*Gist of Income Tax Provisions related to SalaryIt is that time of the
year, when the employers are trying to finalize the deduction of tax from
salary paid to employee and the employees on the other hand are trying to
arrange for the proofsand making a last dash towards any other method for
reduction of TDS. In the beginning ofFebruary, the final TDS calculations
are made and the employer makes an account of TDS already deducted and the
amount that has to be adjusted from the final salary payments.With that at
the outset, let us look at a few important salary provisions under the
Income Tax Act(the “Act”) and their impact on the salary and TDS
calculations thereon; Income chargeable under the head salary:Basically any
income received by an employee from the employer by virtue of the employer
employeerelationship will be charged as salary in the hands of the
employee. Further, the Act makes specific mention of the following
situations, namely;a. where salary is received before it is due (advance
salary),b. salary not received (outstanding salary), andc. salary received
of previous years (arrears of salary) All the above would be chargeable to
tax under the head salary.Here it may be pertinent to note that, any
salary, bonus or remuneration received by a partner ofa firm, from the firm
shall not be regarded as income from salary. The same shall be charged as
income from business or profession, in the hands of the recipient
partner.Deductions from salary:The Act (currently) provides for two
specific deductions from the salary income;a. entertainment allowance (only
for government employees) of an amount equal to onefifth of his salary or
five thousand rupees, whichever is lessb. tax on employment (profession
tax)Salary includes:As per the provisions of the Act, salary specifically
includes the following;i. wagesii. any annuity or pension iii. any
gratuityiv. any fees, commissions, perquisites or profits in lieu of or in
addition to any salary orwagesv. any advance of salaryvi. any payment
received by an employee in respect of any period of leave not availed of by
himvii. the annual accretion to the balance at the credit of an employee
participating in arecognised provident fund, to the extent to which it is
chargeable to tax under rule 6of Part A of the Fourth Schedule viii. the
aggregate of all sums that are comprised in the transferred balance as
referred toin sub-rule (2) of rule 11 of Part A of the Fourth Schedule of
an employeeparticipating in a recognised provident fund, to the extent to
which it is chargeable to tax under sub-rule (4) thereofix. the
contribution made by the Central Government [or any other employer] in
theprevious year, to the account of an employee under a pension scheme
referred to insection 80CCD From the above definition it can be seen that
any payment received by an employee by virtue ofthe employer-employee
relationship shall be regarded as income from Salary, in the hands of
therecipient.Perquisites: Now let us shift our attention to the word
“perquisites”. Perquisites would mean any benefitreceived by an employee
from an employer either free of cost or at a concessional rate. Somecommon
examples are rent free accommodation, ESOP’s, use of motor car, furniture,
so on and so forth. We will look into a few commonly used perquisites more
in detail now;a. Rent free accommodation/ Concessional rent accommodation:
Where the employerprovides accommodation to the employee without any
consideration (rent free), or at a concessional rate, the value of such
accommodation or such concession in the matter ofrent, will be deemed to be
the value of perquisite received by the employee and added tothe income
from salary of the employee. Now the question arises, how do we value the
benefit received by the employee. Thefollowing table provides the valuation
mechanism for such perquisite;Sr.No.Particulars Valuation Mechanism1
Unfurnished Accommodation owned by the employerValue of perquisite =
(Specified rate X salary) –rent recovered from the employeeSpecified rate
is defined as;a. 15% of salary in cities having population> 25 lakhsb. 10%
of salary in cities having population 10lakhs > < 25 lakhsc. 7 ½ % of
salary in any other place2 Unfurnished Accommodationis leased or rented by
theemployerValue of perquisite = (Actual Lease rent or 15%of salary,
whichever is lower) – rent recovered from the employee3 Furnished
Accommodationowned by the employerValue of perquisite = valuation as per
point 1above as increased by the value of furniture, i.e.10% of the cost of
the furniture if it is owned by the employer or actual rent paid, if the
furniture isleased4 Furnished Accommodation isleased or rented by
theemployerValue of perquisite = valuation as per point 2above as increased
by the value of furniture, i.e. 10% of the cost of the furniture if it is
owned bythe employer or actual rent paid, if the furniture isleasedFor the
purpose of this clause, salary includes the pay, allowances, bonus or
commissionpayable monthly or otherwise, but does not include i. Dearness
Allowance (unless it enters into computation for retirement benefits),ii.
Employers contribution to Provident Fundiii. Value of perquisitesiv.
Allowances which are exempt from taxb. The value of any benefit or amenity
granted or provided free of cost at a concessional rate in the following
cases;i. By a company to an employee who is a directorii. By a company to
an employee who has substantial interest in the companyiii. By any employer
to an employee other than the above, whose income from salary, excluding
non-monetary benefits, exceeds Rs. 50,000/-.An example would be the
provision of vehicle for personal use. It would be pertinent tonote that in
case the vehicle has been provided by the employer to the employee for
journey from residence to office or other place of work, or from office or
place of work toresidence, it shall not be considered as perquisite.c. Any
sum paid by employer in respect of any obligation which would have been
payable by the employee.Eg. payment of salary to household staff, etc.d.
The value of any specified security or sweat equity shares allotted or
transferred by theemployer, either free of cost or at a concessional rate.
The value of perquisite = the fair value of the shares on the date the
option is exercised bythe employee – the amount actually paid or recovered
from the employee in respect of thesame.e. Interest free loans or loans at
concessional rate of interest: The value of benefit to the employee from
Interest free loans or loans at concessional rate of interest, advanced
bythe employer (or any other person on his behalf) to the employee or any
member of thehousehold of such employee is considered as a perquisite. The
value to be considered is the amount of interest charged by the State Bank
of India as on the 1st day of the relevantprevious year for loans advanced
for the same purpose. The interest is to be calculated onthe maximum
outstanding monthly balance reduced by the amount of interest, if any, paid
by such employee or the member of the household.However, no amount will be
considered as a perquisite if any of the following conditionshave been
satisfied;i. The amount of loan advanced is less than Rs. 20,000/-, or ii.
