SALARY NOTES

CA. SANAT PYNE (F.C.A. & M.COM) (16757 Points)

11 August 2010  

Salary

 

Chapter IV-A of Income Tax Act 1961

 

 

 

 

Relationship of the receiver with payer

 

EMPLOYER- employee relationship must exist                              

Salary To Partners

 

Charging Section                                                             Section 15

 

Receipt                 or                                DUE basis                  whichever is earlier

 

 

Method Of Computation of Salary      Section 17

 

1.    Basic Pay                                          =                 XXX

2.    Allowances                                      =                 XXX

3.    Perquisite(Facility)                         =                 XXX

4.    Retirement Benefits                        =                 XXX

5.    Profits in Lieu of Salary                 =                 XXX

 


 

GROSS SALARY                                    =                 xxxx

 

Less: Deduction Under Section 16(i)     (now it is DELETED)

                    Under Section 16(ii)             =                 xxx

                   Under Section 16(iii)            =                 xxx

 


 

INCOME under head Salary                   =                 XXX

 

 

 

 

 

 

 

 


 

                                                       Allowances                                                               s                                                           

 

 


 

Personal Allowance     Official Allowance      Foreign Allowance       HRA       DA

 

 

 

 

I.      Personal Allowance

 

 

Allowance

Maximum Exemption Limit

Children Education Allowance

Rs 100 Per Month Per Child (Max 2 Children)

Hostel Allowance

Rs 300 Per Month Per Child (Max 2 Children)

Transport Allowance

Rs 1,600 Per Month—Disabled Person

Rs 800 Per Month-Any Other Person

Outstation Allowance

(Transport Co.)

Lower Of:

ü  70% of Allowance

ü  Rs.6,000 Per Month

Underground Allowance

Rs.800 Per Month

Tribal area allowance

Rs.200 Per Month

Compensatory Field Area Allowance

Rs.2600 Per Month

Compensatory Modified Field Area Allowance

Rs.1,000 Per Month

Allowance for Army Personnel working in Highly Active Field

Rs.4,200 Per Month

Allowance for Army Personnel for ISLAND Duty

Rs.3,250 Per Month

Medical Allowance

No Exemption ,               Fully Taxable

Tiffin Allowance

Cash Allowance

Entertainment Allowance 

[Also see Section 16(iii)]

City Compensatory Allowance

Split Duty Allowance

Servant Allowance

Overtime Allowance

Any Other Personal Allowance


 

II.      Official Allowance

 

Is Granted for Official Purpose.

Any Savings made by employee is Taxable

Þ      Deduction                              =                                  Amount ACTUALLY Spent

 

Examples

ü  Traveling Allowance

ü  Daily Allowance

ü  Conveyance Allowance

ü  Helper Allowance

ü  Academic Allowance

ü  Uniform Allowance

 

 

III.      Foreign Allowance (Similarly for Perquisite)

ü  Any Allowance

ü  Paid by Government of India

ü  To Citizen Of INDIA

ü  For rendering Services outside India

ü  Fully EXEMPT from tax.

 

 

 

IV.      Dearness Allowance

Paid to Compensate for Increase in Prices

Fully                           TAXABLE

 

 

V.      HOUSE RENT ALLOWANCE

Exemption allowed shall be

Lower of:-

Ø  HRA Received

Ø  Rent Paid  -           (10% of Retirement Benefits Salary)

Ø  50% of Retirement Benefits Salary                       Delhi/Mumbai/Calcutta/Chennai

40% of Retirement Benefits Salary                       Any Other State

 

“Retirement Benefits Salary” means        

a)    Basic Pay

b)    DA (If it forms part of Salary)

c)    Commission of Fixed %  on SALES

 

 

PERQUISITES                      Section 17(2) Rule 3

 

 

1st.         Rent free accommodation

 

 

Govt. employees

Others employees

As per govt. rules

(license fees)

(i)     owned by Employer

 

Population as per 2001 Census

Taxable amount (% of Salary)

Upto 10 Lacs

7.5 %

         10 Lacs – 25 Lacs

10 %

More than 25 Lacs

15 %

 

(ii)  not owned by EMPLOYER

Taxable Amount is Lower of:-

(a)    Actual Rent

(b)   15% of ”SALARY”

