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

Notes-

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!!

Taxation of Salary Components - Part 1

The term salary in income tax includes any emoluments so received by providing adequate service or with the completion of duties. It includes:-

·      Wages, Salary due during the previous year

·      Advance salary , Arrears salary, Bonus

·      Annuity or pension

·      Gratuity

·      Fees ,commission, perquisites or profits in addition to salary / wages

·      Any payment received for any period of leave not availed

·      Cash allowance

·      Any sum received under key man insurance policy

And any other payment received by an employee from the employer received during the year.

Employer-Employee relationship –

To charge income under head salary, it is essential that employee has earned such income from his employer. So employer-employee relationship must exist. It is similar to master-servant relation. Exception where employer-employee relationship doesn’t exist:

·         Remuneration received by a director of the company

·         Remuneration received by partner of a firm

·         Salary received by the MP or MLA

The salary income is chargeable to tax under the head “income from salaries” which is due / paid / which represents arrears paid.

Salary payments and its components-

A)   Salary payments that are fully taxable:-

            1.       Basic salary, Wages

            2.       Advance salary

            3.       Arrears salary  

            4.       Commission

            5.       Fees

            6.       Contractual bonus

            7.       Annuity

            8.       Remuneration for extra work

B)    Salary payments that are partially taxable:-

            1.       Gratuity [sec10(10)]

Government employee - Any death cum retirement gratuity received by an employee of the central government, state government or local authority is exempt from tax.

For Non-Government Employees the taxability depends on whether Gratuity is covered under the Gratuity Act, 1972 or not.

1. Gratuity covered under the Gratuity Act, 1972
For the Gratuity covered by the Gratuity Act, total of gratuity received by an employee from various employers in whole of service is exempt from tax to the extent of least of the following three amounts:-
• Rs. 10,00,000/ or
• The gratuity actually received.

·(15÷26)*Last drawn salary per month * Years of service (Round-off if fraction in excess of 6 months)

Note: – Salary here is basic salary + dearness allowance

2. Gratuity not covered under the Gratuity Act, 1972
For Gratuity not covered under the Gratuity Act any gratuity not covered by the Gratuity Act, is exempt from tax to the extent of least of the three amounts-
• Rs.10,00,000/ or
• The gratuity actually received.
• (1÷2) * Average salary of last 10 months * Years of service (Fraction to be ignored)

Note: - Salary here basic salary + dearness allowance + Commission as fixed % of turnover

For Non-Government Employees, gratuity received during period of service is fully taxable.

           2.       Commuted pension [sec(10(10A)]:-

Commuted pension means pension received in the form of lump sum amount taken by commuting the whole or part of the pension.

Uncommuted pension refers to pension received periodically.

A. Government employee – Any commuted pension received is fully exempt from tax.

B. Non-government employee – Any commuted pension received is exempt in the following manner:

1) If the employee receives gratuity then 1/3rd of full value of commuted pension will be exempted from tax.

2) If the employee do not receive gratuity then 1/2 of full value of commuted pension will be exempted from tax.

[Example: If 20% of pension is commuted for Rs. 1,00,000.00 then full value of commuted pension will be Rs.5,00,000.00 (i.e.1,00,000/20 x 100) and 1/2 or 1/3 (as applicable) of Rs. 5,00,000.00 will be exempted from tax] 

Note:

i) Family pension received by the family member after the death of employee then 1/3rd of the pension or Rs. 15,000.00 whichever is less is exempted from tax and balance will be chargeable in the hands of Member who receives the pension (Pension should not be covered by pension for armed forces).

ii) Uncommuted pension is fully taxable in the hands of both government and non-government employees.

iii) If any employer contributes to the notified pension scheme of Govt. (U/s. 80CCD) then is should first be included in the income of the employee and contribution to the extent of 10% of Salary shall be allowed as deduction. In this case the employee should have joined the service on or after 01.01.2004. [Salary here means Basic + D.A. (if terms of employment so provides)].

           3.       Leave salary[Sec10(10AA)]:-

Leave encashment while in service is taxable. Encashment of sick leave is taxable.

A. Government employees:- Leave encashment received at the time of retirement is fully exempt

              B. Non-government employees: - Leave encashment received at the time of retirement is exempt to the  extent of the least of the following four amounts:-

• Leave encashment actually received at the time of retirement.
• Rs. 3, 00,000/-
• Ten months' average salary; (Here the average salary means the average of the salary drawn during the last ten months before retirement),
• Cash equivalent of the leave due at the time of retirement.

Note:-

1. Salary for this purpose means basic salary + dearness allowance (if provided for retirement benefits) and commission as fixed % of turnover.

