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The topic is discussed under, ‘ Who, When, Where & How’ of taxing Salary income.
Who is taxed:
1. Employees are taxed.
2. Employer- employee, Master Servant relation ship should exist. Person receiving remuneration for
services rendered is taxed under ‘Salary’ income. Payee must be working under an agreement of
service.
3. Payment should be received from the employer.
4. If received from a person other than an employer, the same would be considered under ’Income
from other sources’ and not under’ salaries’.
a. Any salary due from an employer in the previous Year, whether paid or not.
b. Any salary paid by an employer in the previous Year, whether due or not.
c. Any arrears paid / allowed in the previous Year, if it has not been taxed in the earlier year.
Example:Mr. Bilal, an employee of Indian Oil Company Ltd. Submitted the following information:
Compute the amount of salary taxable during the previous year 2007-08.
Solution:
Mr. Bilal
Previous year: 2007-08 Assessment Year:2008-09
Particulars of Income Rs
.
A.Salary for the period 1.4.07 to 31.3.08 whether paid or due
Salary from April’07 to March’08 whether paid or not @8000 96000
p.m
Next question is determining where the salary accrues to the employee. Salary accrues in India if it is
earned in India. Salary paid for leave period and other benefits preceding or succeeding such services
rendered in India also is deemed to accrue in India.
However, salary earned by Indian Citizen from Government of India, is deemed to accrue in India.
E.G:Indian Diplomats. Perks & allowances are exempt.
Illustration:
Mr. Anil ,Ambassador from India posted to Washington is paid
Salary of Rs.180000 and
Allowances of Rs.45000.
Despite his being a non resident by status during the previous year, he cannot claim that his salary and
perks will be tax exempt as his services were rendered outside India.
U/S 9(1) (iii), salary paid to an Indian Citizen by the Indian Government is deemed to accrue in India and is
taxable. Allowances are exempt from tax.
1. If rates of recovery from employee is less than the ones shown above the difference is treated as
parks. % specified will vary as shown below:
2. Salary includes Basic, D A , Bonus, commission, fees, taxable allowances and monetary
payments. Exclusions: D A not considered for calculating retirement benefits, Employer’s
contribution to PF, exempt allowances and perks U/S 17(2).
3. Furniture will include TV, Radio, Fridge, Household appliances, A/Cs and similar equipments
and gadgets.
Taxfree perquisites:U/S 17
4. Reimburement by employer of any expenses incurred by the employee on medical treatrment of self
or family in any hospital approved by CCIT provided that the employee will attach with his return of
income a certificate from the hospital specifying the disease or ailment for which medical treatment
was required and receipt for amount paid to the hospital for such treatment.
5. Reimburement of medical expenses upto Rs.15000 incurred by the employee on medical treatrment
of self or family in the previous year.
6. Premium on Employee Health Insurance under any Scheme approved by Central Government U/S
36(1) (ib).
7. Premium on Insurance (Medi Claim) on the health of the employee or his family members under
any Scheme approved for the purpose of S80D.
i.Travel / stay abroad of the employee or his family members outside India for
medical treatment.
iv. Expenses on travel will be exempt only if gross total income of the employee does not exceed Rs.
200000 in the previous year.
9. Reimbursement of the expenses detailed above.
10. Value of benefit provided by the company under ESOP – Employees Stock Option Scheme or
Employees Stock Purchase Scheme in accordance with SEBI guidelines are exempt from tax. Under
such ESOP , shares, debentures or warrants are allotted by the company to its employees free of cost
or at a concessional rate.
11. Fringe Benefits. These are taxable in the hands of the employer and so are not taxed as perks in the
hands of the employees. ‘Fringe Benefits‘ as per section 115WB(1) means means any consideration
for employment provided by way of:
1. Any privilege, service, facility or amenity by way of reimbursement or otherwise to
employees.
2. Any free or concessional ticket provided by the employer for private journeys of his
employees/ family members.
3. Any contribution by employer to an approved superannuation fund for employees.
4. Entertainment
5. Provision of hospitality (excludes any expenditure on food / beverages in office or
factory or through non transferable paid vouchersusable only at eating joints).
