Salary Head

• Essential norms of salary income:

• Relationship between payer and payee,

• Salary and wages -conceptually not different

• Salary from more than one source

• Salary from former employer , present employer and prospective employer

• Salary income must be real and not fictitious

• Foregoing of salary

• Surrender of salary

• Salary paid tax free

• Voluntary payments

• Salary under section 17(1):• Salary is defined to include the following

– Wages

– Any annuity or pension

– Any gratuity

– Any fee, commission, perquisite or profits in lieu of or in addition to any salary or wages

– Any advance of salary

– Any payment received in respect of any period of leave not availed him

– The portion of the annual accretion in any previous year to the balance at the credit of an employee participating in Recognized PF to the extent it is taxable

– Transferred balance in a Recognized PF to the extent it is taxable

– The contribution made by the Central Government in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD(applicable from the AY 2004-05)

– Basis of charge sec [sec 15] as per section salary consists of :

a. Any salary due from an employer (or a former employer) to an assessee in the PY whether actually paid or not:

b. Any salary paid or allowed to him in the PY by or on behalf of an employer (or a former employer) through not due or before it became due; and

c. any arrears of salary paid or allowed to him in the PY by or on behalf of an employer (or a former employer), if not charged to income tax for any earlier PY.

Salary is taxable on “due” or “receipt” basis which ever is earlier.

Place of accrual of salary income [SEC 9.1]

• TAX TREATMENT OF DIFFERENT FORMS OF SALARY INCOME

1. Advance salary2. Arrear salary 3. Leave salary• what is leave salary?• Broad tax treatment• Leave salary at the time retirement to central/state government employees• Leave salary at the time of retirement to other employees

1. Period of earned leave (in number of months) to the credit of the employee at the time of his retirement or leaving the job X Average monthly salary

2. 10 X Average monthly salary

3. The amount specified by the government (i,.e., Rs. 300000 applicable from April 1998)

4. Leave encashment actually received at the time retirement.

• Some other points-

• RELIEF UNDER SECTION 89

• Leave salary t legal heirs not taxable

• Retirement or otherwise

• Salary in lieu of notice period

• Salary to a partner

• Fees and Commission

• Bonus

• Gratuity:• Meaning:

Status of employee Whether Gratuity is taxable

Government employee It is fully exempt from under Sec. 10(10)1

Non Government employee covered by the Payment of Gratuity Act, 1970

It is fully or partly exempt from tax under 10(10)2

Non Government employee not covered by the Payment of Gratuity Act, 1970

It is fully or partly exempt from tax under 10(10)2

• Incase of employees covered by the payment of gratuity act 1972

• What is chargeable to tax??

• How to find the length of service?

• Meaning of salary?

• Case of piece –rated employee:

1. 15 days’ salary (7 days salary in the case of employees of a seasonal establishment ) based on salary last drawn for each year of service(i.e. 15 days’ salary X length of service

2. 350000 Rs

3. Gratuity actually received

• In case of any other employee----

(not covered under the Act)

1. 350000 Rs

2. Half month’s average salary for each completed year of salary

3. Gratuity actually received

Computation of service period ---How to calculate average monthly salary—(includes commission if fixed in nature)

Different situations Tax treatment

Pension is received from UNO by the employee

It is not chargeable to tax.

Family pension received by the family members of armed forces (after the death of the employee)

It is exempt under section 10(19) in some cases

Family pension received by the family members in other cases (after the death of the employee)

It is taxable under the heading “income from other sources” . Standard deduction is available which is 1/3 of such pension or 15000 whichever is lower

Pension received by an employee (during his life time) who has joined the Central Government on or after Jan 1, 2004.

Check the following information###

Pension received by an employee (after retirement but during his lifetime) in any other cases.

Check the following information****

Pension Status of the employee If it is chargeable to tax

Uncommuted pension Govt./ non Govt. employee it is chargeable to tax

commuted pension Govt. employee It is fully exempted from Tax u/s 10(10A)I

commuted pension non Govt. employee It is partly or fully exempted from Tax u/s 10(10A)I

**** pension under the fifth case…..

Uncommuted Pension : It is periodical payment of pension. For instance , X gets monthly pension of rs 2000. Its is taxable as salary for both the types employees.

