SALARY INCOME
(Sec15,16 & 17)
What is salary?
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Payer & Payee
More than one source
Foregoing salary is salary income
Tax free salary should include the tax paid
by the employee
Basis of Charge
• Salary is chargeable to tax when it is due to
be paid whether it is paid or not
• Salary is chargeable to tax when any amount
is paid whether it is due or not
• Arrears of salary paid to employee is
chargeable to tax.
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CHART SHOWING COMPUTATION OF INCOME FROM
SALARIES
Salary/wages
Advance salary
Dearness Pay
Dearness allowance
Bonus
Fees
Commission
Perquisite in lieu of or in addition to salary/wages
Amt. rec. in respect of Encashment of earned leave
salary during service
Contribution of employer in RPF in excess of 12% of
salary
Interest on RPF in excess of 9.5%
Cont.
On retirement of employee: add
• Unrecognised provident fund
(a) Share of employer
(b) Interest on share of employer
• Taxable part of gratuity
• Taxable part of encashment of earned leave
• If retrenched- taxable part of retrenchment
compensation
• In case of voluntary retirement- taxable part of
voluntary retirement compensation
CONT.
• Pension:
(a) Taxable part of commuted pension
(b) Pension from the date of retirement till the
end of P.Y.
Gross salary income
LESS:
• Entertainment allowance-Max rs.5000
• Professional tax
Taxable salary
House Rent Allowance
The least of the following is exempt from tax:
1.50% of Salary where the assessee lives in Mumbai,
Delhi ,Chennai & Calcutta and 40% in other cases
2.Actual HRA received
3.Excess of rent paid over 10% of Salary.
Exempted Amount= least of the above
Taxable Amount= Actual HRA Rec.- Exempted amt.
(Salary for HRA means basic salary , commission if
based on fixed percentage of sale & DA ,if it is part of
retirement benefits)
Allowances:
• Conveyance: Exempted upto Rs.800 per month if
used for travel between home and place of work
• Medical expenses: Exempted when it is a
reimbursement of actual expenses upto Rs.15000
.Beyond this limit, it is taxable.
• Fixed Medical allowance is taxable
• City compensatory allowance is taxable in all cases
Allowances(cont.)
• Tiffin allowance: It is taxable
• Tea & snacks during office hours are not
charged to tax as perquisite while free meals
in excess of Rs50 per meal is a perquisite
• Servant allowances: It is taxable
• Gifts: Perquisite in respect of gift where it is
below Rs.5000, the value is taken as nil
LEAVE TRAVEL CONCESSION
Sec. 10(5)
• This exemption is available to indians as well as
foreigners
• The amount exempt under this clause shall in no
case exceed the amount of expenses actually
incurred for the purpose of such travel
• The value of any L.T.C. received by or due to an
individual,
(a) From his employer for himself & his family in
connection with his proceeding on leave to any
place in india is exempt
Cont.
• (b) From his employer or former employer for
himself & his family in connection with his
proceeding on leave to any place in india after
retirement from his service or after the termination
of his service is exempt
• Amount of exemption is the actual fare paid for
travel anywhere in India by the economy class airfare
of national carrier by shortest route, or first class air
conditioned rail fare, or any other mode not
exceeding the shortest first class rail fare.
PROVIDENT FUND
Statutory provident Recognised
fund
provident fund
Unrecognised
provident fund
Employees
contribution
Ded u/s 80 C
Ded u/s 80 C
No ded
Employer’s cont. &
interest
exempted
Annual accretion is Not exempted per
taxable
year
(a)employer’s cont.in excess of 12% of
salary
(b)interest-in excess
of 9.5%
Lumpsum at the
time of retirement
exempt
exempt
Employer’s cont. &
Interest thereontaxable
PERQUISITES
It means any benefit in addition to salary and wages.
Any sum paid by the employer which otherwise
would have been payable by the employee.
• Eg. Rent free house accommodation,
car, amenities provided free of cost,
• concessional interest on housing loan, etc
•The benefit should be from the employer to be
charged as salary
•It could be in cash or kind
•It should have a legal origin
Perquisites taxable (Category A
Perquisites taxable in the hands of all employees
(fringe benefit tax whether payable or not by
employer)
 Furnished /Unfurnished house without rent or at a
concession (not in a remote area, house for MPs, and
stay in hotel on transfer not exceeding 15 days)
 Service of sweeper, gardener( not taxable for non
specified employee)
 Education facility to employees family members (not
taxable for non specified employee)
Perquisites taxable (with or without FBT)
Contribution by employer to effect an
assurance on the life of the employee or to
effect an annuity
Interest free loan( exempted for loan not
exeeding Rs.20000, or loan for medical
treatment)
Use of Employers movable assets are taxable
except laptop, desktop & car
Perquisites taxable (Category B)
B1.Car or other automotive conveyance ( not taxable
for non specified employee)
B2. Transport facility by a Transport undertaking( not
railways & airlines)
B3 Traveling touring accomodation
B4 Free Food & Beverage ( Rs.50 within office hours
exempted)
B5 Gift voucher beyond Rs.5000
B6 Club Membership & credit Card
SPECIFIED EMPLOYEE
• A director is a specified employee
• An employee who holds 20% or more voting power
(called substantial interest)
• Where an employee is drawing salary of more than
Rs.50,000 per year ( without considering non
monetary benefit and exemptions like HRA) but ,
since the minimum exemption limit is Rs.1,10,000,
practically all tax payers are specified employees.
