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*SALARY
*INTRODUCTION
*A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract.
*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 stages at fixed intervals, for example, monthly payments of one-twelfth of the annual salary.
*No allowance or perquisites or benefits are included in salary for this purpose.
*Salary is taken on due basis only.
*DEFINITION
The term salary is defined under section 17(1) of the income tax act to include following items as salary
*Wages
*Any Annuity or pension
*Any gratuity
*Any fee, commission, perquisite or profit in lieu of salary or in addition to any salary or wages
*Any payment received by an employee in respect of any period of leave not availed by him
*CHARACTERISTICS1. Relationship of employer and employee
2.Salary from more than one employer
3.Salary from present , past or prospective employer
4.Tax free salary
5.Salary received as member of parliament
6.Receipts from peRsons other than employer
7.Place of accrual of salary income
A pension payable outside India
A government of India employs Indian citizens for services to be rendered in foreign
8.Deductions made by the employer
9.Salary or pension received by UNO employees
10.Salary as partner
11.Payments received by legal heiRs of a deceased employee
12.Payment made after cessation of employment
13.Voluntary foregoing: application of salary
14.Previous year of salary
15.Taxability of salary on due or receipts whichever is earlier basis
16.Salary grade/pay scale
17.Advance salary received
18.ArreaRs of salary received
19.Salary in lieu of notice
SALARY
Salary[17(1)]
Allowances[17(3)(ii)]
Profits in lieu of salary[17(3)]
Perquisites[17(2)]
EntertainmentAllowance
[16(ii)]
Tax on employment
[16(iii)]
EntertainmentAllowance
[16(ii)]
Tax on employment
[16(iii)]
EntertainmentAllowance
[16(ii)]
Tax on employment
[16(iii)]
Income under the Head salary
+
+
++
Less
*PROVIDENT FUND
Meaning: This is the compulsory savings scheme in which employer deducts a certain sum of money from employees salary.
*There are four components involved
*Employees contribution
*Employer contribution
*Interest credited by fund
*Lump sum received
*TYPES & ITS TREATMENT
1.Statutory provident fund
*This fund is applicable for government employees, this fund is maintained by government or semi-government departments like railways, RBI, colleges etc.
a)Employees contribution – taxable as gross salary, deduction under section 80c will be offered
b)EmployeRs contribution – exempt
c)Interest credited by fund – exempt
d)Lump sum received – exempt
2.Recognized provident fund
*A fund which is approved by the chief commissioner of income tax is known as recognized provident fund. This fund is maintained by industrial undertakings, business houses ,banks etc
a)EmployeRs contribution – taxable as gross salary deduction under section 80c is available
b)EmployeRs contribution – exempt upto 12% of salary
c)Interest credited by fund – exempt upto 9.5%
d)Lump sum received –exempt provided employee completes 5 year of service.
3.unrecognized provident fund
*It is the provident fund which is not recognized by the commissioner of income tax. Employee and employer both contribute towards this fund
a)Employees contribution – it is added in the salary, deduction under section 80c will not be offered
b)EmployeRs contribution – it is ignored because taxed when it was contributed
c)Interest credited by fund –it will be taxable as “income from other sources” and not as salary income
d)Lump sum received – exempt
4.Public provident fund
*This fund is started for the self-employed people for example doctoRs, lawyeRs, accountants, actoRs etc.
a)Employees contribution -
b)Employer contribution – excess of 12% of the salary of the employee
c)Interest credited by fund – over interest is calculated at prescribed rate at 9.5%
d)Lump sum received -
*ALLOWANCES
Meaning:Fixed monetary payments for a specific purpose is known as allowance. Employer provides to employee a fixed sum of money and also specifies the purpose for which it has to be used.
*TYPES OF ALLOWANCES
1.Fully exempted allowances
*These allowance are not at all taxable.
i.Foreign allowance given by govt. to employees posted abroad
ii.House rent Allowance given to judges of high court and supreme court
iii.Sumptuary allowance given to judges of high court and supreme court.
