Final Indirect Tax Project

8/11/2019 Final Indirect Tax Project

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INCOME FROM SALARY (15).

1. Meaning & Definition of Salary.

DEFINATION:Any remuneration paid by an employer to an employee in

consideration of his services is called salaries. It includes monetary value of

those benefits and facilities, which are provided by the employer and are

taxable.

MEANING : Before one proceeds for Computation of Income under the

head Salaries one must understand the Meaning of Salary with reference to

the Income Tax Act 1961. Salary under the Act is defined U/s 17(1), which

includes the following:-

1. Wages;

2. Any Annuity or Pension

3. Any Fees, Commission, Perquisites orProfits in Lieu of salary

4. Any Gratuity

5.Any Advance of Salary

6. Any payment received by an employee in respect of any period of leave

not availed by him, known asleave encashment

7. Transferred balance in a recognized provident fund to the extent it is

taxable;
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8. Contribution made by central govt. to the account of an employeeunder the pension scheme U/s 80 CCD;

1.1 Basis of Charges.

Basis of charge of an income lets us know that on what grounds income earned by a

person is chargeable to tax. It specifically defines whether income so received is tax

chargeable on receipt basis or accrual basis, or in case of variations in accounting method

how tax should be charged. All five heads of income have different basis of charge which

you will come as you surf through each of income.

Q) What is the basis of charges for salary income ?

Salary income is chargeable to tax on DUE OR RECEIPT BASIS WHICHEER IS

EARLIYER

Income tax act however specifically states that were any salary in advance is include in

the total income of any person or any previous year it shall not be included again in the

total income of the person when the salary became due. It is also worth while to not that

the accounting method employed by the assessee is absolutely irrelevant to violate the

chargeability rule as state above in bold.

Lets go through the following example to gain more clarity on this rule :

You being an employee of a MNC are faced with the following situations during the P .Y

2009-10 (A.Y 2010-11).


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1) You received your annual salary of Rs. 9,00,000/- due and receivable by you in the

previous year.

* The salary of Rs. 9,00,000/- will be chargeable to tax in P.Y=2009-10 in your hands.

2) An annual salary due to you of Rs. 9,00,000/- out of which Rs. 5,50,000/- was

received during the P.Y=2009-10. Rest of received by you in the next P.Y=2010-11.

* The whole salary amount Rs. 9,00,000/- will be chargeable to tax in your and in the

P.Y=2009-10. i.e A.Y=2010-11. The salary of Rs. 3,50,000/- received in P.Y=2010-11.

Will not be chargeable to tax again in P.Y=2010-11. i.e, A.Y=2011-12. Since it has been

taxed earlier.

3) Advance salary received during the P.Y=2009-10. Pertaining to P.Y=2010-11. Of

Rs.2,50,000/-.

* The salary received of Rs.2,50,000/- will chargeable to tax in the P.Y=2009-10.

Instead of P.Y=2010-11. Since the rule specifically says due or receipt whichever is

earlier, however it will not be charged tax again in P.Y=2010-11.

4) Arrears of salary pertaining of P.Y=2008-09 received in P.Y=2009-10. Amounting to

Rs.4,00,000/-.

* The amount so received of Rs.4,00,000/- will not Tax chargeable in your hand in

P.Y=2009-10 since it has been already taxed in your hand in P.Y=2008-09, i.e,

A.Y=2009-10.


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2. Taxation of various forms of salary.

2.1. Advance salary

Advance salary [Sec.17 (1)(v)]

Advance salary is taxable on receipt basis, in the assessment year

relevant to the previous year in which it is received, irrespective of the

incidence of tax in the hands of the employee. The recipient can,

however, claimrelief in terms of section 89. However, a loan taken from

employer is not taxable as advance tax salary.

Provision illustratedSalary of X is Rs. 30,000 per month. During the

month of March 2010, he gets salary of the next two months in advance.

In this case, for the previous year 2009-10, salary of 14 months i.e. Rs.

4,20,000 is taxable (relief under section 89 is claimable). For the

previous year 2010-11, salary of 10 months, i.e. Rs. 3,00,000 will be

chargeable to tax and not of 12 months.

2.2. Arrear salary

It is taxable on receipt basis if the same has not been subjected to tax earlier

on due basis. In this case also recipient can claim relief under section 89.
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Provision illustrated -The following illustrations are given to have a better

understanding:

On March 10, 2010, X receives a sum of Rs. 80,000 as arrears of bonus

pertaining to the previous year 2007-08, it was not taxed during the

previous year 2007-08.

