FINANCIAL YEAR 1985-86
1682. Instruction for deduction of tax at source from salary during the financial year 1985-86 at the rates specified in Part III of First Schedule to Finance Act, 1985
1. I am directed to invite a reference to this Ministry’s Circular No. 388 [F.No. 275/13/84-IT(B)], dated 16-7-1984 and Circular No. 407 [F.No. 275/13/84-IT(B)], dated 1-2-1985 wherein the rates of income-tax deduction during the financial year 1984-85 from the payment of income-tax chargeable under the head “Salaries” under section 192 were intimated.
2. Sub-section (1) of the said section provides that the person responsible for paying any income chargeable under the head “Salaries” shall, at the time of making payment deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee for that financial year. The provisions of sub-section (3) are intended for making adjustments of excess or shortfalls of inadvertent nature and/or due to unforeseen circumstances. Thus, the aggregate tax calculated on the estimated income divided by twelve and rounded off to the nearest rupee is required to be deducted from the monthly salary.
3. In the Finance Act, 1985, some modifications have been made. An extract of Sub-Paragraph I of Paragraph A of Part III of the First Schedule is at Annex 1.
4. The substance of the main provisions of law insofar as they relate to income chargeable under the head “Salaries” on which tax is to be deducted at source during the financial year 1985-86 is given hereunder :
(1) No tax will be deductible at source in any case unless the estimated salary income for the financial year exceeds Rs. 18,000. Some typical examples of calculation are at Annex II.
(2) The value of perquisites by way of free or concessional residential accommodation, or motor cars provided by employers to their employees, shall be determined under rule 3 of the Income-tax Rules, 1962. Further the value of other benefits or amenities provided free of cost or at concessional rates to the employees, like supply of gas, electric energy, water for household consumption, educational facilities, etc., should also be taken into account, for the purpose of computing the estimated salary income of the employees during the current financial year (Example II atAnnex II illustrates computation of some such perquisites). As regards colliery allowance it is to be noted that only the excess over Rs. 100 per month or 50 per cent of the actual colliery allowance paid by Coal India Ltd., whichever is more, is to be treated as perquisite and the balance amount on account of the payment of said allowance may be allowed to be deducted while computing income under the head “Salaries” for purpose of deduction of tax at source.
(3) Exemption in computing total income :
(a) Clause (10) of section 10 provides exemption of death-cum-retirement gratuity from inclusion in computing total income. The Government have issued a Notification bearing No. 537(E), dated 1-7-1985 raising the limit of Rs. 36,000 mentioned in sub-clause (iii) of clause (10 ) of section 10 to Rs. 50,000 for all the three purposes for which the said limit has been mentioned in the provisions of the said clause.
(b) Sub-clause (1) of clause (10AA) of section 10 provides for exemption of any payment received by an employee as cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement on superannuation or otherwise; and
(c) In the case of any employee other than an employee of the Central or State Government any payment of the nature referred to in sub-clause (i) of clause (10AA) of section 10 is to be excluded in computing the total income subject to the provisions of sub-clause (ii ) of the said clause (10AA).
(4) The amount re-paid to an employee from the Additional Dearness Allowance Deposit Account under the provisions of Additional Emoluments (Compulsory Deposit) Act, 1974, shall be liable to be included in his total income of the previous year in which it is re-paid as already explained in the Ministry’s Circular No. 182 [F.No. 275/12/75-IT(J)], dated 28-10-1975]. The amount repaid will include an element of interest also. While the repayment of principal sum will be regarded as salary paid during the relevant financial year and assessed to tax accordingly, the interest element qualifies for deduction in accordance with section 80L of the Income-tax Act, 1961.
(5) Under section 10(10B), as amended by section 4 of the Finance Act, 1985 with effect from 1-4-1986, any compensation received by a workman under the Industrial Disputes Act, 1947 (14 of 1947) or under any other Act or Rule, orders or notifications issued thereunder or under any standing orders or under any award, contract of service or otherwise at the time of retrenchment, is exempt from the payment of income-tax; the amount exempt under these provisions shall not exceed :
(i) an amount calculated in accordance with the provisions of clause (b) of section 25F of the Industrial Disputes Act, 1947; or
(ii) fifty thousand rupees, whichever is less. However, these limits shall not apply in respect of any compensation received by a workman in accordance with any Scheme which the Central Government may, having regard to the need for extending special protection to the workmen in the undertaking to which such Scheme applies and other relevant circumstances, approve in this behalf.
