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Friday, September 16, 2011

Taxation of salary components - Part 2

Continuing the previous article on taxation of salary components, in this part I will discuss taxation on various allowances and perquisites among the components.
      A.      Allowances:
1.       Allowances that are fully taxable-
                                             i.            Dearness allowance
                                           ii.            Overtime allowance
                                          iii.            Fixed medical allowance
                                         iv.            City compensatory allowance
                                           v.            Interim allowance
                                         vi.            Servant allowance
                                        vii.            Any cash allowance

2.       Allowances that are partially taxable-
                                             i.            House rent allowance (HRA) [ sec 10(13A)]:
HRA grant to employees is exempt to the least of following:
Metro cities
(Delhi, Mumbai, Kolkata, Chennai, Bangalore)
Other cities
1) Allowance actually received
1) Allowance actually received
2) Rent paid – 10% of salary
2) Rent paid – 10% of salary
3) 50% of salary
3) 40% of salary
1)      Salary here includes = basic salary + dearness allowance + commission as fixed % of turnover
2)      Exemption is available to employees who actually pay rent for the period the accommodation is occupied

                                              ii.      Special allowances [sec 10(14)]:
1)      Children education allowance is exempt upto Rs. 100 per month per child for maximum of 2 children
2)      Hostel expenditure allowance is exempt upto Rs. 300 per month per child upto maximum of 2 children
3)      Transport allowance exempt upto Rs. 800 per month
4)      Tribal area allowance exempt Rs. 200 per month
5)      Allowance granted to transport employees to meet expenses (Running truck, etc.) is exempt upto 7)% of such allowance or Rs. 6000 per month whichever is less.

3.       Allowances that are fully exempt :-
a)      Allowances granted to government employees outside India
b)      Allowances granted to high court or supreme court judges
c)       Allowances paid by the United Nations Organization
d)      Compensatory allowance received by a judge
There are certain deductions allowed from gross salary (Sec 16) those are discussed here:-
a)      Deduction for entertainment allowance- e.g. Sumptuary allowance
This deduction is allowed only to Government employees to the extent of least of following-
                                             i.            Rs. 5000
                                           ii.            (1/5) th of basic salary
                                          iii.            Actual Entertainment allowance received

       b)      Professional tax-
The tax paid by assessee for tax on employment. If profession tax is paid by the employer the deduction for this is maximum Rs. 2500 per year.

      B.      Perquisites :-
The values of any other benefits apart from those mentioned above are included in perquisites.
(i)                  Rent free accommodation provided by the employer to the employee.
(ii)                Accommodation provided at concessional rate which is not owned by the employer.
(iii)               Any benefit provided by the employer to the employee (whether free of cost or at concessional rate).
(iv)              Any obligation of the employee met by the employer.
(v)                Any sum paid by the employer, directly or indirectly or through a fund, to keep assurance on the life of the assessee or to effect a contract for an annuity( other than a DLI Fund, RPF and Approved Superannuation Fund).
(vi)              The value of any fringe benefit which is not chargeable to tax under Fringe Benefit Tax, provided by the employer to the employee.

Note: Following points is to be noted:
(i)                  Perquisites in point No. (i) to (v) is taxable in the hands of all employees whether specified or not.
(ii)                (ii) Perquisites in Point No. (vi) is taxable in the hands of Specified Employees only.
(iii)               Specified Employees:
Specified Employee is an employee who
(a) is a director of the employer company.
(b) is an employee who has (shareholding of > 20 %) in the company
(c) an employee who draws Rs. 50,000.00 or more during the P/Y. For calculating Rs. 50,000 all monetary payments is to be included.

v  Perquisites which are exempt in the hands of all employees:-
1.       Any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of family member A) in a hospital maintained by the government or any local authority or in any other approved hospital
B) IN a hospital approved by Chief Commissioner for the medical treatment of prescribed diseases
2.       Group Medical Insurance taken by an employer or reimbursement of medical insurance premium paid by the employee on his own health or on health of any family member
3.       Any sum paid or reimbursed by employer for medical treatment not exceeding Rs. 15000
4.       Goods manufactured by employer sold to employees at concessional rates
5.       Amount spent on training of employees
6.       Gifts not exceeding Rs. 5000 per annum
7.       Free lunch facility (Exempt upto Rs. 50 per day)
8.       Club Facility

Only the exempt perquisites are covered here. There are other perquisites which are provided by an employer as mentioned in the first few points of perquisite above. In case of any suggestion comments are always welcome. Keep commenting!!

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