2.3. Leave salary

As per Service rules every employee is entitled to certain no. of leaves per annum.

If an employee does not utilize all his leaves available to him per annum such

unutilized either get lapsed or get carry forward which can be enchased later. If

such carry forward leaves are liquidated in cash form during the continuity of

employment or on retirement, it is known as leave salary.

The taxation of Leave salary for various categories of employees is shown

here under:

Status of

EmployeeNature of Leave

EncashmentTaxability

Government/Non-Government

employee

Leave encashmentduring Continuity of

employment

It is chargeable to tax.However relief can betaken under section 89

Government Leave encashment It is fully exempt from


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employee at the time ofretirement / leaving

job

tax under section10(10AA)(i)

Non-Government

employee

Leave encashment

at the time of

retirement / leavingjob

It is fully or partially

exempt from tax in

some cases undersection 10(10AA)(ii)

In Simple words from the above tabloid summary we can conclude that

Leave Salary is chargeable to tax only in two cases first accumulated leave

being enchased by any class of employee- Govt. or Non Govt. during the

continuation of employment whereof it is fully chargeable to tax.

Second being accumulated leaves enchased by a non govt. employee on his/

her retirement whereof the complicated part of calculation of exempted

leave salary comes into picture which can be calculated as LEASTof the

following:

1.

Period of earned leave (in no. of months) to the credit of theemployee at the time of his retirement leaving the job

Average monthly salary.

2. 10 Average monthly salary.

3. The amount specified by the Government i.e., Rs. 3,00,000 /-;

4. Leave encashment actually received at the time of retirement.

How to f ind out l eave standing to the credit of an employee at the time of

retir ement or leaving the job THREE STEPS THEORY


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Step (a)Find out duration of services in number of years (ignore any

fraction of year).

Step (b)Find out rate of earned leave entitlement from the service rules

how many days leave is credited at the rendered for each year of

services (earned leave entitlement can not exceed 30 days for every year

of actual services rendered for the employer from whose services he has

retired).

For instance, if earned leave is credited at the rate of 45 days leave for

each year of service, for step (b) calculation shall be made at the rate of

30 days leave for each year of service. If, however, earned leave is

credited at the rate of 23 days leave for each year of service, for step (b)

calculation shall be made at the rate of 23 days leave for each year of

service.

Step (c)Find out earned leave actually taken or enchased (in number of

days) during the service time, the computation shall be made as follows:-

Step (a) Step (b) minus Step (c) 30

2.4. Bonus


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It is taxable in the year of receipt if it has not been taxed earlier on due basis.

While contractual bonus is regarded as salary; gratuitous bonus is taxable as

perquisite. If bonus is received in arrears, the assessee can claimrelief in terms of

section 89.

2.5. Gratuity

In the present age, Gratuity is no more a gratuitous payment but has become

legally compulsory in most of the cases. Gratuity being a retirement benefit

is generally payable at the time of employment and on basis of duration of

service. Where the payment of Gratuity Act, 1972, is inapplicable, an

employee can claim gratuity under the terms of contract of employment.

BROAD TAX TREATMENT

Status of Employee Whether Gratuity is taxable

Government employeeIt is fully exempt from tax undersection 10(10)(i)

Non-Government employee covered

by the payment of Gratuity Act,

1972

It is fully or partly exempt from

tax under section 10(10)(ii)

Non-Government employee notcovered by the payment of Gratuity

Act, 1972

It is fully or partly exempt from

tax under section 10(10)(iii)
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In Simple words, the taxation part comes into picture only in the last two

cases, which are dealt below in detail:

IN THE CASE OF EMPLOYEES COVERED BY THE PAYMENT

OF GRATUITY ACT, 1972, [SEC. 10(10)(ii)]:-

Any gratuity received by an employee, covered by the Payment of Gratuity

Act, 1972, is exempt from tax on the following basis

1.15 days salary( 7 days salary in the case of employee of a

seasonal establishment) based on salary last drawn for each of

service (i.e., 15 days salary length of service)

2.Rs. 3,50,000

3.Gratuity actually received.

How to find out length of serviceIf the period of service is 6 months or

less than 6 months, it shall be ignored for this purpose. Conversely, if the

period of the service is more than 6 months it shall be taken as one full

year.

Meaning of SalarySalary for the purpose of the aforesaid limits

means salary last drawn by the employee and includes dearness allowance

but does not include any bonus, commission, house rent allowance,

overtime wages and any other allowance.


