Salary Head
• Essential norms of salary income:
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Relationship between payer and payee,
Salary and wages -conceptually not different
Salary from more than one source
Salary from former employer , present employer and prospective employer
Salary income must be real and not fictitious
Foregoing of salary
Surrender of salary
Salary paid tax free
Voluntary payments
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Salary under section 17(1):
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Salary is defined to include the following
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Wages
Any annuity or pension
Any gratuity
Any fee, commission, perquisite or profits in lieu of or in addition to any
salary or wages
Any advance of salary
Any payment received in respect of any period of leave not availed him
The portion of the annual accretion in any previous year to the balance at the
credit of an employee participating in Recognized PF to the extent it is
taxable
Transferred balance in a Recognized PF to the extent it is taxable
The contribution made by the Central Government in the previous year, to
the account of an employee under a pension scheme referred to in section
80CCD(applicable from the AY 2004-05)
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Basis of charge sec [sec 15] as per section salary
consists of :
a.
Any salary due from an employer (or a former employer) to an assessee in
the PY whether actually paid or not:
Any salary paid or allowed to him in the PY by or on behalf of an employer
(or a former employer) through not due or before it became due; and
any arrears of salary paid or allowed to him in the PY by or on behalf of an
employer (or a former employer), if not charged to income tax for any
earlier PY.
b.
c.
Salary is taxable on “due” or “receipt” basis which ever is
earlier.
Place of accrual of salary income [SEC 9.1]
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TAX TREATMENT OF DIFFERENT FORMS OF SALARY
INCOME
1.
2.
3.
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Advance salary
Arrear salary
Leave salary
what is leave salary?
Broad tax treatment
Leave salary at the time retirement to central/state government employees
Leave salary at the time of retirement to other employees
1.
Period of earned leave (in number of months) to the credit of the employee at the time of
his retirement or leaving the job X Average monthly salary
2.
10 X Average monthly salary
3.
The amount specified by the government (i,.e., Rs. 300000 applicable from April 1998)
4.
Leave encashment actually received at the time retirement.
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Some other pointsRELIEF UNDER SECTION 89
Leave salary t legal heirs not taxable
Retirement or otherwise
Salary in lieu of notice period
Salary to a partner
Fees and Commission
Bonus
• Gratuity:
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Meaning:
Status of employee
Whether Gratuity is taxable
Government employee
It is fully exempt from under Sec. 10(10)1
Non Government employee covered by the
Payment of Gratuity Act, 1970
It is fully or partly exempt from tax under
10(10)2
Non Government employee not covered by
the Payment of Gratuity Act, 1970
It is fully or partly exempt from tax under
10(10)2
• Incase of employees covered by the payment of gratuity act 1972
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1.
15 days’ salary (7 days salary in the case of employees of a seasonal
establishment ) based on salary last drawn for each year of service(i.e. 15
days’ salary X length of service
2.
350000 Rs
3.
Gratuity actually received
What is chargeable to tax??
How to find the length of service?
Meaning of salary?
Case of piece –rated employee:
• In case of any other employee---(not covered under the Act)
1.
350000 Rs
2.
Half month’s average salary for each completed year of salary
3.
Gratuity actually received
Computation of service period --How to calculate average monthly salary—(includes commission if fixed in nature)
Different situations
Tax treatment
Pension is received from UNO by
the employee
It is not chargeable to tax.
Family pension received by the
family members of armed forces
(after the death of the employee)
It is exempt under section 10(19) in
some cases
Family pension received by the
family members in other cases (after
the death of the employee)
It is taxable under the heading
“income from other sources” .
Standard deduction is available
which is 1/3 of such pension or
15000 whichever is lower
Pension received by an employee
(during his life time) who has joined
the Central Government on or after
Jan 1, 2004.
Check the following information###
Pension received by an employee
(after retirement but during his
lifetime) in any other cases.
Check the following
information****
**** pension under the fifth case…..
Pension
Status of the employee
If it is chargeable to tax
Uncommuted pension
Govt./ non Govt. employee it is chargeable to tax
commuted pension
Govt. employee
It is fully exempted from
Tax u/s 10(10A)I
commuted pension
non Govt. employee
It is partly or fully
exempted from Tax u/s
10(10A)I
Uncommuted Pension : It is periodical payment of pension. For instance , X gets monthly
pension of rs 2000. Its is taxable as salary for both the types employees.
