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Income from Salaries

Income from Salaries
BASIS OF CHARGE: [Section 15]
As per Section 15, salary consists of the following:
  1. any salary due from an employer or a former employer to an assessee in the previous year, whether actually paid or not;
  2. any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, though not due or before it became due;
  3. any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.
  4. Once salary is taxed on due/receipt basis, it will not be taxed again on receipt/falling due, as the case may be.
  5. Any salary, bonus, commission or remuneration, by whatever name called, due to or received by, a partner of a Firm from the firm is not regarded as salary under this head.
  6. The assessee can claim relief u/s 89(1) for arrears or advance salary.
  7. Loan from employer is not salary. Hence, advance salary is taxable, while advance against salary is not.
REQUISITE
Employer and Employee relationship between the payer and payee.
CHARGEABILITY
Salary is chargeable to tax on "due" or "receipt" basis whichever is earlier.
As per Sec. 17(1), salary includes the following:
  • Wages
  • Any annuity or pension
  • Any gratuity
  • Any fees, commissions, perquisites or profit in lieu of or in addition to any salary or wages
  • Any advance of salary
  • Any payment received by an employee in respect of any period of leave not availed by him
  • The portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognized provident fund to the extent it is taxable
  • Transferred balance in a recognized provident fund to the extent it is taxable
  • Contribution by the Central Government or any other employer to the account of an employee under a pension scheme referred to in Sec. 80CCD
Deductions from SALARY {Section 16}
  1. Entertainment Allowance {Section 16(ii)
Only Government servant can claim the following deduction —
1. Rs 5000/-
2. 1/5th of salary (20% of salary) [Salary = Basic Pay]
3. Actual entertainment allowance received during the F.Y.
  1. Professional Tax or Tax on Employment {Section 16(iii)
Professional tax paid by an employee is allowed as deduction from his Salary income
  • Deduction is available in the year in which professional tax is actually paid.
  • If Profession Tax is reimbursed by the employer, then Profession Tax reimbursed by the employer will first be included in salary (in case of all employees whether specified or not) as perquisite & then the same amount is allowed as deduction u/s 16(iii) from gross salary.
Note: If an employee has paid Profession Tax of more than one year in a particular year then entire Profession Tax so paid is allowed as deduction.
SPECIFIC EXEMPTIONS
  1. Gratuity [Sec. 10(10)]
Gratuity is exempt only when it is received on - (a) retirement, or (b) becoming incapacitated prior to such retirement; or (c) resignation; or (d) termination of services.
Exemption is also available to gratuity received by the widow, children or dependants of the employee on his death.
Particulars
Exemption
Gratuity recd. by Govt. & Local Authority Employees
Fully exempt u/s 10(10) (i)
Gratuity in case of employees covered by Payment of Gratuity Act, 1972
Lower of following amount.

1. [15 ÷ 26] x Salary last drawn x completed yrs. of service or part thereof in excess of 6 months
2. Maximum amount Rs. 10,00,000 (Rs. 3,50,000 up to 23rd May, 2010.
3. Actually received.
Salary = Basic Pay + Dearness Allowance entire

Gratuity in respect of any other employee.
Lower of following amount.

1. 1/2 x average salary x completed years of service (ignore fraction)
2. Maximum amount Rs. 10,00,000 (Rs. 3,50,000 up to 23rd May, 2010.
3. Actually received.
Average Salary = Average Salary of last 10 months preceding month of retirement.
Salary = Basic Pay + Dearness Allowance (forming part of retirement benefits) + Commission based on the % of turnover
  1. Pension: [Sec. 10(10A)]
    Particulars
    Exemption
    A) Uncommuted pension recd. by any employee.
    (Govt. or Non-Govt.)
    Fully taxable as salary.
    B) Commuted pension recd. by Govt. employee.
    Fully exempt from tax u/s 10(10A)(i)
    C) Commuted pension recd. by Non-Govt. employee.