(6) Under section 10(13A) any special allowance specifically granted to an assessee by his employer to meet expenditure incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee is exempt from income-tax to the extent (not exceeding Rs. 400 p.m.) as may be prescribed, having regard to the area or place in which such accommodation is situated and other relevant considerations. Rule 2A of the Income-tax Rules, 1962 prescribes the limits in respect of the amount which is not to be included in the total income of the assessee for the purpose of section 10(13A ). It has to be noted that only the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee subject to the limits laid down in rule 2A, qualifies for exemption from income-tax. Thus, house rent allowance granted to an employee who is residing in a house/flat owned by him is not exempt from income-tax. The disbursing authorities should satisfy themselves in this regard by insisting on production of evidence of actual payment of rent before excluding house rent allowance from the total income of the employee.
(7)( a) Under section 16 the taxable salary is to be computed after providing standard deduction. The standard deduction is to be allowed of an amount equal to 25 per cent of the salary subject to a maximum of Rs. 6,000. For this purpose, the term “Salary” will include fees, commission, perquisites or profits in lieu of or in addition to salary, but will not include any payment received by the employees which are specifically exempt from tax under clauses (10 ), (10A), (10AA), (10B ), (11), (12) and (13A) of section 10. Thus, house rent allowance to the extent exempt under section 10(13A) of the Act will not be taken into account for the purpose of computing the amount of the standard deduction. It is to be noted that standard deduction on the above basis is to be allowed irrespective of whether any expenditure incidental to employment is actually incurred by the employee or not. This deduction will be available also to persons drawing pension during the current financial year at the same rates and subject to the same ceiling as to the employees in actual service. However, the standard deduction will be limited to Rs. 1,000 only in cases (i) where the employee is provided with any motor car, motor cycle, scooter or other moped by his employer for use otherwise than wholly and exclusively in the performance of his duties, or (ii ) where he is allowed the use of any one or more motor cars out of a pool of motor cars owned or hired by the employer otherwise than wholly and exclusively in the performance of his duties. The use of any vehicle provided by the employer for journey by the employee from his residence to his office or other place of work as also from office or other place of work to his residence shall not be regarded as use of such vehicles otherwise than wholly and exclusively in the performance of his duties.
(b) Para 4, Circular No. 407, dated 1-2-1985 read with Circular No. 408, dated 8-2-1985 may be treated as withdrawn in view of section 6(c) of the Finance Act, 1985.
(c) In respect of salary paid during the financial year 1985-86, the value of any benefit or amenity granted or provided free of cost or at concessional rate by an employer to an employee (not being a director of the company or a person who has substantial interest in the company) is not regarded as a perquisite received by the employee unless the employee’s income under the head “Salaries” exclusive of the value of any benefits or amenities not provided for by way of monetary payment exceeds Rs. 24,000. In cases where salary is received from more than one employer, the aggregate salary from these employers will have to be taken into account for the purpose.
(8)( a) Under section 80C while computing the taxable income the disbursing officers should allow deduction of the whole of the first Rs. 6,000, 50 per cent of the next Rs. 6,000 and 40 per cent of the balance of the qualifying amount of payment towards life insurance premium, contributions to provident fund (including contributions to Public Provident Fund constituted under the Public Provident Fund Act, 1968), contributions for participation in the Unit-linked Insurance Plan, 1971 made under section 19(1)(cc) of the Unit Trust of India Act, 1963, deposits in a 10-year account or 15-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959 and subscription to the National Savings Certificates (VI Issue) and the National Savings Certificates (VII Issue). The interest on National Savings Certificates (VI Issue) is deemed to be re-invested and therefore the holder thereof is entitled to the benefits of section 80C.
(b) In respect of contributions to “recognised provident funds” there is another monetary ceiling limit laid down in clause (d) of sub-section (2) of section 80C, in that the employee’s own contribution to his individual account in the fund will not exceed one-fifth of his salary during the financial year or Rs. 10,000, whichever is less. “Salary” for this purpose would include dearness allowance if the terms of the employment so provide but will exclude all other allowances or perquisites. The expression “recognised provident fund” has been defined in section 2(38) to mean a provident fund which has been and continues to be recognised by the Commissioner in accordance with the Rules contained in Part A of the Fourth Schedule to the Act and includes a provident fund established under a Scheme framed under the Employees’ Provident Funds Act, 1952.
