IncomeIncome under the headunder the head "SALARIES"

TAXATION

AnAn overview overview

• Section 15: Chargeability

• Section 16:i) Entertainment Allowance ii) Profession Tax.

• Section 17: Definition 1) Salary 2) Perquisites 3) Profit in lieu of salary

• Exemptions: Sections 10(5) to Sec 10(14) • IT Rules: 2A-HRA Sec.10(13A) 2B LTC/LTA 10(5) 2BA Voluntary Retirements/Separation. 2BB Spl. allowances.

Section 15 - Chargeability :Section 15 - Chargeability :

• Any amount, due or received by an employee, from an employer & falling within the meaning of the term salary, is chargeable to tax under the head Salaries.

• Employer – Employee relationship is important.

• Contract of Service v/s contract for service.

Section 17: Salary : Definition:Section 17: Salary : Definition: U/S 17 (1) is an inclusive definition.

Sec 17(1) defines- Salary includes:

i) Wagesii) Any annuity or pension.iii) Any gratuityiv) Any fees, commissions, perquisites or profits

in lieu of salary.v) Any advance salary.

Taxation- salaryTaxation- salaryvi) Leave encashment.vii) The annual accretion to recognized P/F to the extent of the

following : a) Employers' contribution in excess of 12% b) Interest on the balance in P/F a/c credited in excess of 9.5%viii) The accumulated transferred balance from

unrecognized P/F a/c to a recognized P/F to the extent it is chargeable.

ix) Contribution made by Central Govt or any other employer under pension scheme referred to in Sec.80CCD.

Taxation - SalaryTaxation - SalarySection 17(2) defines perquisites to include value of benefits such as :

i) Rent free accommodation

ii) Concession in rent

iii) Value of benefit amenity (only in case of specified employees)

iv) Any sum paid on behalf of employee

v) Any premium towards LIC policy or contract if annuity.

vi) Value of other fringe benefits.

Sec. 17(3) Profits in lieu of Salary:

It includes:i) Any amount of compensation due/received from employer or former

employer or in connection with: a) Termination of employment b) Modification of terms & condition of employment.

ii) Any payment due/received from P/F or any other fund or any sum received under key man insurance policy including bonus on such policy (but does not include payments from superannuation fund, gratuity, commuted pension, retrenchment compensation, HRA, employees contribution to P/F & interest thereon.)

iii) Any amount received in lump sum or otherwise by any assessee from any person before his joining any employment with that person or after cessation of his employment with that person.

COMMENTS:COMMENTS:1. Employer/Employee relationship.

2.Salary & Wages conceptually not different.

3. Salary can be from more than one source.

4. Salary may be from:

Past Employer

Present Employer

Prospective Employer

5. Salary must be real & not fictitious

6. Foregoing of salary: Salary is taxed on due basis. Hence once salary has accrued it is taxable.

Taxation -SalaryTaxation -Salary7.Surrender of Salary: If an employee surrenders his salary u/s 2 of

Surrender of Salaries (Exemption from taxation act 1961), the salary so surrendered would be excluded.

8.Salary is taxable on due or receipt basis, whichever is earlier.

9.Place of accrual of salary income:• Normally the place of accrual of is the place where service is

rendered. Therefore, even if non-resident is paid salary outside India for services rendered in India, it is taxed as salary is deemed to accrue or arise in India.

• However, salary paid by the Govt. to Indian citizen but paid outside India is deemed to accrue and arise in India.

• Allowances/perquisites paid by Govt. outside India are exempt.

10.Different forms of Salary• Advance Salary : Taxed on receipt basis.• Arrears of Salary : Taxed on receipt basis

if not taxed earlier on due basis.• Leave Salaries : separately discussed.

11.Defination of Salary for the purpose of calculation of various benefits/perquisites is different.

Taxation - SalaryTaxation - Salary12.Exemptions: I] Leave Travel Concession: Section 10(5) Value of travel concession or assistance received by an individual

from his employer/former employer for himself or his family:• On leave to any place in India• To any place in India after retirement from service or after

termination from service is exempt.

Family : means spouse and children, parents, brothers & sisters wholly dependant on individual.