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Salary of 15 daysSalary of the 15 days is calculated by dividing salary

last drawn by 26, i.e. maximum number of working days, in a month. For

instance, if monthly salary at the time of retirement is Rs. 1000, 15 days

salary would come to Rs. 576.92/- (i.e., Rs. 1000 15 26).

IN THE CASE OF EMPLOYEES NOT COVERED BY THE

PAYMENT OF GRATUITY ACT, 1972,

Any gratuity received by an employee, not covered by the Payment of

Gratuity Act, 1972, is exempt from tax on the following basis

1. Rs. 3,50,000

2. Half months average salary for each completed year service.

3. Gratuity actually received.

2.6. Pension

Pension is a payment made by the employer after the retirement/ death of

the employee as a reward for past services, following table gives a broad tax

treatment of pension:-


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Case Particulars Tax treatment

Case1

Pension is receivedfrom UNO by the

employee or his

family members

It is not chargeable to tax

Case2

Family pension

received by the

family members ofarmed forces (after

the death of the

employee)

It is exempt under section10 (19) insome cases.

Case

3

Family pensionreceived by the

family members of

other cases (after

the death of theemployee)

It is taxable in the hands ofrecipients under section 56 under

the head income from other

sources. Standard deduction isavailable under section 57 which is

1/3 of such pension or Rs. 15000,

whichever is lower.

Case

4

Pension received by

an employee (during

his lifetime) in any

other cases.

Tax treatment depends on whetherPension is Commuted or

Uncommuted (Refer Below).

Uncommuted pension whether received by a Govt. or a Non Govt.

employee is chargeable to tax in both cases

However Commuted pension in case of Govt. is fully EXEMPTfrom tax but in case of Non Govt. employee is exempt on following

basis:

Situation Tax Exemption available

If Gratuity is receivedOne-third of the pension, which he is

normally entitled to receive, is exempt.

If Gratuity is not

received

One-half of the pension which he is

normally entitled to receive is exempt.
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ILLUSTRATION

A retires from services of XYZ Ltd. on May 31, 2009. He gets

pension of Rs. 15,000 per month up to December 31, 2009: (i.e. Rs.

15,000 7). With effect from January 1, 2010, he gets One Third of

his pension commuted for Rs. 10,00,000 and is not in receipt of

Gratuity.

While uncommuted pension is chargeable to tax, commuted pension

is exempt from tax in the case of Government Employees.

Therefore, pension of Rs. 10,00,000 is exempt from tax. The amount

of uncommuted pension will be calculated as under:

Rs.

Uncommuted pension up to 105000

December 31, 2009 (i.e. Rs. 15000 7)

Uncommuted pension from January 1, 2010 30,000

to March 31, 2011 (i.e. 2/3 15,000 3)

Total Uncommuted pension chargeable to tax 1,35,000

as salary

2.7. Profit in Lieu of Salary


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Certain payments made by the Employer to his employee in lieu or in addition to

his salary or wages are taxed under this head dealt hereunder:

{A}. Terminal Compensation:Any compensation received by an assessee

from his Current/ Former employer in respect of Termination on account of

Premature termination, resignation/ Modification in Terms of employment.

{B}. Payments from an Unrecognized PF/ Superannuation fund:

Payment received by an assessee consisting of Employers contribution &

Interest on such Employers contribution only.

{C}. Payment under Key man Insurance Policy:Any payment due for

receipt on account of Key man Insurance Policy including Bonus is taxable.

{D}. Receipts from Any person: Any sum received from any person in

connection with:

- Before his joining employment with that person; or,

- After cessation of employment with that person.

{E}. Any other Sum received except following to the extent exempt U/s 10:

i. Death-cum- retirement gratuity.

ii. Commuted value of Pension.


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iii. Retrenchment compensation.

iv. Receipts from a Statutory PF.

v. Receipts from a Recognized PF.

vi. Any other receipts from an Approved superannuation fund.

vii. House Rent Allowance.

2.8. Voluntary Payment of Employee

Any payments made by an employer to his employee if such payment is

attributable to services rendered during employment is Taxable irrespective of the

fact whether or not there existed any legal obligation to make such payment.

2.9. VRS

Compensation received on Voluntary Retirement under VRS.

Compensation is received/ receivable by an employee of the following

undertakings:

[A]. A Public Sector Company

[B]. Any other Company

[c]. An Authority established under the State, Central or Provincial Act.