(c) The additional monetary ceiling of one-fifth of salary or Rs. 10,000, whichever is less, will not be applicable to the contributions to the provident funds referred to in sub-clauses (iii) and (iv) of clause ( a) of sub-section (2) of section 80C. Such provident funds are :
(A) Government Provident Fund and Railways Provident Fund.
(B) Provident Funds established by such local authorities and institutions as are mentioned in the Schedule to the Provident Funds Act, 1925 and those notified by the Government from time to time under section 8(3) of that Act.
(C) Any provident fund set up by the Central Government and notified by it in the Official Gazette—Public Provident Fund set up under the Public Fund Act, 1968 is an example of such a fund.
(d) Under clause (b) of sub-section (2) of section 80C where the assessee is a Hindu undivided family, the deduction is allowable in respect of—
(i) any sum paid in the previous year by the assessee out of its income chargeable to tax—
(1) to effect or to keep in force an insurance on the life of any member of the family; or
(2) as a contribution to any provident fund referred to in sub-clause (iv) of clause (a) where such contribution is to an account standing in the name of any member of the family; or
(ii) any sum deposited in the previous year by the assessee out of its income chargeable to tax in a ten-year account or a fifteen-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959, as amended from time to time where such sums are deposited in an account standing in the name of any member of the family.
(e) The aggregate of the sums referred to in (a) and (d) above which qualifies for the purpose of computing the deduction under section 80C shall not exceed—
(i) in the case of any individual being an author, playwright, artist, musician, actor or sportsman (including an athlete), sixty thousand rupees;
(ii) in the case of any other individual or a Hindu undivided family or any such association of persons or a body of individuals as is referred to in clause (g) of sub-section (2), forty thousand rupees.
(9) No deduction should be made from the salary income in respect of any donations for charitable purposes. The tax relief on such donations as admissible under section 80G will have to be claimed by the taxpayer separately at the time of finalisation of the assessment. However, in cases where contributions to the National Defence Fund, Jawaharlal Nehru Memorial Fund, the Prime Minister’s Drought Relief Fund, the National Children’s Fund or the Indira Gandhi Memorial Trust are made, 50 per cent of such contributions may be deducted in computing the total income of the employee. Under section 80G of the Act as amended by section 18 of the Finance Act, 1985 the donation to the Prime Minister’s National Relief Fund will be eligible for hundred per cent deduction which would be effective from 1-4-1986, and would, accordingly, apply in relation to the assessment year 1986-87. Thus, deduction in this respect maybe allowed while computing the total income for the purpose of deduction of income-tax at source for financial year 1985-86. Deduction will not be admissible where the aggregate of all contributions for the year is less than Rs. 250.
(10) Under section 80GG an assessee is entitled to a deduction in respect of house rent paid by him for his own residence at the places specified under rule 11B of the Income-tax Rules. Such deduction is permissible subject to the following conditions :
(a) The assessee has not been in receipt of any house rent allowance specifically granted to him which qualifies for exemption under section 10(13A) of the Act;
(b) He will be entitled to a deduction in respect of house rent paid by him in excess of 10 per cent of his total income subject to a ceiling of 15 per cent thereof or Rs. 400 per month, whichever is less. The total income for working out these percentages will be computed before making any deductions under section 80GG;
(c) The assessee does not own :
(i) any residential accommodation himself or by his spouse or minor child or where such assessee is a member of a Hindu undivided family, by such family, at the place where he ordinarily resides or performs duties of his office or carries on his business or profession; or
(ii) at any other place, any residential accommodation being accommodation in the occupation of the assessee, the value of which is to be determined under clause (i) or, as the case may be, clause (ii) of sub-section (2) of section 23; and
(d) The accommodation occupied by him for the purpose of his own residence is situated in any of the following places, namely :—
(i) Agra, Ahmedabad, Allahabad, Amritsar, Bangalore, Bhopal, Calcutta, Coimbatore, Delhi, Faridabad, Gwalior (Lashkar), Hyderabad, Indore, Jabalpur, Jaipur, Kanpur, Lucknow, Ludhiana City, Madurai, Nagpur, Patna, Pune (Poona), Srinagar, Surat, Vadodara (Baroda) or Varanasi (Banaras) or the urban agglomeration of each of such places; and
(ii) Bombay, Calicut, Cochin, Ghaziabad, Hubli-Dharwar, Madras, Sholapur, Trivandrum or Vishakhapatnam.