Rent Free Unfurnished Accomodation
• Classified as Central & State Government
Employees
• Private Sector Employees
Central & State Govt. Employees
• Accomodation provided to MPs, judges of
High court & Supreme Courts, employees who
are in Govt. service being provided
accomodation by virtue of their employment
is exempted from any tax
Valuation of Rent Free Unfurnished
Accommodation (private sector)
Population
as per 2001
census
Above 25
lakhs
Property owned by
Employer
Leased or rent
15% of salary for
the period
Amount of lease
rent or 15% of
salary
Same as above
Between
10% of salary for
10- 25 lakhs the period
Any other
7.5% of salary for
the period
Same as above
Meaning of salary for House accomodation
• Salary includes –
- basic salary
- DA ( if terms of employment provide)
- bonus, commission, fees
- all other taxable allowances
- any monetary payment chargeable to tax, but
not monetary payments in the nature of
perquisite
Exception to accomodation rules
• It is not applicable to an accomodation
located in a remote area( 40 kms from town)
and in a mining, project ,oil exploration site
• Where on account of transfer, an employee is
given two accomodation , only one will be
taxed for 90 days. Beyond that the lesser of
the two will be taxed.
Furnished accomodation
• Step 1: Find out the value of the
accomodation without the value of the
furniture
• Add 10% of the value of furniture if owned by
employer or actual hire charges when hired
( Furniture includes TV, fridge, radio and any
household appliances)
Furnished accomodation in a Hotel
It Includes accomodation in a motel, guest
house.
The value of perquisite is the lower of the two.
• 24% of salary paid during the period when
accomodation is taken or
• Actual paid by the employer
(not taxable if provided for 15 days in a P.Y. and
when an employee is transferred)
Accomodation at a concessional value
Value is determined as follows:
• Find out the value of accomodation as if it is
not provided at a concession
• Deduct the value of rent charged from the
employee
Perquisite of free domestic servants
• When servants are engaged by employee and
reimbursed by employer, taxable in all cases
• When engaged by employer only specified
employees are taxable
• Servant allowances are always taxable
• If servants are provided in a rent free
accomodation , they are not valued separately
Valuation of gas, electric energy or water
supply
• All assesses are taxable except non specified
employees
Perquisite of Motor Car
Perquisite in respect of motor car is taxable only when
the employer is not liable to fringe benefit tax (like
sole proprietor, charitable institutions, etc) Private
company employees will not pay any tax.
• 1.Car is owned by Employee
• 2. Car is owned or hired by Employer
a) Expenses met by Employer
b) Expenses met by Employee
Motor car perquisite
• Car owned by Employee
a) Expenses met by Employee No Tax
b) Expenses met or reimbursed by Employer
- Official purpose only
No tax
- Used for private purpose-actual expenses
less recovery taxable
-Partly used for private purpose (cont. next
slide)
Motor car perquisite( Cont.)
Car owned by employee (cont.)
-Partly used for private purpose
SMALL CAR
LARGE CAR
EXPENDITURE INCURRED BY
EMPLOYER
EXPENDITURE INCURRED BY
EMPLOYER
Less: 1800 p.m.
Less: 2400 p.m.
Add: 900 p.m. for chauffer(if
any)
Add: 900 p.m. for chauffer(if
any)
Value of perquisite
Value of perquisite
2.When Car is owned or hired by Employer
• I CASE: Car is used wholly for official duties
value of perquisite is nil
• II CASE: Car is used wholly for private or personal purposes of
employee or any member of his household
Car owned by
employer
Actual amount of expenditure on running &
maintenance of car
add: remuneration, if any, paid to chauffeur
Add: depreciation @ 10%p.a. of actual cost of car
Less: amt. charged from employee
VALUE OF PERQUISITE
Car taken on lease
by employer
Actual amt. of expenditure on running &
maintenance of car
add: remuneration,if any, paid to chauffeur
less: amt. charged from employee
VALUE OF PERQUISITE
III CASE:
CAR IS USED PARTLY IN THE
PERFORMANCE OF DUTIES AND
PARTLY FOR PRIVATE OR PERSONAL
PURPOSES OF EMPLOYEE OR ANY
MEMBER OF HIS HOUSEHOLD
IF EXPENSES BORNE BY
EMPLOYER
SMALL CAR
LARGE CAR
1800 p.m+ 900
p.m(if
chauffeur)
2400 p.m + 900
p.m (if
chauffeur)
PRIVATE EXPENSES BORNE
BY EMPLOYEE
SMALL CAR
LARGE CAR
600 p.m + 900
p.m(if
chauffeur)
900 p.m + 900
p.m (if
chauffeur)
IV CASE:
EMPLOYEE USES
MORE THAN 1 CAR
FOR PRIVATE
PURPOSES
IN RESPECT OF 1 CAR
IN RESPECT OF OTHER
CAR(S)
SMALL CAR
LARGE CAR
1800 p.m + 900 p.m(if
chauffeur)
2400 p.m + 900 p.m(if
chauffeur)
II Case will apply
Deductions from salary
• Professional Tax paid BY THE ASSESSEE [Sec.16(iii)]
• Entertainment allowance: available only for
Government employees [sec.16(ii)]
 actual amt. received
 1/5 th of basic salary
 limit- rs. 500000
The least of the above will be the amount for deduction
INCOME FROM SALARIES
(RETIREMENT)
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PENSION
COMMUTED PENSION
LEAVE ENCASHMENT SALARY
GRATUITY
RETRENCHMENT COMPENSATION
COMPENSATION ON VOLUNTARY RETIREMENT
PENSION[sec.10(10A)]
1.Pension from UNO
2.Pension received
by the family of
armed forces
3.Family pension
received by family
members after the
death of employee
It is not chargeable to tax
Exempted
Taxable as in the hands
of recipient as income from
other sources
PENSION (cont.)
