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8/4/2019 Income From Salary BT
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Income from Salary
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IMP POINTSSection 15
Employer and employee relationship is very
important to determine the income as Salary. If More than one employer-Salary from each
source is taxable under the head salary
Example: Mr. A works in two places part time
job. Income is calculated under the headsalary in both the places.
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Basis of Charge –Sec 15
Whether salary taxed on payment or due
basis? Salary is taxable on due or receipt basis whichever
earlier
Advance salary received or salary of the last month
not received is taxed in the current previous year Example: April 2009 salary received in March 2009-
taxable in the previous year 2008-09 itself as it isreceived in 2008-09 period(receipt or due which ever is
earlier) March 2009 salary received in April 2009-taxable in
the previous year 2008-09 only(receipt or due whichever is earlier)
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Salary under section 17(1) Wages
Any annuities or pension
Any gratuity
Any fees, commission Perquisites( received in kind)
Profit in lieu of salary
Advance of salary
Any accretion(addition) due to contribution and interest onprovident fund paid out of the employer’s contribution.
The contribution paid by employer under notified pensionscheme
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Different forms of salary-
Retirement benefits 1. Leave encashment salary
2.Gratuity
3.Pension 4.Retrenchment compensation
5.Provident Fund
[Examination point of view these five items are very important]
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Leave encashment For every completed year of service employee
is entitled to receive a certain number of days
of paid leave.Employee either can take leave oren cash it while in service or after retirement.
Note: Any thing received while in service isnormally taxable. After retirement there are
some concessions given.
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1.Leave encashment
1.Received while in
Service
Fully taxable(government or
Non government employee)
Received At the time
of retirement
Government
Employees-ExemptedCentral/
State govt.
mployees(2)
Non government employee(including local authority
and corporation employees)
(see next slide)
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Non-government employee
(including local authority
and corporation employees)
Least of the following
Exempted out of leave cash received
a) 10 months average salary*
b) Amount specified by the government-3,00,000
c) Actually received at the time of retirementd) [Period of leave on 30 days basis for every completed year
of service( -) leave availed while in service(-)leave encashed
while in service] x (average salary)*
*Average salaryBasic + % DA comes
only for retirement +fixed
% of commission on sales.ote: Immediately before the
The retirement
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Exercise-1
X an employee of the central government receives
Rs.4,00,000 as cash equivalent to leave credit to his salary on1st Feb. 2009X after his retirement.
a)How much is taxable?
b)Suppose X is a private employee and received Rs.15000 assalary and served 20 years and taken 3 months leave while in
service at the time of retirement?
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Answer
a) after the retirement leave encashment by governmentemployee is not taxable.
b)If he is a private employee the least of the following isexempted from the amount received Rs.4,00,000
1.Actually received-Rs.4,00,000;
2.10 months average salary=15000 x 10=1,50,000; 3.Maximum limit=Rs.3,00,000
4. One month for completed year of service(-)leave availed whilein service(-)leave en cashed while in service x *(average salary)
= 20months-3month-0 months*(15,000)=2,55,000
How much is exempted? How much is taxable?The lowest of all four is Rs.1,50,000 is exempted from Rs.4,00,000
Therefore taxable leave encashment is Rs.2,50,000.
(Rs.4,00,000-1,50,000)
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ra u y1.Government
Employee(Central,Sta
te and local authority
employees)(three)
2.Average salary:
Not necessary
3.No of days in a
month-Not necessary
4..Received while in
service is fully taxable
5.Received Gratuity
at the time of
retirement
Exempted
Non Government employee
under the payment of
gratuity Act.
Including statutorycorporation
Average salary:last drawn
includes Basic+DA
No of days in a month-
26 days only
Received while in service is
fully taxable
Received Gratuity at the
time of retirement:
Least of the following is
exempted
see in the next page.
Non Government employee
under not covered under
the payment of gratuity
Act. Including statutorycorporation
Average Salary: Basic +DA
comes for retirement +Fixed
% of commission on sales
No of days in a month-
30 days only
Received while in service is
fully taxable
Received Gratuity at the
time of retirement:
Least of the following is
exempted(next page)
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Non Government employee under the
payment of gratuity Act.
Including statutory corporation
Non Government employee under not
covered under the payment of gratuity
Act. Including statutory corporation
The Least of the following isexempted from gratuity received:
1.(15/26) x (last salary drawn
)x (number of years of service )
ie.Basic+DA(No commission please)
Year= above 6 months is
considered as one year.