    1) If such employee receives gratuity.
    1/3 of full value of commuted pension will be exempt from tax u/s 10(10A)(ii)
    2) If such employee does not receive gratuity.
    1/2 of full value of commuted pension will be exempt from tax u/s 10(10A)(ii)
  1. Leave Salary (Encashment): [Sec. 10(10AA)]
    Particulars
    Exemption
    Encashment of leave during service
    It is charged to tax.
    Encashment of leave at the time of retirement

    1. If Central or State Government Employees
    Fully exempt from tax u/s 10(10AA)(i)
    2. For any other employees
    Whichever is less of following

    1. Earned leave months x Average salary
    2. Avg. monthly salary x 10
    3. Maximum amount 3,00,000
    4. Actual received
Note: Period of leave in month
1. No. of actual yrs. of service
2. No. of leave entitlement for each completed year of service as per rules (subject to 30 days)
3. Gross total leave (in days) (step 1 x step 2)
4. Less: Leave encashed & availed during continuation of service (in days)
5. Period of earned leave (in days) (step 3 - step 4)
6. Period of leave in months (step 5/30)
Note: Average monthly salary for this purpose means avg. salary drawn in past 10 months immediately preceding the retirement.
Salary = Basic Pay + Dearness Allowance (forming part of retirement benefits) + Commission based on the % of turnover
  1. Retrenchment Compensation [Sec. 10(10B)]
Compensation received at time of retrenchment, is exempt from tax to the extent of lower of the following:
1) 15 days’ average pay for each completed yr. of services or any part in excess of six months.
2) Maximum amount Rs. 5,00,000.
3) Actual amount received.
  1. Voluntary Retirement Compensation [Sec. 10(10C)]
Any amount received or receivable by an employee of —
1) A public sector company
2) Any other company
3) Authority established under a Central, State or Provincial Act
4) A local authority
5) A co-operative society
6) A university established under a Central, State or Provincial Act or covered under the University Grants Commission Act
7) Notified Indian Institute of Technology
8) Notified Institute of Management
9) Indian Institute of Foreign Trade, New Delhi
10) Any State Government
11) Any Central Government
12) Any other Institute notified by Central Government.
at the time of his voluntary retirement under a scheme framed in accordance with guidelines prescribed by Rule 2BA. However an Employee of Public Sector Company should have completed 10 years of service or completed 40 years of age.
Exemption is Least of the following.
1) Actual amount received under VRS.
2) Rs. 5 lakhs (to be reduced by total exemptions claimed in past years) in total from one or more employers
3) Last Drawn Salary multiplied by 3 months salary for each completed year of service.
4) Last Drawn Salary multiplied by Balance Nos. of Months of Service Left (Refer Rule 2BA also).
Where any relief has been allowed to an assessee under section 89 for any assessment year in respect of any amount received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under this clause shall be allowed to him in relation to such, or any other assessment year.
ALLOWANCES
Allowances Fully taxable in all cases:
  1. City Compensatory Allowance
  2. Fixed Medical Allowance
  3. Tiffin/Lunch/Dinner/Refreshment Allowance
  4. Servant Allowance
  5. Dearness Allowance
  6. Project Allowance
  7. Overtime Allowance
  8. Interim Allowance
  9. Any Other Cash Allowance
House Rent Allowance (HRA) [Sec. 10(13A) and Rule 2A]
The least of the following is exempt —
  1. 40% of salary [50% if house situated at Mumbai, Kolkata or Chennai]
  2. HRA actually received in respect of the period during which the accommodation is occupied
  3. Rent Paid – (Salary x 10%)
Salary = Basic + Dearness Allowance (if part of retirement benefit) + Commission (fixed % of turnover)
Other Allowances
Allowances Exempted To The Extent Of Amount Received Or Specified Limit Whichever Is Less.
Allowances
Exemption limits
1 Children Education allowance
Rs. 100 p.m per child maximum 2 children
2 Children hostel exp. allowance
Rs. 300 p.m per child maximum 2 children
3 Tribal area allowance
Rs. 200 p.m
4 Transport allowance
Rs. 800 p.m & Rs. 1600 p.m for blind/handicapped
5 Transport allowance for transport employee
Least of 70% of allowance or Rs. 10,000 p.m
(Rs. 6,000 till A.Y. 2010-11)
6 Underground allowance
Rs. 800 p.m
7 Compensatory field area allowance 
maximum Rs 2600 p.m
8 Compensatory modified hill area allowance
maximum up to Rs. 1000 p.m.
9 Special Compensatory hill area or high altitude
Rs 300 p.m to Rs. 7000 p.m allowance, etc
10 Border area, Remote area, Disturbed area allowance
Rs. 200 p.m to Rs. 1300 p.m.
11 High altitude allowances (Non-congenial climate)
Rs. 1,060 p.m. (Altitude for 9000 ft to 15000 ft), Rs. 1,600 p.m. (Above 15000 ft)
12 Special compensatory for highly active field area allowance
Limit is Rs. 4,200 p.m.
13 Island allowance
Limit is Rs. 3,250 p.m.
14 Counter Insurgency Allowance
Limit is Rs. 3,900 p.m.
PERQUISITES
Specified employee — Sec. 17(2)(iii)
  • Director of the company or
  • Employee having 20% or more voting power in the employer company or
  • Employee having salary* more than Rs. 50000
* Salary means all taxable monetary benefit after deduction u/s 16
  1. RENT FREE ACCOMMODATION
    Unfurnished Accommodation
    Government Employees As per govt. rules:

