Session -5 &6 Computation of Total Income By B.Pani M.Com,LLB,FCA,FICWA,ACS,DISA,MBA

Heads of Income Salaries Income from House Property Profits and gains of business or profession Capital gains Income from other sources

Salaries Any salary due from an employer or former employer to any assessee in the previous year whether paid or not. Any salary paid in the previous year though not due or before it became due to him. Any arrears of salary paid or allowed to him if not charged to tax in earlier years.

Conditions to be satisfied Employer employee relationship Contract of service and not contract for service Salary is chargeable to tax either on due basis or on receipt basis whichever is earlier. The place of accrual of salary is the place where services are rendered. Partner’s salary is treated as income from business profession.

Salaries Includes i)Wages ii)Any annuity or pension iii)Any gratuity iv)Any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages. v)Any advance salary vi)Any payment received for leave not availed vii)The contribution made by the Central Govt to the account of an employee under a pension scheme.

Perquisite Includes Value of rent free accomodation Value of any concession in the matter of rent provided to the assessee by the employer. The value of any benefit or amenity provided free of cost or at concessional rate. Any sum paid by the employer in respect of any obligation payable by the employee. Any sum payable by an employer to effect an assurance on life or annuity

COMPONENTS OF SALARY Employee compensation Basic salaryAllowancesPerquisites / Local Benefits Retirals | 7

Perquisites do not include Value of any medical treatment for employee and his family in a hospital maintained by the employer. Reimbursement of expenditure incurred by the employee for his medical treatment and his family in Govt or other approved hospitals. Any portion of the premium paid by the employer to effect insurance on health of the employee and his family members. Any sum reimbursed in respect of medical expenditure incurred not exceeding Rs Any expenditure incurred by the employer for treatment of employee or his family members abroad.

Profits in lieu of salary Any compensation for termination or modification of terms of employment. Any payment received under keyman insurance policy. Any amount due to or received whether in lump sum or otherwise before joining the employment or after cessation of his employment

Deduction from salaries Entertain allowance granted to an employee who is in receipt of salary from the Govt a sum equivalent to one fifth of his salary or five thousand rupees whichever is lower. A deduction of any sum paid by the assessee on account of tax on employment.

Example Compute the salary income for Assessment year in the following cases Mr X is in Govt service receives Rs 4000 pm as basic salary Rs 500/- pm as DA and Rs 600 pm as entertainment allowance Mr Y is an Executive Director of a private company is in receipt of Rs 25000/- as basic salary and Rs 5000 pm as entertainment allowance. Mr Z is employed in a multinational company for a salary of Rs 1 lac pm. Value of taxable perquisite is Rs /- per year.He pays professional tax of Rs 2500/- for the year.

Answer ParticularsMr XMr YMr Z Salary DA Entertainment All Perquisites Total Less Ent. All Less Prof Tax Taxable Salary

Gratuity Sec 10 (10) Any death cum retirement Gratuity received by Govt employee is wholly exempt Any employee covered under payment of Gratuity Act the least of the following is exempt i)Rs /- ii)15 days salary based on last drawn salary for each completed year of service or part thereof in excess of six months

Pension Pension periodically received and commuted pension Uncommuted pension is taxable as salary in the hands of both Govt. and Non-Govt employees. Any commuted pension is exempt for Govt. Employee Any commuted pension received by non Govt employee is exempt as follows i)If receiving gratuity 1/3 rd of commuted value ii)If not receiving gratuity ½ of commuted value.

TAXABILITY OF COMPONENTS ComponentDescription Basic Salary Fully taxable Allowances House Rent Allowance (“HRA”) Allowance paid to meet the expenditure on rent As per Section 10(13A) of the Income Tax Act, 1961 (“the Act”), HRA is exempt upto the minimum of the following:  amount of HRA received  rent paid in excess of 10 percent of the basic salary  40/50 percent of the basic salary Conveyance Allowance Allowance to meet the expenditure for commuting to and from office Exempt upto Rs 800 pm, ie Rs 9,600 pa as per Section 10(14)