2.Rs.3,50,000
3.Gratuity actually received
Note:
If he worked more than one company
collectively more than 6 months equal to
The least of the following isexempted from gratuity received:
1.(15/30) x (10 preceding months
average salary) x (number of
fully completed years of service)Basic + % DA comes for
retirement + Fixed Percentage of
commission on sales
2. Rs.3,50,0003. Gratuity actually received
Note:
Fraction of the year is not
considered
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Pension
Regular pension received by the employeehimself ( not dead )after the retirement istaxable as salary.
Family pension(after the death of husband/wife) received by wife/husbandcomes under income from other sources asthere is no employer and employee
relationship after the death of husband who was an employee.
•Standard deduction is available ie. 1/3 rd of family pension or
•15,000 whichever is lower is deductible from family pension.
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Commuted pension-Sec.17(1)(ii) Instead of receiving monthly pension some portion of
regular pension can be accumulated and can bereceived at the time of retirement a lump sum isknown as commuted pension.
1. In case of Government employee-Exempted afterretirement.
Government employee means:-Central, state,localauthority and corporation employees(totally 4)
2.Non Government
If gratuity received Maximum 1/3 of the regular
pension is not taxable. If gratuity is not received ½ of the regular pension is
not taxable.
Note: above those limits are taxable for non
government employees
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Example – commuted pension Mr. X receives pension every month Rs.10,000.
He wants to commute some portion of thepension.
? How much can he commute if
A) he is a state government employee B) he is a Bangalooru development authority
employee.
C) He is receiving gratuity from Karnataka
Government. D) He is an employee of Shanthi Ltd.
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Answer for commuted pension A,B and C all are government employees
therefore any amount of pension commutedare exempted . It is because government never
exceeds the statutory limit of 1/3 or ½ dependson the situation.D) If he an employee of Shanthi ltd. Max.1/3 if
he receives gratuity ie 1/3(10,000)=Rs.3333
If he does not receive gratuity he cancommute ½ of pension ie. ½(10,000)=Rs.5,000.Note:remaining pension regularly received
(after commutation)is taxable.
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Pension scheme-(after 1st Jan
2004) Applicable for those join after 1st Jan 2004
Contribution made by employer –taxable
Employer and employee’s contribution to theextent of 10% is deductible as savingU/S80CCD. Beyond 10% is not deductible.
When pension received –fully taxed in the
hands of recipient Salary=Basic +DA if it comes for retirement
benefit
Example-next page
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Annuity[17(1)(ii)]
Annual payment constantly paid by employer toemployee. It is a yearly grant.
Even paid voluntarily it is taxable
Annuity received from ex employer is taxed as
profit in lieu of salary-taxed as salary.
Profit in lieu of salary In connection with termination of employment
If company wants a manager to quit immediately as per theservice rules he is paid a lump sum immediately. Suchcompensation is treated as salary.
The compensation can be received from present or formeremployer.
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Salary received from a United
Nations organisation Not taxable in India as per sec 2 of the United
Nations (Privileges and Immunities) Act,1947.
Pension also exempt
VRS[10(10C)] Voluntary Retirement schemeMaximum amount of exemption is Rs.5,00,000.
Conditions:
The same employee can not be re-employed in thesame or any other company comes under the samemanagement.
As per prescribed guidelines
Government services
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owances
City compensatory allowance Fully taxable as salary
Compensation for higher cost of living in cities
Tiffin allowance, fixed medicalallowance
Any amount received in cash is always taxable
before the expenditure incurred
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House rent allowance(10[13A])
There will be no tax exemption if the residentialaccommodation is self occupied (not taken house
for rent by employee or employee has not paid any
rent for residential accommodation used by him
[section 10(13A) of Income Tax Act and rule 2A]
•Salary means basic plus DA (if forming part of retirement benefits)
• plus commission (if fixed as a percentage of turnover).
•Exemption will be lowest of
• (a) 50% of salary where residential accommodation is in Mumbai,
Kolkata, Delhi or Chennai and 40% of at other place
(b)(Rent paid minus 10% of salary)
(c) Actual allowance paid.
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House rent allowance Important points:
1.It is advisable to calculate claim month wise if any changes in salary or house rent allowance or rent paid
or place of stay during the previous year. 2. Salary to be estimated on due basis when you
calculate the meaning of salary
Place of work is not important but the place of accommodation taken is important either to claim50% or 40% depends on type of city.
After receiving rent allowance either he stays in hisown house or rent accomodation is not taken rentallowance for such period is taxable.
