Article explains what is Salary Income, What are allowance, TDS on Salary, Taxability of Reimbursement of Expenses, Salary from different employers and non-deduction of TDS by them, Issue of Form 16, Taxability of pension income/ Family pension / retirement benefits like PF and Gratuity / arrears of salary , leave encashment/ receipts from life insurance policies on maturity along with bonus / ex-gratia received from employer / House Rent allowance (HRA)/ Fixed Medical allowance/ Conveyance allowance / transport allowance, What is Form 12BB, When relief under section 89 of the Income Tax Act is available, standard deduction on Salary, effective date of enhancement of limit of gratuity from Rs 10 lakh to 20 lakh for purpose of tax exemption computation under section 10(10)(ii) etc.
A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis. From the point of view of running a business, salary can also be viewed as the cost of acquiring and retaining human resources for running operations, and is then termed personnel expense or salary expense. In accounting, salaries are recorded in payroll accounts.
Salary is a fixed amount of money or compensation paid to an employee by an employer in return for work performed. Salary is commonly paid in fixed intervals, for example, monthly payments of one-twelfth of the annual salary.
Here we have Considered Some of the Frequently asked Question on Taxability of Salary Income under the Income tax Act,1961
Q.1 What is considered as salary income?
Ans: Section 17 of the Income-tax Act defines the term ‘salary’. However, not going into the technical definition, generally whatever is received by an employee from an employer in cash, kind or as a facility [perquisite] is considered as salary.
Q.2 What are allowances?
Ans: Allowances are fixed periodic amounts, apart from salary, which are paid by an employer for the purpose of meeting some particular requirements of the employee. E.g., Tiffin allowance, transport allowance, uniform allowance, etc.
There are generally three types of allowances for the purpose of the Income-tax Act – taxable allowances, fully exempted allowances and partially exempted allowances.
Perquisites are benefits received by a person as a result of his/her official position and are over and above the salary or wages. These perquisites can be taxable or non-taxable depending upon their nature. . Uniform allowance is exempt to the extent of expenditure incurred for official purposes u/s 10(14).
Q.3 My employer reimburses to me all my expenses on grocery and children’s education. Would these be considered as my income?
Ans: Yes, these are in the nature of perquisites and should be valued as per the rules prescribed in this behalf.
Q.4 During the year I had worked with three different employers and none of them deducted any tax from salary paid to me. If all these amounts are clubbed together, my income will exceed the basic exemption limit. Do I have to pay taxes on my own?
Ans: Yes, you will have to pay self-assessment tax and file the return of income.
Q.5 Even if no taxes have been deducted from salary, is there any need for my employer to issue Form-16 to me?
Ans: Form-16 is a certificate of TDS. In your case it will not apply. However, your employer can issue a salary statement.
Q.6 Is pension income taxed as salary income?
Ans: Yes. However, pension received from the United Nations Organisation is exempt.
Q.7 Is Family pension taxed as salary income?
Ans: No, it is taxable as income from other sources.
Q.8 If I receive my pension through a bank who will issue Form-16 or pension statement to me- the bank or my former employer?
Ans: The bank.
Q.9 Are retirement benefits like PF and Gratuity taxable?
Ans: In the hands of a Government employee Gratuity and PF receipts on retirement are exempt from tax. In the hands of non-Government employee, gratuity is exempt subject to the limits prescribed in this regard and PF receipts are exempt from tax, if the same are received from a recognised PF after rendering continuous service of not less than 5 years.
No exemption shall be available for the interest income accrued during the previous year in the recognised and statutory provident fund to the extent it relates to the contribution made by the employees over Rs. 2,50,000 in the previous year.
However, if an employee is contributing to the fund but there is no contribution to such fund by the employer, then the interest income accrued during the previous year shall be taxable to the extent it relates to the contribution made by the employee to that fund in excess of Rs. 5,00,000 in a financial year.
The CBDT vide notification no 95/2021, dated 31-08-2021, has notified Rule 9D for calculation of taxable interest relating to contribution in a provident fund or recognised provided fund, exceeding above specified limit.
Q.10 Are arrears of salary taxable?
Ans: Yes. However, the benefit of spread over of income to the years to which it relates to can be availed for lower incidence of tax. This is called as relief u/s 89 of the Income-tax Act.
Q.11 Can my employer consider relief u/s 89 for the purposes of calculating the TDS from salary?
Ans: Yes, if you are a Government employee or an employee of a PSU or company or co-operative society or local authority or university or institution or association or body. In such a case you need to furnish Form No. 10E to your employer.
Q.12 My income from let out house property is negative. Can I ask my employer to consider this loss against my salary income while computing the TDS on my salary?
Ans: Yes but only to the extent of Rs. 2 lakh, however, losses other than losses under the head ‘Income from house property’ cannot be set-off while determining the TDS from salary.
Q.13 Is leave encashment taxable as salary?
Ans: It is taxable if received while in service. Leave encashment received at the time of retirement is exempt in the hands of the Government employee. In the hands of non-Government employee leave encashment will be exempt subject to the limit prescribed in this behalf under the Income-tax Law.
Q.14 Are receipts from life insurance policies on maturity along with bonus taxable?