Commuted Pension: It is lump sump payment in lieu of periodical payment.
For instance , X gets rs 2000 per month as monthly pension. As per service rules he gets
25 percent of his pension commuted for rs 60000 ( after commutation he will get the
remaining 75 percent .i.e, 1500 by way of monthly pension). In this case Rs. 60000 is pension
Which X has received In lieu of 25 percent of his monthly pension.
Status of the employee
Gratuity received\ not received
Exemption in respect of
commuted pension
Govt. Employee ( a central ,
state, and local authority,
statutory corporation)
Gratuity may or may not be
received.
Entire amount is exempt
Non- Govt. Employee
Gratuity is received
1\3 of the pension which he is
normally entitled to receive is
exempt from tax u/s 10 10a
Non Govet Employee
Gratuity not received
One half the pension which he
is normally entitled to receive
is exempt from tax.
#### pension under the Forth case…..
Notified pension scheme in case of an employee joining Central
Government or any other
employee
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2.
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Contribution by the Central Government or any other employer to the
notified pension scheme is first included under the head “ salaried” in
hands of the employee
Such contribution is deductible (to the extent of 10 percent of the salary
of the employee) u/s 80CCD
Employee’s contribution to the notified pension scheme (to the extent of
10 percent of the salary of the employee) is also deductible u/s 80CCD.
When Pension is received out of the aforesaid amount, it will be
chargeable to tax in the hands of the recipient .
The aggregate amount of deduction u/s 80C, 80CCCand 80CCD can’t
exceed rs 100000.
Salary for the purpose of points 2 n 3 includes BS and Da but excludes
allowances and perquisites.
No deduction will be allowed u/s 80C in respect of amounts on which
deduction has been claimed u/s 80CCd.
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Annuity:- it means “an yearly allowance, or income; the grant of a
annual sum for a term of year, for life, or in perpetuity”. This will be
treated as profits in lieu of salary u/s 17.3.
Retrenchment compensation: sec 10.10B: compensation received by a
workman under the industrial disputes act, 1947, or any other Acts or
rules, orders or notification issued thereunder or under any standing
orders or under any award, contract of service or otherwise at the time of
retrenchment , is exempt from tax to the extent of lower pf the following.
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An amount calculated as per the provisions of section 25F of the ID act
The specified by the Govt. Rs. 500000
The amount received
Profits in lieu of salary:::
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b)
c)
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Compensation for loss of employment or modification of the employment
terms:
Payment from unrecognised provident or superannuation fund:
employer’s contribution
Interest on employer’s contribution
Employee’s contribution and
Interest on employee’s contribution.
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The first two are taxable as “profits in lieu of salary “ under the
following prepositions:
The provident fund/ superannuation fund is an unapproved fund.
These are taxable at the time of payment to the assessee.
1.
2.
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Payment under keyman insurance
Payment before joining or after retirement
Any other payment:
3. Reimbursement of expenses4. Payment made gratuitously to WIDOW/LEGAL HEIRS of employees.
5. Compensation received at the time voluntary retirement or separation
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ALLOWANCE
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Allowance is generally defined as fixed quantity of money or other substance
given regularly in addition to salary for the purpose of meeting some particular
connected with the services rendered by the employee or as compensation for
usual conditions of that service.
1.
2.
City compensatory allowance: it is always taxable.
House Rent Allowance : Exemption in respect of HRA given below.
1. An amount equal to 50 percent of salary, where residential house is situated at
Bombay, Calcutta , Delhi or Madras and an amount equal 40 percent of salary
where residential house is situated at any other place
2. HRA received by the employee in respect of the period during which rental
accommodation is occupied by the employee during the PY
3. The excess of rent paid over 10 percent of salary
3.
The meaning of salary: it includes basic salary +DA + commission
fixed percentage of turnover.
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Salary shall be determined on “due” basis
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The computation of exemption:
Salary of the employee
HRA
Rent paid
The place where house is taken on rent.
Entertainment Allowance : (sec 16 II) – Entertainment allowance is first
included in income under the head salaries and after a deduction is given
on the basis of the following.
In case of a Govt. employee: (central or state) the least of
Rs 5000
20 percent of salary
Amount of entertainment allowance granted during the previous year, is
deductible.. Where salary excludes all other allowance n perquisites.
