SALARY INCOME

What is salary?  Payer & Payee  More than one source  Foregoing salary is salary income  Tax free salary should include the tax paid by the employee

Basis of Charge  1. Salary is chargeable to tax when it is due to be paid whether it is paid or not.  2. Salary is chargeable to tax when any amount is paid whether it is due or not  3. Arrears of salary paid to employee is chargeable to tax.

Salary means-  Basic salary and allowances  Annuity  Gratuity  Commission  Perquisite in lieu of salary  Advance salary  Employers contribution to PF  Leave salary

House Rent Allowance The least of the following is exempt from tax: 1.50% of Salary where the assessee lives in Mumbai, Delhi,Chennai & Calcutta and 40% in other cases 2.Actual HRA received 3.Excess of rent paid over 10% of Salary. (Salary for HRA means basic salary & DA& commission based on % of turnover,if it is part of retirement benefits) No other allowances are included

Allowances:  Conveyance: Exempted upto Rs.800 per month if used for travel between home and place of work  Medical expenses: Exempted when it is a reimbursement of actual expenses upto Rs Beyond this limit, it is taxable.  Fixed Medical allowance is taxable  City compensatory allowance is taxable in all cases

Allowances(cont.)  Tiffin allowance: It is taxable  Servant allowances: It is taxable  Education allowance is Rs.100 per month per child upto TWO children

 Leave travel concession is exempted twice in a block of FOUR years.  It is available to Indian citizen for proceeding on leave for himself and his family (family includes spouse, children, dependent parents,brother and sister)  Amount of exemption is the actual fare paid for travel anywhere in India by the economy class airfare of national carrier by shortest route, or first class air conditioned rail fare, or any other mode not exceeding the shortest first class rail fare.

Provident Fund Statutory Recognised Public Unrecognised PF PF PF PF Employees Eligible for No deduction Contribution Deduction U/S 80C U/S 80C Employers Contribution Exempted N.A. Exempt from tax upto 12% Interest Exempted upto No tax Taxable 9.5%

Provident Fund (cont)  Lumpsum withdrawn at the time of retirement Statutory PF: Exempt Recognised PF : Exempt PPF : Exempt Unrecognised PF: Employees contribution exempted -Employers contribution is taxable and interest earned is also taxable

GOVERNMENT EMPLOYEES GETTING LEAVE ENCASHMENT AT TIME OF RETIREMENT: Govt employee at that time is exempted from tax. While leave encashment while in service is taxable Leave Encashment

NON GOVERNMENT EMPLOYEES GETTING LEAVE ENCASHMENT AT TIME OF RETIREMENT/ LEAVING THE JOB He is exempted on basis of least of the following: 1.period of earned leave (in no.of months) to the credit of employee at the time of his retirement or leaving the job)*(average monthly salary) 2.10*average monthly salary 3. the amt. specified by the government Rs.3,00, leave encashment actually received at the time of retirement Leave Encashment( cont.)

Salary for this purpose means 1.basic salary and includes 2.dearness allowances if terms of employment so provide 3.Commision if it is fixed % based on turnover It is calculated on the basis of average salary drawn during the period of 10 months immediately preceding the retirement.( date wise) No of days leave allowed as per IT Act is 30days per annum or as per the company rule if it is less than 30 days HOW TO FIND OUT AVERAGE MONTHLY SALARY?

GRATUITY 1.GRATUITY WHILE IN SERVICE IS FULLY TAXABLE FOR ALL 2. GRATUITY PAIDV AT THE TIME OF RETIREMENT BENEFITS- A) Government employee –fully exempt B) Non-government employee - Covered under Payment of Gratuity Act is fully or partially exempt under section 10 -Not covered by the Payment of Gratuity Act,1972- fully or partially exempt under section 10

GRATUITY (cont.)  IN CASE OF GOVT EMPLOYEES: wholly exempt  IN CASE OF EMPLOYEES COVERED UNDER PAYMENT OF GRATUITY ACT: 15 days salary based on last drawn for each year of service (26 days a month as working days) Rs.3,50,000 gratuity actually received (the least of the above 3 is exempt from tax)

GRATUITY (cont.)  how to find length of service -if 6mths or less then ignored else taken as 1 full year  what is salary: Salary means last drawn by employee and includes dearness allowance  how to determine 15 days salary -calculated by dividing salary last drawn by 26 days

GRATUITY (cont.) IN CASE OF OTHER EMPLOYEES NOT COVERED UNDER PAYMENT OF GRATUITY ACT:  1. Rs 3,50,000  2. Half month’s average salary for each completed year of service  3. Gratuity actually received

GRATUITY (cont.)  AVERAGE MONTHLY SALARY: Salary for 10 months immediately preceding the month in which the employee has retired  Salary for this purpose means- basic salary - dearness allowance( if taken for benefits) - Commission if it is fixed % on turnover  No of years in service is rounded of to full completed years in service

PENSION 1.Pension from UNO 2.Pension received by the family of armes forces 3.Family pension received by family members after the death of employee It is not chargeable to tax Exempted Taxable as in the hands of recipient as income from other sources

PENSION (cont.)  Pension received by employee who has joined employment after January 1, Tax treatment : Rules apply  Pension received in any other case Tax treatment: Rules apply

Pension Uncommuted Pension: (Monthly) Taxable in case of Govt. & Private Sector Employees Commuted Pension: (Lumpsum) a) Govt. Employees are exempted fully b) Private sector exempted as per rules

COMMUTED PENSION (cont.) Central /state Govt, Local authority employee Non Govt. Employee With or without Gratuity Gratuity is received Gratuity is not received Exempted Fully 1/3 of normal Exempted ½ of normal is exempted

