INCOME UNDER THE HEAD SALARIES Relationship between Payer & Payee Employer & Employee v/s Principal

al & Agent Employer & contractor Payment received in capacity other than employee Salary from more than one source Salary from former employer, present employer & prospective employer : Remuneration due or received during the year is chargeable Salary income must be real and not fictitious For going of salary Surrender of salary Salary Paid Tax free Basis of Charge Any salary due from an employer or a former employer to any assessee in the previous year whether paid in that previous year or not. Any salary paid or allowed to him in the previous year by or on behalf of employer or a former employer though not due in that financial year or before it becomes due to him. 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 in any earlier previous year. Salary Includes: Wages Annuity or pension Gratuity Fees , bonus , commissions or profit in lieu of salary Advance salary Leave salary Annual accretion to balance of provident fund Contribution to notified pension scheme Place Of Accrual Of Salary Income Who is employee Who is employer Where service is rendered It is taxable in India Salary Allowa nce Yes No

Case 1 India Citizen ( Resident or Non Resident) Case 2 Non Resident ( Not covered by case 1) Case 3 Resident & Ordinary Resident ( but other than Case 1

GOI

Outside India

Any

Outside India

No

No

Any

Anywhere

Yes

Yes

Tax Treatment of Salary Income :1 Advance Salary :- Taxable, Relief under 89(1) 2 Arrear salary :- Taxable on receipt basis if not taxed on due basis

a) b) a) b) c)

Leave Salary :- Treatment of leave salary: Encashment of leave during tenure of service:leave encashment in service with same employer is fully taxable. Encashment of leave at the time of retirement: Government Employees( Central & state government only):leave encashment at the time of retirement whether on superannuation or otherwise is exempt from tax. Other Employees: is exempt to the least of following: a)Leave Encashment actually received. b)10 Months average salary c)Cash equivalent of unavailed leave calculated on the basis of maximum 30 days of leave every year of actual service rendered to employer from whose service he has retired. **salary includes DA to the extent terms of employment so provide & includes commission based on fixed purchase of turnover. ***average salary means average based on 10 months immediately preceding retirement. 4. Salary in Lieu of notice period 5. Salary to a partner 6. Fees & Commissions 7. Gratuity:Gratuity is a payment made by the employer to an employee in appreciation of past services rendered by the employee. gratuity can either be received by: Employee himself at the time of retirement:- salary head Legal heirs at the time of death of employee:- other sources. For the purpose of exemption of gratuity the employees are divided into three categories:Government employee & employees of local authority Employees covered under payment of gratuity act 1972 Other employees

A) Govt Employees & employees of local authority: entire amount of death-cumretirement gratuity is exempt from tax. B) Employees governed by payment of gratuity act.: 5 years continuous service required not in case of death or disablement. the minimum of the following is exempt from tax: -amount of gratuity actually received -15 days of salary for every completed year of service or part thereof in excess of 6 months. In case of seasonal employee 7 days wage for each session. -Rs 350000/c) Other Employees:Minimum of following is exempt from tax: -Actual amount of gratuity received -Half months average salary for every completed year of service -Rs 350000/1. Pension : Pension: Uncommuted Pension: fully taxable whether government or non government. Commuted Pension:

In case of government employees, employees of local authority or statutory corporation : is wholly exempt from tax. In case of other employees: the commuted value of pension received by any employee under any scheme is exempt to the following extent: a) Where employee receives gratuity also:commuted value of 1/3rd of pension which he is normally entitled to receive,is exempt from tax. b) Where employee does not receive any gratuity: The commuted value of half of the pension,which he is normally entitled to receive is exempt from tax. 9. Annuity: present employer:-taxable as salary & former employer-taxable as profit in lieu of salary 10. Retrenchment Compensation:any compensation received by workmen at the time of his retirement,under the industrial dispute act , or any other act or rules shall be exempt to the least of following: a) Actual amount received b) 15 days of average pay for every completed year of service or part in excess of 6 months. c) Amount specified by the central government i.e Rs 500000/11. Voluntary retirement compensation The compensation is received only at the time of voluntary retirement or termination of his services in accordance with any scheme or schemes of voluntary retirement The scheme of the said companies or authorities or societies or universities or the institutes referred as the case may be are framed as per economic viability. Quantum of exemption: actual amount of compensation received or Rs500000/whichever is less. 12. Recognised provident fund Any contribution by the employer to the RPF in excess of 12% of the gross salary of the employee, is taxable in the hands of employee & hence included in the gross salary of employee. Any interest credited to the employees in RPF in excess of 9.5%is taxable in the hands of the employee and hence included in the gross salary of employee. Transferred balance of unrecognised provident fund ,when it is converted into recognised provident fund is also taxable in the hands of employee & hence included in gross salary. 13.Other Items Treatment of Bonus: taxable on receipt basis, however in case of arrears relief can be claimed Salary in lieu of notice period: taxable Fees & Commission: Fixed or variable fully taxable Overtime payments:taxable fully 14. ALLOWANCES House Rent Allowance:HRA is exempt to the least of the following three amounts: a) Actual HRA received by the employee b) Excess of rent paid for the accomodation occupied by him over 10% of the salary for relevant period