2. Fully taxable allowances
*It is fully taxable
i.Dearness allowance
ii.City/capital /compensatory allowance
iii.Lunch/Tiffin/marriage/family/deputation/wardship/non practising/project/overtime/medical allowance
iv.Entertainment allowances: least of the following* statutory limit Rs5000
*1/5th of basic salary only
*Actual entertainment allowance received during the year.
3. Partially taxable allowances
a)House rent allowance
Allowance paid to meet the cost of accommodation is known as HRA .
The minimum of the following exempt
Actual HRA received
Excess of rent paid over 10% of salary
50% of salary if the accommodation is in metropolitan cities and 40% in case of other cities
Taxable HRA= actual HRA received – exempted amount
b)Allowance covered under section 10(14) Helper allowance :exempted up to actual amount spent on engaging a helper to
perform the official duties.
Uniform allowance : exempted upto the actual amount incurred on acquiring and maintaining. Excess will be taxable
Academic research allowance: exempted upto actual amount
Conveyance allowance : exempted upto actual amount
Travelling . Transfer or daily allowance : exempted upto actual amount incurred for purpose of employment.
Any special allowance in the nature of composite Hill Compensatory allowance/ high Altitude Allowance/ Uncongenial climate allowance/ snow bound area / avalanche allowance :
exemption allowed upto Rs 300 p.m to Rs 7000 p.m
Compensatory field area allowance : exemption upto Rs 2600 p.m
Any special compensatory allowance in the nature of border area allowance/ remote area allowance/ difficult area allowance/ disturbed area allowance: exemption allowed upto Rs 200 p.m to Rs 1,300 p.m
Compensatory modified field area allowance : exemption upto Rs 1000 p.m
Counter insurgency allowance/ compensatory field area allowance : expemtion upto Rs 3900 p.m
Highly active field area allowance : exemption upto Rs 4200 p.m
Underground allowance given to coal mine workeRs : exemption allowed upto Rs 800 p.m
Island duty allowance given to armed forces posted in andaman and nicobar and lakshdweep group of islands :exepmtion upto rx 3200 p.m
Transport allowance : exempted upto Rs 800 p.m
Tribal area allowance : exempted upto Rs 200 p.m in stated of MP, TN, UP, KARNATAKA, TRIPURA, ASSAM, WEST BENGA;, BIHAR, ORISSA
Any running flight allowance : exempted upto 70% of such allowance or Rs 10,000 p.m whichever is less.
Children education allowance : exempted upto Rs 100 per child for two children only
Hostel expenditure allowance: exempted upto Rs 300 p.m for per child, max two children only
Domestic servant allowance : fully taxable
Any special allowance : exempted upto Rs 1,300 p.m
*MEANING OF SALARY FOR DIFFERENT PURPOSES
1. For H.R.A./PF/Gratuity and leave encashment
2. For specified cases
3. For deduction u/s 16(ii)
4. For gratuity under payment of Gratuity Act
For rent free house
*Pay +D.P +D.A (which enters) +commission on turnover achieved by him
*All what he gets in cash less exemptions ,if any, less deductions u/s 16,must be more than Rs.50,000
*Only basic salary
*Pay +D.P +D.A(Which enters)+any fee, commission, bonus(except gratutious bonus)+all fully taxable allowances + Taxable portion of other allowances+ Taxable E.A+ Leave encashment pertaining to current year.
*PERQUISITESMeaning:It is defined as any casual emolument, free or profit attached to an office or position, in additional to salaries or wages. It is simply known as non- monetary benefits provided by an employer to an employee.
*TYPESUNDER SECTION 17(2) PERQUISITES ARE OF THE FOLLOWING TYPES
a.The value of rent- free accommodation provided to the assessee by his employer.
b.The value of any concession in matter of rent respecting any accommodation provided to the assessee by his employer.
c.The value of any benefit or amenity granted or provided free of cost or at any concessional rate in any of the following cases:
By a company to an employee who is a director thereof.
By a company to an employee being a person who has a substantial interest in the company.