Commuted Pension: It is lump sump payment in lieu of periodical payment.

For instance , X gets rs 2000 per month as monthly pension. As per service rules he gets 25 percent of his pension commuted for rs 60000 ( after commutation he will get the remaining 75 percent .i.e, 1500 by way of monthly pension). In this case Rs. 60000 is pension Which X has received In lieu of 25 percent of his monthly pension.

Status of the employee Gratuity received\ not received Exemption in respect of commuted pension

Govt. Employee ( a central , state, and local authority, statutory corporation)

Gratuity may or may not be received.

Entire amount is exempt

Non- Govt. Employee Gratuity is received 1\3 of the pension which he is normally entitled to receive is exempt from tax u/s 10 10a

Non Govet Employee Gratuity not received One half the pension which he is normally entitled to receive is exempt from tax.

#### pension under the Forth case…..

Notified pension scheme in case of an employee joining Central Government or any otheremployee

1. Contribution by the Central Government or any other employer to the notified pension scheme is first included under the head “ salaried” in hands of the employee

2. Such contribution is deductible (to the extent of 10 percent of the salary of the employee) u/s 80CCD

3. Employee’s contribution to the notified pension scheme (to the extent of 10 percent of the salary of the employee) is also deductible u/s 80CCD.

4. When Pension is received out of the aforesaid amount, it will be chargeable to tax in the hands of the recipient .

5. The aggregate amount of deduction u/s 80C, 80CCCand 80CCD can’t exceed rs 100000.

6. Salary for the purpose of points 2 n 3 includes BS and Da but excludes allowances and perquisites.

7. No deduction will be allowed u/s 80C in respect of amounts on which deduction has been claimed u/s 80CCd.

• Annuity:- it means “an yearly allowance, or income; the grant of a annual sum for a term of year, for life, or in perpetuity”. This will be treated as profits in lieu of salary u/s 17.3.

• Retrenchment compensation: sec 10.10B: compensation received by a workman under the industrial disputes act, 1947, or any other Acts or rules, orders or notification issued thereunder or under any standing orders or under any award, contract of service or otherwise at the time of retrenchment , is exempt from tax to the extent of lower pf the following. – An amount calculated as per the provisions of section 25F of the ID act

– The specified by the Govt. Rs. 500000

– The amount received

Profits in lieu of salary:::– Compensation for loss of employment or modification of the employment

terms:

– Payment from unrecognised provident or superannuation fund:

a) employer’s contribution

b) Interest on employer’s contribution

c) Employee’s contribution and

d) Interest on employee’s contribution.

• The first two are taxable as “profits in lieu of salary “ under the following prepositions:

1. The provident fund/ superannuation fund is an unapproved fund.

2. These are taxable at the time of payment to the assessee.• Payment under keyman insurance

• Payment before joining or after retirement

• Any other payment:

3. Reimbursement of expenses-

4. Payment made gratuitously to WIDOW/LEGAL HEIRS of employees.

5. Compensation received at the time voluntary retirement or separation

• ALLOWANCE • Allowance is generally defined as fixed quantity of money or other substance

given regularly in addition to salary for the purpose of meeting some particular connected with the services rendered by the employee or as compensation for usual conditions of that service.

1. City compensatory allowance: it is always taxable.

2. House Rent Allowance : Exemption in respect of HRA given below.

3. The meaning of salary: it includes basic salary +DA + commission fixed percentage of turnover.• Salary shall be determined on “due” basis

1. An amount equal to 50 percent of salary, where residential house is situated at Bombay, Calcutta , Delhi or Madras and an amount equal 40 percent of salary where residential house is situated at any other place

2. HRA received by the employee in respect of the period during which rental accommodation is occupied by the employee during the PY

3. The excess of rent paid over 10 percent of salary

• The computation of exemption:

a. Salary of the employee

b. HRA

c. Rent paid

d. The place where house is taken on rent.

Entertainment Allowance : (sec 16 II) – Entertainment allowance is first included in income under the head salaries and after a deduction is given on the basis of the following.

In case of a Govt. employee: (central or state) the least of

Rs 5000

20 percent of salary

Amount of entertainment allowance granted during the previous year, is deductible.. Where salary excludes all other allowance n perquisites.