Explanation: “Urban agglomeration”, in relation to a place, means the area for the time being included in the urban agglomeration of such place for the purpose of grant of house rent allowance by the Central Government to its employees under the orders issued by it from time to time in this regard.
The disbursing authorities should satisfy themselves that all the conditions mentioned above are satisfied before such deduction is allowed by them to the assessees. They should also satisfy themselves in this regard by insisting on production of evidence of actual payment of rent.
(11) Section 10(14) of the Act provides for exemption from income-tax of any special allowance or benefit, not being in the nature of an entertainment allowance or other perquisite within the meaning of clause (2) of section 17 specially granted to the employee to meet the expenses actually incurred wholly, necessarily and exclusively in the performance of the duties of an office or employment of profit. In view of this provision, disbursing authorities have been authorised vide Board’s Circular No. 196 [F.No. 275/29/76-ITJ, dated 31-3-1976] not to deduct tax at source from conveyance allowance granted to an employee to the extent it is exempt under the said section. It has been stated herein that the employee in receipt of conveyance allowance would have to furnish the necessary certificate before the disbursing authority in support of the fact that the conveyance allowance is only a reimbursement of expenses laid out wholly, necessarily and exclusively in the performance of duties of an office or employment of profit. The satisfaction of the disbursing authorities would still be liable for scrutiny by the Income-tax Officer during regular assessment proceedings before him. The disbursing authority is also required to endorse a certificate in terms of section 10(14 ) on the tax deduction certificate issued under section 203 of the Act. In this connection, attention is invited to the Explanation to clause (14) of section 10 which clarifies that any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides shall not be regarded for purposes of that clause as a special allowance granted to meet expenses wholly, necessarily and exclusively incurred in the performance of such duties. This may be kept in view while deciding whether any expenditure from the special allowance has been actually incurred, and if so, the extent to which it has been incurred to meet the expenses wholly, necessarily and exclusively in the performance of duties of an office or employment of profit.
(12) Section 80RRA provides that where the gross total income of an individual who is a citizen of India, includes any remuneration received by him in foreign currency from any employer (i.e., a foreign employer or an Indian concern) for any services rendered by him outside India, 50 per cent of such remuneration will be deducted in computing the taxable income. It also provides that where the assessee renders continuous service abroad for more than 36 months, the remuneration received by him for any period of service after the expiry of the said 36 months will not qualify for any deduction. In the case of an employee of Central Government or any State Government or a person who was, immediately before taking up the service outside India, in the employment of the Central Government or any State Government, the deduction will be allowed only if the service of the employee is sponsored by the Central Government. In the case of any other individual, the deduction will be allowed only if he is a “technician” and the terms and conditions of his service outside India are approved for the purpose of the said section by the Central Government or the prescribed authority. It is pertinent to note that the deduction is to be allowed with reference to the remuneration received by the individual in foreign currency for services rendered outside India. Thus, if the remuneration is paid to the Indian technician, etc. partly in Indian currency and partly in foreign currency the amount paid in Indian currency will not be taken into account for purposes of deduction under section 80RRA. Likewise, if a part of the remuneration, although paid in foreign currency, relates to services rendered in India, then such part of the remuneration will also not qualify for deduction under section 80RRA.
The expression “foreign employer” has been defined in Explanation (b) to section 80RRA to mean (i) the Government of a foreign State; or (ii) a foreign enterprise; or (iii) any association or body established outside India. While allowing the deduction under this section, documentary evidence should be obtained on the following points :
(i) In the case of an individual who is in the employment of the Central Government or any State Government, the fact of his service having been sponsored by the Central Government.
(ii) In the case of any other individual being a technician, the fact of the terms and conditions of his service outside India having been approved in this behalf by the Central Government (Ministry of Finance, Department of Revenue, Foreign Tax Division, New Delhi).
[It should also be ensured that the deduction is allowed with reference to the remuneration received in foreign currency in respect of the period of service outside India. The fact that deduction is admissible only in relation to the first 36 months of continuous service outside India should also be kept in view.]
