Meaning of salary: As per Indian Income Tax Act Salary includes:-
- Wages
- Annuity or pension
- Any gratuity over and above the exemption limit
- Any fees
- Commission
- Any advance salary
- Amount contributed by the employer towards the recognized provident fund in excess of 12% of salary
- Interest on balance in RPF in excess of specified limit.
- Value of any perquisites
- Any benefits given to the employee by the employer
- Any amount of profit in lieu of salary
- Arrears of salary received in current year but not taxed in earlier years.
- Leave encashment etc.
Explanations:
Leave salary: If received during employment, is taxable. Salary received on retirement, is taxable subject to certain conditions.
Salary in lieu of notice period: is taxable in the year, it is received.
Pension: Pension is an annuity received by an employee after his retirement. Periodical pension is fully taxable. Commuted pension is exempt subject to certain conditions.
Pension received by a widow: (generally called family pension) falls under the head ‘Income from other sources’.
Profit in lieu of salary:
- Any compensation due to or received by an employee from his employer or former employer at or in connection with the termination of his employment or modification of the terms and conditions relating thereto.
- Any Payment (Other than Receipts exempt from tax) under section 10, due to or received by employee from his employer or former employer or from a provident fund or other fund to the extent it does not consist of contributions by the assessee or interest on such contributions or any sum/bonus received under a Keyman Insurance Policy.
- Any amount whether in lump-sum or otherwise, due to or received by an assessee from his employer, either before his joining or after leaving the employment.
Tax on Salary borne by employer:
When the salary is paid ‘tax free’, that is, the tax due on the salary is paid in to government account by the employer, the employee has to return in his total income the gross salary i.e. the aggregate of the net salary received plus the amount of tax paid on his behalf by the employer. It does not make any difference whether the tax is borne by the employer voluntarily or under a contractual obligation.
RECEIPT IN THE NATURE OF EXEMPT FROM INCOME TAX
There are few receipts under head of salary income which are exempt subject to certain conditions. Those terms and conditions are not explained here in details because the purpose of writing this term is only to give brief and basic idea of income tax act for learners. Following are few receipts which are exempt from income tax:-
- Leave Travel Concession
- Gratuity
- Commuted pension
- Leave encashment
- Retrenchment compensation
- Payment on Voluntary retirement
- Traveling allowance on tour or on transfer, including any sum paid for packing and transportation of personal effects on transfer.
- Daily allowance or tour or for the period of journey on transfer.
- Conveyance Allowance – Rs.1600/= per month.
- Transport allowance Rs.3200/= per month granted to an employee, who is blind or orthopaedically handicapped with disability of lower extremities to meet his expenditure for the purpose of commuting between the place of his residence and the place of duty.
- Any allowance granted to meet the expenditure incurred on a helper where such helper is engaged for the performance of official duties.
- Any allowance granted for encouraging the academic research and training pursuits, in educational and research institution.
- Uniform allowance.
- Children education allowance Rs.100/= per month maximum for 2 children.
- Any allowance to meet the expenditure on hostel on his child Rs. 300/= per month, maximum for 2 children.
- Gratuitous payment to widow/legal heirs if the employee who dies while in service.
- Any income by way of pension received by Government employees or family pension received by any member of family, who has been awarded Param Vir Chakra/Maha Vir Chakra/Vir Chakra/other notified gallantry award.
- Any allowance in lieu of rent free accommodation paid to High Court Judges or Supreme Court Judges.
- House Rent Allowance (HRA) exemption (u/s10) is entitled least of the following :-
- Actual HRA received, or
- Rent paid in excess of one-tenth of salary or
- 50% of salary if the accommodation is situated at Delhi, Mumbai, Kolkata, or Chennai or
- 40% of salary if the accommodation is situated at any other place.
Note: HRA will not be exempt if the residential accommodation is occupied by the assessee, is owned by him or the assessee has not actually spent any expenses on account of rent.
The employee who is receiving the HRA up to a certain limit, is not required to produce the rent receipts. However, at the time of regular assessment, the employee has to produce the rent receipt.
For this purpose of calculation of exemption of HRA, Salary includes Dearness Allowance if the terms & conditions of employment so provide i.e. where Dearness Allowance is taken into account while calculating Provident Fund & Allowance etc.
PERQUISITES: Perquisites are a gain or profit incidentally made from employment in addition to regular salary.
TAXABLE PERQUISTES: Following are few perquisites which are taxable under head ‘salary income’:-
- Value of rent free accommodation.
- Value of any accommodation provided by employer at concessional rent.
- Any sum paid by the employer in respect any obligation which but for such payment, would have been payable by the assessee.
- Value of any other benefits or amenity as may be prescribed, such as free meals, club facility, credit card, gift, interest free or concessional loans, etc.