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Answer-HRA
A) Rented house in Pune:
Since salary, place of stay, HRA and rent paid are samethroughout the year we can calculate for the whole financial year.
House rent Allowance received (12,000x12) Rs.1,44,000
Least of the following is exempted:1.40% of salary*=26000 x 12 x40% 1,24,800
2.Rent paid-10% of salary* 1,48,800
[(15000-10% x26000) x 12]
3.Actually received 1,44,000
The Least is Rs.1,24,800 which is exempted out of HRA received.There fore taxable HRA is Rs.19,200 ie (1,44,000-1,24,800)
*Salary means:
20,000+(30% x20,000)=26,000
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Answer-HRA
b) Rented house in Mumbai
Since salary, place of stay, HRA and rent paid are samethroughout the year we can calculate for the whole financial year.
House rent Allowance received (12,000x12) Rs.1,44,000
Least of the following is exempted:1.40% of salary*=26000 x 12 x50% 1,56,800
2.Rent paid-10% of salary* 1,48,800
[(15000-10% x26000) x 12]
3.Actually received 1,44,000
The Least is Rs.1,44,000 which is exempted out of HRA received.There fore taxable HRA is Zero ie (1,44,000-1,44,000)
*Salary means:
20,000+(30% x20,000)=26,000
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Entertainment allowance[16(ii)]In case of *government employees:Least of
the following is deductible:
1. Rs. 5,000;
2. 20% of salary**;3.Amount of entertainment allowance
granted during the previous year.Non government employees are not
exempted
*Government employee
Central and State government employees
**Salary excludes any allowance
Benefit or other perquisites
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Special allowances[10(14)]
For official duties (afterReaching office)
Not directly relate to
Official duty
(General)1.Official travel/transfer
Allowance to meet the cost2.Conveyance allowance
to meet customers
3.daily allowance on official
Tour/journey
4.Helper allowance to carry
Official documents
5. Research allowance
6. Uniform allowance to do
Official duty
To be
Spent
Fully
Other
Wise,
amountnot
Spent
taxable
See in
theNext
slide
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Not directly relate to
Official duty
(General)
1.Allowance for
transport
employees
2.Childreneducation
allowance
&70% of allowance
Or Rs. 6000 per
month whichever is
lower exempted
Rs.100 per monthper child max.two
children.If in hostel
Rs.300 extra per
child for two
children
3. Traveling
allowance to
commute from
home to office
4. Other borderarea allowances
Rs. 800 per month.
If handicapped
person Rs.1600 per
month is exempted.
Depends onaltitude/Place
They are fixed.Whether spent
Or not.Excess
Taxable as they
Are not givenFor official
Duty
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ExerciseParticulars No. of
Children/
Name
Amount
received
from
employer
Exempted from tax
Chargeableto tax
1.Educational
allowance
2.Hostel
expenditure
3. Transport
allowance from
house to office or
vice-versa
4.Transport
company
employee – daily
allowance
5. -DO-
Three
Three
-------
Y
X
300 PM per
child
400 per
child per
month
12000
72000
1,20,000
100 x2 x12=2400
300 x2
x12=7,200(limited to
two children
800 x12=9600
70%(72000) or 6000 per
month which ever is
lower=50,400
6000 x 12=72000 or
70%(1,20000)=84000Whichever is lower
(200 x2 x12+300
x12=8400
(100 x2 x12 +400
x12)=7200
12000-9600=2400
72000-50,400=21600
1,20,000-72000=48000
Amount spent or not, exemptions are given
Exercise
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Exercise
Salary income and various allowances: Compute the gross salary of Mr. Amal for the assessment year 2009-10on the basis of the following
information: 1. Basic pay Rs. 8,000 per month
2. DA –40% of basic pay
3. City compensatory allowance-10% of basic pay
4.Medical allowance –Rs.800 per month
5. Children educational allowance- Rs. 200 per month for threechildren
6. Hostel expenditure allowance-Rs. 400 per child per month for 2children
7. Transport allowance- Rs. 18,600 8. Overtime allowance-Rs. 4000
Answer:
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Answer:
Computation of gross salary of Mr. Amal for the assessment year2009-10:
Taxable allowances
1. Basic pay Rs. 8,000 x 12 96,000
. DA –40% of basic pay(8000 x 40% x12) 38 400
3. City compensatory allowance-10% x 8000 x12 9,600
4.Medical allowance –Rs.800 x 12 9,600
5. Children educational allowance-[ (Rs. 200-100)2 x 12+
200 x 12] 4,800 6. Hostel expenditure allowance-(Rs. 400-300) 2 x 12 2,400
7. Transport allowance- Rs. 18,600-(800 x 12) 9,000
8. Overtime allowance-Rs. 4000 4,000
Gross salary 1,73, 800
Children education – Rs. 100 per month per child for two children allowed.
