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
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