    Licenses Fees less 

    Rent recovered form employee

    Other Employees
    In Hotel

    24% of salary or actual
     charges whichever is less

    ** nothing taxable if
     accommodation is
    provided not more than
    15 days and on transfer
    of employee from one
    place to another
    Owned by employer

    Not owned by employer (on lease or rent)
    As per 2001 census

    As per 2001 census
    Population >25 lakhs
    10 lakh < Population < 25 lakh
    Population up to 10 lakhs
    15%**
    10%**
    7.5%**
    Actual rent or 15% of salary whichever is lower
  The above is applicable only for unfurnished house
**% on amount of salary (less) Rent actually paid by employee
Furnished House
If the furniture (TV, washing machine) is provided then 10% p.a of cost of furniture or actual hire charges if taken on rent shall be added with unfurnished house.
Salary = basic salary + DA + bonus (current year) + commission + taxable portion of all allowance + monetary payment from employer other than PF (not include perquisites)
  1. VALUATION OF PROVISION OF DOMESTIC SERVANTS
    Servant appointed by
    Servant’s salary paid by
    Value of perquisite
    Taxable in the hands of
    Employee or Employer
    Employee
    Nil
    Not applicable
    Employee or Employer 
    Employer
    Actual cost incurred by the employer on the servant
    All employees
  1. VALUATION OF SUPPLY OF GAS, ELECTRICITY OR WATER SUPPLIED BY EMPLOYER
    Facility in the name of
    Value of perquisite
     Taxable in the hands of
    Provided from own source
    Provided from outside
    Employee
    Manufacturing cost to the employer
    Amount paid to the supplier
    All employees
    Employer
    Manufacturing cost to the
    employer
    Amount paid to the supplier
    Specified employees
  1. VALUATION OF EDUCATIONAL FACILITIES
    Facility provided to
    Value of perquisite
    Taxable in the hand of

    Provided in the school owned by the employer
    Provided in any other school

    Children
    Cost of such education in similar school (an exemption of Rs. 1000 p.m. per child is available)
    Cost of such education (an exemption of Rs. 1000 p.m. per
    child is available)
    Specified employee
    Other house hold member
    Cost of such education in similar school
    Cost of such education incurred
    Specified employee
  1. VALUE OF LEAVE TRAVEL CONCESSION:
Any concession received by employee for himself or his family for travelling to any place in India is exempt to the extent of amount spent subject to the following conditions:
  1. Exemption only for two journeys in a block of four years and out of two journeys exemption for one journey can be claimed in the calendar year succeeding the end of the block. [current block: 2010-13]
  2. Exemption only for two children but exemption will be available for all children born before October 1, 1998
Amount of exemption
Situations
Amount of exemption
Where journey is performed by air
Amount of economy class air fare of the national carrier by shortest route or amount spent whichever is less
Where journey is performed by rail
Amount of air conditioned first class rail fare by the shortest route or amount spent whichever is less
Where the place of origin of journey and destination are connected by rail and journey is performed by any other mode of transport
Amount of air-conditioned first class rail fare by the shortest route or amount spent whichever is less.
Where the place of origin of journey and destination are not connected by rail

