Income from Salary Simplified

CA Pallav Singhania , Last updated: 21 October 2013
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BASIS OF CHARGE: [Section 15]

As per Section 15, salary consists of the following:

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

2. 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;

3. 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.

4. Once salary is taxed on due/receipt basis, it will not be taxed again on receipt/falling due, as the case may be.

5. Any salary, bonus, commission or remuneration, by whatever name called, due to or received by, a partner of a Firm from the firm is not regarded as salary under this head.

6. The assessee can claim relief u/s 89(1) for arrears or advance salary.

7. Loan from employer is not salary. Hence, advance salary is taxable, while advance against salary is not.

REQUISITE

Employer and Employee relationship between the payer and payee.

CHARGEABILITY

Salary is chargeable to tax on "due" or "receipt" basis whichever is earlier.

As per Sec. 17(1), salary includes the following:

a. Wages

b. Any annuity or pension

c. Any gratuity

d. Any fees, commissions, perquisites or profit in lieu of or in addition to any salary or wages

e. Any advance of salary

f. Any payment received by an employee in respect of any period of leave not availed by him

g. The portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognized provident fund to the extent it is taxable

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

i. Contribution by the Central Government or any other employer to the account of an employee under a pension scheme referred to in Sec. 80CCD

Deductions from SALARY {Section 16}

1. Entertainment Allowance {Section 16(ii)

Only Government servant can claim the following deduction —

a. Rs 5000/-

b. 1/5th of salary (20% of salary) [Salary = Basic Pay]

c. Actual entertainment allowance received during the F.Y.

2. Professional Tax or Tax on Employment {Section 16(iii)

Professional tax paid by an employee is allowed as deduction from his Salary income

a. Deduction is available in the year in which professional tax is actually paid.

b. If Profession Tax is reimbursed by the employer, then Profession Tax reimbursed by the employer will first be included in salary (in case of all employees whether specified or not) as perquisite & then the same amount is allowed as deduction u/s 16(iii) from gross salary.

Note: If an employee has paid Profession Tax of more than one year in a particular year then entire Profession Tax so paid is allowed as deduction.

SPECIFIC EXEMPTIONS

1. Gratuity [Sec. 10(10)]

Gratuity is exempt only when it is received on - (a) retirement, or (b) becoming incapacitated prior to such retirement; or (c) resignation; or (d) termination of services.

Exemption is also available to gratuity received by the widow, children or dependants of the employee on his death.

Particulars	Exemption
Gratuity recd. by Govt. & Local Authority Employees	Fully exempt u/s 10(10) (i)
Gratuity in case of employees covered by Payment of Gratuity Act, 1972	Lower of following amount.
	1. [15 ÷ 26] x Salary last drawn x completed yrs. of service or part thereof in excess of 6 months 2. Maximum amount Rs. 10,00,000 (Rs. 3,50,000 up to 23rd May, 2010. 3. Actually received.
Salary = Basic Pay + Dearness Allowance entire
Gratuity in respect of any other employee.	Lower of following amount.
	1. 1/2 x average salary x completed years of service (ignore fraction) 2. Maximum amount Rs. 10,00,000 (Rs. 3,50,000 up to 23rd May, 2010. 3. Actually received.

Average Salary = Average Salary of last 10 months preceding month of retirement.

Salary = Basic Pay + Dearness Allowance (forming part of retirement benefits) + Commission based on the % of turnover

2. Pension: [Sec. 10(10A)]

Particulars	Exemption
A) Uncommuted pension recd. by any employee. (Govt. or Non-Govt.)	Fully taxable as salary.
B) Commuted pension recd. by Govt. employee.	Fully exempt from tax u/s 10(10A)(i)
C) Commuted pension recd. by Non-Govt. employee.
1) If such employee receives gratuity.	1/3 of full value of commuted pension will be exempt from tax u/s 10(10A)(ii)
2) If such employee does not receive gratuity.	1/2 of full value of commuted pension will be exempt from tax u/s 10(10A)(ii)