(w.e.f 01.10.98,this exemption will not be available to more than to surviving children (Restriction is not applicable to children born before 01.10.98 and also to multiple births after this date)

Other PointsOther Points a) No. of trips: Two in a block of 4 calendar years. Present block:2010-2013.

b) Amount of Exemption not to exceed following limits subject to actual amount spent:

• If journey is conducted by air: Economy class fare of national carrier by shortest route.• Any other mode: a) Where rail service is available - Air conditioned Ist class railway fare by the

shortest route.

b) Where rail service is not available and: i) recognised public transport system does not exist- An amount equivalent to the air conditioned Ist class rail fare for the

distance by the shortest route as if the journey was under taken by rail.

ii) recognised public transport system exists- An amount equivalent to Ist class or deluxe class fare of such transport

by shortest route.

Taxation -Sa la ryTaxation -Sa la ryII] Gratuity: Section 10(10) It is a lump sum amount paid to an employee ,on the basis of duration

of service, at the time of retirement or termination of services. Exemption from tax is as under: a) For Govt. employees : Fully exempt

b) For other employees covered under payment of Gratuity Act, 1972: Exempt amount will be minimum of: i) 15 days salary for every completed year of service. ii) Rs. 3.5 lakhs iii) Actual Gratuity amount. Calculation : salary last drawn x 15 days x No. of completed years. ---------------------------------------------------- 26 days(6 months and above to be rounded off to 1 year. Fraction less than 6 months

to be ignored.)

Salary last drawn = Basic + D.A

c) For other employees NOT covered under payment of Gratuity Act 1972: Exempt amount will be minimum of: i) Rs. 3.5 lakhs ii) Half months salary (on the basis of last 10 months average)

for every completed year of service, fraction to be ignored. iii) Gratuity amount actually received

Calculation : Years of service X Average salary / 2

Salary = Basic + D.A + Commission as a % of turnover

Illustration: Mr.Shyam ,an employee of ABC ltd.,receives gratuity of Rs.90000 under

payment of Gratuity Act. He retires on 14th August,2009 after rendering service of 32 years and 4 months. Last drawn salary was Rs.3250. Calculate gratuity chargeable to tax.

Actual Gratuity Rs.90000

Less Exempt U/S 10(10)Least of :i) Rs.3.5 lakhsii) 15/26 X 32X 3250 = Rs.60000iii) Gratuity actually received = Rs.90000

Exempted Gratuity Rs.60000 -------------------- Taxable Gratuity Rs.30000 --------------------

Taxation – Salary Taxation – Salary • Pension :Periodic payment received

after retirement.• Pension may be commuted or un

commuted.• Commuted : Lump sum payment in

lieu of periodical payment• Un commuted : It is periodical

payment received every month

Taxation - salaryTaxation - salary• Employee can commute part of the

pension in which case remaining part will be received periodically.

• Un commuted pension is taxable in the hands of both – Govt as well as Non Govt employee.

• Commuted pension received by Govt servant is exempt.

Taxation - SalaryTaxation - Salary• Commuted Pension in the hands of non

Govt employee is exempt as under :• If employee is in receipt of gratuity: 1/3 rd of the amount of commuted

pension, which he would have received had he commuted the whole amount

• If employee is not in receipt of gratuity: ½ of the commuted amount had he

commuted whole pension Will be exempt and balance amount

taxable.

Taxation - salaryTaxation - salary• Illustration:• On 30th June,2009, Mr. Santosh retires

from Central Govt service and gets pension of Rs. 3000/- per month up to 31.1.2010.With effect from 1.2.2010, he gets 1/3 rd of his pension commuted for Rs.1,20,000/-

• Calculate his taxable pension for A.Y.2010-11.

Taxation - salaryTaxation - salary• Taxable pension of Mr. Santosh:• 1. Un commuted pension before date of commutation 3000 X 7 = 21000 2.Uncommuted pension after the date of commutation 3000X2/3X2 = 4000 3.Commuted pension 120000 exempt 120000 -------- nil• Taxable Pension = 25000

Taxation - SalaryTaxation - Salary• Illustration:Mr. Kamath retires from X

Ltd from 31.10.2008.He gets pension of Rs.2000/-per month up to

31.10.2009. Wef. Nov.1,2009 he gets 60% of pension commuted for Rs.30000/-He is not in receipt of gratuity.

Calculate taxable pension.