(13) Under section 80U: (a) In computing the total income of an individual, being a resident, who, as at the end of the previous year,—
(i) is totally blind, or
(ii) is subject to or suffers from a permanent physical disability (other than blindness) being a permanent physical disability, specified in the rules made in this behalf by the Board, and which has the effect of reducing substantially his capacity to engage in a gainful employment or occupation, there shall be allowed a deduction of a sum of ten thousand rupees:
Provided that such individual produces before the Income-tax Officer, in respect of the first assessment year for which deduction is claimed under this section—
(a) in a case referred to in clause (i), a certificate as to his total blindness from a registered medical practitioner being an oculist; and
(b) in a case referred to in clause (ii), a certificate as to the permanent physical disability referred to in the said clause from a registered medical practitioner.
(b) The Board has by Notification No. SO 529(E), dated 17-7-1985 specified the physical disabilities which will be reckoned as permanent physical disabilities for purposes of deduction under this section. According to the said notification a permanent physical disability shall be regarded as a permanent physical disability for purposes of clause (ii ) of sub-section (1) of section 80U, if it falls in any one of the categories specified below, namely :
(i) Permanent physical disability of more than 50 per cent in one limb.
(ii) Permanent physical disability of more than 60 per cent in two or more limbs.
(iii) Permanent deafness with hearing impairment of 71 decibels and above.
(iv) Permanent and total loss of voice.
The deduction of Rs. 10,000 from the total income is allowed by the employer subject to the production of a certificate from the Income-tax Officer in favour of the employer as laid down in this Ministry’s Circular No. 272, dated 27-5-1980. The certificate once issued will continue to be in force till it is withdrawn by the Income-tax Officer.
(14) The total income computed in accordance with the provisions of the Act should be rounded off to the nearest multiple of ten rupees by ignoring the fraction which is less than five rupees and increasing the fraction which amounts to five rupees or more to ten rupees. The net amount of tax deductible should be similarly rounded off to the nearest rupee.
(15) Section 201 providers :
“(1) If any such person and in the cases referred to in section 194 the principal officer or the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax :
Provided that no penalty shall be charged under section 221 from such person, principal officer or company unless the Income-tax Officer is satisfied that such person or principal officer or company, as the case may be, has without good and sufficient reasons failed to deduct and pay the tax.
(1A) Without prejudice to the provisions of sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid.
(2) Where the tax has not been paid as aforesaid after it is deducted the amount of tax together with the amount of simple interest thereon referred to in sub-section (1A) shall be a charge upon all the assets of a person or the company, as the case may be, referred to in sub-section (1).”
(16) Attention is also invited to section 276B, where it is provided that if a person without reasonable cause or excuse fails to deduct or after deducting fails to pay the tax as required under the provisions of Chapter XVII-B of the Income-tax Act, 1961, he shall be punishable :
(i) in a case where the amount of tax which he has failed to deduct or pay exceeds one hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine; and
(ii) in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to three years and with fine.
5. While making the payment of tax deducted at source to the credit of the Central Government it may kindly be ensured that the correct amount of income-tax and surcharge is recorded in the relevant challan. It may also be ensured that the right type of challan is used. The relevant challan for making payment of tax deducted at source from salaries is No. 9 with “Blue Colour Band”. Where the amount of tax deducted at source is credited to the Central Government through book adjustment, care should be taken to ensure that the correct amount of income-tax is reflected therein.
6. These instructions are not exhaustive and are issued only with a view to helping the employers to understand the various relevant provisions. Wherever, there is a difference of opinion, a reference should always be made to the provisions of the Income-tax Act and the relevant Finance Act through which the changes in the tax structure are made.
Circular : No. 429 [F.No. 275/35/85-IT(B)], dated 8-8-1985.
ANNEX I – EXTRACT FROM THE FINANCE ACT, 1985 – PART III OFTHE FIRST SCHEDULE
Paragraph A
Sub-Paragraph I
In the case of every individual or Hindu undivided family, or unregistered firm or other association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to sub-clause (vii ) of clause (31) of section 2 of the Income-tax Act, not being a case to which Sub-Paragraph II of this Paragraph or any other Paragraph of this Part applies :
Rates of income-tax
(1)
where the total income does not exceed Rs. 18,000
Nil;
(2)
where the total income exceeds Rs. 18,000 but does not exceed Rs. 25,000
25 per cent of the amount by which the total income exceeds Rs. 18,000;
(3)
where the total income exceeds Rs. 25,000 but does not exceed exceeds Rs. 50,000
Rs. 1,750 plus 30 per cent of the amount by which the total income Rs. 25,000;
(4)
where the total income exceeds Rs. 50,000 but does not exceed Rs. 1,00,000
Rs. 9,250 plus 40 per cent of the amount by which the total income exceeds Rs. 50,000.