a) where a recognized public transport exists
First class or deluxe class fair by the shortest route or the amount spent whichever is less
b) where no recognized public transport exists
Air conditioned first class rail fare by shortest route or the amount spent whichever is less.
  1. VALUE OF INTEREST FREE LOAN
* Calculate interest on the basis of SBI lending rates and interest paid by employee. The difference will be the value of perquisite
* Interest on maximum outstanding monthly balance of advance is considered to determine any concession in interest. Maximum outstanding monthly balance means balance of loan on the last day of each month.
* Nothing is taxable if –
- loans in aggregate do not exceed Rs 20,000 or
- loan is provided for a treatment of specified disease (Rule 3A) like neurological diseases, Cancer, AIDS, Chronic renal failure, Hemophilia (specified diseases).
SBI LENDING RATES
The details of interest rate as on 1st April, 2011 is available on www.statebankofindia.com.
  1. VALUE OF perquisite in resPECT OF MOVABLE ASSETS
    Assets given
    Value of benefits
    a) Use of laptops and computers
    Nil
    b) Movable asset other than Laptops and computers
    i. 10% p.a. of the actual cost of such asset, or
    ii. the amount of rent paid, or payable by the employer
    iii. Less: amount recovered from employee.
  1. VALUE OF perquisite in resPECT OF MOVABLE ASSETS sold to employee
    Assets transferred
    Value of perquisites
    Computers & electronics
    Depreciated value of asset [depreciation is computed @50% on WDV for each completed year of usage] less: amount recovered from employee.
    Motor cars
    Depreciated value of asset [depreciation is computed @20% on WDV for each completed year of usage] less: amount recovered from employee.
    Any other asset
    Depreciated value of asset [depreciation is computed @10% on SLM for each completed year of usage] less: amount recovered from employee.
  1. VALUE OF medical facilities
The following shall not be treated as perquisite —
  1. Medical treatment of the employee or his family (spouse and children, dependent - parents, brothers and sisters): —
  • Provided in any hospital maintained by the employer.
  • Any sum paid by the employer towards expenditure actually incurred by the employee in any hospital: —
— Maintained by employer or Government or Local Authority or any other hospital approved by Central Government for the purposes of medical treatment of its employees;
— Approved by the Chief Commissioner having regard to the prescribed guidelines in respect of prescribed diseases.
  1. Premium paid by an employer by cheque to General Insurance Corporation to effect/keep in force:
  • Insurance on the health of his employees.
  • Medical Insurance Premia.
  1. Any sum, not exceeding Rs.15,000 , paid to any hospital/nursing home/clinic other than(a & b)
  2. Amount payable for treatment Outside India: —
  • Medical expenses — to the extent permitted by RBI.
  • If Gross Total Income (before including the travel expenditure) of the employee, does not exceed Rs. 2,00,000/-, then travel abroad for patient and one attendant — fully deductible. Stay abroad for patient and one attendant - permitted by RBI.
  1. VALUE OF MOTOR CAR
Owned or hired by employer and used
Exclusively for official purpose Exclusively for private purpose  Both official and Private Purpose
Nil. If specified documents maintained Actual Running & Maintenance exp + remuneration of Chauffeur + actual Wear & tear @ 10% p.a of cost or hire charges if car taken on hire charges Less: amount recovered
Running and maintenance borne by *
Employer
Employee
Up to 1.6 ltrs Rs. 1800 p.m +
for chauffeur Rs. 900 p.m
Up to 1.6 ltrs Rs. 600 p.m
+ for chauffeur Rs. 900 p.m
Exceeding 1.6 ltrs
Rs. 2400 p.m + for drivers
Rs. 900 p.m
Exceeding 1.6 ltrs
Rs. 900 p.m + for drivers
Rs. 900 p.m
* Nothing is deductible in respect of any amount recovered from the employee
Owned by employee and used
Exclusively for official purpose
Exclusively for private purpose
Both official and private purpose
 