Ans: As per section 10(10D), any amount received under a life insurance policy, including bonus is exempt from tax. However, following receipts would be subject to tax:
1. Any sum received under sub-section (3) of section 80DD; or
2. Any sum received under Keyman insurance policy; or
3. Any sum received in respect of policies issued on or after April 1st, 2003, in respect of which the amount of premium paid on such policy in any financial year exceeds 20% (10% in respect of policy taken on or after 1stApril, 2012) of the actual capital sum assured; or
4. Any sum received for insurance on life of *specified person (issued on or after April 1st2013) in respect of which the amount of premium exceeds 15% of the actual capital sum assured.
* Any person who is –
i) A person with disability or severe disability specified under section 80U; or
ii) suffering from disease or ailment as specified in the rule made under section 80DDB.
Following points should be noted in this regard:
Q.15 What is the taxability of ex-gratia received from employer?
Ans: If a person or his heir receives ex-gratia from Central govt/state govt/ local authority/Public Sector Undertaking due to injury to the person/death while on duty such ex-gratia payment will not be taxable.
Q.16 Where is House Rent allowance (HRA) to be reflected while filing income-tax return (ITR)?
Ans: The amount of HRA is required to be disclosed in the ITR under the column allowances to the extent exempt under section 10. section 10(3A) is the relevant section under which the amount of exempt HRA to be shown.
Q.17 What is the taxability of House Rent allowance (HRA)?
Ans: Least/minimum of the following is exempt (Not taxable/deducted from total HRA received)
(a) Actual amount of HRA received
(b) Rent paid Less 10% of salary
(c) 50% of salary if house taken on rent is situated in Kolkata, Chennai, Mumbai and Delhi
40 % of salary if the house is taken on rent is NOT situated in Kolkata, Chennai, Mumbai and Delhi.
Q.18 What is the taxability of Fixed Medical allowance?
Ans: Medical allowance is a fixed allowance paid to the employees of a company on a monthly basis, irrespective of whether they submit the bills to substantiate the expenditure or not. It is fully taxable in the hands of employee.
Q.19 What is the taxability of Conveyance allowance?
Ans: As per section 10(14) read with Rule 2BB Conveyance allowance is exempt to the extent of amount received or amount spent, whichever is less. For e.g., If amount received is Rs. 100 and amount spent is Rs. 80, then only Rs. 20 is taxable. However, if amount actually spent is Rs. 100; then nothing is taxable.
Q.20 Is standard deduction applicable to all the salaried person whether he is an employee of Central or State Government?
Ans: The standard deduction is allowed while computing income chargeable under the head salaries. It is available to all class of employees irrespective of the nature of employer. Standard Deduction is also available to pensioners. Amount of Standard Deduction is Rs. 50,000 or amount of salary/pension, whichever is lower.
Note: The standard deduction under section 16(ia) is available only for Pension Chargeable under the head “Income under the head Salaries” and not for Pension chargeable under “Income from Other Sources”.
Q.21 Is transport allowance can be claimed as exemption by an employee?
Ans: Exemption of transport allowance of Rs. 1600 p.m granted to an employee is discontinued with effect from A.Y 2019-20.
However, exemption of transport allowance of Rs. 3200 p.m granted to an employee who is blind or deaf and dumb or orthopaedically handicapped is still available.
Q.22 Is standard deduction applicable to family pensioners?
Ans: Section 16(ia) has been introduced by Finance Act, 2018 for class of person whose income is chargeable to tax under head salary. Family Pension is taxable under the head income from other sources. Hence standard deduction is not applicable in case of Family Pension.
Q.23 Mr. X having Gross Salary of Rs. 7,00,000 during the previous year 2021-22. Compute the standard deduction allowable to him?
Ans: Standard deduction is allowable to the extent of :
a) Rs. 50,000 or
b) Amount of Salary, whichever is lower
In this case standard deduction of Rs. 50,000 is allowable to Mr.X.
Q.24 What is Form 12BB?
Ans: As per RULE – Rule 26C of the Income Tax Rules – Form No. 12BB is required to be furnished by an employee to his employer for estimating his income or computing the tax deduction at source.
An assessee shall furnish evidence or particulars of the claims, such as House Rent Allowance, Leave Travel concession, Deduction of Interest under the head ” Income from house property” and deductions under Chapter-VIA in Form No. 12BB for estimating his income or computing the tax deduction at source.
Q.25 When relief under section 89 of the Income Tax Act is available?
Ans: Relief under section 89 is available to an individual if he has received
In case of payment received other than above CBDT can allow relief under section 89 after examining each individual case. [Rule 21A (6)]
Q.26 What is the effective date of enhancement of limit of gratuity from Rs 10 lakh to 20 lakh for purpose of tax exemption computation under section 10(10)(ii)?
Ans: The exemption limit under section 10(10)(ii) for the employees, who are covered under Payment of Gratuity Act, 1972, has been enhanced from Rs. 10,00,000 to Rs. 20,00,000 vide notification S.O. 1420 (E) dated 29 March 2018 notified by Ministry of Labour and Employment. The exemption limit under section 10(10)(iii) for the employees, who are not covered under the Payment of Gratuity Act, 1972, is Rs. 20,00,000 as enhanced by Notification No. SO 1213(E), dated 08-03-2019.
[As amended by Finance Act, 2022]