By any employer.
d. Any sum paid by the employer in respect of any obligation which, but for such payment would have been payable by the employee.
e. Any sum payable by the employer, whether directly through a fund, other than a recognised provident fund or any approved superannuation fund to affect an assurance on the life of the assessee or to affect a contract for an annuity.
f. The value of any specified security or sweat equity shares allotted or transferred directly or indirectly, by the employer or former employer, free of cost or at concessional rate to the assessee.
g. The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee to the extend it exceeds Rs.1,00,000 and
h. The value of any other fringe benefit or amenity as may be prescribed.
*TYPES OF PERKS
Perks can be divided into three categories:
Perks exempted for all employees.
Perks taxable for all employees.
Perks taxable only for specified employees.
*1. EXEMPTED FROMTAX(fully exempted)
*Free medical facilities or reimbursement of medical expenditure
*Free refreshment supplied
*Free meals given at remote area or offshore
*Free recreational facilities
*Provision for telephone including mobile phones
*Free education
*Cost of refresher course
*Any rent free residential
*Good sold by employer to employee
*Free ration received by members
*Perquisite allowed by govt to employees posted abroad
*Rent free house given to officer of parliament
*Conveyance facilities to judges
*Any amount contributed by employee towards pension
*Computers, laptops given to employee for office use
*Transfer of movable assets
*Accident insurance premium
*Interest free loan
B. PERKS TAXABLE FOR ALL EMPLOYEES
B1 .Rent Free houseNature of employment: gov, semi govt or any otherPlace where rent free house is provided: all cities, towns having population exceeding Rs
25,00,00. all cities and town having population exceeding Rs
10,00,000 but not exceeding Rs 25,00,000 all other cities and towns having population of
10,00,000 or less than 10,00,000Meaning of accommodation:
it includes house, farm house, flat, hotel accommodation, guest house, caravan , mobile home or ship etc
it excludes: a remote areas, mining site or project execution site
offshore area Value of rent free accommodation if provided to supreme court ,high court judges ,union minister, leader of opposition and official of parliament
1.more than one accommodation:
if a person retain more than accommodation for fiRst three months value of one such house having lower value shall be taxable. If such accommodation is retained for more than three months value of both such houses shall be taxable.
Hotel accommodation :
a. If hotel accommodation is provided for period not exceeding in aggregate 15 days in previous year it is fully exempted
b. If period exceeds 15 days the perks shall be calculated as follows:
* calculated salary for rent free house as given in note
* computed salary for number of days he stayed in hotel
* calculate 24 % o his salary
* Compare actual bill payable by employer to the hotel, whichever is less.
NOTE: if accommodation in hotel is more than 15 days, perquisite is not taxable for first 15 days and taxable for remaining days
(IV) Nature of accommodation: owned by employer/ hired or leased by employer
(V) Meaning of salary:
Basic pay or wages
Dearness pay
Commission
Bonus
Fees
Value of all taxable allowances
Any other monetary business
Leave encashment of salary
B II – IN CASE ACCOMMODATION IS PROVIDED AS concessional accommodation
*Means employer has given a house to his employee for which he is charging a part of rent .
* value of rent *****
less: rent paid by employee or charged by employer *****
______
value of concessional accommodation *******
_______
B III OBLIGATION OF EMPLOYEE MET BY EMPLOYER
(a)Gas and electricity bill : actual expenses are taxable
(b)Education of children bills : actual expenses are taxable
(c)Income tax, professional tax: actual expenses are taxable
(d) Salary of domestic servants: actual amount is taxable
B IV sum payable by the employer directly or through a fund to effect an assurance/ an annuity:
(a)The sum so payable may be either directly or through a fund
(b)If the sum is payable through a recognized provident fund or an approved superannuation fund, it shall not be treated as taxable per for employee.
B V any specified security or sweat equity shares allotted or transferred to employee
Value of any shares etc allotted or transferred by the employer to the employee either free of cost or at concessional rate shall be treated as perk to employee.
B V1 contribution to an approved superannuation fund by the employer : taxable as perk to employee to the extent it exceeds Rs 1,00,000.