TAXABILITY OF COMPONENTS ComponentDescription Children education allowance Allowance for expenditure incurred by employee on children’s education Exempt from tax upto Rs.100 per month per child (for a maximum of two children) as per Section 10(14) Perquisites/Local Benefits Reimbursement of Car expenses (in lieu of conveyance allowance) Reimbursements in the nature of car maintenance, fuel, chauffeur's salary & insurance of the car Not taxed in the hands of employees FBT levied on 20% of expenditure and payable by the employer Medical Reimbursement Reimbursement for medical expenditure incurred by an employee Exempt from tax upto Rs 15,000 pa as per Section 17(2) FBT levied on 20% of expenditure upto Rs 15,000 by the employer

ComponentDescription AccommodationOwned by the employer 15% of salary (in cities having population exceeding twenty-five lakhs) 10% of salary (in cities having population exceeding ten lakhs but not exceeding twenty-five lakhs) 7.5% of salary in any other place Leased by the employer 15% of salary; or actual rent paid; whichever is lower Hotel accommodation 24% of salary; or actual charges; whichever is lower TAXABILITY OF COMPONENTS

ComponentDescription Retirals Contribution to Recognized Provident Fund (“PF”) Kind of retirement benefit provided to the employees Employer’s is exempt upto 12 percent of the basic salary Deduction under Section 80C is available to an employee with respect to employee’s contribution to PF which is equal to employer’s contribution

Valuation of Furnished Accomodation 10% of the cost of furniture to be added to the value of the unfurnished houe.

Salary for the purpose of valuation of Accomodation It includes the pay,allowances, bonus or commission but does not include i)Dearness Allowance or Dearness Pay ii)Employer’s contribution to provident fund iii)Allowances exempt from tax.

Example Mr X has been provided with furnished accomodation at Delhi. The WDV of the furniture works out to be Rs 3000 where as the actual cost is Rs 27000/-.Mr X draws Rs 15000/- pm as basic pay and Rs 2500 as monthly commission,Calculate the value of perquisite of rent free accomodation

Answer Basic Pay-15000x12= Commission 2500x12=30000 Total Rs Value of accomodation= 15%= Rs 31500/- Value of furniture 10 %= Rs 2700/- Value of the furnished accommodation= Rs 34200/-

Example Mr X the director of P Ltd had following income during the year ; Basic Salary Rs 3500 pm, DA Rs 500 pm, HRA Rs 600 pm.Rent paid for his house in Kolkata is Rs 750/- per month. X and the company each contributed 12.5% of salary to the recognised provident fund. Compute the taxable salary in the hands of Mr X.

Answer Basic Salary 3500x12= Rs 42000/- DA 500x12= Rs 6000/- HRA Rs *= Rs 3000/- Employer’s contribution in excess of 12% of salary Rs 48000x.5%= Rs 240 Gross salary Rs 51240/- *Least of the following i)Actual rent paid over 10% of salary= =4200 ii) Actual HRA received Rs 7200/- iii) 50% of Salary Rs 24000/-

Valuation of Rent free Accommodation in case of Govt Employees The value of such accomodation is equal to the licence fees determined by the Central or State Govt in accordance with the rules frame in this regard.

Salary for different purposes Employer’s contribution to PF- Basic salary, DA if provided in terms of employment and commission as a percentage of turnover. Entertainment Allowance- Only basic salary and excludes all allowances and perquisites. Gratuity- Basic salary, DA if provided in terms of employment and commission as a percentage of turnover. Leave salary- Basic salary, DA if provided in terms of employment and commission as a percentage of turnover.

HRA- Basic salary, DA if provided in terms of employment and commission as a percentage of turnover of relevant period. Relevant period means the period during which the said accommodation was occupied. Accommodation-It includes the pay,allowances, bonus or commission but does not include i)Dearness Allowance or Dearness Pay ii)Employer’s contribution to provident fund iii)Allowances exempt from tax.

Example X posted at Mumbai receives salary of Rs 10000/- pm. His employer contributes Rs 15600/-PM to PF. His other allowances are Project Allowance of Rs 36000/- and medical allowances of Rs 3000/-. He gets 0.5% commission on a turnover of Rs /-. He got reimbursement of Rs 25000/- for medical treatment of his wife in a private nursing home.He has been provided with a car with driver the cost of which is Rs 60000/- pa.Calculate taxable salary of Mr X

Answer Salary Rs /- Project Allowance Rs 36000/- Medical Allowance Rs 3000/- Commission 0.5% Rs 2400/- Medical reimbursement =Rs 10000/- Car with Driver Nil Contribution in excess of 12%= =Rs912/- Taxable salary =Rs /-

Example X received basic pay Rs , special allowance Rs 9000,entertainment allowance Rs 8000 and reimbursement of medical expenditure Rs He has been provided with rent free furnished flat in Mumbai with lease rent of Rs Some of the household appliances are provided costing Rs 36000/- wef 1 st June 2008.The company pays hire charges of Rs for three ACs provided throughout the year.Calculate the value of Rent free accomodation (i) X as a Govt Employee paying licence fee of Rs 4000 (ii) X as a employee in pvt sector.