PERQUISITES NOT TAXABLE: There are certain perquisites which are not taxable and not added in ‘salary income’. Following are such perquisites which are exempt from income tax:-
- Value of medical treatment provided to an employee or his family member in a hospital maintained by his employer.
- Reimbursement of expenditure incurred on medical treatment of an employee or his family member in a Government approved hospital (like CHS or CGHS)
- Reimbursement of expenditure incurred by the employee in a hospital approved by the Chief Commissioner in connection with the medical treatment of the employee or any member of his family. This concession will be admissible for treatment of prescribed diseases or ailments. The employee is required to attach with his return of income:-
- A certificate from hospital of disease.
- A receipt of amount paid to hospital
- Medical insurance premium paid by the employer for the health of the employee or his family member under a scheme approved by the Central Government.
- Reimbursement of expenditure incurred on medical treatment of an employee or his family member up to Rs.15000/=.
Note: Family for this purposes means: The spouse, children of employee and the parents, brother & sisters, wholly or mainly dependent on individual.
- Free meal of value up to Rs.50/= per meal provided by the employer during office hours at business premises
- Gift or Gift Voucher up to a certain specified limit in a year. If the value of Gift Voucher is more than that specified limit then whole amount shall be taxable. The specified limit for this purpose for financial year 2016-17 is Rs.5000/=.
- Tea or snacks provided during office hours.
- Free meals during working hours provided in a remote area or a offshore installation.
Difference Between Allowances and Perquisites::- From the point of view of employer, both are the expenses, incurred by employer for employees. But in case of allowances, these are received by the employee in cash to meet some specific expenses on regular basis whether these expenses are incurred or no by the employee.In case of perquisites, the expenses are incurred by the employer on behalf of employee.
PERMISSIBLE DEDUCTIONS FROM SALARY INCOME
- Professional Tax
- Interest on home loan taken.
- Deduction under chapter VI-A of Indian Income Tax Act. Certain payments made by employees are permitted as deduction from salary income subject to certain terms and conditions. For example:-
- Life Insurance Premium
- LIC Pension Plan (Jeevan Suraksha).
- Contribution of Notified Pension Scheme.
- Deposit in Public Provident Fund Account.
- Repayment of housing loan. (Principal amount only)
- Donation for charitable purposes subject to certain terms and conditions.
- Medical Insurance Premium for self up to Rs.20000/= (Rupees 30000/= in case he/she is senior citizen .
- Additional deduction for medical insurance premium will be allowed for parent(s) for Rs.25000/= (Rs.30000/= if the insured person is senior citizen).
- Expenses incurred on Preventive Health check up is allowed up to Rs.5000/=. This amount can be paid in cash also. Same rules for preventive health check up applies for parents also. Please note that the amount spent on preventive health check up will be included in amount on medical insurance premium. Total of preventive health check up expenses and medical insurance premium must not exceed the permissible limit under section 80D.
- With effect from 01.04.15, any expenses incurred for medical treatment of any parent or parents, who is very senior citizen and not covered under medical insurance, is allowed up to Rs.30000/=. Very senior citizen means the person who has completed 80 years in the relevant financial year.
- Interest on loan taken for higher education from any financial institution.
- Tution fees of the children
- Donation for charitable purpose subject to certain terms and conditions.
- Expenditure on rent if the employee is not in receipt of house rent allowance.
- Installment paid for home loan taken.
- Contribution to Public Provident Fund.
- Investment in Infrastructure bonds.
- Fix deposit with banks for five years.
- Investment in National Saving Certificate etc.
Illustration:-
Mr. X was the employee of M/s XYZ during financial year 2016-17. He received the following amounts from his employer:-
1. Basic Salary Rs700000/=
2. Conveyance Allowance Rs.60000/=
3. House Rent Allowance Rs.240000/=
Mr. X spent the following amounts against salary income:-
- Rent paid Rs.300000/=
- Medical Insurance Premium for self Rs.8000/=
- Expenses incurred in respect of preventive health check up of his wife Rs.4000/=
- Deposit in Public Provident Fund Account Rs.100000/=
Other Information:-
- Mr. X does not own any residential accommodation.
- His Employer Had deducted Employee’s Contribution for Provident fund Rs.60000/=
- Mr. X lives in Delhi and he is 46 years old..
Compute his income from salary for financial year 2016-17.