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[d]. A local authority

[e]. A Co-operative society

[f]. A University established under Central, State or Provincial Act and an

institution declared to be a university under Section 3 of the University Grants

Commission Act 1956.

a. An Indian Institute of Technology

b. Such Institute of Management as the Central Govt. may specify.

c. State Govt.

d. Central Govt.

e. Institutes having importance throughout India/ State(s) as notified.

QUANTUM OF EXEMPTION:

It is the Actual amount of compensation available or Rs. 5, 00,000/-

whichever is lower.However one point is must notice that this exemption is

available only once, if it is availed in any assessment year, it will not be

available for any other assessment year.

GUIDELINES: RULE 2BA: These provide that the Scheme of VRS should

be in accordance with the following requirements, namely:-

1. The Scheme should be applicable to an Employee who has completed 10

yrs. of Service or has completed 40 yrs. of age; this requirement not be

applicable in case of amount received by an employee of a Public Sectorcompany.


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2. It should apply to all employees including workers & executives of acompany or of a Co-operative society, as the case may be, excepting Directors

of a company or of a Co-operative society.

3. The Scheme of Voluntary retirement/ separation should have been drawn to

result in overall reduction in the existing strength of the employees.

4. The vacancy caused by voluntary retirement is not to be filled up, nor the

retiring employee is to be employed in another company or concerned

belonging to the same management;

5. The amount receivable on account of voluntary retirement/ separation of the

employee does not exceed:

amount equivalent to one The and Three month's salary for each

completed year of service or;

Salary at the time of retirement balance months of service left before

date of retirement/superannuating.

2.10. Leave Travel Concession

Any amount received by employee from his employer in connection of his

proceeding on leave to any place in/ outside India is exempted under this

head subject to following:

I. Journey done by Air: Economy class national carrier via shortest route.

II. Journey done by Railways: AC 1stClass fare via shortest route.


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III. Journey done by any other mode of transport: If recognized Public

transport exists then 1stClass deluxe fare else amount equivalent to AC 1

st

class Rail fare.

PLEASE NOTE:

In case of situation 3 above where journey performed by any other

mode of transport, where in the place of origin of journey and

destination are connected by railways. The amount of air condition first

class rail fare by the shortest route OR the amount actually spent,

whichever is less shall be exempted.

Maximum exemption claimable is to the extent of Actual Expenditure

subject to amount of L.T.C received.

2.11. Provident fund

Following is its broad tax treatment:-

ParticularsStatutory

P.F

Recognized

P.F.

Unrecognized

P.F.

Public

provident

fund

Employerscontributionto P.F.

Not treatedas Income

of the year

in which

contributionis made

Not treated

as income up

to 12 percent of salaryexcess of

employers

contribution

Not treatedas income of

the year in

which

contributionis made

Employerdoes notcontribute


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3. ALLOWANCES.

3.1. House Rent Allowance

House Rent Allowances: Commonly known as HRA, exemption being

bestowed through section 10(13A) briefed as:

1.

An amount equal to 50 per cent of salary, where residential

house is situated at Mumbai, Kolkata, Delhi or Chennai and anamount equal to 40 per cent of salary, where residential house is

situated at any other place.

2.

House rent allowance received by the employee in respect of the

period during which rental accommodation is occupied by the

employee during the previous year.

3. Rent paid minus 10 per cent of salary

PLEASE NOTE:

Salary here means Basic+ D.A+ Commission based on fixed % of

turnover achieved by an employee.

MODE OF COMPUTATION OF EXEMPTION:Under section

10(13A), the amount of exemption in respect of house rent

allowance received by an employee depends upon the following:

- Salary of the employee;

- House rent allowance;


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- Rent paid; and

- The Place where house is taken on rent.

When these four are same throughout the year, the exemption under

section 10(13A) should be calculated on ANNUAL basis. When,

however, there is a

Change in respect of any of the above factors will make the

calculation to be done on MONTHLYBasis.

2. Entertainment Allowances

Exemption on receipt of this allowance is allowable only to Central/ State

Govt. Employees and not to Private Sector employees. Exemption being

calculated as least of the following:

Rs. 5,000/-

Entertainment allowance actually received.

20% of Salary (Salary= Basic+ DA+ Commission based on fixed % of

turnover)


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3.3. Allowances Dependent on Expenditure Incurred

ALLOWANCES SPECIFICALLY EXEMPTED TO THE EXTENT

OF EXPENDITURE INCURRED:

Allowance Description

Traveling/

Transfer

Allowance

Any Allowance granted to meet the cost of travel

on tour or on transfer including any sum paid onconnection with transfer, packing and

transportation of personal effects on such

transfer.

