Computation of income from Salaries

07/04/2023 [email protected] 1

Computation of Income from Salaries for B Com students

Based on B. Com Syllabus of Goa University Presented by

Dr. Sanjay P Sawant Dessai Associate Professor

VVMs Shree Damodar College Margao Goa


• Sections 15 -Basis of charge )• Section 16 -Deductions from salary income)• Section 17- Definition and different forms of

salary (Perquisites and Profit in lieu of salary)• Inclusive of allowances• (exclusive of valuation of Perquisites)

UNIT II: COMPUTATION OF INCOME FROM ‘SALARIES’


Sections: 15, (Basis of charge )

Section 15 stated that following income shall be chargeable to income-tax under the head "Salaries"—

(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;

(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;

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


Essential norms

• Salary is taxable on “due” or “Receipt” basis whichever is earlier

• Relationship between payer and payee • Employer and employee relationship • Remuneration paid to person in respect of

service rendered


Exception

Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as "salary" for the purposes of this section.

• Its an appropriation of profit – chargeable under the head profits and gains of business and profession


Definitions (17)

• Salary 17(1) includes the following • Wages • Annuity or pension • Any gratuity• Any fees, commission, perquisites or profits in lieu of salary or wages• Any advance salary• Any payment received in respect of any period of leave not availed by him

(Leave encashment) • Portion of the annual accretion to the balance at the credit of an employee

participating in recognised provident fund to the extent taxable • Transferred balance in a recognised provident fund to the extent it is taxable • Any contribution made by central govt or any employer to the account covered

under pension scheme refereed in section 80CCD.


Allowances

• Allowances are fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the service rendered by employee.

• Amount of Exemption • Amount of allowance or the actual amount

spent whichever is lower


Allowances • House rent allowance • Transport Allowance• Conveyance Allowances• Daily Allowance• Uniform Allowance• Helper Allowance• Research Allowance• Children Education Allowance• Children’s Hostel Expenditure Allowance. (Covered under

section 10)


House Rent Allowance u/s. 10 (13A).

• Exemption in respect of house rent allowance is least of the following three

• Amount equal to 50 percent of salary, where house is situated in metros and 40 percent of salary where residential house is situated at any other place.

• Actual house rent allowance received• Excess of rent paid over 10 percent of salary


Transport Allowance

• Transport allowance is granted to meet his expenditure for the purpose of commuting between the place of his residence and place of duty .

• Exemption • Up to Rupees 800 per month • Rupees 1600 per month in the case of blind or

orthopedically handicapped employee


Children Education Allowance

• The allowance is given for children's education • Rupees 100 per month per child up to a

maximum of 2 children


Hostel Expenditure Allowance

• The allowance is granted to an employee to meet the hostel expenditure on his child

• Rupees 300 per month per child up to a maximum of two children.


Medical allowance

• Fixed medical allowance is chargeable to tax • Reimbursement of medical expenses – Exemption up to Rs. 15,000 per year


Employers contribution to approved superannuation

• Employers contribution towards approved superannuation fund – chargeable to tax above Rs 1,00,000 per assessment year


Employers contribution to Provident fund

• Employers contribution to statutory provident fund – fully exempt

• Employers contribution to recognised provident fund – Excess of 12 percent of salary is taxable


Interest credited to provident fund

• Statutory provident fund – not taxable • Recognised provident fund – excess of 9.5

percent is taxable • Public provident fund – exempt from tax


Perquisites 17(2)

• Dictionary meaning• – A gain or profit incidentally made from

employment in addition to regular salary or wages, especially one of a kind expected or promised.

• Any casual emolument or benefit attached to an office or position in addition to salary or wages

Back


Examples of perquisites

a. The value of rent-free accommodation b. The value of concession in the matter of rent

respecting any accommodation c. Benefit or amenity granted or provided free

of cost or at concessional rate.


Perquisites d. Any sum paid by an employer in respect of any obligation

but for which payment would have been payable by assessee

e. Insurance premium on life of the employee paid by the employer

f. The value of any specified security or sweat equity allotted free of cost or at concessional rate

g. Contribution to an approved super annuation fund by the employer in respect of the assessee in excess of Rs. I lakh.

h. The value of any fringe benefit or amenity as may be prescribed


Profit in lieu of Salary 17(3)• Profit in lieu of salary includes-a. Any compensation due or received by an employee in connection

with the termination of the employment/ modification of the terms and conditions of his employment

b. Payment from employer or former employer from provident fund or such other funds, excluding the amount exempted form tax under section 10

c. Any sum received under Keyman Insurance policy including the sum allocated by way of bonus on such policy

d. Amount due to or received, whether in lumpsome or otherwise by any assessee from any person

• -before his joining any employment • -after cessation of his employment Back


Deductions from salaries (section 16)

• Entertainment allowance 16(ii)• A deduction of entertainment allowance

specifically granted by an employer to the assessee who is in receipt of a salary from the Government

• A sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less


Entertainment allowance deductions

• Least of the following amount is to be deducted from salary income

1. Actual amount of entertainment allowance received

2. 1/5th of his basic salary 3. Rupees 5,000


Tax on employment 16(iii)

• A deduction of any sum paid by the assessee on account of a tax on employment leviable by or under any law.

• Profession tax


Important items

• Advance salary taxable in the year of receipt, however assesse can claim relief u/s 89

• Arrears of salary – taxable on receipt basis, however not taxed earlier

• Leave salary ( leave encashment ) • At the time of retirement - exempt • Leave encashment at the time of employment –

taxable, but relief under section 89 is available