• Pension received in case of non govt.
employee -Taxable
COMMUTED PENSION
• Uncommuted
Pension
• Commuted
Pension
Commuted
Pension
Govt. /Non Govt Taxable
Employee
Govt. Employee Exempted
from Tax
Non-Govt.
It is fully or partly
Employee
exempted
COMMUTED PENSION (cont.)
Central /state Govt, With or without
Local authority
Gratuity
employee
Gratuity is received
Non Govt.
Employee
Non Govt.
Employee
Gratuity is not
received
Exempted
Fully
1/3 of normal
Exempted
½ of normal
is exempted
GOVERNMENT EMPLOYEES GETTING LEAVE ENCASHMENT
AT TIME OF RETIREMENT:
 Govt employee at that time is exempted from tax.
 While leave encashment while in service is taxable
NON GOVERNMENT EMPLOYEES are chargeable to tax on
leave encashment while in service
LEAVE ENCASHMENT AT TIME OF RETIREMENT:
He is exempted on basis of least of the following:
1.period of earned leave (in no.of months) to the credit of
employee at the time of his retirement or leaving the job)* average
monthly salary
2.10 months *average monthly salary
3. the amt. specified by the government Rs.3,00,000
4. leave encashment actually received at the time of retirement
HOW TO FIND OUT
AVERAGE MONTHLY SALARY?
•Salary for this purpose means
1.basic salary and includes
2 .dearness allowances if terms of employment so provide
3.Commision if it is fixed % based on turnover
•It is calculated on the basis of average salary
drawn
during the period of 10 months immediately preceding the
retirement.( date wise)
GRATUITY [SEC10(10)]
1. GRATUITY WHILE IN SERVICE IS FULLY TAXABLE
2. GRATUITY AS RETIREMENT BENEFITS
• Government employee –fully exempt
• Non-government employee-fully or partially exempt
under section 10
• Non-government employees not covered by the
Payment of Gratuity Act ,1972- fully or partially
exempt under section 10
GRATUITY (cont.)
• IN CASE OF GOVT EMPLOYEES:
– wholly exempt
• IN CASE OF EMPLOYEES COVERED UNDER PAYMENT
OF GRATUITY ACT:
– 15 days salary based on last drawn for each year of service
(26 days a month as working days)
– Rs.10 LACS
– gratuity actually received
(the least of the above 3 is exempt from tax and the balance
is taxable)
GRATUITY (cont.)
• how to find length of service -if 6mths or less
then ignored else taken as 1 full year
• what is salary: Salary means last drawn by
employee and includes dearness
allowance,dearness pay, comm. on sales
• how to determine 15 days salary -calculated
by dividing salary last drawn by 26 days
RETRENCHMENT COMPENSATION [SEC 10(10B)]
• Years of job * avg. Salary *15
• Limit – rs 5lac
• Amount received
least of the above will be exempt
Taxable amount = amt received – exempted amount.
NOTE• Years of job= completed years + 1year for excess over
6months.
• Average salary- (a) in case of monthly salary- on the basis of
salary of last 3months pay
(b)in case of weekly wages- on the basis of
wages of last 4 weeks
(c) in case of daily wages – on the basis of
wages of last 12 full working days
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Cont.
Salary means
• Remuneration in money.
• Allowances
• Value of house accommodation, supply of
light, water, medical attendance, other
amenity or service or any concessional supply
of food grains or other articles.
• Travel concessions
Salary does not exclude
Bonus, contribution to pension fund or
provident fund, gratuity
COMPENSATION ON VOLUNTARY RETIREMENT
[Sec.10(10C)]
• The amount equivalent to 3 month’s salary for each
completed year of service
• Salary at the time of retirement*balance months of
service left before the date of his retirement
• Amount receieved
• Maximum statutory limit-rs 500000
Meaning of salary- basic salary, D.A. if it is given as per
terms of employment, comm. Based upon fixed % of
turnover