – Metro cities.
# Relevant Period : Period for which Accommodation was actually occupied by Assessee.
6|Page
BY CA RAM PATIL
Concept 9: Retirement Benefits
I.
Gratuity
Gratuity
Voluntary payment
Employer
In appreciation of
service rendered
During
Employment
Fully Taxable
Employee
At Retirement
Exempt u/s
10(10)
Exempt u/s 10(10)
Govt Employee
[Sec 10(10)(i)]
Fully Exempt
•
•
•
POGA 1972
Employee
Any Other
Employee
[Sec 10(10)(ii)]
[Sec 10(10)(iii)]
15/26 * Last month salary *
Rounded no. of year of service
Actual Gratuity Received
Statutory Limit Rs. 20 Lacs
Whichever is Lower is
Exempt
•
•
•
1/2 * Avg salary p.m *
Completed no. of year of
service
Actual Gratuity Received
Statutory Limit Rs.20 Lacs
Whichever is Lower is
Exempt
7|Page
BY CA RAM PATIL
Note 1
POGA 1972 Employees
# Salary = Basic salary +
DA
# Rounded year of service = Rounded off only if fraction exceeds 6 months
Eg: 32 years 8 M = 33 years
32 years 4 M = 32 years
32 years 6 M = 32 years
Note 2
Any other employees
# Salary = Basic salary + DA + T/O commission for 10 months
# Average salary per month = salary of 10 months preceding the month of retirement
10
[ Excluding month of retirement]
# Ignore fraction year
# Where gratuity is received in any earlier from former employer and again received from another
employer in a later year, the limit of Rs. 20,00,000 will be reduced by the amount of gratuity exempt
Earlier.
Note 3
Taxable gratuity = Gratuity received – Gratuity exempted u/s 10(10).
8|Page
BY CA RAM PATIL
II. Pension
Pension
Uncommuted
Pension
Commuted Pension
Fully Taxable to all
employees
Exempt u/s
10(10A)
Govt
Employee
Fully Exempt
Other Employee
Gratuity
Received
Exemption=1/3 of full amount
of pension
Gratuity Not
Received
Exemption=1/2 of full
amount of pension
* Full amount of pension = Commuted pension
% of commuted pension
* Taxable commuted pension = Pension received – Pension exempted u/s 10(10A)
* Do not forget to take uncommuted pension after commutation
9|Page
BY CA RAM PATIL
III.
Leave encashment
Leave Encashment
During Employment
At Retirement
Fully Taxable to all
employees
Exempt u/s
10(10AA)
Govt Employee
Other Employee
Fully Exempt
Whichever is Lower
is Exempt
•
•
•
•
Leave credit in months * avg salary p.m
10M * Avg salary p.m
Actual Leave Encashment Received
Statutory Limit= Rs.3 Lacs
* Leave credit
Leave allowed
Max 30 days x completed of service
less: leave taken
Leave credit (in days) / 30 days
Leave credit in months
xx
xx
xxx
30
xx
# Average salary p/m = BS + DA (T) + T/0 for 10 months preceding the date of retirement
10
10 | P a g e
BY CA RAM PATIL
III.
Retrenchment compensation Sec. 10(10B)
1. Amount as per sec. 25 (F) of industrial dispute Act 1974.
2. Actual Retrenchment compensation .
3. Statutory limit : 500,000
(Whichever is Lower)
IV. Voluntary Retirement Compensation Sec 10(10C)
i.(a) Salary p.m x 3 months x No. of years of completion of services [ignore fraction]
i.(b) Salary p.m x No. of remaining months of service
ii. Actual compensation received
iii. Maximum Rs. 5,00,000
o
Salary p.m = Basic + DA(T) + T/O commission
o
Exemption can be under this section only once in a lifetime.
o
Assessee can either claim exemption or relief but not both.
V. Provident Fund
Interest
Employee contribution
SPF/RPF/URPF/P
PF
Employer Contribution
Lumpsum Amount on withdrawal
PF = Employee contribution + Employer contribution + Interest contribution
11 | P a g e
BY CA RAM PATIL
Tax Treatment of Provident Fund
Particulars
SPF
RPF
Employee
Sec 80C
Sec 80C
Contribution
available
available
(Investment)
Employer’s
Exempt
Exempt upto
Contribution
12% of salary
(Income)
[BS+DS+TOC]
Interest
Exempt
Exempt upto
9.5% pa
Lumpsum
Exempt
Exempt *
URPF
Sec 80C not
available
PPF
Sec 80C
available
Not taxable
----
SAF
Sec 80C available
Not taxable
Exempt
Exempt upto Rs
7,50,000 [excess is
taxable u/s 17(2)(vii)]
Note
Taxable*
Exempt
Exempt u/s 10(13)
-
*Exemption is available only if period of employment exceeds 5 years. Pre-matured withdrawal.