The loan is advanced for medical treatment of specified diseases.It is
important to note here that, the exemption in case of loan advanced for the
medicaltreatment of specified disease shall not be allowed on the amount
reimbursed to the employee under medical insurance scheme.f. The value of
any other fringe benefit or amenity as may be prescribed.Exemptions &
DeductionsWe have considered what constitutes salary, what are perquisites
and the valuation mechanism thereof. Now let us move on to certain
exemptions available in regards to income from salary;1. House Rent
Allowance (HRA): House rent allowance, as the name suggests, is anallowance
received by an employee towards the rent expenses incurred by him for his
place of residence.Under the Income Tax Act, 1961, HRA is exempt to the
extent of Least of the following;a. Actual HRA receivedb. Actual rent paid
less 10% of salaryc. 50% of salary in case the accommodation is situated in
Mumbai, Delhi, Kolkata or Chennai and 40% of salary in case of any other
cityNaturally, if the employee resides in a house owned by him, there won’t
be any rentexpenditure and hence the exemption will be NIL. This particular
exemption has raised many questions as regards the applicability in a few
peculiar situations. Let us consider afew common situations and the
applicability of HRA thereof;a. Where the employee owns a house and resides
in the same: As mentioned above, where no rent expenditure has been
incurred, the exemption under this section will beNIL.b. Where the employee
owns a house in another city and pays rent for premises leasedin the city
of work: In this case, since the employee incurs expenditure towards rent
the exemption will be calculated as mentioned above.c. Where the employee
owns a house which is under construction (in the same city) andpays rent
for premises leased for residence: In this case again, the exemption should
be allowed to the employee as expenditure has been incurred towards
residential rent.d. Where the employee owns a house which has been given
out on rent, and he pays rentfor another accommodation in the same city:
The plain reading of the provisions would suggest that the exemption should
be allowed since expenditure towards renthas been incurred.Note: The above
examples are just indicative. The allowability of the exemptionshall vary
based on the actual facts of the case. 2. Gratuity: The amount of gratuity
received by an employee from his employer (present orpast) on death,
retirement or termination of employment shall be exempt from tax subjectto
the limits prescribed.The amount of gratuity that is exempt from income tax
is as under; a. Actual amount of gratuity receivedOrb. If covered by
Gratuity Act: 15 days (last drawn) salary for every completed year
ofservice or part thereof in excess of 6 months (month to be considered of
26 days) If not covered by Gratuity Act: Half months average salary for
every completed yearof service (average salary of last 10 months)Orc. Rs.
10,00,000/-Whichever is LeastHence from the above, the maximum amount which
shall be exempt from tax will be Rs. 10,00,000/-.3. Commuted Pension:
Normally pension payments are periodic payments (monthly)received by the
employees. In certain cases the employee may request the employer topay a
lump sum amount, which is called commuted pension. Commuted pension is
exempt to the extent of 1/3rd of pension if gratuity is also received, or
50% of pension ifno gratuity is received. Conversely, any uncommuted
pension received is taxable underthe head Salary.4. Voluntary Retirement
Scheme: In case of approved voluntary retirement scheme, and subject to
fulfillment of prescribed conditions, the exemption shall be the least of
thefollowing;a. Actual amount receivedb. Three months salary for each
completed year of servicec. Last drawn salary multiplied by the balance
months of service left before retirement d. Rs. 5,00,000/-5. Leave Salary
Encashment: Leave salary encashment refers to situations wherein
theemployee encashes the leave standing to his credit, i.e. un-availed
leave. The taxation ofleave salary encashment is as follows; a. Leave
encashment during the term of service is taxableb. Leave encashment at the
time or retirement/ resignation is exempt to the extent of least ofthe
following;i. Actual amount receivedii. 10 months average salary iii. Rs.
3,00,000/-iv. No. of months of leave to the credit of employee multiplied
by his average salaryFor the purpose of the above calculation, leave to the
credit of the employee refers to theleave entitled as reduced by leave
availed and leave encashed already. 6. Travel Concession: The value of
travel concession or assistance received by anemployee from the employer in
respect of him proceeding on leave with his family,subject to such
conditions as have been prescribed. (Rule 2B of the Income Tax Rules) The
above are some of the more important exemptions from the salary income,
which we havedealt in detail.Before we conclude, let us consider a few
practical points that need to be taken care of;1. The employee should
provide the details and the proofs of investments on time to enable the
employer to consider the tax saving investments and accordingly deduct
tax.2. The employee should disclose any other income, like bank interest,
interest on fixeddeposits, income from house property, salary from other
employer, etc to enable the employer to consider the same.3. In case of
HRA, the proof of rent agreement & rent receipts should be provided on
time.4. The employer should take into consideration the interest paid and
the principal repayment towards housing loan.5. The employer should take
utmost care in calculation of valuation of exemptions andperquisites.6. The
employer shall take into consideration the conveyance allowance of Rs.
800/- per month and the medical reimbursement of expenses upto Rs.
15,000/-, while making thecomputation of salary.7. The deduction of
profession tax should be done as notified.8. The payment of TDS deducted,
the profession tax deducted, employer and employee contribution of
provident fund should be paid on a timely manner to avoid late paymentpenal
consequences.There are certain provisions of salary, which have a different
treatment for governmentemployees. This article has been prepared keeping
in mind the requirements of non-government and corporate employees.*
*Author:*
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Kannan
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