Nil. If specified documents maintained

Actual expenditure incurred by employer (-) amount recovered from employee

Running and maintenance borne by
Employer
Employee


Actual expenditure (-)
Rs. 900 p.m
No tax
  1. Employer should maintain complete details of journey undertaken for official purpose, which includes date of journey, destination, mileage and amount of expenditure incurred thereon.
  2. Certificate of supervising authority of the employee, wherever applicable, to the effect that the expenditure incurred for wholly and exclusively for performance of official duties, should be provided
MISCELLANEOUS
Free meals during office hours

Free meal in remote area or offshore installation area is not taxable perquisite
Actual cost to the employer in excess of Rs.50 per meal or tea
or snacks
Less: amount recovered from the employee.
(Tea or non-alcoholic beverages and snacks during working
hours is not taxable)
Value of any gift or voucher or taken other than gifts made in cash or convertible into money (e.g. gift cheques) on ceremonial occasion
Value of gift. In case the aggregate value of gift during the
previous year is less than Rs. 5,000, then it is not a taxable perquisite
Expenditure incurred on credit card or add on card including membership fee and annual fees
Actual expenditure to employer is taxable
Less: amount recovered from Employee
If it is incurred forofficial purpose and supported by necessary
documents then it is not taxable.
Expenditure on club other than health club or sports club or similar facilities provided uniformly to all
Actual expenditure incurred by the employer
Less: amount recovered from employee
employees If the expenditure is incurred exclusively for official purposes and supported by necessary documents then it is not taxable.
(Initial fee of corporate membership of a club is not a taxable perquisite)
Any other benefit or amenities or service or right or privilege provided by employer other than telephone or mobile phone
Cost to the employer
Less: amount recovered from employee
PROVIDENT FUND

Statutory provident fund
Recognized provident fund
Unrecognized provident fund
Public Provident Fund
Employer’s contribution to provident fund
Not taxable
Not taxable up to 12 per cent*of salary
Not taxable
Employer does not contribute
Employee’s contribution
Available deduction u/s 80C
Available deduction u/s 80C
Not available
Available deduction u/s 80C
Interest credited
Fully exempt
Exempt up to 9.5% (from 01.04.2001 onwards)
On Employee contribution
- taxable under "income
from other sources"
On Employer contribution – not taxable at the time
of credit.
Exempt from tax
Lump sum payment received at the time of retirement or termination of service or withdrawn
Exempt u/s. 10(11)
Exempt from tax u/s. 10(12) Subject to conditions: not taxable if employee retires after 5 years of service or due to inability of work. Otherwise treated as URPF
Employee’s Contribution
exempt from tax & Interest
thereon is taxable under the head of income from other sources.
Employer’ s contribution
and interest thereon is
taxable as Profits in lieu
of Salary, under" Salaries")
Exempt from tax u/s 10(11)
Notes:
  • "salary" means basic salary. It includes dearness allowance if terms of employment so provide. It also includes commission when determined at a fixed percentage of turnover achieved by an employee.
APPROVED SUPERANNUATION FUND
  • Employers contribution towards an approved superannuation fund is chargeable to tax in the hands of employees to the extent such contribution exceeds Rs. 1 lakh per year.
  • Interest on accumulated fund balance is exempt from tax in employees hands.
Value of any specified security or sweat equity Shares allotted to employee
  1. Specified Security means securities as defined in Section 2(h) of the Securities Contract (Regulation) Act and also includes Employees Stock Option Plan (ESOP).
  2. Sweat equity shares means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in name of Intellectual Property Rights.
  3. Perquisite will be taxable as the difference between the fair market value (FMV) of the shares on the date of exercise of the options less the exercise price.
Calculation of FMV on date of exercising the option
PARTICULARS
FMV
Listed on a recognized stock exchange
Average of opening and closing price on that date
Listed on more than one recognized stock exchanges
Average of opening & closing price of share on the recognised stock exchange which records the highest volume of trading in the share
If no trading in the share on any recognized stock exchange –

If share listed on a recognized stock exchange
Closing price of share on any recognised stock exchange on a date closest to date of exercising the option & immediately preceding such date
If share listed on more than one recognized stock exchanges
Closing price of share on a recognised stock exchange, which records highest volume of trading in such share.
If shares not listed on a recognised stock exchange or any specified security other than equity shares
Such value of share in the company as determined by a merchant banker on the specified date

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