SALARY INCOME

The Basic Concepts Relationship b/w Payer & Payee More than one source Director Lecturer MP/MLA More than one source Former/present/prospective employer Foregoing salary is salary income Surrender of salary u/s 2 of VSS Act,1961 Tax free salary Voluntary payment v/s contractual payment Comp for death, injury ??

Salary-basis of charge u/s 15 The following income shall be chargeable to income-tax under the head Salaries (a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not; (b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him; (c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year. [Explanation 1].For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due. [Explanation 2.Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as salary for the purposes of this section.]

Basis of Charge Salary is taxable on due or receipt basis whichever is earlier Method of accounting of employee not relevant

Deductions from salaries 16. The income chargeable under the head Salaries shall be computed after making the following deductions, namely : [(ii) a deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee who is in receipt of a salary from the Government, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less;] [(iii) a deduction of any sum paid by the assessee on account of a tax on employment within the meaning of clause (2) of article 276 of the Constitution, leviable by or under any law.]

Salary defined u/s 17(1) For the purposes of sections 15 and 16 and of this section, salary includes (i) wages; (ii) any annuity or pension; (iii) any gratuity; (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; (v) any advance of salary; (va) any payment received by an employee in respect of any period of leave not availed of by him; (vi) the annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule; (vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule 11 of Part A of the Fourth Schedule of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof; and (viii) the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD

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

Computation template Income from Salary XXX Income by way of allowances YYY Taxable value of perquisites PPP Gross Salary GGG Less: Deduction u/s 16 Entertainment allowance AAA Professional tax BBB Income from salaries ZZZ

Leave Encashment Fully chargeable to tax if received during continuity of employment (whether govt/non-govt employee) Govt Employees: At time of retirement is fully exempted from tax u/s 10(10AA)(i) Non govt employee: fully or partly exempt if received at the time of retirement depending on conditions

Leave Encashment( cont.) NON GOVT employees – leave encashment at the time of retirement: Exemption is granted to the extent of least of the following: 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) 10*average monthly salary The amt. specified by the government i.e Rs.3,00,000 Leave encashment actually received at the time of retirement

Terms defined Leave standing to credit: [No of years of service(ignore fractions) * Leave allowed per year (max 30 days per yr) – leave encashed]/(30) Salary for this purpose means basic salary and includes DA if terms of employment so provide commission 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)

Gratuity 2. Gratuity is a retirement benefit 1.GRATUITY WHILE IN SERVICE IS FULLY TAXABLE 2. Gratuity is a retirement benefit Government employee –fully exempt Non-government employee covered by Payment of Gratuity Act -fully or partially exempt under section 10(10)(ii) Non-government employees not covered by the Payment of Gratuity Act ,1972- fully or partially exempt under section 10(10)(ii)

Gratuity(cont.) IN CASE OF GOVT EMPLOYEES: wholly exempt In case of employees covered by 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 (excl bonus,comm,HRA,allowances) how to determine 15 days salary – calculated as salary last drawn *15days/ 26 days

Gratuity (cont.) In the case of non govt employee NOT covered by Payment of Gratuity Act , least of the following is exempt from tax: Rs 3,50,000 Half month’s average salary for each completed year of service 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 Case 1. Pension from UNO It is not chargeable to tax Case 2. Pension received by the family of armed forces Case 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.) Case 4: Pension received by employee who has joined employment after January 1, 2004. Case 5: Pension received in any other case Tax treatment : New Pension Schemes rules apply Tax treatment: Rules apply

Pension-Case 5 –u/s 17(1)(ii) Uncommuted Pension Commuted Pension Govt. /Non Govt Employee Govt. Employee Non-Govt. Taxable Exempted from Tax u/s 10(10A)(i) It is fully or partly Exempt u/s 10(10A)(ii)

Commuted Pension(cont.) Status of Employee Govt employee Non Govt. Employee Gratuity recd/not With or without Gratuity Gratuity is received Gratuity is not received Exemption u/s 10(10A) Exempted Fully 1/3 of normal exempt ½ of normal is exempt

PERQUISITES Any benefit in addition to salary and wages. Any sum paid by the employer which otherwise would have been payable by the employee. Cash ?? or kind Legal origin Beneficiary: Spouse Parents Children Servants Dependents

Perquisites defined u/s 17(2) (in brief) Rent free acco Concession in acco Any benefit/amenity granted to specified employee Employees obligation discharged by employer Employee funding annuity/life ins (except by way of RPF/SF) Any other fringe benefits or amenity as may be prescribed

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 ONLY when Employer is NOT liable to pay FBT 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 ( Rs.50 within office hours exempted) B5 Gift voucher beyond Rs.5000 B6 Club Membership & credit Card

SPECIFIED EMPLOYEE A director - 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 . Exclude/deduct: non monetary benefit and exemptions like HRA Deduct entertainment allowance and prof. tax but , since the minimum exemption limit is Rs.1,50,000, practically all tax payers are specified employees !!!

Perquisites not taxable in hands of non-specified employee Sweeper/gardener/watchman/personal attendant Gas/electricity/water for house Education facility to family members LTC (upto twice in block of 4 years). Medical facility Car or conveyance Transport facility by transport undertaking (not railways/airline)

Rent Free Unfurnished Accomodation Categories: Central & State Government Employees Excl local auth,incl on deputation Private Sector Employees Accommodation: Farmhouse Hotel/motel/guest house Caravan Ship Floating str

Central & State Govt. Employees Basis of valuation: equal to license fee set by the State/Cent Govt for allotment of houses to its employees Accommodation provided to : MPs Judges of High Court Supreme Court Official of Parliament Ministers

Private Sector Employees Basis of valuation: Population of the place exceeding 25 lakhs : 15 % of salary where employer owns acco else - lower of lease rent or 15% of salary Population between 10-25 lakhs : 10% of salary where employer owns acco Others : 7.5% of salary where employer owns acco

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 Salary to be taken on accrual basis More than one employer?