Conveyance

Allowance

Any Allowance whether granted on tour of for

the period of journey in connection with transfer

to meet the ordinary daily charges incurred by anemployee on account of absence from his normal

place of duty.

Daily Allowance

Any Allowance granted to meet the expenditureincurred on conveyance in performance of duties

of an office or employment of profit, provided

that free conveyance is not provided by the

employer.

Helper Allowance

Any Allowance granted to meet the expenditureincurred on a helper where such helper is

engaged for performance of the duties of an

office or employment of profit.

Research

Allowance

Any Allowance granted for encouraging theacademic, research and training pursuits in

educational and research institutions.

Uniform

Allowance

Any Allowance granted to meet the expenditure

incurred on the purchase or maintenance ofuniform for wear during the performance of

duties of an office or employment of profit.


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3.4. Allowances Independent of Expenditure Incurred

ALLOWANCES WHOSE EXEMPTION IS NOT DEPENDENT ON

EXPENDITURE:

Allowance Exemption Specified

SpecialCompensatory (Hill

Areas) Allowance

Exemption may range from Rs. 300/- to Rs.7000/- per month

Tribal Area

Allowance

Exemption available in specified states upto

Rs. 200/-p.m

Allowance for

Transport Employees

An employee working in any transport system

for meeting his personal expenditure duringhis duty performed in the course of running of

such transport from one place to another place,

provided that such employee is not in receipt

of daily allowanceup to 70% of allowancesubject to a maximum of Rs. 6,000 p.m.

Children educationallowance

Rs. 100 p.m. per child up to a maximum of 2children.

Children hostelallowance

Rs. 300 p.m. per child up to a maximum of 2children.

Compensatory FieldArea Allowance.

In specified areas @ Rs. 2,600 p.m.

Compensatorymodified field area

allowance

In specified areas @ Rs. 1,000 p.m.

Transport Allowance Exempt up to Rs. 800 p.m (in case ofOrthopedically handicapped employees

exempt up to Rs. 1600 p.m)

Underground For employees in underground coal mines @


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Allowance Rs. 800 p.m

High Altitude

Allowance

For members of armed forces operating in

high altitude areas @ Rs. 1,060 p.m. forAltitude of 9000 to 15000 feet and @ Rs.

1,600 for altitude above 15000 feet.

SpecialCompensatory highly

active field area

allowance

Available to members of armed forces @ Rs.4,200 p.m.

Island dutyAllowance

Available to members of armed forces @ Rs.3,250 p.m.

Counter InsurgencyAllowance

Available to members of Armed forces @3,900 p.m

Border AreaAllowance

Available to members of Armed forces @ 200p.m to 1,300 p.m


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4. PERQUISITES.

Meaning of Perquisites

Section 17(2) defines perquisites to include:Chargeable to Tax in the

hands of Specified + Non- Specified Employees both.

The value of Rent Free Accommodation provided to the assessee by his

employer (whether Furnished or Unfurnished);

The value of any Concession w.r.t any accommodation provided to the

assessee by his employer;

Any sum paid by the Employer w.r.t any obligation liable to be

discharged by the Employee;

Any sum payable by Employer towards a Life assurance Policy or

towards a Contract of Annuity;

Chargeable to Tax in the hands of only Specified Employees.

The value of any amenity granted at Free of Cost or Concessional rate

to the assessee by his employer;

The value of Fringe Benefits or amenities (not being the oneschargeable in the hands of the employer u/s 115WB):-

oInterest free concessional rent

oUse of moveable assets


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4.1. Rent Free Unfurnished Accommodation

Rent free Unfurnished Accommodation less Any rent recovered

from the Employee.

Category

of

Employee

Perquisite Value

Central/State

Govt.employee

License fee on the basis of rule framed by Govt. for allotment of

houses to officers.

Other

Sectorsemployee

s

Depends on two factors, viz,

1. Population size of the city where accommodation is given.

2. Whether Accommodation is owned or leased.

Nature of

Accommodatio

n

Populatio

n > 25

Lacs.

Population

10

Lacs

Populatio

n < 10

Lacs.

Owned 15% ofSalary

10% ofSalary

7.5% ofSalary

Leased Lease Rent payable or 15% of Salary,

whichever is lower.

PLEASE NOTE:

Salary here is calculated to include all taxable benefits excluding

Perquisites and deductions from salary.