From RPF in ordinary situations is taxable and hence RPF shall deduct TDS u/s 192 A.
Note
The amount or aggregate of amounts of any contribution made o in a recognised provident fund
o in NPS referred to in section 80CCD(1)
o in an approved superannuation fund by the employer to the account of the assessee, to the
extent it exceeds Rs.7,50,000
Any annual accretion by way of interest, dividend or any other amount of similar nature shall be
treated as perquisites to the extent it relates to the contribution referred above (in excess of Rs.
7,50,000).
Withdrawal from UPRF
Employee
Contribution
Not an income
Employer
Contribution
Taxable as IFS
Interest on
Employee Contribution
Taxable as IFOS
Interest on
Employer
Contribution
Taxable as IFS
12 | P a g e
BY CA RAM PATIL
Has the employee rendered continuous
service of at least 5 years with the employer?
No
Yes
Exempt
Are his services terminated due to
(i) his ill-health (ii) contraction or
discontinuance of employer’s
business or (iii) any other cause
beyond the control of the
employee?
No
Yes
Exempt
Is the entire balance
standing to the credit of
the employee
transferred to his
individual account in any
RPF maintained with his
new employer?
No
T
a
x
a No
b
l
e
Is the entire balance
standing to the credit of
the employee
transferred to his NPS
account referred to in
section 80CCD and
notified by the Central
Government?
Yes
Yes
Exempt
Exempt
13 | P a g e
BY CA RAM PATIL
Concept 10: Perquisites
Non Monetary Benefits
(personal Nature)
Employer
Employee
Taxable value
Sec 17(2) read with Rule of Income tax Act 1962
TYPES OF PREQUISITIES
Taxable perquisites (19)
Taxable to all Employee
1. Accommodation
2. Life Insurance
3. Contribution to
Superannuation Fund
4. Interest free loan
5. Use of movable Assets
6. Transfer of movable Assets
7. Gift from employer
8. Credit card facility
9. Club facility
10. Free food
11. ESOP
12. Tour and travel
13. Obligation of employee
By employer
Exempt perquisites
1. perquisites received by
HS/SC Judges
Taxable to specified employees 2. Perquisites received by
Government employee outside
1. Domestic Servant Facility
India
2. Gas/water/Electricity
3. Perquisites received
3. Education Facility
employee UNO
4. Medical Facility
4. Perquisites received by
5. Use of motorcar
member of UPSC
6. Leave travel concession.
5. Telephone Facility.
* Specified Employee
(i)
Employee who is director
(ii)
Employee who is a Substantial (20% or More) Shareholder
(iii)
Employee whose net cash taxable salary > 50,000 p.a
14 | P a g e
BY CA RAM PATIL
A.
1.
Perquisites Taxable to all Employees:
Accommodation
(a)
Rent free unfurnished Accommodation (RF UFA)
Government Employee
Other Employee
T/V/P = License fee
Owned by Employer
Depends on population (2001)
Upto 10L
T/V/P = 7.5 % of
Salary
10L -25L
T/V/P = 10%
(b) Rent free furnished Accommodation
Value of RFUFA
Add : value of furniture
T/V/P of RFFA
Abv 25L
Hired by Employer
T/V/P = 1) 15% of
Salary
or
2) Hire
charges
T/V/P = 15%
(RFFA)
xx
xx
xxx
15 | P a g e
BY CA RAM PATIL
l
o
w
e
r
Value of furniture
Owned by employer
Hired by employer
T/V/P =10% p.a of original
Cost ( ignore WDV )
(c)
T/V/P = Hire charges
Concessional Accommodation (CA)
Value of RFFA / RFUFA
Less : Amount recovered from employee
T/V/P of CA
(d)
xxx
(xxx)
xxx
Hotel Accommodation
Upto 15 days
Above 15 days T/V/P
T/V/P – Nil
T/V/P = 24 % of salary
Or
Hotel charge
(e)
Dual Accommodation
Upto 90 days
After 90 days
T/V/P = House1 or House2
T/V/P = House1 + House2
* Salary
Includes
B = Basic Salary
D = Dearness Allowance (T)
A = Other Taxable Allowance
B = Bonus
C = Commission
M = Other Monetary Benefits
Excludes
* DA ( NT)
* Exempt allowance
* Employer contribution
to PF
* Other Retirement
benefits.
16 | P a g e
BY CA RAM PATIL
Salary for relevant period – the period for which accommodation was actually occupied by
Assessee.
Accommodation provided at project sites, mines, power plant etc. is official in nature.
Therefore, not taxable.