B VII value of any other prescribed fringe benefits or amenities: prescribed under section 17 (2)(viii)
BVII Interest free or concessional loan from employer :
Interest is to be calculated at rate charged by the state bank of India
Interest is to be calculated for each month previous year
Interest paid by employee if any is to be deducted out of total interest
Maximum outstanding balance , any amount of loan has been repaid in any month same is to be deducted only balance amount due to the employer .
For the assessment year 2013-2014 interest rates charged by state bank of India as on 1-4-2012 shall be applicable
Perquisite not chargeable:
(a)Total amount of loan given by employer does not exceed Rs 20,000.
(b)Where the loan is given for medical treatment of diseases.
B VII (ii) valuation of perk in respect of travelling, touring, accommodation
(a)Where these facilities are provided to all employees:
find out the amount spent, deduct any amount recoverable and balance is taxable
(b) Where these facilities are no provided to all employees:
find out value at which these facilities are provided by other agencies, deduct any recovered amount and balance is taxable
B VII(iii) FOOD OR BEVERAGES FACILITY
Value of perk= (amt spent by employer) - ( amt charged recovered by employer from employee)
Exemptions: Free food or non-alcoholic beverages provided by employer during
working hours provided in a remote area or an off shore installation. Tea and snacks provided during working hours Food or non alcoholic beverages provided by employer during
working hours at office or business premises or through paid vouchers which are non transferable and usable only at eating joints, shall be exempted upto Rs 50 per meal.
B VII (iv) VALUATION OF PERQUISITE IN RESPECT OF GIFT VOUCHER OR TOKENGift from an employer of an aggregate amount of Rs 5000 in the previous year shall be exempted, if excess its payable.Gift received in cash or convertible to cash is fully taxableCash gift may be less than RS 5000 or more its fully taxableIf an employee gets a gift of Rs 20,000 in kind only 5000 shall be chargeable to tax
BVIII (v) VALUATION PERQUISITE IN RESPECT OF CREDIT CARD:
Taxable value is the amount spent by the employer. expenses include membership fee and annual fee.
B VII (vi) VALUATION OF PERQUISITE IN RESPECT OF CLUB FACILITIES:
Amount shall be equal to amount spent or reimbursed by employer.
Expenses include: annual or periodical fees paid or payable to club
In case of health club, sports facilities have been provided to all employees at employer’s premises, then such benefit shall be exempt.
B VII (vii) USE OF MOVABLE ASSETS:
movable asset owned by the employer except computers and laptop –actual benefit is derived is taxable
movable asset does not include:
(10 % of cost of asset X number of days asset is used/ number of days of the financial year) valuation of perk is determined as:
(a)If asset is owned by employer- 10 % of the original cost of such asset
(b)If the asset is hired by employer- charges paid or payable by the employer.
*B VII (vii)TRANSFER OF MOVABLE ASSETSWhere any assets owned by the employer is transferred
to the employee then it will be regarded as perquisites. Perquisites value is as follows:
Nature of asset perquisite value
Computers and other original cost of the asset –depreciation
Electronic equipments. at 50%for every completed year from the date of purchase.(WDV)
Motor car original cost of the asset- depreciation
at 20% for every completed year from the date of purchase.(WDV)
Other assets original cost of asset- depreciation at 10% for every completed year
from the date of purchase.(SLM)
C. TAXABLE IN SPECIFIED CASES (SEC 17(2)(III)
*Meaning of specified employee: He is director of companyHe has substantial interest in affairs of the companyHis monetary annual salary income is more than Rs
50,000 p.a
C1 –VALUATION OF PERQUISITE OF MOTOR CAR OR ANY OTHER AUTOMATIVE CONVEYANCE:
Employer had provided vehicle for private use of employee, it is a perquisite which is taxable in the hands of the employee provided they are in specified category:
(A)Motor car is owned or hired by employer and its running expenses are meant or reimbursed by employer
(1) Car is fully used in the performance of official duties: value of per is NILL.