3. Leave Salary (Encashment): [Sec. 10(10AA)]

Particulars	Exemption
Encashment of leave during service	It is charged to tax.
Encashment of leave at the time of retirement
1. If Central or State Government Employees	Fully exempt from tax u/s 10(10AA)(i)
2. For any other employees	Whichever is less of following
	1. Earned leave months x Average salary 2. Avg. monthly salary x 10 3. Maximum amount 3,00,000 4. Actual received

Note: Period of leave in month

1. No. of actual yrs. of service

2. No. of leave entitlement for each completed year of service as per rules (subject to 30 days)

3. Gross total leave (in days) (step 1 x step 2)

4. Less: Leave encashed & availed during continuation of service (in days)

5. Period of earned leave (in days) (step 3 - step 4)

6. Period of leave in months (step 5/30)

Note: Average monthly salary for this purpose means avg. salary drawn in past 10 months immediately preceding the retirement.

Salary = Basic Pay + Dearness Allowance (forming part of retirement benefits) + Commission based on the % of turnover

4. Retrenchment Compensation [Sec. 10(10B)]

Compensation received at time of retrenchment, is exempt from tax to the extent of lower of the following:

1) 15 days’ average pay for each completed yr. of services or any part in excess of six months.

2) Maximum amount Rs. 5,00,000.

3) Actual amount received.

5. Voluntary Retirement Compensation [Sec. 10(10C)]

Any amount received or receivable by an employee of —

1) A public sector company

2) Any other company

3) Authority established under a Central, State or Provincial Act

4) A local authority

5) A co-operative society

6) A university established under a Central, State or Provincial Act or covered under the University Grants Commission Act

7) Notified Indian Institute of Technology

8) Notified Institute of Management

9) Indian Institute of Foreign Trade, New Delhi

10) Any State Government

11) Any Central Government

12) Any other Institute notified by Central Government.

at the time of his voluntary retirement under a scheme framed in accordance with guidelines prescribed by Rule 2BA. However an Employee of Public Sector Company should have completed 10 years of service or completed 40 years of age.

Exemption is Least of the following.

1) Actual amount received under VRS.

2) Rs. 5 lakhs (to be reduced by total exemptions claimed in past years) in total from one or more employers

3) Last Drawn Salary multiplied by 3 months salary for each completed year of service.

4) Last Drawn Salary multiplied by Balance Nos. of Months of Service Left (Refer Rule 2BA also).

Where any relief has been allowed to an assessee under section 89 for any assessment year in respect of any amount received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under this clause shall be allowed to him in relation to such, or any other assessment year.

ALLOWANCES

Allowances Fully taxable in all cases:

1. City Compensatory Allowance

2. Fixed Medical Allowance

3. Tiffin/Lunch/Dinner/Refreshment Allowance

4. Servant Allowance

5. Dearness Allowance

6. Project Allowance

7. Overtime Allowance

8. Interim Allowance

9. Any Other Cash Allowance

House Rent Allowance (HRA) [Sec. 10(13A) and Rule 2A]

The least of the following is exempt —

1. 40% of salary [50% if house situated at Mumbai, Kolkata or Chennai]

2. HRA actually received in respect of the period during which the accommodation is occupied

3. Rent Paid – (Salary x 10%)

Salary = Basic + Dearness Allowance (if part of retirement benefit) + Commission (fixed % of turnover)

Other Allowances

Allowances Exempted To The Extent Of Amount Received Or Specified Limit Whichever Is Less.