Hostel expenditure Rs. 300 per child per month for two children allowed
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Perquisites
Casual emolument or benefit attached to
an office or positionin addition to
salary or wages
Something that benefits a man by going into hisown pocket
Whether perquisites should be given in Kind?
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Perquisites Need not be in kind.It can be in cash.
What are the conditions to be fulfilled to becomea perks?
Conditions
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1.Allowed by
Employer to
Employee4.Personal
advantage
To the
employee
5. Derived by
Virtue of
Employer’s
authority
3.Directly
Depend
upon service
2.Allowed during
Continuance
Of employment
Conditions
To become
perquisites
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Other conditions Employer and employee relationship should exist
at any point of time-need not be an employeenow.
Legal origin is important-Un authorizedadvantage taken by employee without employer’sauthority will not become perquisites.
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1.Rent free
Accommodation
Provided
By employer
4.PersonalObligations of
Employee
Met by
employer
5. Funds paidBy employer
Other than
RPF/Insurance
fund
3.value of
Benefits provided
Like furnitureIn the accommodation2.concessional
Accommodation
Provided
By employer
Perquisites
Includes
6.Fringe
Benefits
Allowed
To employeesOf Other
Than
companies
Accommodation Related(1-3)
Including sweeper,gardener,watchman,gas,electricity,
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Perquisites Taxable in the hands of employee
In the hands of employee
1. (R)ent free or concessional rent
accommodation
2. (S)weeper in the house, gardener,
watchman, personal attendant
3. Free/concessional
(g)as,electricity,water etc
4. (E)ducational facility to employee’s
family members including servantsand depentant, parents, spouse and
children(need not be dependent)
5. (L)eave travel concession beyond 2
travels in a block period
Short form(RSGEL)
Category – B
1.Car given by employer
2. Transport facility given by transport
undertakings except Railway and
airlines.
( only to Specified Employee)
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Special items in computation perquisites:
Rent Free accomodation(RFA)
Company’s House given at free of cost or rentedby company given to employee at free/cocessional
rent. Step1. Unfurnished Accomodation
Central or
State Government
employeesPrivate employees
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1.Central or state government
employee-RFALicense fee of flat determined by
central government is perquisites
in the hands of employee.
Fair market value of rent
is not important
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RFA-Government employee-
Exercise Exercise:- Mr. X is working in Central government
service given rent free accommodation in angovernment apartment at free of cost. The license fee
prescribed by government is Rs.3000 but fair rental value of the house is Rs. 10,000. How much is taxable?
Answer:-
Fair rent is not considered. The license fee Rs. 3,000 is
taxable in the hands of Specified employee.
2 Private Employees(RFA)
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2. Private Employees(RFA)
It depends on Population of the city whereaccommodation provided.
Exceeding population25 lakhs
Population beyond10 lakhs-Up to25 lakhs
Population Upto10 lakhs
OwnedBy
employer 15%of salary
or amount paid
By company
To outsider
Whichever
Is lower
Rented
By
company
Owned
By
employer
Rented OwnedBy
employer Rented
By
company15% of salary 10% of
salary7.5% of Salary
Population as per 2001 census
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Explanation to the diagram 1.If house property is owned by employer
depends on the population of the city percentage differs. Big city it is 15% of salary,
medium city it is 10% and small city it is 7.5%of salary for accommodation with out any facility like furniture.
If house is rented by employer given toemployee it is 15% of salary or rent paid by
employer whichever is less taxable forspecified employees irrespective of the type of city.
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If Furniture provided by employerIf rented
Actual hire
chargespayable
If owned
10% of original
Cost of furniture
Meaning o sa ary or RFA
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Meaning o sa ary or RFA
All Cash salary received or recivable in hand(including taxable allowances) by the employeehimself.
Excludes all *perquisites and *DA which will notcome under retirement purpose
If any allowance is exempted ( like HRA(partly),children educational allowance upto Rs.100 Permonth or transport allowance up to Rs. 800 permonth etc.) to the extent exempted is not
included in the meaning of salary but balance isincluded in the meaning of salary.