From 2002-03 , non Govt. employees will not get deductions..

• Special allowances prescribed as exempt u/s 10.14.A. the amount of allowance; orB. the amount utilised for the specific purpose for which allowance is given.

• The following allowances are treated as special allowances.1. Traveling allowance2. conveyance allowance3. Daily allowance4. Helper allowance5. Research allowance6. uniform allowance

When exemption does not depend upon expenditure.A. the amount of allowanceB. the amount specifies in rule 2BB

Name of the allowance Exemption under 2BB

Special compensatory allowance Varies from 300 to 7000 rs per month

Border area allowance 200 to 1300 rs per month

Tribal areas allowance Rs 200 per month

Allowance for transport employees A.70 % of such allowance

B. rs 6000 p/m..Whichever is lower.

Children education allowance Rs 100 p/m per child up to a max of two children.

Hostel expenditure allowance Rs 300 p/m per child up to a max of two children.

Compensatory field area allowance To rs 2600 p/m

Compensatory modified area allowance

Rs 1000 p/m

Counter urgency allowance Rs 3900 p/m

Transport allowance Rs 800 p/m (rs 1600 p/m in case an employee is

blind or orthopaedically handicapped

Underground allowance Exemption up to rs. 800 p/m.

High altitude allowance Rs 1060 p/m (for altitude of 9000 to 15000 ) or 1600 rs p.m (for above 1500 feet)

High active field area allowance Up to rs 4200.

Island duty allowance Up to rs 3250.

• Allowance to government employees outside India.

• Tiffin allowance

• Fixed allowance

• Servant allowance

• Allowance to High court judges

• Allowance received from UNO

• Allowance to foreign technician

• Allowance to other foreign citizens

• Sumptuary allowance

• Perquisites: (sec 17.2)• The term perquisite is defined as “a gain or profit incidentally made from

employment in addition to regular salary or wages, especially one kind expected or promised”

• The following prepositions should also be kept in view..

• Personal benefit –

• Cash or kind

• Should be provided by employer?

• Enforceable right

• Personal accident policy

• Pensionary deferred annuity benefits

• Contingent rights

• Personal advantage during employemnt

Valuation of perquisites :0

Perquisites are valued on the basis of their value to the employee and not on the basis of The cost t the employer for providing such perquisites—However the value of perquisite is included in salary income only if it is actually provided To the employee.

•Perquisites provided by the employer directly or indirectly to an employee or any member of his household (by reason of his employemnt) shall be chargeable to tax in the hands of employee. “member of house hold” shall include---A. Spouse (whether dependent or not)B. children and their spouses (whether dependent or not)C. parents (whether dependent or not)D. servants and dependants

• Valuation of rent- free unfurnished accommodation.Provision of rent free accommodation is a perquisite, which is taxable in the

hands of all employees (specified or non specified)For the purpose of valuation of the perquisite in respect of unfurnished

accommodation. All employees are divided in two categoris 1. Central and state Govt employees:

The rule of valuation: the value of perquisite in respect of accommodation provided to such employees will be equal to the license fee which would have been determined by the central Govt and state govt. in accordance with the rules for allotment of houses to its officer.

2. Private sector employees.For salary calculation, , it includes BS + DA+Bonus+Commission+fees+any

other taxable allowance for this purpose .. Salary does not include DA (not forming part of RB) + Employer’s contribution to PF +lumpsum

amount received at the time tremination of service superannuation or VR.

One should note the following points:

• Salary to be calculated on “accrual” basis.

• Salary from two or more employers

• Monetary payments vs. Perquisites.

• Basis of valuation …

Population as on 2001 census where accommodation is provided

Where the accommodation is owned by the employer

Where the accommodation is taken on lease

Exceeding 25 lakh 15 percent of salary in respect of the period during which the accommodation is occupied by the employee.

Amount of lease rent paid or payable or 15 percent of salary, whichever is lower

Exceeding 10 lakh but not exceeding 25 lakh

10 percent of salary in respect of the period during which the accommodation is occupied by the employee

Same as above

Any other 7.5 percent of salary in respect of the period during which the accommodation is occupied by the employee

Same as above