 

 

“SALARY” means

Ø  Basic Pay

Ø  DA (If it forms part of Salary)

Ø  Bonus/Commission

Ø  Taxable Portion of all Allowances

Ø  Any other Payment in Cash

Note:

(i)     Furnished House: Add to value calculated above

                                                  i.      OWNED furniture                                     10% p.a. of cost of furniture

                                                ii.      RENTED furniture                                      actual hire charges

(j)      In case of Transfer, If employee is given 2 Houses at both Places:-

a)      For First 90 days    one house with lower value                  Taxable

b)      After 90 days                                             Both Houses are taxable

 

 

 

2nd.       Accommodation at Concessional Rent

Taxable Amount =Determine the value above & reduce the amount Recovered from

                                                                                                                        employee

 

 

3rd.       Gardner/Watchman Sweeper      &         Gas/Water Electricity

Taxable only in case of “SPECIFIED employees”

Taxable Amount                     =                      Expenses incurred

 

“SPECIFIED employees” means

a)      Director

b)      employee having Voting Power >=  20%

c)      employee having Salary more than Rs.50,000

 

4th.        Obligation of employee met by EMPLOYER

 

Taxable Amount                                  =                                  Amount Spent

 

 

5th.         Payment of Insurance Premium by EMPLOYER on behalf of employee

 

For assurance on the life of the assessee         (Except Accidental Policy)

 

Taxable Amount                                  =                                  Amount Spent

           

6th.         Interest Free Loans or Concessional Loans

For any Loan given By EMPLOYER TO employee

 

Taxable Amount=Interest @ “Charged by SBI” at “MAX. MONTHLY outstanding balance”

 

Exemption for Loans < Rs20,000

 

 

7th.         Use of EMPLOYER’s Asset by the employees

                                                                                    Taxable Amount

  1. Laptop & Computers                                       NIL
  2. Other Assets                                                    10% p.a of Actual Cost or Hire Charges

 

8th.         Sale of any Movable Assets by EMPLOYER to employee

 

Actual Cost of EMPLOYER
Less: Depreciation, for each COMPLETED year

  In Case of:

ü  Computer& Electronic items          50% WDV

ü  Motor Car                                      20% WDV

ü  Any other Asset                             10% SLM

Less: Amount Recovered

Taxable Amount

 

9th.        Medical Facility                                                                  Proviso to Sec17(2)

 

Whether given to employee or Members of his Family         

                                                                                                            Taxable Amount

1.       Treatment is done in any Hospital:-                                                                                        NIL

ü  maintained by EMPLOYER

ü  maintained by Govt.

ü  maintained by Local Authority

ü  Approved for Specified Diseases, by Specified Authority

 

2.       Payment Of Health Insurance Premium                                                                        NIL

 

3.       Reimbursement of Actual Expenditure in Any Other Hospital                          In excess of Rs.15,000

 

10th.                                       TAX Free Perquisites

 

FACILITY

Remarks

Foreign Perquisites

ALWAYS

RFA to Judge of HC or SC

Conveyance Facility to Judge of HC or SC

Children Education upto Rs1,000 P.m

Telephone Facility

 

 

 

 

Superannuation Benefits

 

 

Gratuity                                                                                            Section 10(10)

 

1.      GOVT. employees                                                                                     Fully exempt

2.       Others employees

 

(i)           employees covered by the Payment Gratuity Act, 1972:-

Exemption shall be Least of the following

(a)     15 days Salary for each Completed Year of Service or part in excess of 6 months (26 days in a month)

(b)     Rs. 3,50,000

(c)     Amount received

Meaning of salary:             Last drawn Salary               {Basic Pay + DA}

 

(ii)         employees not covered by gratuity Act:-

Exemption shall be Least of the following

(a) 15 days Salary for each Completed Year of Service (30 days in a month)

(b) Rs. 3, 50,000

(c) Amount received

                               

Meaning of salary: Average Salary for 10 Months immediately preceding the Month of Retirement   {Same as in HRA}

Pension                                                                                        Section 10(10A)

 

I.        Uncommuted pension-                                                                              Taxable            ALL employees

