Income under the Head Salaries

INCOME UNDER THE HEAD SALARIES

1 INTRODUCTION

The statute enjoins every employer to estimate the liability of tax deductible at source and to deduct tax at an average rate. For this the employer is required to determine the salary payable to the employee and accordingly compute the tax liability. The employer must estimate this tax liability at the very beginning of the financial year in accordance with the following sequence of steps :

(1) The employer should first compute the gross salary payable to the employee during the year taking into account any salary received/receivable by the employee from any other employer/former employer.

(2) The gross salary is to be reduced by those payments which are exempt from taxation.

(3) Standard deductions and other deductions u/s 16 are to be reduced from the above amount to arrive at the net salary payable.

(4) Income chargeable under any other head as reported by the employee is to be added and accordingly the gross total income (GTI) is to be computed.

(5) Deduction under Chapter VI-A for which the employee is eligible is to be reduced from gross total income and thus the total income is to be computed.

(6) On the basis of the rates in force, the tax liability on the total income of the employee is to be computed. From this amount, rebate u/s 88, 88B and 88C is to
be reduced.

(7) The tax liability so computed is to be increased by the surcharge pay-able and l/12th of this net tax payable is to be deducted every month by the employer.

2 WHAT   IS   "SALARY"?  

Salary   is   said   to   be   the remuneration received by or accruing to an individual for service rendered as a result of an express or implied contract. The statute, gives an inclusive but not exhaustive definition  of salary.  As  per  sec   17(1),   salary  includes therein: (i) Wages; (ii) Annuity or pension; (iii)   Gratuity; (iv)  fees,  commission,  perquisites  or  profits  in lieu of salary; (v) Advance salary; (vi) Receipt from provident fund;   (vii)   Contribution   of  employer   to   a   recognised provident fund in excess of prescribed limit; (vii) Leave encashment; (viii) compensation as a result of variation of service contract etc.

3 Exceptions to salary income:

The existence of an   'employer-employee'   relationship   is   a   must   for   a payment to be taxed under the head salaries. Accordingly, the  following class  of payments  do not fall under the purview of the head 'salaries'.

  4.VALUATION OF PERQUISITES:

The taxable value of perquisites in the hands of the employee is normally taken to be its cost to the employer. However, there are specific rules for valuation of certain perquisites laid down in Rule 3 of the I.T. Rules, which have been revised by CBDT notification dated 25.9.2001. These are briefly given below. It may be noted that while the revised rule 3 relating to valuation of perquisites shall be deemed to have come into force on 1.4.2001. The employer may at the option of employee compute the value of all perquisites made available to him for the period from 1.4.2001 to 30.9.2001, in accordance with the rule 3 as it stood before this amendment. However this option of the tax payer of using old or new rules for the period specified above shall be applied uniformly in respect of all perquisites in case of a particular tax payer.

5. Valuation of residential accommodation provided by the employer:

(a) Union   or  State   Government  Employees: The value of perquisite is the licence fee as determined by the Govt. as reduced by the rent actually paid by the employee.

(b) Non Govt. Employees: The value of perquisite is an amount equal to 10% of the salary (7.5% of salary in cities where population as per 1991 census, is below 4lacs). In case the accommodation provided is not owned by the employer, but is taken on lease or rent, then the value of the perquisite would be the actual amount of lease rented paid/payable by the employer or 10% of the salary, whichever is lower. In both of above cases, the value of the perquisite would be reduced by the rent, if any, actually paid by the employee.

Value of Furnished Accommodation :

The value would  be   the   value  of unfurnished  accommodation  as computed above increased by 10% per annum of the cost of furniture   (including T.V./radio/refrigerator/A.C./other gadgets). In case such furniture is hired from a third party, the value of unfurnished accommodation would be increased by the hire charges paid/payable by the employer. However,any payment recovered from the employee towards the above would be reduced from this amount.

Value of hotel accommodation provided by the employer: 

The value  of perquisite  arising out of the above would be 24% of salary or the actual charges paid or payable to the hotel, whichever is lower. The above would be reduced by any rent actually paid by the employee. It
may   be   noted   that   no   perquisite   would   arise   if the employee  is  provided  such  accommodation  on  transfer from one place to another for a period of 15 days or less.

Perquisite of motor car   provided by the employer:

1. If it is used wholly and exclusively for the official purpose, the value of the perquisite would be nil. Rule 3(2 )(B) provides that the value would be taken as nil provided the following documents are maintained by the employer :

2. If it is used exclusively for private purposes of the employee or any member of his household, the value of  the   perquisite   would   be   the   actual   expenses incurred by the employer on the running/maintenance of the car, remuneration paid to the chauffeur and normal wear and tear of the car. For the purpose of this sub-rule, the normal wear & tear of a car shall be taken as 10% per annum of the actual cost.

3. If it is used for both personal and official purposes, the value of the perquisite would Rs. 1200 (Rs. 1600 if the car has H.P. greater than 16) plus Rs. 600 for chauffeur, if any. In case, the expenses on running/ maintenance relating to personal use are met by the employee,   the   value   of  the   perquisite   would   be Rs. 400 (Rs. 600 if car has H.P. greater than 16) plus Rs. 600 for chauffeur.