Allowances	Exemption limits
1 Children Education allowance	Rs. 100 p.m per child maximum 2 children
2 Children hostel exp. allowance	Rs. 300 p.m per child maximum 2 children
3 Tribal area allowance	Rs. 200 p.m
4 Transport allowance	Rs. 800 p.m & Rs. 1600 p.m for blind/handicapped
5 Transport allowance for transport employee	Least of 70% of allowance or Rs. 10,000 p.m (Rs. 6,000 till A.Y. 2010-11)
6 Underground allowance	Rs. 800 p.m
7 Compensatory field area allowance	maximum Rs 2600 p.m
8 Compensatory modified hill area allowance	maximum up to Rs. 1000 p.m.
9 Special Compensatory hill area or high altitude	Rs 300 p.m to Rs. 7000 p.m allowance, etc
10 Border area, Remote area, Disturbed area allowance	Rs. 200 p.m to Rs. 1300 p.m.
11 High altitude allowances (Non-congenial climate)	Rs. 1,060 p.m. (Altitude for 9000 ft to 15000 ft), Rs. 1,600 p.m. (Above 15000 ft)
12 Special compensatory for highly active field area allowance	Limit is Rs. 4,200 p.m.
13 Island allowance	Limit is Rs. 3,250 p.m.
14 Counter Insurgency Allowance	Limit is Rs. 3,900 p.m.

PERQUISITES

Specified employee — Sec. 17(2)(iii)

a. Director of the company or

b. Employee having 20% or more voting power in the employer company or

c. Employee having salary* more than Rs. 50000

* Salary means all taxable monetary benefit after deduction u/s 16

1. RENT FREE ACCOMMODATION

Unfurnished Accommodation
Government Employees As per govt. rules: Licenses Fees less Rent recovered form employee	Other Employees			In Hotel 24% of salary or actual charges whichever is less ** nothing taxable if accommodation is provided not more than 15 days and on transfer of employee from one place to another
	Owned by employer		Not owned by employer (on lease or rent)
	As per 2001 census		As per 2001 census
	Population >25 lakhs 10 lakh < Population < 25 lakh Population up to 10 lakhs	15% 10% 7.5%**	Actual rent or 15% of salary whichever is lower

The above is applicable only for unfurnished house

**% on amount of salary (less) Rent actually paid by employee

Furnished House

If the furniture (TV, washing machine) is provided then 10% p.a of cost of furniture or actual hire charges if taken on rent shall be added with unfurnished house.

Salary = basic salary + DA + bonus (current year) + commission + taxable portion of all allowance + monetary payment from employer other than PF (not include perquisites)

2. VALUATION OF PROVISION OF DOMESTIC SERVANTS

Servant appointed by	Servant’s salary paid by	Value of perquisite	Taxable in the hands of
Employee or Employer	Employee	Nil	Not applicable
Employee or Employer	Employer	Actual cost incurred by the employer on the servant	All employees

3. VALUATION OF SUPPLY OF GAS, ELECTRICITY OR WATER SUPPLIED BY EMPLOYER

Facility in the name of	Value of perquisite		Taxable in the hands of
	Provided from own source	Provided from outside
Employee	Manufacturing cost to the employer	Amount paid to the supplier	All employees
Employer	Manufacturing cost to the employer	Amount paid to the supplier	Specified employees

4. VALUATION OF EDUCATIONAL FACILITIES

Facility provided to	Value of perquisite		Taxable in the hand of
	Provided in the school owned by the employer	Provided in any other school
Children	Cost of such education in similar school (an exemption of Rs. 1000 p.m. per child is available)	Cost of such education (an exemption of Rs. 1000 p.m. per child is available)	Specified employee
Other house hold member	Cost of such education in similar school	Cost of such education incurred	Specified employee

5. VALUE OF LEAVE TRAVEL CONCESSION:

Any concession received by employee for himself or his family for travelling to any place in India is exempt to the extent of amount spent subject to the following conditions:

1. Exemption only for two journeys in a block of four years and out of two journeys exemption for one journey can be claimed in the calendar year succeeding the end of the block. [current block: 2010-13]

2. Exemption only for two children but exemption will be available for all children born before October 1, 1998

Amount of exemption

Situations	Amount of exemption
Where journey is performed by air	Amount of economy class air fare of the national carrier by shortest route or amount spent whichever is less
Where journey is performed by rail	Amount of air conditioned first class rail fare by the shortest route or amount spent whichever is less
Where the place of origin of journey and destination are connected by rail and journey is performed by any other mode of transport	Amount of air-conditioned first class rail fare by the shortest route or amount spent whichever is less.
Where the place of origin of journey and destination are not connected by rail
a) where a recognized public transport exists	First class or deluxe class fair by the shortest route or the amount spent whichever is less
b) where no recognized public transport exists	Air conditioned first class rail fare by shortest route or the amount spent whichever is less.