2. Life Insurance.
T/V/P = Premium Paid by employer.
# Medical or accidentally policy premium paid by employer is exempt (health care).
3. Employer Contribution to RPF/ Pension Fund u/s 80CCD(1)/ Superannuation Fund
T/V/P
Upto 7.5 L p.a.
Above. 7.5 L p.a.
Exempt
Excess taxable
4. Interest Free Loan
For treatment of specified diseases
T/V/P = Nil
upto 20,000
T/V/P = Nil
Any Other Purpose
aggregate amt. loan > 20,000
TV/P = Max Monthly O/S
Interest rate
Balance as on last
x of SBI on 1st
date of each month.
day of Payment
Interest charged
- by the Employer
17 | P a g e
BY CA RAM PATIL
x1
12
4. Use of Movable Assets
Laptop/computer
Any other Assets
TV/P – Nil
Owned by Employer
Hired by Employer
TV/P = 10% of cost
(ignore WDV)
TV/P = Hire charge
5. Transfer of movable Assets.
T/V/P = Original cost / or WDV – sale price
New
Particulars
Original cost
( - ) Depreciation for
each completed year
closing WDV
( - ) Amount received
from employee ( SP )
T/V/P
Old
Lap/computer
Motor car
Other Assets
xxx
xxx
xxx
50% (WDV)
20% (WDV)
10% (SLM)
XXX
XXX
XXX
Eg:- Employer transferred laptop for Rs. 2000 to employee
[ o.c = 100,000; period of use = 3 years / months ]
Original cost
(-) Depn y1 @ 50%
WDV
(-) Depn y2 @50%
WDV
(-) Depn y3 @50%
WDV
(-) Depn for 8 months
WDV
(-)
Selling price
T/V/P
100,000
50,000
50,000
25,000
25,000
12,500
12,500
12,500
2000
10500
18 | P a g e
BY CA RAM PATIL
7. Gift from Employer
Monetary Gift
TVP = cost to employees
Non-Monetary Gift
( in kind/ voucher )
Upto 5000
Above 5000
T/V/P = Nil
full amount
Will be
Taxable
T/V/P =
8. Credit card / 9. Club facility
Wholly and exclusively
Related to business
Otherwise
TVP = Nil
TVP = cost to employer
10. Free food
Tea / Snacks
During working hours
Any other
Time
T/V/P = Nil
T/V/P = Fully taxable
In office / Factory Premises
Any other premises
T/V/P = Fully taxable
Upto 250 meal
T/V/P = Nil
Above Rs. 50/meal
T/V/P = excess taxable *
* Assume 30 working days .
T/V/P = cost of employer – ( 50 x 300 )
19 | P a g e
BY CA RAM PATIL
11. ESOP / ESOS / Sweat equity
T/V/P = [ Fair Market value – Issue price] x No. of shares
Note : cost of acquisition = FMV taken u/s 17( 2 ) in capital gain
Fair Market Value
Listed Securities
Exercise on Trading Day
Average Price
[(Op Price + Cl Price)/2]
Exercise on non-trading
Day
Closing Price on
preceding previous
trading day
Unlisted Securities
Value determined by
Merchant Banker
As on
Date of exercising of the option
Or
Earlier date but not earlier than
180 days from the date of the
exercising the option
Note
If shares are listed on more than one recognized stock exchange then the FMV on RSE
which records the highest volume of trading in the share.
Year of Tax
Tax on perquisite of specified securities and sweat equity shares is required to be paid in
the year of exercising of option.
However, where such shares or securities are allotted by the current employer, being
an eligible start-up referred to in section 80-IAC, the perquisite is taxable in the year
• after the expiry of 48 months from the end of the relevant assessment year
• in which sale of such security or share are made by the assessee
• in which the assessee ceases to be the employee of the employer
whichever is earlier
20 | P a g e
BY CA RAM PATIL
12. Tour and Travel
Official Nature
T/V/P = Nil
Personal Nature
eg. Official tour with
Family or extended
Tour
T/V/P = cost of
Employer
Free travel ticket
for Airline /
Railway employee
T/V/P = Nil
Any other
sector employee
T/V/P =
Fare charged
to other
Passenger
13. Obligation of Employee paid by Employer
T/V/P = cost to employer – amt. recovered by employer
B. Perquisites Taxable only to specified Employees.
1. Domestic Servant Facility
Servant provide by Employer
T/V/P = cost of the Employer
2. Gas/ water /Electricity Facility
Provided by outside agency
Provided by the employer
T/V/P = Invoice amt (cost employer)
eg : [ TATA power to
TATA Employee
TVP = Manufacturing Cost
p.u x unit consumed
By Employer
21 | P a g e
BY CA RAM PATIL
3. Education Facility
To children of
Employee
To Employee
T/V/P= Nil
In school Owned/
Controlled by
Employer
To any other Family
Member
T/V/P= Cost to
Employer
In any other
School
Cost upto Rs.1000
p.m. p.c.