4. In case the motor car is owned by the employee but the   running/maintenance   charges   and   chauffeur's salary, if any, are met by the employer, then the value of the perquisite would be :-

5. Plus Rs. 600 in case any driver has been engaged.

  Perquisite arising out of supply of gas, electric energy   or  water:   This  shall  be   determined   as   the amount paid by the employer to the agency supplying the same. If the supply is from the employer's own resources, the value of the perquisite would be the manufacturing cost per unit incurred by the employer.

Free/Concessional Education Facility: Value of the   perquisite   would   be   expenditure   incurred   by   the employer. If the educational institution is maintained & owned by the employer, the value would be nil if the value of the benefit per child is below Rs. 1000/- p.m. or else the reasonable cost of such education in a similar institution in or near the locality.

  Free/Concessional journeys provided by an undertaking engaged in carriage or passengers or goods: Value of perquisite would be the value at which such amenity is offered to general public as reduced by any amount, if recovered from the employee.

Value of certain other benefits:

(a) Interest free/concessional loans—The  value  of the perquisite  shall  be  the  sum  equal  to  the  simple interest computed @ 10% per annum in respect of house or conveyance loans and @ 13% per annum for other loans as reduced by any interest actually paid by the employee.

(b) Value of free meals—Shall be the expenditure incurred by the employer. However, free meals provided during office hours or through non-transferable paid vouchers usable only  at eating joints  shall be  exempt upto Rs. 50/- per meal.

(c) Value of gift or voucher or token—received by the employee from the employer would be the sum equal to the amount of such gift. However, if the aggregate value  of such  gifts  during the  year  is  below Rs.  5000/- the perquisite shall be taken as nil.

(d) Credit card provided by employer—The value of the perquisite shall be the amount of expenses including membership fees  and annual fees incurred by the employee. However, if the same is used exclusively for official purposes, the value of the perk shall be nil.

(e) Club Membership provided by employer—The value of the perquisite shall be the amount of all expenses incurred   by   the   employer   or   reimbursed   to   the employee including the annual fees. However, if the same is incurred exclusively for official purposes, the value of the perquisite shall be nil.

(f) Provision   of sweeper,   gardener,   watchman   or attendant—The  value  of perquisite  resulting from provision of a sweeper, a gardener, a watchman pr a personal attendant shall be the actual cost to the employer  as  reduced by  the  amount  paid by  the employee in respect of such services. (Cost to the employer in respect of the above will be the salary paid/payable).

  The value of any other benefit or amenity provided by the employer shall be determined on the basis of cost to the employer under an arms' length transaction as reduced by the employee's contribution.

  EXEMPTIONS FROM SALARY INCOME:

  Section 10 of the I.T. Act provides for certain categories of payments to be exempt from taxation, either wholly or partly. Such payment are not to be included under the head 'salary' for computing the tax deductible. Some of these are listed below and are discussed in detail in Chapter-5 of this booklet.

  Exemption of Allowances: There are various other receipts besides the above given regularly in addition to salary for meeting specific requirements of the employee. These are referred to as allowances, in common parlance and taxability of some of these are discussed here.

(i) Leave Travel Concession : The value of any travel concession or assistance accrued by or due to an employee from his employer or former employer in connection of his proceeding on leave (a) to any place in India; (b) to any place in India or retirement or after termination of service. The amount exempt as prescribed in Rule 2B is the amount actually incurred on performance of travel on leave in India by the shortest route to that place, subject to economy air fare of A.C. 1st class fare. This exemption is available only in respect of two journeys in a block of 4 calender years.

(ii) House Rent Allowance: House rent allowance granted to the employee is exempt u/s 10(13A) to the following extent.

Provided expenditure on rent is actually incurred, the amount of exemption granted is the least of:

It has to be noted that only the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee subject to the limits laid down in rule 2A, qualifies for exemption from income-tax. Thus, house rent allowance granted to an employee who is residing in a house/flat owned by him is not exempt from income-tax. The disbursing authorities should satisfy themselves in this regard by insisting on production of evidence of actual payment of rent before excluding the house rent allowance or any portion thereof from the total income of the employee. Though incurring actual expenditure on payment of rent is a prerequisite for claiming deduction under section 10(13A), it has been decided as an administrative measure that salaried employees drawing house rent allowance upto Rs 3000 per month will be exempted from production of rent receipt, it may, however, be noted that this concession is only for the purpose of tax deduction at source, and, in the regular assessment of the employee, the assessing officer will be free to make such enquiry as he deems fit for the purpose of satisfying himself that the employee has incurred actual expenditure on payment of rent.

(iii) Allowances exempt u/s 10(14): Certain allowances given by the employer to the employee are exempt u/s 10(14) w.e.f. 1-7-1995, all these exempt allowance are detailed in Rule 2BB of Income Tax Rules and are briefly given below :

  Perquisites exempt from Income Tax: Some instances of perquisites exempt from tax are given below :