In case of Hotel Accommodation perquisite value equals 24% of

the Salary or Actual rent charges paid, whichever is lower.


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Subject to Hotel accommodation does not exceed 15 days & isonly for relocation of employees.

Salary is to be calculated on accrual basis.

4.2. Rent Free Furnished Accommodations

Rent free Furnished Accommodation less Any rent recovered from the

Employee.

To the value of Perquisite arrived at above following need to added, In case

of any amount recovered by the employee, same is deductible in valuation

of perquisite:

Nature of

Accommodation

Perquisite Value

Owned 10% of the Original cost of the Furniture provided

LeasedActual hire charges payable for such hired

furniture.

PLEASE NOTE:

Salary here is calculated to include all taxable benefits excluding

Perquisites and deductions from salary.

In case of Hotel Accommodation perquisite value equals 24% ofthe Salary or Actual rent charges paid, whichever is lower.Subject to Hotel accommodation does not exceed 15 days & is

only for relocation of employees.


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4.3. Other Perquisites

As per the provisions of Section 17 (2)(iv) Any amount paid by the employer

in respect of any obligation which otherwise would have been payable by the

employee itself would be taken as taxable in all cases. Broadly they can be

defined under following two categories:

Any Sum Paid by the Employer in meeting the Monetary Obligation of the

Employee, e.g., School fees of Children, Servant's salary, Sweeper/

Gardener's salary etc.

Any Sum payable by the employer whether directly or through a fund to

effect Life assurance/ Contract of annuity on assessee

Let's take a look at the following examples for gaining better clarity on above

provision:

Mrs. X (a non specified employee) engages a maid servant on a monthly

salary of Rs. 3,000/-. However the employer of Mrs. X directly pays the

salary to the maid servant in which case it would be taxable in hands of

Mrs. X irrespective of the fact that she is a specified or a non specified

employee.


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4.4 . Perquisites Taxable in Hands of Only Specified Employees

Following are the perquisites which are taxable in the hands of Specified

Employees only:

I. Sweeper, gardener or watchman provided by the employer

The value of benefit of provision of services of sweeper, watchman, gardener or

personal attendant to the employee or any member of his household shall be the

actual cost to the employer. The actual costin such a case is the total amount

of salary paid or payable by the employer or any other person on his behalf for

such services.

II. Free Supply of Gas, Electricity or Water

The value of these benefits is taxable in the hands of specified employees, if the

connection is taken in the name of the employer, and is determined according to

the following two rules:

a) If the employer provides the supply of gas, electricity, and water from its

own sources, the manufacturi ng cost per uni tincurred by the employer shall

be the value of perquisite.


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b) If the supply is from any other outside agency, the value of perquisite shall

be the amount paid by the employer to the agency supplying these facilities.

III. Free Education

a) Cost of free education to any member of employees' family provided in an

educational insti tuti on owned and maintained by the employershall be

determined with reference to reasonable cost of such education in a similar

institution in a near by locality. For education facilities provided to the children

of employee (excluding any other member of house hold), the value shall be

Nil, if the cost of such education per child does not exceed Rs.1, 000 per

month.

b) Where free education facilities are allowed to any member of employees'

family in any other educational i nstituti onby reason of his being in

employment of that employer, the value of perquisite shall be determined as in

c) I n any other casethe value of benefit of providing free or concessional

educational facilities for any member of the house hold (including children) of

the employee shall be the amount of expenditure incurred by the employer.


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4.6. Perquisites That are Totally Tax Free

Food & Beverages provided by employer in office/ factory or through paid nontransferable vouchers usable only at eating joints.

Loan given to employees up to Rs. 20,000/- or loan given for medicaltreatment of diseases specified inRule 3A.

Perquisites provided by India govt. to its Indian citizen employees

staying outside India.

Rent free official residence & Conveyance facilities provided to a Judgeof Supreme/ High court.

Rent free furnished residence to a Parliament officer/ Union minister/

Opposition Leader.

Accommodation provided to an employee working at a Mining site/

onshore oil exploration Site/ Dam site/ Power generation site.

Educational facility provided to employeeschildren in a school owned &

maintained by the Employer, subject to benefit per child not exceeding Rs.

1,000/- p.m.

Use of Laptops/ Computers provided by an employer to his employees.
http://law.incometaxindia.gov.in/TaxmannDit/DispCitation/ShowCit.aspx?fn=http://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxRules/Rules2006/Rules003A.htmhttp://law.incometaxindia.gov.in/TaxmannDit/DispCitation/ShowCit.aspx?fn=http://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxRules/Rules2006/Rules003A.htm


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5. DEDUCTION FROM SALARY.