2. As per the act, leave due per year is maximum 30 days per completed year of service. If company provides leave less than 30 days, then leave due for above calculation will be the lower value.

          4.       Retrenchment compensation [sec 10 (10B)]:-

The compensation received by an employee is exempted to the least of the following:-

i)      Actual amount received

ii)    Rs. 5,00,000

            iii)    Amount calculated as per Industrial Dispute Act i.e. -

             (15÷26) * Average salary of last 3 months x Completed years of service and any part in excess of 6 months     will be counted as one year.

[Example: Say Mr. X earns Rs. 9,000 p.m. as salary income at the time of retrenchment and worked for 36 years 9 months.

The amount as per Industrial Dispute Act = (15÷26)*9000*(36+1) = Rs. 192115]

         5.       Voluntary retirement scheme [sec10(10c)]:-

The scheme is drawn to reduce existing strength of the employees of the company. The amount received by an employee is exempted to the least of the following:-

i)       Actual amount received

ii)     Rs. 5,00,000.00

             iii)      Last drawn salary x 3 x No. of years worked

             iv)      Last drawn salary x No. of years left for service

             Note:

i)         Salary means salary last drawn and includes Basic + D.A. (if terms of employment so provides) + Commission of fixed % of turnover.

ii)       The employee has completed 10 years of service and has become 40 years of age or more. This is not applicable in case of public sector companies (i.e. he will be allowed the exemption even if he has not completed 10 years of service and has not become 40 years of age.)

iii)      It will be allowed once in the life time of the assessee. It applies to all employees except the directors of the company.

iv)      The vacancy caused is not to be filled up.

         \6.       Leave travel concession:-

This is taxable on the basis of Receipt or due whichever is earlier. The amount of leave travel concession received by an employee for himself or for his family member will be exempted from tax if the amount received is in connection with the following:- > On leave to any place in India.

(Note 1) > On leave to any place in India after retirement from the service or termination of service.

(Note 2) The Exemption shall be restricted to the amount actually incurred by the assessee. The amount actually incurred shall be restricted to the followings:-

Sr. no.	Journey Performed by	Amount of exemption
1	Air	Air economy fare of the national carrier by the shortest route or the amount spent whichever is less.
2	Rail	A.C. 1st class fare by the shortest route to the place of destination or Amount actually incurred whichever is less.
3	Any other mode	Amount of A.C. 1st class fare shortest route to the place of destination or Amount actually incurred whichever is less.
4.	If not connected by rail
	If recognized Public Transport system exists	The amount of 1st class or Deluxe class fare on such transport or the amount actually incurred whichever is less.
	If no recognized Public Transport system exists	The amount of 1st class fare by the shortest route(as if the journey is performed by rail) or Amount actually incurred whichever is less.

1. Family means spouse, children, and parents, brother, and sister of the employee mainly dependent of the assessee.

2. Only two journeys performed in a block of 4 calendar year is exempted from tax.

3.  If an assessee has not availed travel concession or assistance during any of the specified four-year block periods only 1 trip can be carried forward to be availed in the 1st calendar year of the next block. This is known as “carry over” concession.

4. Exemption is available in respect of fare only (Rail fare, Bus fare and Air fare). No exemption can be availed for the expenses incurred in respect of taxi charges, scooter charges, lodging/boarding expenses.

5. Exemption is available to Indian as well as Foreign citizen.

           7.       Provident fund(PF) :-

Particulars	Recognized PF	Unrecognized PF	Statutory PF
Employer’s Contribution	Amount in excess of 12 % of salary is taxable	Not taxable yearly	Fully exempt
Employee’s contribution	Eligible for deduction u/s 80C	Not eligible for deduction	Eligible for deduction u/s 80C
Interest credited	Amount in excess of 8.5% p.a. is taxable	Not taxable yearly	Fully exempt
Amount received on retirement	See Note 2	See Note 3	Fully exempt

              Notes:-

1. Salary = basic salary + dearness allowance (if provided for retirement benefits) + Commission as fixed % of turnover

2. Amount received is fully exempt if employee has rendered continuous service for a period of 5 years or more.

3. Employee’s own contribution is not taxable but the interest earned on it will be taxable under “income from other sources”. Both employer’s contribution and interest is taxed as income from “Salary”.

C)    Salary payments that are fully exempt from tax:-

       1)       Any payment from an Approved Superannuation Fund

       2)       Salary from United Nations Organization

       3)       Salary to non-resident technicians

       4)       Remuneration to consultants

       5)       Remuneration to employees of such consultants

       6)       Remuneration to Foreign Citizens

So these are all salary payments in general and their tax treatment. In further articles, I will post tax treatment on various allowances and perquisites provided by the employer to the employee. Any comments over this are welcome!!