Article explains Employer-Employee Relationship, Salary and Its Components, What are allowances, Are all allowances taxable, Perquisites, Perquisites that are taxable for all the employees, Perquisites that are taxable only to specified employees, Perquisites that are exempt from tax, Important Points related to Salary, Place of accrual of salary, What is CTC, Advance Salary and Its Taxability, Arrears of Salary and Its Taxability, Tax treatment of salary received by an Indian citizen deputed outside India, Tax treatment of salary foregone by the employee, Different Forms related to Salary Income, Detailed Discussion on Various Components of Salary (Dearness Allowance, Pension, Gratuity, Pay Commission) and How is TDS calculated on salary and Recent Amendment for Salaried Class.
I have started writing this article keeping in mind the questions raised in minds of salaried class taxpayers. Also, it is aimed to address the doubts of all those who file the Return of their salaried class clients.
If you are in an employee-employer relationship, you belong to the salaried class of individuals.
The relationship of employer-employee is established where there is control over the method of doing the work of other person. Control is said to exist if the payer can direct what has to be done, when, how and by whom it has to be done, and the receiver is bound to follow all his instructions. Where this relationship exists, there is a “contract of service”.
Salary is defined as the remuneration that a person receives periodically for rendering services based on an implied or express contract.
The salary for the purpose of calculation of income from salary includes:
However, not all income is termed as salary. If a professional is being paid for his/her expertise in a professional capacity, it is termed as ‘Professional/Technical Fees’.
Similarly, a partner earning salary from his/her company is charged taxes under ‘Profits & Gains from Profession or Business’.
Other examples include the salary paid to a Member of Parliament or a Member of Legislative Assembly.
Allowances are fixed amounts, apart from salary, which are paid by an employer for the purpose of meeting some particular requirements of the employee. There are generally three types of allowances for the purpose of income tax- taxable, fully exempted and partially exempted.
Perquisites are those payments which are received by an employee from the employer over and above the salary.
Note: The above list of allowances and perquisites is not exhaustive.
1. Salary due from employer (including former employer) to taxpayer during the previous year, whether paid or not;
2. Salary paid by employer (including former employer) to taxpayer during the previous year before it became due;
CTC is one of the generic term when a person talks about salary. CTC stands for Cost To Company. It is the amount that the company in spending on hiring and sustaining an employee.
CTC includes the salary as well as the other benefits provided to an employee which can be meal coupons, office space rent, Provident Fund, Medical Insurance, House Rent Allowance(HRA) and any other element that cost to the company.
It may be noted that CTC varies from the actual income from salary that a person receives as CTC also includes variables over and above the actual salary that a person is receiving.
Advance salary received by an employee is taxed in the year of receipt. However, an employee can claim relief under section 89 in respect of advance salary.
Similarly, Bonus received by an employee is charged to tax in the year of receipt.
Arrears of salary received by an employee are taxed in the year of receipt if the same were not taxed earlier on due basis. However, an employee can claim relief under section 89 in respect of arrears of salary.
Salary received by an Indian citizen deputed outside India by the Government is treated as income deemed to be accrued or arisen in India and will be taxed in India. However, in such a case allowance and perquisites will be exempt from tax.
Salary is charged to tax on due or receipt basis whichever is earlier, hence, salary foregone by the employee is charged to tax on due basis, even though it is not received by him. In other words, salary foregone after its accrual is charged to tax, even though it is not received by the employee. However, if salary is surrendered to the Central Government under section 2 of the Voluntary Surrender of Salary (Exemption from Taxation) Act, 1961, then such surrendered salary is not charged to tax.
Let us now discuss about different forms, which most of you would be aware of. These forms are a common sight in HR Department of the Organization.
Investment declaration has to be done in the beginning of a financial year. Your employer asks you to declare your tax-saving investments for the year to be able to deduct tax accordingly from your monthly salary. Investment declaration is important for you because it can lead to higher in-hand salary.
In the beginning of the financial year, you have to just make an estimate of the investments that you intend to make. You don’t need to submit actual proofs till the end of the financial year. You can actually invest less or more. The eventual investments don’t have to be exactly as declared.
The Form 12BB is a statement of claims by an employee for deduction of tax. With effect from 1st June 2016, a salaried employee is required to submit the Form 12BB to his or her employee to claim tax benefits or rebate on investments and expenses. Form 12BB has to be submitted at the end of the financial year.
Form 12BB applies to all salaried taxpayers. Using Form 12BB, an employee has to declare the investments that they have made during the year. Documentary evidence of these investments and expenses have to be provided at the end of the financial year as well.
Q. When do I have to submit Form 12BB?
Ans:Usually, employers ask for a declaration at the start of the financial year to estimate TDS calculations for the whole year. Form 12BB has to be later submitted towards the end of the financial year.
Q. Do I need to submit Form 12BB to the Income Tax Department?
Ans: No, Form 12BB does not have to be submitted to the tax department. It has to be submitted to your employer.
Form 12b is an income tax form that needs to be furnished according to Rule 26A by an individual joining a new organisation or company in the middle of the year. The main purpose of the form is to furnish details of the income earned by the individual from the previous employer. Every new employee has to submit Form 12B to their new employer. Furnishing Form 12B is not compulsory.
Ans. Once the employee submits Form 12b with the correct details required, the new employer will furnish a Consolidated Form 16 at the end of the year based on the details provided by the new employee in Form 12b.
Q. Whose responsibility is it to fill Form 12b?
Ans. It is the employee’s responsibility and not the previous employer’s responsibility to fill Form 12b. The employee has to fill in the declaration in Form 12b and also attach Form 16, if provided by the previous employer.
Q. Can the current employer refuse to deduct TDS on the individual’s previous salary after the submission of Form 12b?
Ans. It is the employer’s obligation to deduct TDS on the individual’s consolidated salary after accounting for TDS deducted by the individual’s previous employer.