c) 50% of the salary where the residential house is situated at mumbai, calcutta, delhi or chennai & 40% of the salary where house is at any other place. ** salary for the purpose includes dearness allowance if terms of employment so provide but excludes all other allowances and perquisites. ALLOWANCES WHERE EXEMPTION DEPENDS ON ACTUAL EXPENDITURE : Travelling Allowance :- cost of travel on tour or on transfer Conveyance allowance : conveyance in performance of duties Daily Allowance Helper Allowance Research Allowance Uniform Allowance WHEN EXEMPTION DOES NOT DEPEND UPON EXPENDITURE Children Education allowance: Actual amount or Rs 100 p.m. per child whichever is less Hostel Expenditure Allowance: Actual amount or Rs 300p.m per child whichever is less. Tribal area or Scheduled area : Actual amount or Rs 200 p.m whichever is less. Hilly area or high altitude allowance: varies from Rs.300 to 7000p.m Border area , remote area or disturbed area allowance. : varies from Rs 200 to Rs1300 p.m Compensatory field area allowance: exempt to the extent of Rs 2600 p.m Compensatory ,modified field area allowance: Rs1000p.m Counter Insurgency allowance granted to members of armed forces: Rs 3900 p.m Transport allowance: paid for duty from residence to office :Rs 800 p.m & Rs 1600 p.m for the othopadically & visually impaired Underground allowance: Rs 800 p.m High Altitude allowance: 9000 ft to 15000ft Rs 1060 p.m for altitude above 15000 ft Rs 1600 p.m Allowance granted to a transport employee: 70% of such allowance upto a maximum of Rs 6000p.m

PERQUISITES The value of any rent free accommodation provided to the assessee by his employer Value of any concession in the matter of rent respecting any accomodation provided to the assessee by his employer. Value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases: a)By a company to an employee who is director b)By a company to an employee being a person who has substantial interest in the company. c) By an employer to an employee to whom the provisions of clause (a) & (b) do not apply and whose income under the head salaries exclusive of all the value of all the benefits or amenities not povided for by way of monetary payment exceeds Rs.50000/Any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee Any sum payable by the employer whether directly or indirectly or through a fund other than a recognized provident fund or approved superannuation fund or a deposit

linked insurance funds to effect an assurance on the life of an assessee or to effect a contract for an anuity. The value of any specified security or sweat equity shares allotted or transferred directly or indirectly , by the employer or former employee , free of cost or at concessional rate to the assessee The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee to the extent it exceeds one laks rupees. ** the definition of the term perquisite is inclusive TAXABILITY OF PERQUISITES:THE PERQUISITES FOR TAX PURPOSERS MAY BE CLASSIFIED UNDER THREE HEADS:Perquisites which are taxable in the hands of all categories of employees Perquisites which are taxable only when the employee belongs to specified group. Tax free perquisites.

Perquisites which are taxable in the hands of all categories of employees Rent free accommodation provided by the employee to the employee. Such accommodation may be furnished or unfurnished. Any concession in the rent in respect of the accomodation provided by the employer to the employee. Any sum paid by the employer in discharging the monetary obligations of the employee which would otherwise would have been payable by the employee.any sum payable by the employer whether directly or through afund ( othe than RPF, ASF or deposit linked insurance fund.) to effect an assurance on the life of the assessee or to effect a contract for an annuity. Perquisites which are taxable only in the case of specified employees Any benefit /amenity in the form of afacility(other than discussed before)provided by the employer to the employee which is not tax free, shall be taxable only in the hands of specified employees. Some of these are: a) Services of a sweeper, gardner,watchman or personal attendant. b) Free or concessional use of gas, electricity, water for house hold consumption. c) Free or concessional education facilities. ** if in monetary terms taxable for all & otherwise taxable only for the specified employees **specified employee: a)Director of acompany b)Has substantial interest in the company c)Income under the head salaries excluding all the benefits and amenties not provided for by way of monetary payment, exceeds Rs50000/Value of Rent Free Unfurnished Accomodation:Central or State Government Employees : Licence fees which would have been determined by the central government or state government in accordance with rules framed by the government for the purpose. Other Employees :1. Population +25 laks :- 15% of salary Or amount of rent paid /payable 2. Population 10-25 lakhs :- 10% of salary 3. other :- 7.5% of salary

** Meaning Of Salary :- basic + da + bonus+ commission +Fees + Other taxable allowance + any monetary payment chargeable to tax. Value of Furnished :A) Not Being a hotel :- Unfurnished +10% of cost of furniture + actual hire charges of furniture. B) Being a Hotel :- 24% of salary or Actual charges payable by employer whichever less * Not exceeding 15 days & such accommodation for transfer Valuation of perquisite in respect of gas , electricity or water supply provided free of cost. Value of education facility in employers institute : upto 1000 nil, Beyond cost of education in similar institute -1000-cost paid Value of perquisite in respect of free domestic servants. Value of LTC :- Air, Rail, Other case Only 2 journeys in a block of 4 years Carry over of concession permissible *Exemption based on actual expenditure & not on fixed allowance. Valuation of perquisite in respect of interest free loan or loan at concessional rate : Upto 20000 not, beyond SBI Medical facilities In India: Maintained by employer, Central or State Government, Approved by CIT, Health Policy, Other Valuation for car : Owned or Not Owned, Official, Personal , Both Valuation of traveling, touring & accommodation Valuation of perquisite in respect of gifts , vouchers or token. Valuation of Sweat equity Provident Funds SPF RPF URPF PPF Employer Contribution Not an Not income Not treated NA income upto 12% as income of contribution year 80C A A Na A Interest Credited to PF Not income Not income Not treated Exempt upto 9.5% as income of from tax the year in which credited Lump Sum payment E E T E 80C Benefits 89(1) Relief Hints of tax Planning 1. DA should form part of salary 2 Commission 3. Commutation 4 URPF to RPF +5 Years of service 5 Employer contribution 12% 6. Medical facility rather than allowance