Exercise-RFA
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Exercise-RFA
Value of rent free accommodation : Preetham is sales manager of aprivate company and for previous year 2007-08,he received the following
(amts in Rs) Basic Salary 248000
Bonus 16000
Dearness allowance(forming part of salary) 30000
Project allowance 15000
Commission on sales 16000 City compensatory allowance 25000
Medical allowance 12000
He has been provided with a rent free accommodation in Bangaloreowned by the employer. The population of Bangalore may be assumed to
be 50 lakhs as per 2001 census Determine the taxable value of the perquisite in respect of rent free
accommodation.
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He has been provided with a rent free accommodation in jaipur ownedby the employer. The population of jaipur may be assumed to be15lakhs as per 2001 census
Determine : a) Meaning of salary for RFA b)the taxable value of the perquisite in respect of rent free
accommodation.
C) Calculate total taxable Salary
Solution: a) Meaning of salary:-
All Cash salary received or recivable in hand including taxableallowances by the employee himself.
Excludes all *perquisites and *DA which will not come under
retirement purpose
Any allowance is not taxed( like HRA(partly),children educational allowance upto Rs.100 Permonth or transport allowance up to Rs. 800 per
month etc.) are not included in the meaning of
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b)The valuation of rent free accommodation shall be: 15% of the salary i.e. 15% of (248000+ 16000+30000+15000+16000+25000+12000)=Rs 54,300 Note: Salary shall be taken on basis for the period for which
accommodation has been provided. Employer’s contribution does not come to the assessee in cash as it is paid
directly to the department. That is why I have mentioned the meaning of
salary is cash salary received by the assessee himself.
C) Calculate total taxable Salary Basic Salary 248000 Bonus 16000 Dearness allowance(forming part of salary) 30000 Project allowance 15000 Commission on sales 16000 City compensatory allowance 25000 Medical allowance 12000
Rent free accommodation 54300 Total Taxable Salary 416300
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Perquisites –Domestic servants,
free supply of gas, electricity etc Sweeper, gardener watchman personal assistant paid
by employer is perquisites to the extent of cost to theemployer.
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Monthly Fixed Education allowance Training of employees is not perquisites
Fixed educational allowanceRs.100 per child per month is exempted per child.
Maximum two children.Beyond is taxable Hostel Rs.300 per month per child
exempted.Maximum two children.Beyond it is taxableto the employee
Payment of school fees and re-imbursement of school fees
Taxable as perquisites fully
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Education facility to children(own) in their own
school or any other school/college If less than Rs. 1000 per month exempted
If exceeds Rs. 1000 per month
cost of education in similar institution in thenear locality (minus )Rs. 1000(minus) amountrecovered.
Example:- Employer pays Rs. 1500 per month to the
school selected by employee for three children andone grand children.How much is taxableperquisites?
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Leave travel concession for Family Any place in India Only travel short route permissible Two Journey in four block period allowed. If Journey is not taken place with in two years, in
the very next year if used it can be claimed. Flight- economy class fair allowed(not taxable). Train-Air conditioned first class fair allowed(Not
taxable) Note:- Only Journey expenditure is exempted. Two
children only who are born after 1st October 1998
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Employee’s obligation met by employer either giving money or
reimbursed is taxed in the hands of employee(17(2)(iv)) Example:1.Domestic servant’s salary reimbursed by
employer.
2.Gas connection in the name of the employee but
monthly gas bill paid by employer-Taxable to all employee whether specified or not.
3.If gas connection in the name of the company then there is no obligation to employer. Suchperquisites is taxable in the hands of Specifiedemployee.
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Valuation of Interest
free/concession loan Difference between SBI interest rate on 1st day of
the previous year-rate of interest charged by company from employee.
SBI rate:on 1st April 2007 are:- Housing loan morethan 5 years-10.75%, Upto 5 years-10.25%,educational loan upto 4 lakhs-11.5%, above4 lakhs-13.25%
Exceptions- see in the next slide
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Example X is employed by A Ltd. on 1st June 2007, he has takeninterest free Housing loan of Rs. 14,00,000.How muchis taxable?
Ans:Lending rate upto 5 years is 10.25% per annum 10.25% x 14,00,000=1,19,583 is taxable.
Suppose the interest charged by the company fromassessee is 6%, then how much is taxable?
=(10.25%-6%) x 14,00,000=Rs59500 taxable
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Perquisites in respect of movable assets given to
an employee for personal use. 10 % of Original cost of such asset purchased by
employer(- )reimbursed by employee
If taken on rental basis by employer:
Rent payable(-)reimbursed by employee
Note: It is not on WDV value
Medical facilities Medical facilities availed in employer’s hospital, is not
taxable
If private –Up to Rs.15000 is not taxable if reimbursed tospecified employees.