6. Conference (not being participation fee by employees in any conference) including
expenditure on conveyance, tour and travel (including foreign travel), on hotel, boarding
and lodging in connection with any conference.
7. Sales promotion including publicity
8. Employees welfare (excluding expenditure on / payment made to fulfill any statutory
obligation or mitigate occupational hazards or provide first aid facilities in the hospital /
dispensary run by the employers).
9. Conveyance, tour and travel (including foreign travel).
10. Use of hotel, boarding and lodging facilities
11. Repair, running (fuel included), maintenance of motorcars and depreciation thereon.
12. Repair, running (fuel included), maintenance of aircrafts and depreciation thereon.
13. Use of phone (mobile phones)other tha expenditure on leased lines.
14. Maintenance of any accommodation in the nature of guest house (other than
accommodation used for training purposes).
15. Festival celebrations
16. Use of health club and similar facilities.
17. Use of any other club facilities.
18. Gifts
19. Scholarship
Perks not taxable at all as per CBDT Circular and directives:
1. Allowances to Judges of High Court & Supreme Court
2. Allowances to employees of U N O
3. Recreation provided to employees as a group
4. Expenses on training employees
5. Goods manufactured by employer sold to employees at concessional rates.
The following are taxable under the head profit in lieu of salary S17(3).
1. Compensation for termination of employment is taxable except compensation paid U/S 10.
2. Retrenchment compensation paid to workers U/S 10 (10B)
3. Voluntary Retirement Compensation paid to employees U/S 10 (10C)
4. Contribution to PF and interest in excess of specified % .
5. In case of statutory PF U/S 10(11) Employer’s contribution in Pr. Year is exempt. The interest
credited during the previous year and the lump sum payment on retirement is also exempt.
6. In case of Recognised PF U/S 10(12) Employer’s contribution in Pr. Year is exempt upto 12% of
Basic Salary. The interest credited during the previous year is exempt to the extent of 9.5% and the
lump sum payment on retirement is exempt subject to specified rules of the Fund.
7. In case of unrecognised PF U/S 17(3) Employer’s contribution in Pr. Year is exempt. The interest
credited during the previous year is also exempt. and the lump sum payment on retirement and
interest are taxable as ‘income from other sources’.
8. When unrecognized PF balance is transferred to RPF, transferred balance is taxable to the extent it is
taxable, i.e employer’s contribution over 12% and interest in excess of 9.5%. under the head
‘deemed income’ towards salaries.
Allowances:
All allowances are taxable unless specifically exempted.
LTA & HRA exempt to the extent of prescribed limits or actual expense whichever is less.
Allowances for duties in border area/ remote/ disturbed/ tribal area are exempt to the extent of actuals or
prescribed limits, whichever is lower.
EXEMPTIONS:
Leave Travel Concession U/S 10(5):
In the case of an individual, the value of any LTC received from employer for himself and his family
(comprising of spouse, children, parents and dependant brothers and sisters) in connection with his
proceeding on leave to any place in India.
On proceeding to any place in India after retirement from service or after termination of service.
This will be subject to conditions prescribed and will be limited to the actuals incurred or the limit stipulated
– lesser of the two.
All persons employed in shops, factories, establishments employing more than 10 persons are covered under
Payment of Gratuity Act. Under this Act,
4. Salary includes basic & DA but excludes bonus, commission, overtime, other allowances etc.
PROBLEM:
‘X’ covered under Payment of Gratuity Act 1972 retired on 30.8.07. at the time of retirement he was
drawing a basic salary of Rs.20000 and 10% as DA.He joined the Company in 1.4.90. He was paid gratuity
of Rs.250000.
Compute taxable Gratuity for the financial year 2007-08.
Completed years of service would mean only that. Part of the year, even more than 6 months is
excluded.
Average salary of last 10 months are considered, whereas under Payment of Gratuity Act, it is based on
last drawn salary.
PROBLEM:
Mr. Johar employee of a snooker club having staff of 7 people, retired on 31.1.07 after serving 20years
and 11 months. His basic was Rs.2500. DA Rs.1000 (50% eligible for retirement benefit) and
conveyance allowance Rs.500. He received commission of Rs.5000 during this period @1% of turnover
achieved by him. He was paid gratuity of Rs.38000. He had received gratuity of Rs.5000 from a
previous employer. Compute taxable gratuity.