Answer If X is a Govt employee Rs 4000 is taxable value of the unfurnished flat If X is a employee in private sector 15% of Rs ( )= Rs 26850/- 10% of cost of furniture=36000*10%*10/12=Rs 3000 Add rent of air conditioner Rs 10000/- Valuation of furniture Rs 13000/- Value of rent free furnished accommodation (i)As Govt employee Rs =Rs 17000/- (ii)As pvt employee Rs =Rs 39850/-

Example Mr Shah retires on 31/10/2008 voluntarily from Zuari Agro Ltd as per the scheme approved u/s 10(10C) of Income Tax Act. He furnishes the following particulars ; Salary Rs 5000pm,Pension Rs 3000 pm, DA forming part of basic Rs1000pm, Compensation on retirement Rs , Gratuity Rs , Commuted pension of 70% Rs on 31/01/2009,Leave salary of Rs 30000, Service period 20 years and eight months, Leave availed while in service 25 months. But for Voluntary retirement Mr Shah would have retired only after 40 months.The last increment he received was in 2007.Compute his taxable income for the AY

Gratuity Least of the following is exempted i)Rs /- ii)Half month salary for 20 years 6000/2*20=Rs iii)Actual gratuity Rs Rs 60000/- being the least is exempt and balance Rs 60000/- is taxable

Pension Uncommuted pension before the date of commutation 3000*3=Rs 9000/- Uncommuted pension after the date of commutation 3000*30%*2=Rs 1800/- Commuted pension Rs 42000/- Less exempt1/3 rd of 42000/70*100=Rs 20000/- Taxable commuted pension= Rs 22000/- Total taxable pension = = Rs 32800/-

Compensation on voluntary Retirement Least of the following is exempt i)20*3*6000=Rs360000/- or 40*6000=Rs /- which ever is lower Rs /- ii)Rs /- iii) Actual amount of compensation received Rs /- Rs /- being the least of above is exempt

Leave Salary Least of the following is exempt i)Cash equivalent of leave to the credit of employee (20 months-25 months)Nil ii) 10 months salary 6000*10=Rs 60000/- iii) Amount notified Rs /- iv) Actual leave salary Rs 30000/- Rs Nil being the least is exempt, balance Rs 30000/- is taxable

Computation of taxable salary of Mr Shah Salary 5000*7= Rs 35000/- DA 1000*7=Rs 7000/- Pension Rs 32800/- Compensation on voluntary retirement Nil Leave salary Rs 30000/- Total Taxable salary Rs /-

Relief U/S 89 If any person receives any portion of his salary in arrears or in advance he can claim relief in terms of Sec 89. The relief has to be computed in the following manner 1.Calculate the tax payable on the total income including the additional salary of the relevent previous year in which the same is received. 2.Calculate the tax payable excluding the additional salary of the relevant previous year in which the same is received

3.Find out the difference 4.Compute the tax on the total income after excluding the additional salary in the previous years to which such salary relates. 5.Compute the tax on total income after including the additional salary in the previous year to which such salary relates. 6.Find out the difference between 4 and 5 The excess of tax computed at 3 over 6 is the amount admissible as relief.

Example During the financial year ending 31 st March 2009 Mr X an employee of a public sector undertaking is paid Rs as basic salary and Rs as arrear of salary for the year During the financial year X has received Rs /- as salary. X deposited Rs 10000/- and in PPF for the year and respectively. Calculate the relief u/s 89.

Answer Taxable income on receipt basis Taxable income on accrual basis Salary Arrear salary60000 Gross salary Standard deduction20000 Net Income Less deduction under 80C Taxable income Tax Rebate u/s Tax & surcharge

Relief u/s 89= =2656