5.1. ENTERTAINMENT ALLOWANCE.

Entertainment Allowance,exemption is calculated as dealt above and the

Actual allowance is first added back in the salary & then exemption is

deducted for calculation of Taxable value of Entertainment Allowance.

5.2. PROFESSIONAL TAX.

Professional Tax deduction is available on PAID basis up to a maximum of

Rs. 2,500/-; if tax is paid by employer on behalf of employee first it is

added back in salary & then deducted on paid basis.

RELIEF U/S 89.

MEANING OF RELIEF U/S 89.

SECTION 89RELIEF WHEN SALARY/FAMILY

PENSION/GRATUITY PAID IN ARREARS/

ADVANCE

Persons Covered

Any assessee in receipt of any kind of salary or

profits in lieu of salary or family pension orgratuity, which is received in arrears or in advance
http://www.indiataxes.com/Information/incometax/contents/salaries/allowances/allow_ent.htmhttp://www.indiataxes.com/Information/incometax/contents/salaries/allowances/allow_ent.htm


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Relevant

Conditions

1. The assessees total income due to receipt

of such arrears or advance gets assessed ata rate higher than that at which it wouldotherwise have been assessed.

2. The assessee being a government servant

or an employee in a company, co-

operative society, local authority,university, institution, association who is

entitled to claim relief U/s. 89, may

furnish to his employer, the particulars

specified in Form 10E. The employer insuch case shall compute the relief U/s. 89

on the basis of such particulars and take it

into account while deducting TDS.

3. As per Circular No. 431 dated 12-9-1985

[156 ITR (st.) 82], the relief U/s. 89 shall

be admissible in respect of encashment ofleave salary by an employee when in

service.

4. The relief is to be given in the assessment

in which the extra payment by way ofarrears, advance etc., is taxed.

5. In order to claim relief, the assessee

should send an application to concernedassessing officer on plain paper.


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Relevant

Percentage/Amount

The method of computation of relief U/s. 89 isprovided in Rule 21A of the Income Tax Rules,

1962. Basically, the relief U/s. 89 is arithmetical. Itinvolves finding out two rates of tax. The first is

the rate of tax applicable to the extra amount

(arrears or advance) in the year of receipt. The

second is finding out the rate of tax on extraamount for the years to which they relate. The

difference between the two is the extent of relief.

The mode of computation of relief for different

types of receipts is given below:-

A.In respect of salary/family pension paid

in arrears/ advance (AdditionalSalary)

B.In respect of Gratuity

C.In respect of compensation on

termination of employment

D.In respect of Commutation of Pension

5.3. FOR GRATUITY.

In respect ofGratuity

a. Where payment of gratuity is for past service of 15 years or more: -

1. Calculate the tax on total income including the amount of gratuity [in excess

of exempt U/s 10(10)] of the previous year in which gratuity is received;
http://www.indiataxes.com/Information/incometax/contents/salaries/taxationofsalaries/sal_gratuity.htmhttp://www.indiataxes.com/Information/incometax/contents/salaries/taxationofsalaries/sal_gratuity.htm


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2. Find out the average rate of tax on total income by dividing the tax arrived

at in (1) by the total income (including the amount of gratuity) of the previous

year in which the gratuity is received;

3. Find out tax payable on gratuity in year of receipt by multiplying the

average rate of tax arrived at in (2) with the amount of gratuity;

4. Add one-third of the amount of gratuity to the total income of each of the

three years immediately preceding the previous year in which such gratuity is

received;

5. Find out tax on total income (after including one-third gratuity), for each of

the three preceding previous years arrived at in (4);

6. Find out the average rate of tax on total income of each of three preceding

previous years by dividing the tax arrived at in (5) of the relevant previous year

by the total income (including the amount of one-third gratuity) of that year;

7. Total the average rates of these three years and divide the result by three in

order to work out the average of these three average rates;

8. Multiply the average of these three average rates arrived at as per (7) with

the amount of gratuity received [in excess of exempt U/s 10(10)];


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6. ILLUSTRATIONS AND COMPUTATIONS

1. ILLUSTRATION FOR RENT FREE UNFURNISHED

ACCOMMODATION

ParticularsAmount

(Rs.)