Johar is not a government employee. Since staff strength is less than 10 he is not covered by Payment of
Gratuities Act.
So under S10(10)(iii) least of the following is exempt.
1. Actual received Rs.38000
2. Notified amount Rs.350000. This will be reduced by Rs.5000 recd. Earlier.
3. Half years salary for each completed year 20 years. 11 months , being part of the year is ignored.
Salary is (for the past 10 months) 2500x10=25000+ DA 50% eligible i.e Rs.500 x 10=5000+fixed
commission @1% of turnover 5000 = Rs.35000
Commuted Pension:
Pension is monthly payment to retired employees and is taxed as ‘Salary’. If an employee opts to
commute his pension, i.e decides to receive in lumpsum part or the whole of his pension, it is exempt
fully or partly, based on the category of the employee.
Government employees:
Payment of commuted pension is fully exempt, if received under the following schemes:
1. Civil Pension (commutation) Rules of Central Govt.
2. Similar scheme as applicable to members of civil services of the Union, person holding
defence or civil posts under the Union.
3. Members of All India Services, State Civil Services, Defence Services
4. Holders of civil posts under State
5. Employees of Local Authority / statutory Corporation.
Paid to Other Employees:
Exempt portion will be
a. Full normal pension+ % pension commuted
b. commuted pension (Annual value)
rd
1/3 of will be exempt if gratuity is paid.
½ of if Gratuity is not received.
PROBLEM:
Thomas retired from Cromptons Ltd. On 30.6.2006. He had joined the company from 4.1.74. He
receivedpension Rs.2000p.m upto 30th Nov.2006. On 1.12.06 he requested xcommutation of 50%
of pension and received Rs.75000. If he had received Rs50000 as gratuity , fully exempt from
tax, calculate taxable salary.
Solution:
IF GRATUITY PAID
Average Salary is calculated by salary for 10 months preceding the retirement and includes
Basic, DA + Commission/ incentives
‘Completed Years of service is calculated by calculating Date retired less date joined. Only
completed years are taken into account, ignoring part of the year (Even 11 months+ days).
PROBLEM:
Mr. Tired received Rs.20000 per month of leave to his credit as leave encashment, on his
retirement on 31.3.07.
1. He served the company for 15 years and 6 months
2. He was eligible for 60 days leave for each year
3. He availed 3 months leave while in service.
4. His average salary for 10 months before retirement is Rs.20000
SOLUTION:
Exempt figure is least of the following:
I. Encashment of earned leave to credit, not exceeding 30 days per completed year of
service.
Leave entitled for each year 30 days (limited to 30 days though actual is 60 days) = 15
months.
Leave availed = 3 months
Leave encashment exempt = 15 -3 =12 months.x Rs.20000=Rs.240000.
(The actual payment in excess on actual leave credit less availed will be taxable.)
II.10 months average salary, based on salary drawn for 10 months preceding the retirement
10 months @20000 =Rs.200000.
III.Amount notified by Government – Rs.3 lakhs for the Asst Year 2007-08.
Least of the four , Rs.200000 will be exempt. Balance Rs.360000 will be taxed under the head
‘Salaries’.
Retrenchment Compensation:
Retrenchment Compensation will be exempt if any compensation is received under the
Industrial disputes Act / any other Act /Rules Notification / Award / Contract by any workman
at the time of his retrenchment / the closure of the unit/ transfer of management or ownership
resulting in interruption of his service due to less favourable terms of service or the inability of
new employer to pay the workers retrenchment compensation.
Tax so paid cannot be claimed as business expenditure by the employer as provided u/s 40(a)
(vi).
Any payment received by a member from a fund covered by PF Act 1925 or any other
Provident Fund set up by Government (such as P P F) will be exempt.
Receipt of accumulated balance due from RPF to a member will be exempt as per the stipulated
provisions.