PERQUISITES It means any benefit in addition to salary and wages. Any sum paid by the employer which otherwise would have been payable by the employee. Eg. Rent free house accommodation, car, amenities provided free of cost, concessional interest on housing loan, etc Any sum payable through a fund other than to a PF The benefit should be from the employer to be charged as salary It could be in cash or kind It should have a legal origin

Perquisites taxable (Category A Perquisites taxable in the hands of all employees (fringe benefit tax whether payable or not by employer )  Furnished /Unfurnished house without rent or at a concession (not in a remote area, house for MPs, and stay in hotel on transfer not exceeding 15 days)  Service of sweeper, gardener( not taxable for non specified employee)  Education facility to employees family members (not taxable for non specified employee)

Perquisites taxable (with or without FBT)  Contribution by employer to effect an assurance on the life of the employee or to effect an annuity  Interest free loan( exempted for loan not exeeding Rs.20000, or loan for medical treatment)

Perquisites taxable (Category B) B1.Car or other automotive conveyance ( not taxable for non specified employee) B2. Transport facility by a Transport undertaking( not railways & airlines) B3 Traveling touring accomodation B4 Free Food & Beverage B5 Gift voucher beyond Rs.5000 B6 Club Membership & credit Card

SPECIFIED EMPLOYEE  A director is a specified employee  An employee who holds 20% or more voting power (called substantial interest)  Where an employee is drawing salary of more than Rs.50,000 per year ( without considering non monetary benefit and exemptions like HRA) but, since the minimum exemption limit is Rs.1,10,000, practically all tax payers are specified employees.

Rent Free Unfurnished Accomodation  Classified as Central & State Government Employees  Private Sector Employees

 Accomodation provided to MPs, judges of High court & Supreme Courts, employees who are in Govt. service being provided accomodation by virtue of their employment is exempted from any tax Central & State Govt. Employees

Valuation of Rent Free Unfurnished Accommodation (private sector) Population as per 2001 census Property owned by Employer Leased or rent Above 25 lakhs15% of salary for the period Amount of lease rent or 15% of salary Between lakhs 10% of salary for the period Same as above Any other7.5% of salary for the period Same as above

Meaning of salary for House accomodation  Salary includes – - basic salary - DA ( if terms of employment provide) - bonus, commission, fees - all other taxable allowances - any monetary payment chargeable to tax, but not monetary payments in the nature of perquisite

Exception to accomodation rules  It is not applicable to an accomodation located in a remote area( 40 kms from town) and in a mining, project,oil exploration site  Where on account of transfer, an employee is given two accomodation, only one will be taxed for 90 days. Beyond that the lesser of the two will be taxed.

Furnished accomodation  Step 1: Find out the value of the accomodation without the value of the furniture  Add 10% of the value of furniture if owned by employer or actual hire charges when hired ( Furniture includes TV, fridge, radio and any household appliances)

Furnished accomodation in a Hotel It Includes accomodation in a motel, guest house. The value of perquisite is the lower of the two.  24% of salary paid during the period when accomodation is taken or  Actual paid by the employer (not taxable if provided for 15 days in a P.Y. and when an employee is transferred)

Accomodation at a concessional value Value is determined as follows:  Find out the value of accomodation as if it is not provided at a concession  Deduct the value of rent charged from the employee

Perquisite of free domestic servants  When servants are engaged by employee and reimbursed by employer, taxable in all cases  When engaged by employer only specified employees are taxable  Servant allowances are always taxable  If servants are provided in a rent free accomodation, they are not valued separately

Valuation of gas, electric energy or water supply  All assesses are taxable except non specified employees

Valuation of Interest Free Loan  If a loan is given by an Employer to the employee which is interest free, it is a perquisite chargeable to tax.  The rate of interest for calculating the value of the perquisite is ‘ the rate of interest charged by State Bank of India on the first day of the relevant P.Y’.

Perquisite of Motor Car Perquisite in respect of motor car is taxable only when the employer is not liable to fringe benefit tax (like sole proprietor, HUF, charitable institutions, etc) Private company employees will not pay any tax.  1.Car is owned by Employee  2. Car is owned or hired by Employer a) Expenses met by Employer b) Expenses met by Employee

Motor car perquisite  Car owned by Employee a) Expenses met by Employee - No Tax b) Expenses met or reimbursed by Employer - Official purpose only No tax - Used for private purpose-actual expenses less recovery taxable -Partly used for private purpose (cont. next slide)

Motor car perquisite( Cont.) Car owned by employee (cont.) -Partly used for private purpose 1) Find actual expense incurred by employer 2) Less amount used for official purpose ie.Rs.1200 upto 1.6lts engine capacity & Rs.1600 above 1.6 lts 3) Balance is the value less if any recovered from employee

2.When Car is owned or hired by Employer  A. Expense by employer a) Used only officially No tax b) Wholly used for personal- all expense paid by employer c) Partly official & partly personal- -sum of Rs.1200 upto 1.6 ltrs engine capacity - sum of Rs.1600 beyond 1.6 ltrs capacity

2.When Car is owned or hired by Employer (cont.)  B. Expense & maintenance by Employee a) Used only officially, not perquisite so no tax b) Wholly used for personal- 10% of cost for wear & tear c) Partly official & partly personal- -sum of Rs.400 upto 1.6 ltrs engine capacity - sum of Rs.600 beyond 1.6 ltrs capacity and Rs.600 for chauffeur

Deductions from salary  Standard Deduction- No deduction is available now.  Professional Tax paid in this year  Entertainment allowance: available only for Government employees