Income Chargeable under The Head Salaries

CA Namita Mishra

Charging Section of Salary:-

As per sec 15 of the Income Tax Act 1961 salary is taxable:-

a) On due or receipt basis whichever is earlier

b) Any arrears of salary received are fully taxable in the year of receipt subject to relief u/s 89(1).

Salary in common parlance means any amount paid by an employer to his employees in lieu of services rendered by them. However income tax act 1961 defines the term “ salary” u/s 17(1) to include the following monetary as well as non monetary payments :-

a) Wages

b) Annuity or pension

c) Any Gratuity

d) Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages

e) Any Advance of Salary

f) Leave Encashment

g) Employers contribution to provident fund in excess of 12% of Salary

h) The contribution by the central government or any other employer in the Previous year to the account of an employee under a pension scheme u/s 80CCD

Taxability of wages

All wages received in consideration of services rendered are taxable under the Income Tax Act, 1961.

Taxability of Annuity

• Annuity received from present employer is taxed as “ Salary”
• Annuity received from past employer is taxed as “ Profits in Lieu of Salary”
• Annuity received from a person other than employer is taxed under “Income from Other Sources”, such as “LIC ANNUITY”.

All annuities received are chargeable to tax and there is no exemption whatsoever.

Taxability of Pension

Pension is any amount of periodic payment made by an employer to the employee in consideration of past service payable after retirement.

Pension is of two Kinds:-

Uncommuted Pension:-  

Uncommuted pension is pension received periodically. It is fully taxable in the hands of both government and non government employees.

Commuted Pension:–

Commuted pension means lump sum amount taken by commuting the whole or part of the pension

• Commuted pension received by employees of the central government/local authorities/ statutory corporation/members of the defence services is fully exempt from tax.
• Commuted pension received by non government employees is taxable subject to exemption u/s 10(10A) of the Income Tax Act, 1961 as under:-

a) Where the employee has also received gratuity

b) Where the employee has not received gratuity

Taxability of Gratuity

Gratuity is a voluntary payment made by an employer in appreciation of services rendered by an employee.

• Any death cum retirement gratuity received by Central/State government employees is fully exempt.
• Any gratuity received by an employee during the period of service is fully taxable.

Gratuity received by Non government Employee

Gratuity received by non government employees is fully taxable under the income tax act 1961 subject to exemption provided by sec 10(10) which is described as under:-

Where the employee is covered by payment of gratuity act 1972:-

Least of the following is exempt:-

a) Rs 20,00,000

b) Gratuity received

c) 15/26 * Last drawn salary * no of completed year of service or part thereof in excess of 6 Months (Where an employee has worked for 8 years 7 months, the completed year of service shall be considered 9)

Salary for this purpose means: Salary + Dearness Allowance

Where the employee is not covered by the Payment of Gratuity act 1972:-

Least of the following is exempt:-

a) Rs 20,00,000

b) Gratuity received

c) 1/2 * Average salary of last 10 months * completed year of service (where an employee has worked for 8 Years 7 Months, the completed years shall be considered as 8)

Note: Salary for this purpose means Salary + Dearness allowance (If provided in terms of employment for retirement benefits) + commission as a % of turnover.

Taxability of Advance salary

Salary is taxable on due or receipt basis whichever is earlier. As such if any salary has been received by an assessee in advance, the same is taxable in the year of receipt.

Taxability of Leave Encashment

Leave encashment means the amount received by an employee from his employer on account of encashment of un availed leaves standing to the credit of his account.

• Leave salary received by an employee during the period of service is fully taxable.
• Leave salary received by a government employee at the time to retirement is fully exempt from tax.
• Maximum entitlement for leaves under the income tax law is 30 per year.
• In case of government employees, leave encashment is taxable subject to the exemption provided u/s 10(10AA).

As per the provisions of sec 10(10AA), least of the following is exempt from leave encashment:-

a) Rs 3,00,000

b) Leave salary actually received

c) 10 months salary (on the basis of average salary of last 10 months preceding date of retirement)

d) Leave due  * Average salary p.m.

30 Days

(Average salary to be calculated on the basis of average salary of last 10 months preceding date of retirement)

Note: Salary for this purpose means Salary + Dearness allowance ( If provided in terms of employment for retirement benefits) + commission as a % of turnover.

Steps to determine period of leave in months:

1. No of actual completed years of service

2. Number of days leave entitlement for each completed year of service as per rules of the employer (not exceeding 30 days for each year)

3. Gross total leave in days (Step 1 * 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 / 30Days)

Taxability of Employers contribution to provident fund in excess of 12% of salary

Any amount contributed by an employer to a recognized provident fund in excess of 12% of salary is taxable under the head salary.