SOLVED PROBLEMS:
John is an employee of Citibank.at Mumbai. During the financial year ending 31.3.09
He receives the following:
Salary 100000 p.m 1200000
DA (not eligible for retirement benefits) 20000 p.m 240000
Bonus equal to 2 months salary 200000
Entertainment Allowance 120000
Conveyance Allowance 60000
He is given furnished accommodation at Mumbai. Cost of furniture and appliances allowed for his use is
480000. Rent paid by him to the employer is Rs.120000.
NOTE: Accommodation in a city having population of 25 lakh + it will be 15%; 10 lakh + ,less than 25
lakhs , it will be 10%, other places 7.5%
Exemption Limit:
A.Actual allowance received.
B.Amount by which actual expense of the employee exceeds 1/10th of salary during the relevant period
i.Amount equal to ½ of the salary, where such accommodation is located in Mumbai,Kolkota, Chennai or
Delhi
ii.In any other place 2/5th of the salary
Particulars Amt. in
Rs.
Income from Salary
1 Salary
1.1 Gross Salary
1.2 Salary Due/ Deemed to accrue in India
1.3 Salary Advances / Arrears of pay recd.
1.4 Voluntary payments by employer
Less Exempt U/S 10 xxxxx
2 Allowances
2.1 Dearness Allowance
2.2 Entertainment Allowance
2.3 LTA (Exempt U/S10(10)
2.4 HRA(Exempt U/S10(13A)
2.5 Expenses allowed U/S 10(14) xxxxx
3 Annuity xxxxx
4 Pension
4.1 Not Commuted Monthly Pension
4.2 Commuted Pension
Less: Commuted Pension Exempt U/S 10(10A)
i.Government Employees (Fully exempt)
ii.Non Government Employees
a.With gratuity 1/3 of commuted value
b.W/O gratuity 1/2 of commuted value xxxxx
5 Gratuity (Gross less exempt U/S10(10)
I. Government Employees (Fully exempt)
II. Employees under Payment of Grat. Act- Least of
a. Monthly Sal. x 15/26 x Completed Yrs of Service
b. Rs.350000
c.Gratuity received
III Other Employees –Least of
a. Avg. of last 10 month Salary x ½ x No. of Yrs of Service
b. Rs.350000
c.Gratuity received
Fees & Commission xxxxx
6 Perquisites: xxxxx
7 7.1 Taxable Perquisites
7.1.1 Rent – free accommodation
7.1.2 Concessional Rent
7.1.3Payment of employee’s obligation by Employer
7.1.4 Premium paid for ins. of life or for annuity
7.1.5 Prescribed amenities
(Interest free loans, transfer of movable assets)
7.2 Tax free Perquisites xxxxx
7.2.1 Medical Treatment in Employer’s Hospital
7.2.2 Medical Treatment in Govt./ approved Hospital
7.2.3 Medical expenses upto 15000
7.2.4 Premium on employees health insurance
7.2.5 Premium on Medicalim insurance
7.2.6 Medical treatment, travel & stay abroad
7.2.7 FBT at the hands of Employer
Profit in lieu of Salary xxxxx
8 Termination compensation
Compensation for modified terms of employment
Employer’s Cont. to PF + interest
Keyman Insurance Policy
Less: exempt U/S 10:
Compensation to Workmen/Retrenchment/ V R S
Payment from Statutory P F , R P F
Payment from Superannuation Fund
Contribution by Govt. under New Pension Scheme Leave Encashment xxxxx
9 (Gross – exempt U/S 10(10AA) xxxxx
1 I Govt. Employee – Fully exempt.
0 II Non Govt Employee – Least of
a. Leave encashment @30 days p.a
b. 10 x average salary of last 10 months
c. Rs.300000
d. Actual Receipt
Taxable annual accretion in RPF xxxxx
11.1 Employer’s cont. in excess of 12% of Basic Salary
1 11.2 Interest in excess of 9.5% p.a
1 Taxable transferred balance in RPF xxxxx
xxxxx
Gross Taxable Salary
1 Less: Deductions U/S 16 xxxxx
2 14.1 Entertainment Allowance
14.1.1 Government Employee - Least of
1 a.1/5th of Basic Salary
3 b. Rs.5000
1 c. Actual Allowance
4 14.1.2 Other Employees - Nil xxxxxx
14.2 Profession Tax xxxxxx
xxxxx
Net Taxable Dalary (13 – 14)
xxxxxx
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