Basic Pay 3,00,000.00

Dearness Allowance 1,20,000.00

Bonus@ 30% of Basic 90,000.00Commission @ 3% of turnover achievedamounting to Rs 10,00,000

30,000.00

Transport Allowance 10,000.00

Children Education Allowance (Mr. B has only one

daughter)5,000.00

Research Allowance (Actual Expenditure Rs.

9000/-)20,000.00

Servant appointed by Mr. B, whose Salary @ Rs.

1500/- p.m is borne by the company18,000.00

Watchman appointed by Mr. B, whose Salary @

Rs. 3000/- p.m is borne by the company36,000.00

LIC premium paid during the year 30,000.00

Advance Salary Received 50,000.00

Above all Mr. B has also been provided with a rent free unfurnished

accommodation in Mumbai in Company's owned flat. You are required to

calculate the Perquisite value of such Rent Free Unfurnished Accommodation

in view of the applicable provisions for Assessment Year 2010-11.


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SOLUTION:-

The perquisite value will be determined as under:

ParticularsAmount

(Rs.)Amount (Rs.)

Basic Pay 3,00,000.00


Bonus@ 30% of Basic 90,000.00

Commission @ 3% of turnoverachieved amounting to Rs 10,00,000 30,000.00


Less: Exempt: Rs. 800 p.m 9,600.00 400.00

Children Education Allowance (Mr. B

has only one daughter)5,000.00

Less: Exempt: Rs. 100 p.m per child

upto a maximum of TWO children1,200.00 3,800.00

Research Allowance 20,000.00Less: Actual Expenditure incurred 9,000.00 11,000.00

Salary for the purpose of determining the perquisite

value of Rent free Unfurnished Accommodation5,55,200.00

Therefore Value of perquisite equals 15% of Salary

as calculated above83,280.00

PLEASE NOTE:-As per the applicable provisions for A.Y. 2010-11:

1) LIC Premium paid will not be deducted u/s 80C for determining the

perquisite value.

2)Advance salary received by the assessee will not be taken into accountsince salary here includes only 'accrued' salary.


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6.2. ILLUSTRATION FOR RENT FREE FURNISHED

ACCOMMODATION.

Mr. X, a Marketing Head in a private sector company having its Head

Office at Bangalore draws the following salary package during the

previous year 2009-10:

ParticularsAmount

(Rs.)

Basic Pay 5,00,000.00


Bonus@ 20% of Basic 1,50,000.00


Children Education Allowance (Mr. B has only two sons) 5,000.00

Research Allowance (Actual Expenditure Rs. 22000/-) 20,000.00

Watchman appointed by Mr. B, whose Salary @ Rs. 3000/-

p.m is borne by the company36,000.00

PPF paid during the year 22,000.00Arrears of Salary Received 1,00,000.00

Annual Furniture Hire Charges for Flat paid by the

Company40,000.00

Above all Mr. B has also been provided with a rent free Furnished

accommodation in Bangalore in a flat taken by the Company on Lease @ Rs.

20,000 per month. You are required to calculate the Perquisite value of such

Rent Free Furnished Accommodation in view of the applicable provisions for

Assessment Year 2010-11.


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SOLUTION:-

The perquisite value will be determined as under:

Particulars Amount (Rs.) Amount (Rs.)

Basic Pay 5,00,000.00


Bonus@ 20% of Basic 1,50,000.00

Transport Allowance

Less: Exempt: Rs. 800 p.m.9,600.009,600.00

-

Children Education AllowanceLess: Exempt: Rs. 100 p.m per

child upto a maximum of TWO

children

5,000.00

2,400.00 2,600.00

Research AllowanceLess: Actual Expenditure incurred

restricted to Allowance received

20,000.0020,000.00

-

Salary for the purpose of determining the perquisite

value of Rent free Unfurnished Accommodation7,52,600.00

Lease Rent paid by the Company for Flat @ 20,000

p.m (A)2,40,000.00

15% of Salary as calculated above (B) 1,12,890.00

Perquisite Value of Unfurnished Accommodation is

lower of (A) or (B), i.e. ( C)1,12,890.00

Add: Actual Hire Charges paid by the Company on

Furniture for determining the Perquisite Value of

Rent Free Furnished Accommodation (D)

40,000.00

Therefore Perquisite Value of Rent free

Furnished Accommodation equals ( C) + (D)1,52,890.00


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7. BIBLOGRAPHY.

T.Y.B.Com Books of Direct & Indirect Taxes.

M.Com Semesters books of Indirect Taxes.

www.taxgururanjeetkunwar.com

www.accounting-n-taxation.com

Documents

Final Indirect Tax Project