6. VALUE OF INTEREST FREE LOAN

* Calculate interest on the basis of SBI lending rates and interest paid by employee. The difference will be the value of perquisite

* Interest on maximum outstanding monthly balance of advance is considered to determine any concession in interest. Maximum outstanding monthly balance means balance of loan on the last day of each month.

* Nothing is taxable if –

- loans in aggregate do not exceed Rs 20,000 or

- loan is provided for a treatment of specified disease (Rule 3A) like neurological diseases, Cancer, AIDS, Chronic renal failure, Hemophilia (specified diseases).

SBI LENDING RATES

The details of interest rate as on 1st April, 2011 is available on www.statebankofindia.com.

7. VALUE OF perquisite in resPECT OF MOVABLE ASSETS

Assets given

Value of benefits

a) Use of laptops and computers

Nil

b) Movable asset other than Laptops and computers

i. 10% p.a. of the actual cost of such asset, or

ii. the amount of rent paid, or payable by the employer

iii. Less: amount recovered from employee.

8. VALUE OF perquisite in resPECT OF MOVABLE ASSETS sold to employee

Assets transferred	Value of perquisites
Computers & electronics	Depreciated value of asset [depreciation is computed @50% on WDV for each completed year of usage] less: amount recovered from employee.
Motor cars	Depreciated value of asset [depreciation is computed @20% on WDV for each completed year of usage] less: amount recovered from employee.
Any other asset	Depreciated value of asset [depreciation is computed @10% on SLM for each completed year of usage] less: amount recovered from employee.

9. VALUE OF medical facilities

The following shall not be treated as perquisite —

1. Medical treatment of the employee or his family (spouse and children, dependent - parents, brothers and sisters): —

a. Provided in any hospital maintained by the employer.

b. Any sum paid by the employer towards expenditure actually incurred by the employee in any hospital: —

— Maintained by employer or Government or Local Authority or any other hospital approved by Central Government for the purposes of medical treatment of its employees;

— Approved by the Chief Commissioner having regard to the prescribed guidelines in respect of prescribed diseases.

2. Premium paid by an employer by cheque to General Insurance Corporation to effect/keep in force:

a. Insurance on the health of his employees.

b. Medical Insurance Premia.

3. Any sum, not exceeding Rs.15,000 , paid to any hospital/nursing home/clinic other than(a & b)

4. Amount payable for treatment Outside India: —

a. Medical expenses — to the extent permitted by RBI.

b. If Gross Total Income (before including the travel expenditure) of the employee, does not exceed Rs. 2,00,000/-, then travel abroad for patient and one attendant — fully deductible. Stay abroad for patient and one attendant - permitted by RBI.

10. VALUE OF MOTOR CAR

Owned or hired by employer and used

Exclusively for official purpose

Exclusively for private purpose

Both official and Private Purpose

Nil. If specified documents maintained

Actual Running & Maintenance exp + remuneration of Chauffeur + actual Wear & tear @ 10% p.a of cost or hire charges if car taken on hire charges Less: amount recovered

Running and maintenance borne by *

Employer	Employee
Up to 1.6 ltrs Rs. 1800 p.m + for chauffeur Rs. 900 p.m	Up to 1.6 ltrs Rs. 600 p.m + for chauffeur Rs. 900 p.m
Exceeding 1.6 ltrs Rs. 2400 p.m + for drivers Rs. 900 p.m	Exceeding 1.6 ltrs Rs. 900 p.m + for drivers Rs. 900 p.m

* Nothing is deductible in respect of any amount recovered from the employee

Owned by employee and used

Exclusively for official purpose	Exclusively for private purpose	Both official and private purpose
Nil. If specified documents maintained	Actual expenditure incurred by employer (-) amount recovered from employee	Running and maintenance borne by
		Employer	Employee
		Actual expenditure (-) Rs. 900 p.m	No tax

1. Employer should maintain complete details of journey undertaken for official purpose, which includes date of journey, destination, mileage and amount of expenditure incurred thereon.