(5)
where the total income exceeds Rs. 1,00,000.
Rs. 29,250 plus 50 per cent of the amount Rs. 1,00,000 by which the total income exceeds
ANNEX II – TYPICAL EXAMPLES OF INCOME-TAX CALCULATION
Example I
Rs.
Rs.
1.
Total salary income
30,000
2.
Contribution to Government provident fund
5,000
3.
Payment towards life insurance premia
1,000
4.
Contribution for participation in Unit-linked Insurance Plan, 1971, made under section 19(1)(cc) of the Unit Trust of India Act, 1963
300
6,800
5.
Deposits in a 10-year account or 15-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959
500
6.
Total salary income
30,000
7.
Deduct: Amount of standard deduction under section 16(i) @ 25% of the amount subject to a maximum of Rs. 6,000
6,000
8.
Gross total income (6-7)
24,000
9.
Deduct: Amount on account of contribution towards GPF, LIP, Unit-linked Insurance Plan and deposit in 10-year account or 15-year account under Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959. The total amount paid Rs. 6,800
6,400
10.
Total income
17,600
11.
Total tax payable
Nil
Example II
[Illustrating calculation of limits under section 80C and valuation of some perquisites in case of an employee of a private company posted at Bombay]
Rs.
1.
Salary including dearness allowance
48,000
2.
Bonus
9,600
3.
Contribution to recognised provident fund
11,000
4.
LIP
10,000
5.
Subscription to National Savings Certificates (VI & VII Issues)
10,000
6.
Interest accrued for the first year on NSC (VI Issue) @ Rs. 12.40 for every Rs. 100 or say Rs. 5,000
620
7.
Free gas, electricity, water etc. (actual bills paid by the company)
2,400
8.
Furniture at cost (including television set, radio set, refrigerator, other household appliances and an air-conditioner) belonging to the company
40,000
9.
(i) Furnished flat provided to the employee for which actual rent paid by the company (actual rent assumed to be equal to the Fair Rental Value)
42,000
(ii) Rent recovered from the employee
12,000
Computation of total income
1.
Salary
48,000
2.
Bonus
9,600
57,600
3.
Valuation of perquisites:
(a) Furnished flat at concessional rent under section 17(2) read with clauses (a) and (b) of rule 3 of Income-tax Rules, 1962 Fair Rental Value (FRV) (assumed to be equal to actual rent Rs. 42,000) 10 per cent of salary including bonus
5,760
Add : Excess of (FRV) over 60 per cent of salary including bonus of Rs. 57,600 (i.e., Rs. 42,000—Rs. 34,560)
7,440
Add: Perquisite of the furniture (10 per cent of cost, i.e., Rs. 40,000)
4,000
17,200
(b) Less : Rent paid by the employee
12,000
5,200
62,800
4.
Free gas, electricity, etc.
2,400
65,200
5.
Less : Standard deduction under section 16(i) @ 25 per cent subject to maximum of Rs. 6,000
6,000
6.
Gross total income
59,200
7.
Less: Deduction under section 80C :
– P.F. paid Rs. 11,000 but restricted to 1/5th of salary Rs. 48,000 (excluding bonus) or Rs. 10,000, whichever is less
9,600
– LIP
10,000
– National Savings Certificates (VI & VII Issues) and interest accrued on Rs. 5,000 for the first year of NSC (VI Issue) (Rs. 10,000 + 620)
10,620
Total of PF, LIP, NSC of Rs. 30,220 (maximum allowable up to Rs. 40,000)
30,220
– First Rs. 6,000 (100%)
6,000
-Next Rs. 6,000 (50%)
3,000
– On balance Rs. 18,220 (40%)
7,228
16,288
8.
Total income (6—7) (Rs. 59,200—Rs. 16,288)
42,912
42,910
9.
Tax payable thereon (Rs. 1,750 + 30% of excess over Rs. 25,000, i.e., on Rs. 17,910)
7,123
[Rate at which monthly deduction from salary is required to be made works out to Rs. 594]
Notes :
1. In the case of a Government servant, the value of perquisites of unfurnished accommodation provided free is determined in accordance with the rules framed by the Government for allotment of residence to its employees. For determining the perquisite value of free furniture, it is taken, as in other cases, at 10 per cent per annum of the original cost of the furniture, or if it is hired from a third party, the actual hire charges payable.