From 2002-03 , non Govt. employees will not get deductions..
• Special allowances prescribed as exempt u/s 10.14.
A. the amount of allowance; or
B. the amount utilised for the specific purpose for which allowance is given.
• The following allowances are treated as special allowances.
1. Traveling allowance
2. conveyance allowance
3. Daily allowance
4. Helper allowance
5. Research allowance
6. uniform allowance
When exemption does not depend upon expenditure.
A. the amount of allowance
B. the amount specifies in rule 2BB
Name of the allowance
Exemption under 2BB
Special compensatory allowance
Varies from 300 to 7000 rs per month
Border area allowance
200 to 1300 rs per month
Tribal areas allowance
Rs 200 per month
Allowance for transport employees
A.70 % of such allowance
B. rs 6000 p/m..Whichever is lower.
Children education allowance
Rs 100 p/m per child up to a max of two children.
Hostel expenditure allowance
Rs 300 p/m per child up to a max of two children.
Compensatory field area allowance
To rs 2600 p/m
Compensatory modified area
allowance
Rs 1000 p/m
Counter urgency allowance
Rs 3900 p/m
Transport allowance
Rs 800 p/m (rs 1600 p/m in case an employee is
blind or orthopaedically handicapped
Underground allowance
Exemption up to rs. 800 p/m.
High altitude allowance
Rs 1060 p/m (for altitude of 9000 to 15000 ) or 1600
rs p.m (for above 1500 feet)
High active field area allowance
Up to rs 4200.
Island duty allowance
Up to rs 3250.
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Allowance to government employees outside India.
Tiffin allowance
Fixed allowance
Servant allowance
Allowance to High court judges
Allowance received from UNO
Allowance to foreign technician
Allowance to other foreign citizens
Sumptuary allowance
• Perquisites: (sec 17.2)
• The term perquisite is defined as “a gain or profit incidentally made from
employment in addition to regular salary or wages, especially one kind
expected or promised”
• The following prepositions should also be kept in view..
• Personal benefit –
• Cash or kind
• Should be provided by employer?
• Enforceable right
• Personal accident policy
• Pensionary deferred annuity benefits
• Contingent rights
• Personal advantage during employemnt
Valuation of perquisites :0
Perquisites are valued on the basis of their value to the employee and not on the basis of
The cost t the employer for providing such perquisites—
However the value of perquisite is included in salary income only if it is actually
provided To the employee.
•Perquisites provided by the employer directly or indirectly to an employee or any
member of his household (by reason of his employemnt) shall be chargeable to tax in
the hands of employee. “member of house hold” shall include--A. Spouse (whether dependent or not)
B. children and their spouses (whether dependent or not)
C. parents (whether dependent or not)
D. servants and dependants
• Valuation of rent- free unfurnished accommodation.
Provision of rent free accommodation is a perquisite, which is taxable in the
hands of all employees (specified or non specified)
For the purpose of valuation of the perquisite in respect of unfurnished
accommodation. All employees are divided in two categoris
1. Central and state Govt employees:
The rule of valuation: the value of perquisite in respect of accommodation
provided to such employees will be equal to the license fee which would
have been determined by the central Govt and state govt. in accordance
with the rules for allotment of houses to its officer.
2. Private sector employees.
For salary calculation, , it includes BS + DA+Bonus+Commission+fees+any
other taxable allowance for this purpose .. Salary does not include
DA (not forming part of RB) + Employer’s contribution to PF +lumpsum
amount received at the time tremination of service superannuation or VR.
One should note the following points:
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Salary to be calculated on “accrual” basis.
Salary from two or more employers
Monetary payments vs. Perquisites.
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Basis of valuation …
Population as on 2001
census where
accommodation is provided
Where the accommodation is
owned by the employer
Where the
accommodation is
taken on lease
Exceeding 25 lakh
15 percent of salary in respect of
the period during which the
accommodation is occupied by
the employee.
Amount of lease rent
paid or payable or 15
percent of salary,
whichever is lower
Exceeding 10 lakh but not
exceeding 25 lakh
10 percent of salary in respect of
the period during which the
accommodation is occupied by
the employee
Same as above
Any other
7.5 percent of salary in respect of Same as above
the period during which the
accommodation is occupied by
the employee