2. Certificate of supervising authority of the employee, wherever applicable, to the effect that the expenditure incurred for wholly and exclusively for performance of official duties, should be provided

MISCELLANEOUS

Free meals during office hours Free meal in remote area or offshore installation area is not taxable perquisite	Actual cost to the employer in excess of Rs.50 per meal or tea or snacks Less: amount recovered from the employee. (Tea or non-alcoholic beverages and snacks during working hours is not taxable)
Value of any gift or voucher or taken other than gifts made in cash or convertible into money (e.g. gift cheques) on ceremonial occasion	Value of gift. In case the aggregate value of gift during the previous year is less than Rs. 5,000, then it is not a taxable perquisite
Expenditure incurred on credit card or add on card including membership fee and annual fees	Actual expenditure to employer is taxable Less: amount recovered from Employee If it is incurred forofficial purpose and supported by necessary documents then it is not taxable.
Expenditure on club other than health club or sports club or similar facilities provided uniformly to all	Actual expenditure incurred by the employer Less: amount recovered from employee employees If the expenditure is incurred exclusively for official purposes and supported by necessary documents then it is not taxable. (Initial fee of corporate membership of a club is not a taxable perquisite)
Any other benefit or amenities or service or right or privilege provided by employer other than telephone or mobile phone	Cost to the employer Less: amount recovered from employee

PROVIDENT FUND

	Statutory provident fund	Recognized provident fund	Unrecognized provident fund	Public Provident Fund
Employer’s contribution to provident fund	Not taxable	Not taxable up to 12 per cent*of salary	Not taxable	Employer does not contribute
Employee’s contribution	Available deduction u/s 80C	Available deduction u/s 80C	Not available	Available deduction u/s 80C
Interest credited	Fully exempt	Exempt up to 9.5% (from 01.04.2001 onwards)	On Employee contribution - taxable under "income from other sources" On Employer contribution – not taxable at the time of credit.	Exempt from tax
Lump sum payment received at the time of retirement or termination of service or withdrawn	Exempt u/s. 10(11)	Exempt from tax u/s. 10(12) Subject to conditions: not taxable if employee retires after 5 years of service or due to inability of work. Otherwise treated as URPF	Employee’s Contribution exempt from tax & Interest thereon is taxable under the head of income from other sources. Employer’ s contribution and interest thereon is taxable as Profits in lieu of Salary, under" Salaries")	Exempt from tax u/s 10(11)

Notes:

"salary" means basic salary. It includes dearness allowance if terms of employment so provide. It also includes commission when determined at a fixed percentage of turnover achieved by an employee.

APPROVED SUPERANNUATION FUND

a. Employers contribution towards an approved superannuation fund is chargeable to tax in the hands of employees to the extent such contribution exceeds Rs. 1 lakh per year.

b. Interest on accumulated fund balance is exempt from tax in employees hands.

Value of any specified security or sweat equity Shares allotted to employee

1. Specified Security means securities as defined in Section 2(h) of the Securities Contract (Regulation) Act and also includes Employees Stock Option Plan (ESOP).

2. Sweat equity shares means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in name of Intellectual Property Rights.

3. Perquisite will be taxable as the difference between the fair market value (FMV) of the shares on the date of exercise of the options less the exercise price.

Calculation of FMV on date of exercising the option

PARTICULARS	FMV
Listed on a recognized stock exchange	Average of opening and closing price on that date
Listed on more than one recognized stock exchanges	Average of opening & closing price of share on the recognised stock exchange which records the highest volume of trading in the share
If no trading in the share on any recognized stock exchange –
If share listed on a recognized stock exchange	Closing price of share on any recognised stock exchange on a date closest to date of exercising the option & immediately preceding such date
If share listed on more than one recognized stock exchanges	Closing price of share on a recognised stock exchange, which records highest volume of trading in such share.
If shares not listed on a recognised stock exchange or any specified security other than equity shares	Such value of share in the company as determined by a merchant banker on the specified date