2. Where unfurnished accommodation is provided to its employee by the Reserve Bank of India or any other public sector body specified in sub-clause (2) of clause (a) of rule 3 of the Income-tax Rules, say, a nationalised bank, State Trading Corporation, etc., it is taken as 10 per cent of the salary due to the employee and where the accommodation is furnished as in other cases, an additional 10 per cent of the original cost of furniture, or if it is hired from a third party, the actual hire charges payable therefor.
3. In the example given above, the actual rent has been assumed to be equal to the “fair rental value”. “Fair rental value” can, however, be different from the actual rent. It is defined in Explanation 2, below clause (a) of rule 3, to mean in the case of an accommodation which is unfurnished, “the rent which a similar accommodation would realise in the same locality or the municipal valuation in respect of the accommodation, whichever is higher”.
4. In case the accommodation is situated in Bombay, Calcutta, Delhi and Madras be excess over 60 per cent of salary over fair rental value, as against 50 per cent in other cases, is required to be added in determining the value of perquisites in view of Board’s Circular No. 374, dated 14-12-1983.
Example III
[Illustrating limits of deduction under section 80C]
Rs.
Rs.
1.
Total salary income (including Rs. 2,400 as conveyance allowance @ Rs. 200 p.m. received from the employer)
36,000
2.
Contribution to recognised provident fund
9,500
3.
Payment to life insurance premia
1,000
4.
Contribution for participation in Unit-linked Insurance Plan, 1971 made under section 19(1)(cc) of the Unit Trust of India Act, 1963
1,500
5.
Deposit in a 10-year account or 15-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959
1,000
6.
Total salary income
36,000
7.
Deduct : Amount of standard deduction under section 16(i) @ 25 per cent of the amount subject to maximum of Rs. 6,000
6,000
8.
Gross total income (6–7)
30,000
9.
Deduction under section 80C :
Contribution of Rs. 9,500 to PF under section 80C(2)(d ) restricted to 1/5th of salary of Rs. 36,000 or
Rs. 10,000, whichever is less, i.e.,
7,200
– Life Insurance Premia
1,000
– Contribution to participation in Unit-linked Insurance Plan, 1971 made under section 19(1)(cc) of the Unit Trust of India Act, 1963
1,500
– Deposit in a 10-year account or 15-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959
1,000
Deduction admissible on Rs. 10,700
– on the first Rs. 6,000 (100%)
6,000
– on the balance Rs. 4,700 @ 50%
2,350
8,350
10.
Total income (8–9)
21,650
11.
Income-tax payable at Rs. 21,650 (Rs. 21,650–18,000 = Rs. 3650 @ 25%)
912.50
12.
Rounded off under section 288B
913
[Rate at which monthly deduction is required to be made works out to Rs. 76]
Example IV
[Illustrating calculation of house rent allowance under section 10(13A) in respect of residential accommodation situated at Delhi]
Rs.
1.
Salary (excluding allowances and perquisites)
40,000
2.
House rent allowance received
8,400
3.
Actual rent paid
11,400
4.
Contribution to recognised provident fund
6,000
5.
LIP
3,000
6.
Deposits in a 10-year account under the Post Office Savings Bank (Cumulative Time Deposits) Rules, 1959
1,000
Computation of total income
1.
Salary
40,000
2.
House rent allowance received
8,400
48,400
3.
Less: Allowance u/s 10(13A)
Actual rent paid
11,400
Less: 10% of salary
4,000
7,400
20 per cent of salary (accommodation being situated at Delhi)
8,000
Maximum allowable @ Rs. 400 p.m.
4,800
4,800
43,600
4.
Less : Standard deduction under section 16(i) @ 25% subject to the maximum of Rs. 6,000
6,000
5.
Gross total income
37,600
6.
Less : Deduction under section 80C :
Total PF, LIP and CTD Rs. 10,000. These contributions being within the prescribed admissible limits, the deduction is admissible on Rs. 10,000
– First Rs. 6,000 (100%)
6,000
– On balance Rs. 4,000 (50%)
2,000
8,000
8,000
7.
Total income
29,600
8.
Tax payable thereon Rs. 1,750 + 30% of Rs. 4,600 (Rs. 29,600—Rs. 25,000)
3,130
[Rate at which monthly deduction is required to be made works out to Rs. 261.]