Contribution by employer to pension fund established u/s 80CCD

Any contribution by employer to a pension fund established u/ 80 CCD of the

Income tax act is to be first included in the salary of the assessee and then deductible under section 80CCD/92) upto 14% of employee’s salary in case of Government employees and 10% in case of all Non-Government employees.

Taxability of Allowances:

Allowance means any amount received by employee from employer in order to meet some specific expenses.

Allowances can be classified into three categories:-

• Allowances that are fully taxable
• Allowances which are exempted for a specific amount
• Allowances which are exempted on the basis of actual expenditure
• Allowance which are fully exempt

Allowances that are fully taxable:-

Entertainment allowance/ Dearness allowance/ Overtime allowance/Fixed medical allowance/City compensatory allowance/Interim allowance/Servant allowance/Project allowance/Tiffin/Lunch/Dinner allowance/Any other cash allowance/Warden allowance/Non practicing allowance are all taxable allowances.

Allowances which are exempted for a specific amount:-

Name of Allowance	Extent to which allowance is exempt
Hilly areas allowance or high altitude allowance or uncongenial climate allowance or snow bound area allowance or avalanche allowance.	Rs 300 to Rs 7,000 p.m. depending upon the location.
Border area allowance or remote locality allowance or difficult area allowance or disturbed area allowance.	Rs 200 to Rs 1,300 p.m. depending upon the location.
Tribal areas/schedule areas/Agency areas allowance.	Rs 200 p.m.
Any allowance granted to an employee working in any transport system to meet his personal expenditure during his duty performed in the course of running such transport from one place to another.	70% of such allowance upto a maximum of Rs 10,000 p.m. (Exemption is not allowable if the employee is in receipt of a daily allowance)
Children education allowance	Rs 100 p.m. per child upto a maximum of two children
Hostel Allowance	Rs 300 p.m. per child upto a maximum of two children
Compensatory Field area allowance	Rs 2,600 p.m. in specified areas
Compensatory modified field area allowance	Rs 1,000 p.m. in specified areas
Counter insurgency allowance	Rs 3,900 p.m.
Transport allowance granted to an employee who is blind/deaf/dumb or orthopedically handicapped with disability to meet his expenditure for the purpose of commuting between the place of residence and the place of his duty	Rs 3,200 p.m.
Underground allowance	Rs 800 p.m.

Allowances which are exempt on the basis of actual expenditure:-

The following allowances are exempt upto the amount of expenditure incurred by an employee:-

a) Traveling allowance

b) Daily allowance

c) Helper allowance

d) Uniform allowance

e) Scientific research allowance

Allowances which are fully exempt:-

Allowances received by judges of high court/supreme court/employees of united nations organization.

Taxability of Perquisites

An employee may be provided with several perquisites by an employer. The perquisites are any benefits provided by an employer to employee. Some of the major perquisites offered by companies to its employees and there taxability are as under:-

RENT FREE ACCOMMODATION

1. Rent free unfurnished Accommodation:-

(i) Government employees:-

value of perquisite chargeable to tax:-license fees fixed by government.

(ii) Non-Government Employees:-

1. Where accommodation is not owned by employer:-

Rent paid or 15% of salary whichever is lower

2. Where accommodation is owned by employer:-

• Accommodation in a city having population upto 10 Lakhs :-  7.5% of salary
• Accommodation in a city having population more than 10 lakhs upto 25 lakhs :-  10% of salary
• Accommodation in a city having population more than 25 lakhs :-  15% of salary

2. Rent free furnished Accommodation:-

Value of furnishing to be calculated as under:-

1. Furnishing are taken on rent :- Rent Paid

2. Furnishing owned by employer :- 10% of actual cost

Value of rent furnished accommodation:-Value of rent free unfurnished accommodation + Value of furnishings

OBLIGATION OF EMPLOYEE MET BY EMPLOYER

1. Electricity/Water/Heater/Gas:

Where employer provides the same from own sources:-

Value of perquisite:- Cost of production

Where employer provides from outside sources:-

Value of perquisite:- Amount Paid by the employer

2. Sweeper/Gardener/Watchman/Domestic Servant:

Value of perquisite: Amount paid by employer

3. Free Education:-

Where employer provides free education in own college:-

Value of perquisite : Fee charged by similar college in nearby area

Where employer provides free education in any other college:-

Value of perquisite : Actual amount paid by employer

4. Free Transport:-

• Free transport facility provided by employee engaged in the business of transportation of passengers/ goods

Value of perquisite: Amount charged when similar services are provided to general public.