Exceptions to accommodation rules It is not applicable to an accommodation located in a remote area (40 kms from town with population LT 20,000) and in a mining, project ,oil exploration site Where on account of transfer, an employee is given two accommodations, only one will be taxed for 90 days. Beyond 90 days the lesser of the two will be taxed.

Rent free furnished accommodation (not being a hotel) Step 1: Find out the value of the accommodation without the value of the furniture Step 2 : Now 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 accommodation in a Hotel It includes accommodation in a motel, guest house. The value of perquisite is the lower of the two. 24% of salary paid during the period when accommodation is taken or Actual bills paid by the employer (not taxable if provided for 15 days in a P.Y. and when an employee is transferred)

Accommodation at a concessional value Value is determined as follows: Find out the value of accommodation as if it is NOT provided at a concession Deduct the value of rent charged from the employee

Perquisite of free domestic servants Where value is actual cost to employer in all cases : Sweeper/watchman/gardener/personal attendant 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 accommodation , they are not valued separately

Valuation of gas, electric energy or water supply All assessees are taxable Value = cost to employer (mfc. cost/amt paid to 3rd party) – amt recovered from employee

Free Education Training of employees Education/Hostel allowance for children 100/300 pm pc (max2 ) School fees paid/reimbursed by employer Education facility owned by employer Exempt upto Rs1000 pm pc (max? ) Else: MV-amt recovered-1000 If beneficiary is not a child, then MV-amt recovered Scholarship ??

Any Questions ??? Thank you

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 Expenses met by Employee - Not taxable Expenses met or reimbursed by Employer - Official purpose only - Not taxable Conditions apply  - Used for private purpose Value= actual expenses – amt recovered

Motor car perquisite( Cont.) Car owned by employee (cont.) -Partly used for private purpose Find actual expense incurred by employer Less amount used for official purpose ie.Rs.1200pm up to 1.6lts engine cubic capacity & Rs.1600 above 1.6 lts CC Also add Rs 600pm for chauffeur (if any) Value = Actual exp. – deemed(official) -- amt. recovered from employee

2.When Car is owned or hired by Employer Expenses met/reimbursed by employer Wholly used for official purpose - Not taxable Conditions apply  Wholly used for personal purpose Value= Actual exp+10% cost of car-recovery Partly official & partly personal- -sum of Rs.1200 up to 1.6 ltrs engine capacity -sum of Rs.1600 beyond 1.6 ltrs capacity -add Rs 600pm for chauffeur ignore recovery

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 - recovery c) Partly official & partly personal- -sum of Rs.400 upto 1.6 ltrs engine capacity -sum of Rs.600 beyond 1.6 ltrs capacity -add Rs 600pm for chauffeur ignore recovery

When Vehicle (except car)is owned by Employee and exp met by employer Official purpose only - Not taxable Conditions apply  Partly official & partly personal- Value= Actual exp - Rs 600pm (or higher) - recovery

Misc issues – free car perquisite Month – means full month- ignore part of month Where 2 or more cars are allowed One car valued as partly official Rest valued as used for personal use only Car at concessional rate Car facility b/w office and residence Conveyance facility for judges (HC/SC)

Amt payable by employer to effect assurance on life of employee Taxable except in case of RPF SAF Grp Ins scheme ESIS Fidelity guarantee schemes

Interest free loan (or concession) Loan is a perquisite To calculate value, find: Max O/S amt on the last day of each month Benchmark similar SBI rate as on 1st April of PY Find interest o/s on monthly balance Value=such interest – recovery 2 Exemptions: Loan for medical treatment Loan amt LT Rs 20,000

Use of movable assets Value = cost to employer – recovery Cost = 10% of actual cost or rental Computers/laptops are excluded

Movable assets sold to employee at nominal price Value = Cost – DEP – recovery DEP: Electronic items/ Computers 50% for each completed year by reducing balance method Motor cars 20% for each completed year by reducing balance method Other items 10% of actual cost for each completed year

Perquisites taxable ONLY if Employer is not liable to pay FBT Employers not liable to pay FBT: Individual/sole proprietor HUF Govt Political party RBI/SEBI Charitable institute

1. Free Transport Value= cost to employer – recovery NIL for employees of railways/airlines If employer is any other transport undertaking FMV-recovery

2. Lunch/Refreshment Any allowance is fully taxable Value = cost to employer – recovery In remote area/offshore location-NIL Tea/snacks in working hrs-NIL Non transferable paid vouchers: Rs 50 exempt per meal Else, Value = cost- Rs.50-recovery

3.Travelling,touring,accommodation Value = cost to employer – recovery What about? Spouse accompanying on official tour? Official visit extended to personal tour?

4. Gift, voucher or token Exempt up to Rs. 5000 provided It is not in cash/equivalent Ex. Diwali gift of a watch+cash of Rs.10,000

5. Credit card Value = cost to employer – exp on official use-recovery Exp incurred by employer: Membership fee Annual fee Cost of add on cards Official use subject to conditions

6.Club expenditure Value = cost to employer – exp on official use-recovery Imp issues: employee or household Paid/reimbursed by employer Health club/sports facilities to all employees?? Corporate membership fees? Official use subject to conditions

Any Questions ??? Thank you