Solution:
| INCOME FROM SALARY | |||
| Basic Salary |
700000 |
||
| Conveyance Allowance |
60000 |
||
| Less: Allowed as deduction Rs.800/= p.m. |
19200 |
40800 |
|
| House Rent Allowance |
240000 |
||
| Less: Allowed as deduction |
230000 |
10000 |
|
| (see notes) | |||
| Gross Total Income |
750800 |
||
| Less: Deductions under Chapter VI-A | |||
| Contribution to P.F. (u/s 80-C) |
60000 |
||
| Deposit in PPF (u/s 80-C) |
100000 |
||
|
Total |
160000 |
||
| Gross deduction allowed u/s 80-C) |
150000 |
||
| Preventive health check Expenses of his wife(u/s 80-D) | 4000 | ||
| Medical Insurance premium (u/c 80-D) | 8000 |
12000 |
162000 |
| Net Taxable Salary Income |
588800 |
Working Notes:
1. Maximum Deduction Allowed u/s 80-C is Rs.150000/=
2. Maximum deduction allowed u/s 80-D Rs.25000/=
3. Conveyance Allowance granted to an employee u/s 10, to meet his/her expenditure for the purpose of commuting between the place of his/her residence and the place of his/her duty is allowed maximum Rupees 1600/= per month..
4. HRA:- (u/s 10)
| Deduction against HRA u/s 10 will be allowed least of the followings: | |||
| HRA RECEIVED |
240000 |
||
| 50% of Basic Salary |
350000 |
||
| RENT PAID |
300000 |
||
| Rent paid Rs.300000 minus 10% of basic salary Rs. 700000 |
230000 |
Rupees 230000/= is the lowest amount among above figures. Therefore, Rupees 230000/= will be allowed as deduction against HRA received.
| Illustration:- | |
| Mr. X had the following income during financial year 2016-17:-. | |
| Calculate the tax liability of Mr.X. | |
| PARTICULARS | AMOUNT |
| (IN RUPEES) | |
| SALARY FROM M/S XYZ LIMITED | 2000000 |
| INTEREST ON FDR FROM CITI BANK | 60000 |
| INTEREST FROM FDR – HDFC BANK | 5000 |
| INTEREST FROM PERSONAL LOAN | 3000 |
| INTEREST ON PPF ACCOUNT | 30000 |
| DIVIDEND RECD FROM MUTUAL FUNDS | 20000 |
| HIS EMPLOYER DEDUCTED HIS CONTRIBUTION TO P.F. | 70000 |
| HE DEPOSITED IN PUBLIC PROVIDENT FUND ACCOUNT | 80000 |
| HE MADE THE REPAYMENT OF HOUSE LOAN | 300000 |
| HE PAID INTEREST ON LOAN FOR RESIDENTIAL HOUSE PROPERTY | 110000 |
| HIS EMPLOYER DEDUCTED TDS ON SALARY | 420000 |
| TDS DEDUCTED BY BANK ON INTEREST ON FDR | 6000 |
| Solution:- | |||
| NAME | MR. X | ||
| STATUS | INDIVIDUAL | ||
| ASS. YEAR | 2017-18 | ||
| PAN | AAAAS1111K | ||
| DATE OF BIRTH | 12.12.1980 | ||
| COMPUTATION OF INCOME | |||
| INCOME FROM SALARY | |||
| SALARY RECEIVED (AS PER FORM – 16) – XYZ LTD. | 2000000 | ||
| INCOME FROM HOUSE PROPERTY | |||
| INTEREST ON LOAN FOR RESIDENTIAL HOUSE PROPERTY | -110000 | ||
| INCOME FROM OTHER SOURCES | |||
| INTEREST ON FDR – CITI BANK | 60000 | ||
| INTEREST FROM FDR – HDFC BANK | 5000 | ||
| INTEREST FROM PERSONAL LOAN | 3000 | ||
| INTEREST ON PPF (EXEMPT) 30000/= | 0 | ||
| DIVIDEND RECD (EXEMPT) 20000/= | 0 | 68000 | |
| 1958000 | |||
| GROSS TOTAL INCOME | |||
| LESS : DEDUCTIONS (CHAPTER VI-A) | |||
| SEC-80-C | |||
| CONTRIBUTION TO P.F. | 70000 | ||
| PPF | 80000 | ||
| REPAYMENT OF HOUSE LOAN | 300000 | ||
| GROSS DEDUCTIONS | 450000 | ||
| DEDUCTIONS RESTRICTED TO | 150000 | ||
| NET TAXABLE INCOME | 1808000 | ||
| TAX ON ABOVE | 367400 | ||
| ADD: EC + S&HEC 3% | 11022 | ||
| TOTAL TAX PAYABLE | 378422 | ||
| LESS: TAX PAID | |||
| TDS ON SALARY | 420000 | ||
| TDS ON INTREST ON FDR | 6000 | 426000 | |
| NET REFUND DUE | 47578 | ||
| CALCULATION OF INCOME TAX | |||
| PARTICULARS | INCOME | TAX RATE | TAX |
| UP TO 250000 | 250000 | 0 | 0 |
| FROM 250001 TO 500000 | 250000 | 10% | 25000 |
| FROM 500001 TO 1000000 | 500000 | 20% | 100000 |
| 1000001 ONWARDS | 808000 | 30% | 242400 |
| TOTAL | 1808000 | 367400 | |
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