(2) Car is fully used for the private, personal, or family purposes of the employee:
Value of perk= actual expenses salary of normal wear & any amount charge
incurred on running + chauffeur +tear of car (10% - by employer from
&maintenance of actual cost) employee
(3) Car is used in the performance of duties and partly for private or personal purposes:
* He expenses on maintenance and running are meant or reimbursed by the employer:
(a) where the cubic capacity of engine does not exceed 1.6 liters Rs 1800p.m
(b) where the cubic capacity of engine exceed 1.6 liters Rs 2400p.m
* The expenses on running and maintenance for private or personal use are fully met by employee himself:
(a) where cubic capacity of engine does not exceed 1.6 ltr Rs 600 p.m
(b) where cubic capacity of engine exceed 1.6 ltr Rs 900 p.m
* Facility of chauffeur: if it is provide Rs 900p.m shall be added in the above mentioned amounts in (1 and 2) above
(B) Car is owned by employee but its running and maintenance expenses are met or reimbursed by the employer:
(i) Car is being used wholly and exclusively for official purposes- No value taxed
(ii) Car is being used partly for official purposes and partly for personal or private purposes :
value calculated as:
actual amount of expenses
Less: Rs 1800 pm for small car & Rs2400 for big car
Rs 900 pm for driver or a higher sum for official purposes subject to certain condition
( c ) where the employee owns any other automotive conveyance but the actual running or maintenance expensive are met or reimbursed by the employer:
(1)employee’s conveyance is being used only for official purposes: no value to be taxed
(2)Employee’s conveyance used partly for official purpose and partly for personal or private purpose - actual amt of expenses as reduced by Rs900 p.m
C II PERQUISITE OF FREE DOMESTIC SERVANTSActual cost of the employerValue of perk= (amount charged/recovered by employer
from employee) – (amount spent by employer)
CIII PERQUISITE IN RESPECT OF FREE SUPPLY OF GAS . ELECTRIC ENERGY , WATER SUPPLY :
The taxable value of this perk shall be equal to the amount paid by employer to the outside agency.
where the employer owns these services and provides free to its employees the taxable value shall be the actual cost of these services.
in case employee pays some part of the cost to employer or recover cost, amount so paid by employee shall be deducted and only balance is taxable .
C IV – FREE EDUCATIONAL FACILIIES TO CHILDREN OF EMPLOYEE’S HOUSEHOLD
(1) payment or reimbursed of fees of school, college, etc: if the amount is directly paid by employer to school, colleges etc and reimbursed by employee is taxable, whether the employee is a specified or non specified type.
(2) educational facilities in a school or college maintained by employer:
(a) free educational facilities to employee’s own children:
• if the cost does not exceed Rs 1000 p.m the taxable value is nil
• The cost exceeds Rs 1000 p.m , the taxable value of perk shall be the employer (-) 1000 (-) any amt paid or received from employee.
(3) the value of perk is taxable only to secified catgory of employee.
C-V FACILITY OF FREE OR CONCESSIONAL PRIVATE JOURNEY TO AN EMPLOYER ENGAGED IN THE CARRIAGE OF PASSENGERS OR GOODS:
Value of perk = (normal freight or fare chargeable from public)- (amount charged / recovered from employee)
C V1 MEDICAL FACILITIES:taxable only in case of specified employee. if medical bills are in name of employee and payment is
made /reimbursed by employer then it is a perk taxable in case of all employees
*PROFITS IN LIEU OF SALARYMeaning:
To the term in lieu means in additional to where employer pays an amount to employee which is not considered as allowance perquisite or terminal benefit, then it will be treated as profit in lieu of salary. The amount becomes taxable.
Examples: joining bonus, retention bonus, referral bonus etc.
PENSION
*Periodical payments after retirement of an employee is known as pension. Pension is further subdivided into:
oUncommuted pension – it is received on a month on month basis and it fully taxable.
oCommuted pension- it is received as lump sum and enjoys exemption under sec10(10A).
DEDUCTIONS UNDER SEC 80C
Deduction under sec 80C shall be allowed only to following assesse
An individual
A Hindu undivided family
RATE OF DEDUCTION
Total amount deposited in various approved savings scheme or Rs.1,00,000 per annum is less shall be allowed as deduction. This limit of Rs.1,00,000 also includes the amount of deduction allowable to the assessee under sec 80CCC and 80CCD.
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