• Free tickets to railway and airline employees are exempt

5. Medical Facilities:-

• Medical facilities are provided in a government hospital in India/ Employer owned hospital in India/ a hospital approved by the board are exempt from tax.
• Medical facilities in any other case upto a total value of Rs 15000 is exempt from tax.
• Medical Facilities provided by employer outside India:-

a) Treatment and stay expenditure are exempt upto the limits permitted by RBI

b) Traveling expenditure is exempt where the Gross total income of the assessee is upto 2 Lakhs. IN case of Gross total income being in excess of Rs 2 Lakhs, the traveling expenditure is chargeable to tax.

6. Telephone Facility:-

Telephone facility provided by employer is completely exempt from tax.

ANY OTHER FRINGE BENEFITS

1. Free Meals:-

• Free meals provided by employer to employee during working hours upto a total value of Rs 50 per meal is exempt from tax.
• Breakfast/snacks & tea/ brunch at work place are exempt from tax.

2. Use of Movable Property:-

• Taxable @ 10% of actual cost or rent paid by employer in respect of that asset as the case may be.
• Use of Laptop and Computer are exempt from tax.

3. Transfer of Movable assets:-

• Transfer of Computer and Computer peripherals:

Taxable value of perquisite = W.D.V. of the asset as calculated after providing depreciation @ 50% p.a. on written down value of the asset for each completed year of use.

• Transfer of Car:

Taxable value of perquisite = W.D.V. of the asset as calculated after providing depreciation @ 20% p.a. on written down value of the asset for each completed year of use.

• Transfer of any other asset:

Taxable value of perquisite = W.D.V. of the asset as calculated after providing depreciation @ 10% p.a. on straight line method for each completed year of use

4. Credit card Expenses:-

Taxable Value of Perquisite = Actual amount of expenses incurred by the employer.

5. Club expenses:-

Taxable Value of Perquisite = Amount of expenses incurred by the employer.

• Corporate membership and club membership provided uniformly across all employees is exempt from tax.

6. Interest free concessional Loan:-

Taxable value of perquisite = interest rate charged by SBI on similar loan as on 1^st April of the P.Y. (-) interest rate recovered from employee.

However, no notional interest is charged to tax in case of the following loans:

a) A loan given for the purpose of medical treatment of certain prescribed diseases as mentioned in Rule 3A of the Income Tax rules (and is not reimbursed to the employee under a medical insurance scheme)

b) A loan not exceeding in the aggregate Rs 20,000/-

LEAVE TRAVEL CONCESSION:

• Exemption in respect of leave travel concession is provided in respect of 2 journeys undertaken in a block of 4 calendar years.
• Exemption is available in respect of employee and his family members. Family means Self, two children and dependant parents/brother/sister.

a) Taxable value of perquisite is calculated depending upon the mode in which journey is undertaken:

Air: Economy class fare undertaken by the shortest route

Train : First class A.C. fare by shortest route

Any other mode: Where public transport exists : Deluxe class fare by shortest route

Where no public transport exists :  First class A.C. fare by train by shortest route.

CAR FACILITY:

• Where the car is owned by the employee, used completely for personal purposes and expenses are incurred by employer:-

Value of perquisite : Actual amount of expense incurred

• Where the car is owned by the employee, used partially for personal and partially for official purposes and expenses are incurred by employer:-

Value of perquisite : Actual amount of expense incurred

Less

1800 p.m. (where the car engine is upto 1.6L C.C.)

2400p.m.(where the car engine is above 1.6L C.C.)

Add

900 p.m. for driver facility

• Where the car is owned/hired by the employer, used completely for personal purposes and expenses are incurred by employer:-

Value of perquisite: Actual amount of expense incurred

(+) Salary paid to driver (If any)

(+) Dep 10% of Cost

Where the car is owned/hired by the employer, used partially for personal and partially for official purposes and all expenses are borne by employer:-

Value of perquisite:

Rs 1800 p.m. (where the car engine is upto 1.6L C.C.)

Rs 2400p.m.(where the car engine is above 1.6L C.C.)

Add

900 p.m. for driver facility

• Where the car is owned/hired by the employer, used partially for personal and partially for official purposes and only official expenses are borne by employer:-

Value of perquisite:

Rs 600 p.m. (where the car engine is upto 1.6L C.C.)

Rs 900p.m.(where the car engine is above 1.6L C.C.)

Add

900 p.m. for driver facility

Note: In case of all perquisites, if any amount is recovered from the employee, then the same has to be deducted from the value of perquisite to arrive at the taxable value of perquisite.

(The author can be reached at [email protected])

(Republished with Amendments)