Form 16 is a certificate, in which employer certifies the details about the salary and the tax deducted at source from the salary during the year.
Form 16 is issued once in a financial year, on or before 31st May of the next year immediately following the financial year in which tax is deducted.
Form 16 has two parts:
Part A- It contains the information of the employer & employee, like name & address, PAN and TAN details, a period of employment, details of TDS deducted & deposited with the government.
Part B- It contains the details of salary paid, other incomes, deductions allowed, tax payable etc.
What if no taxes have been deducted from salary, is there any need for employer to issue Form-16 ?
Form-16 is a certificate of TDS and in this case it will not apply. However the employer must issue a salary statement.
Form 26AS is required to be issued Under Section 203AA of the Income-tax Act. It is a consolidated tax credit statement issued to a taxpayer and shows the Income tax that has been deposited with the government with respect to the taxpayer and Form 26AS
Form 26AS Contains all the details of the taxes paid and deposited with the Income Tax Department.
Form 10C is the primary form to be submitted for claiming the benefits under the employee pension scheme.
The contributions made by your employer towards your PF account is segmented into EPF funds and EPS funds.
The part of the contribution from your employer that goes into the EPS scheme can be withdrawn by using Form 10C.
All members of the EPS scheme satisfying the below mentioned criteria can apply:
I have tried to explain the meaning of a few terms which might be used in your salary slip in the most simple language. Wikipedia came as a great help to me while writing this section.
The concept of Dearness Allowance or DA was introduced after World War II and was initially known as ‘Dear Food Allowance’. However, it was later linked to the Consumer Price Index.
A number of committees in the Central Government have been revising and restructuring the percentage of Dearness Allowance.
The DA component takes care of the change in the cost of living depending upon the location of the employee. Specially, for government sector employees, job transfers are an essential feature and hence DA becomes even more significant in order to hedge the inflation cost of living difference as well as inflation. The DA component is different for different employees based on their location. This means DA is different for employees in the urban sector, semi-urban sector or the rural sector.
The Income Tax Act mandates that tax liability for Dearness allowance will have to be declared in the filed returns.
VAD or Variable dearness allowance is the allowance that comes as a result of revision every six months for central government employees.
There are three components that make up VAD. First is the consumer price index, second, the base index and third is the variable DA amount fixed by the government of India.
Rarely Known Fact about Dearness Allowance:
It is practice to merge the DA with the basic salary once the DA percentage breaches the 50% mark. This is supposed to be a great salary booster for employees since all other components of the salary are calculated as a percentage of the basic salary.
Pension is a regular payment made by the state to people after their official retirement, to widows, and disabled people. It is a deferred wages of people’s services in the past. The minimum pensionable service varies from service to service. Since Apr 2004, a new ‘National Pension Scheme,’ a contributory system is evolved as an universal pension scheme. This is not applicable to the Armed Forces.
Q.Is pension income considered as salary?
Ans. Yes; However pension received from the United Nation is exempt.
Q.Is Family pension considered as salary?
Ans. No, It is taxable under ‘other sources’.
Q.If someone receives pension through a bank who will issue Form-16 or pension statement – the bank or former employer?
Ans. The bank.
Commutation means inter-change. Many pensioners convert their future right to receive pension into a lumpsum amount receivable immediately. For example, suppose a person is entitled to receive a pension of say Rs. 2000 p.m. for the rest of his life. He may commute 1/4th i.e. 25% of this amount and get a lumpsum of say Rs. 30,000. After commutation, his pension will now be the balance of 75% of Rs. 2,000p.m. = Rs. 1,500 p.m.
Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company. Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job.
One can know your gratuity amount in advance. The amount of gratuity depends upon the tenure of service and last drawn salary. Every employer is bound to give gratuity amount to its employees if it employs more than 10 people. The gratuity is given after leaving the job of you have completed continuous service of 5 years.
An employer may offer gratuity out of his own funds or may approach a life insurer in order to purchase a group gratuity plan. In case the employer chooses a life insurer, he has to pay annual contributions as decided by the insurer. The employee is also free to make contributions to his gratuity fund. The gratuity will be paid by the insurer based upon the terms of the group gratuity scheme.
Pay Commission is set up by Government of India, and gives its recommendations regarding changes in salary structure of its employees. Since India’s Independence, seven pay commissions have been set up on a regular basis to review and make recommendations on the work and pay structure of all civil and military divisions of the Government of India.
Calculate TDS from Salary
The government allows tax exemption under Section 80C and 80D. This allows an individual to seek for exemption on tax based on various types of investment he/she is making for that particular financial year.
Deductions under Section 80C, 80CCC, 80CCD and 80D
Deductions under other sections like 80E, 80G, 80TTA
The following process is involved in the deduction of TDS:
Now comes the most important part of the article i.e. how TDS is computed on salary. It is simply taking out your net taxable income, calculating Tax thereon and taking out the amount of deduction on monthly basis (Average)
While the basic salary is fully taxable according to respective tax bracket, some exemptions are available for payments made as allowances and perks. You can calculate TDS on your income by following the below steps.
As per an amendment in the Budget 2018, tax exemption on medical reimbursement amounting to Rs. 15,000 and transport allowance amounting to Rs. 19,200 in a financial year have been replaced with a standard deduction of Rs. 40,000 (For FY 2018-19) and Rs. 50,000 (For FY 2019-20).
With this, I have reached to the end of this Article. I have tried to address some of not much talked areas in Salary. Besides discussing about taxability of various allowances and perquisities (which is often formula based in this Chapter), the main purpose was to make masses aware of something which is not much known. Hope the content of the article helps.
Your feedbacks will be highly appreciated.