II.     Commuted pension-

(i)                 GOVT. employees                                                             Fully exempt

(ii)               NON GOVT. employees                                                    Following is exempt:-

(a) Receiving GRATUITY                                                       1/3

(b)Other Cases                                                                         1/2

 

Leave Encashment                                                                    Section 10(10AA)

 

1.Any Leave Encashment when employee is in Service                                             Fully Taxable

2.Any Leave Encashment when employee has RESIGNED/RETIRED

A       GOVT. employees                                                                                           Fully exempt

B       Others employees

Exemption shall be Least of the following

(i)     Leave Salary Received

(ii)   Rs. 3,00,000

(iii)                                     10                    x                      AVERAGE SALARY

(iv)             Leave at Credit                                    x                       AVERAGE SALARY

Leave Entitlement        {Maximum 30days for each completed year of Service}

Less:    Total Leave Availed

Less:    Total Leave Encashed

Leave at Credit

                       

Meaning of salary: Average Salary for 10 Months immediately preceding the Month of Retirement      {Same as in HRA}

Retrenchment compensation                                                      Section 10(10B)

Exemption shall be Least of the following

(a)          Amount Received

(b)           an amount calculated under Section 25F(b)  of the Industrial Disputes Act, 1947

[i.e 15 days Salary for each Completed Year of Service or part in excess of 6 months   (26 days in a month)]

(c)          Rs 5,00,000

 

 

Compensation voluntary retirement                                         Section 10(10C)

Exemption shall be Least of the following

(i)                 Amount receivable or

(ii)        Rs. 5,00,000

 

Conditions for claiming exemption:-

(i)                 Any employee [except: Director of Co.]

(ii)        Maximum amount

                        (a) 3                 x                      Salary p.m            x                      completed years of Service

                        (b)                                            Salary p.m            x                       Months left for Service

 

Salary  [same as in HRA]

Provident Fund                                                                                     Section 10

 

 

 

Statutory Provident Fund

Recognised Provident Fund

Unrecognised Provident Fund

EMPLOYERS Contribution

Exempt

Exempt upto 12% of Salary

Exempt

employee Contribution

Claim Section80C

Claim Section 80C

---------------------

Interest Income (both EMPLOYER & employee)

Exempt

Exempt upto 9.5%

Exempt

Lump sum Payment on Retirement or Termination

Exempt

Exempt, if specified conditions are fulfilled

#*

#*

employee Contribution-                                   Exempt

EMPLOYERS Contribution-    taxable [U/h Salary]

Interest on EMPLOYERS Contribution-                       taxable [U/h Salary]

Interest on EMPLOYERS Contribution- taxable [U/h Other Sources]

             

Profits in lieu of salary                                                                        Section 17(3)

1.      Any compensation due to an assessee from his EMPLOYER in connection with the termination of his employment or the modification of the terms and conditions relating thereto;

2.      Any payment for gratuity, pension, retrenchment compensation or provident fund

3.      Any sum received under a keyman insurance policy including the sum allocated by way of bonus on such policy.

4.      Any amount due to or received, whether in lump sum or otherwise, by any assessee from any person—

            (a) before his joining any employment with that person; or

(b) after cessation of his employment with that person.

 

 

 

Professional Tax                                                                    Deduction U/s 16(ii)

Deduction                    =                      Any amount paid by   

à        employee

à        EMPLOYER on behalf of employee

Entertainment Allowance                                                      Deduction U/s 16(ii)

GOVT employees

Deduction shall be Least of the following:

1.      Amount Received

2.      Rs.5,000

3.      20% Of Basic Pay

 

 

 

 

 

 

 

 

Meaning of Salary in different Cases

 

 

 

HRA

Gratuity {employees not covered by Gratuity Act}

Leave Encashment                                                                              Basic Pay

Voluntary Retirement                                                                         + DA [forming part]

Recognised Provident Fund                                                               + Comm. on fixed% of Turnover

 

 

 

 

 

 


 

Gratuity {employees covered by Gratuity Act}                                                         Basic Pay + DA

 

 

 

 

 

 

 


 

RFA                                                                Basic Pay               + DA[forming part]+Bonus+ Commission

 + Taxable portion of all allowances

 + Monetary Payment from EMPLOYER