Cost > Rs.1000 p.m.
p.c.
T/V/P= Nil
T/V/P= Fully Taxable
T/V/P= Cost to
Employer
4. Medical Facility
In India
Outside India
In Employer’s
hospital/Govt.
hospital/
Recognized
Hospital
T/V/P = Nil
Any Other
Place
Cost of
Treatment (P)
Cost of Stay
(P+1A)
Cost of Travel
(P+1A)
Upto RBI
Limit
Above RBI
Limit
GTI upto 2L
T/V/P =
Nil
T/V/P
Cost to Employer
– RBI Limit
T/V/P =
Nil
T/V/P = Fully
Taxable
GTI = Gross Total Income
22 | P a g e
BY CA RAM PATIL
GTI > 2L
T/V/P =
Fully
Taxable
# Medical allowance = Fully Taxable
# Medical Insurance = Fully exempt
Patient
Employee
Spouse
Children
Dependent
Parent
Brother
Sister
5. Leave travel concession
Exempt u/s 10(5)
Exemption =
1. Amt received from employer
2. Amt spend by employee
3. Income tax limit
*Income tax limit
Journey performed by Air
Exempt : Air fare of economy
Class by shortest route .
By any other mode
places are connected
By railways
places are not
Connected by
Railways
Exempt: AC 1st class
Rail fare
Recognised public
Transport exists
Exempt: fare of Deluxe
Class
Any other case
( deemed )
Exempt: Rail fare
of AC 1st class for
Similar distance
# Journey must be performed in India.
# Exemption is for maximum 2 Journeys in the block of 4 calendar year.
23 | P a g e
BY CA RAM PATIL
Relative
Employee
Spouse
Children max 2 c ( except )*
Dependent
Parent
Brother
Sister
* Multiple birth taken after 1st child shall be considered as one
6. Motorcar
Exclusive for office use
Exclusive for office use
OR
H
( house )
10% p.a original cost/hire change
Running & Maintenance exp
by employer
Driver salary given by employer
O
( office )
T/V/P = Nil
Less : amt recovered from
Employee
T/V/P
xxx
xxx
xxx
xxx
(xxx)
xxx
Partly for office & partly for private use [ only one car ]
Car owned by employer
Car owned by employee
Running and maintenance
Running and maintenance
By employer
By employee
T/V/P = 1800*/
2400* p.m
T/V/P = 600*/900* p.m
By employer
T/V/P =
R & M exp
paid by e’er
(-) std amt for
Office use
(1800*/ 2400* Pm)
By employee
T/V/P= Nil
* If driver is provided by employer then all std amounts will be increased by Rs. 900 P.m.
24 | P a g e
BY CA RAM PATIL
Concept 11: Deduction [Section 16]
Section 16 (ia) : Standard deduction .
1. Actually salary
or
2. Maximum 50,000
Section 16 (ii) : Entertainment Allowance .
Only for govt. employee
Section 16 (iii) : Profession tax / Employment tax
Deduction is allowed only on payment basis
If Profession tax is paid by employer
Step 1 : Taxable as salary ( perquisites )
Step 2 : Deduction allowed u/s 16
Concept 12: TDS implication on Salary [Form 16]
Sec
Nature of
payment
Threshold Limit for
TDS
Payer
Payee
Rate of TDS
192
Salary
BEL (2,50,000/
3,00,000, as the
case may be). This is
taken care of in
computation of the
average rate of
income-tax.
Any Person
Individual
/Employee
Average rate
of income- tax
computed on
the basis of
the rates in
force
192A
Premature
withdrawal
from
Employee
Provident
Fund
Payment or
aggregate payment ≥
Rs. 50,000
Trustees of
the EPF
Scheme or any
authorised
person under
the Scheme
Individual
/Employee
10% [In case
of failure to
furnish PAN,
TDS@
Maximum
Marginal Rate]
25 | P a g e
BY CA RAM PATIL
Concept 13: Computation of Relief u/s 89
Relevant PY – Year of receipt of Arrears of salary:
Tax on total income (including arrears of salary)
Tax on total income (excluding arrears of salary)
Tax on arrears (difference b/w above) –[A]
Relevant PY – Year to which Arrears of salary pertain:
Tax on total income (including arrears of salary)
Tax on total income (excluding arrears of salary)
Tax on arrears (difference b/w above) –[B]
Relief u/s 89 [A-B]
xxx
(xxx)
xxx
xxx
(xxx)
xxx
xxx
26 | P a g e
BY CA RAM PATIL