Taxation -Salary Taxation -Salary • Taxable pension of Mr. Kamath: 1. Un commuted pension before the date of commutation: 2000x7 = 14000 2. Un commuted pension after date of commutation 2000x5 *.4= 40003. Commuted pension 30000 Less Exempt ( 30000X100/60X1/2 ) 25000 5000Taxable Pension 23000 Exercise :4.8 page 141 4.12 page 144

Taxation -SalaryTaxation -Salary• Leave Salary : sec.10 (10AA)• Means encashment of leave standing to ones credit.• Leave encashment during continuation of job taxable • Leave encashment on retirement :Govt Employee : Fully exemptNon Govt Employee : Encashment is limited to the minimum

of :Cash equivalent of leave salary (on the basis of average salary

of last 10 months)10 months average salarySpecified amount Rs. 3 lakhs ( w.e.f. 1.4.98)

Taxation – Salary Taxation – Salary • Salary means Basic+ DA +Commission based on fixed

percentage of turnover• Average salary :Average of Salary drawn during last 10

months preceding retirement.• Steps to be taken:• 1. Find out average salary = Basic +DA +Com average for last 10 months• 2.Completed years of Service : Retirement Date less Joining

date – take completed years• 3.Leave due :Completed years of service x30 days• 4. Leave balance : Leave due less leave availed• 5. Cash equivalent of leave = average salary x leave

balance• Exempt Leave encashment Minimum of ; cash equivalent of

leave, Rs. 3 lakh and actual leave salary received

Taxation - salaryTaxation - salary• Illustration:• Mr X an employee Siemens Ltd receives

Rs.80000/- as leave salary at the time of his retirement on 28th Feb,2010.Average salary drawn during last 10 months – Rs.3000/-. His last drawn salary was Rs.3200/-Duration of his service was 24 years and 7 months. Leave taken while in service is 9 months. Leave entitlement as per employers rules is one and half month for every completed year. Calculate taxable leave for A.Y.2010-11.

Taxation – salary Taxation – salary • Taxable leave salary of Mr. X:• Leave due 24 months• Leave taken 9 months• Leave balance 15 months• Exempt • Actual Leave salary 80000• Minimum of • Cash equivalent 3000x15 =45000• 10 months salary 10x3000 =30000• Specified amt Rs. 3 lakhs• Actual leave salary =80000 30000• Taxable leave salary 50000• Exercise : 4.16 PAGE 147

Taxation - SalaryTaxation - Salary• Retrenchment Compensation :sec10(10B):• Compensation received by a workman at

the time of retrenchment is exempt to the extent of lower of the following :

• Amount calculated under Industrial Disputes Act,1947 ( 15 days average pay for every completed year of service or any part thereof in excess of 6 months)

• Rs.500000/-

Taxation – Salary Taxation – Salary • Compensation under Voluntary retirement

scheme:• Eligible Employees :Employees of• A public sector company• Any other company• Authority established under Central/ State Govt• Local Authority• Co operative society• University/IIT

• Institute of Management notified by Central Govt.

Taxation - salaryTaxation - salary• Guidelines under Rule 2BA:• VRS Scheme to be in accordance with following guidelines:• It applies to an employee of the co. who has completed 10 years

of service or completed 40 years age.• It applies to all employees including workers and executives

excepting directors of the co.• Scheme to result in overall reduction in strength of employees of

the co.• The vacancy caused is not to be filled up• Retiring employees not to be employed in another co. under the

same management• The amount of compensation not to exceed the amount equivalent

to 3 months salary for every completed year of service • or salary at the time of retirement multiplied by the balance

months of service left before the date of retirement or super annuation whichever is lower.

Taxation – salary Taxation – salary • Amount of exemption :• Least of the following will be exempt:• 1. Last Drawn salary x 3x completed years

of service or Last drawn salary x remaining months of

service – whichever is lower.2. Rs. 5 lakh3. Actual amount of compensation.Last drawn salary : Basic + D.A( if provided

in terms of employment)+ commission as fixed % of turnover.

Taxation -SalaryTaxation -Salary• Illustration:• Mr. Sashtri aged 52 years and put in

20 years of service in public sector undertaking voluntarily resigns. His last drawn salary is Rs.20000/-. He has 7 years and 2 months left for his retirement. He is paid Rs. 12 lakhs as Compensation under VRS.

• Calculate his taxable compensation.

Taxation - SalaryTaxation - Salary• Calculation of Taxable compensation:• Actual Compensation : 12 Lakhs• Least of the following is exempt• 1) 20000X3X20 =12 LAKH

OR 20000x86= 17.20 lakh Lower of the two = 12 lakh 2) Monetary ceiling = 5 lakh 3) Actual Compensation 12 lakh Least of these amount will be exempt = 5 lakhsTaxable compensation = 7 lakhs.