Income From Salary (1).pdf

INCOME FROM SALARY

Meaning of salary: As per Indian Income Tax Act Salary includes:•

Wages

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Annuity or pension

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Any gratuity over and above the exemption limit

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Any fees

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Commission

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Any advance salary

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Amount contributed by the employer towards the recognized provident fund in excess of 12% of salary

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Interest on balance in RPF in excess of specified limit.

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Value of any perquisites

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Any benefits given to the employee by the employer

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Any amount of profit in lieu of salary

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Arrears of salary received in current year but not taxed in earlier years.

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Leave encashment etc. Explanations: Leave salary: If received during employment, is taxable. Salary received on retirement, is taxable subject to certain conditions. Salary in lieu of notice period: is taxable in the year, it is received. Pension: Pension is an annuity received by an employee after his retirement. Periodical pension is fully taxable. Commuted pension is exempt subject to certain conditions.

Pension received by a widow: (generally called family pension) falls under the head ‘Income from other sources’. Profit in lieu of salary:

1. Any compensation due to or received by an employee from his employer or former employer at or in connection with the termination of his employment or modification of the terms and conditions relating thereto. 2. Any Payment (Other than Receipts exempt from tax) under section 10, due to or received by employee from his employer or former employer or from a

provident fund or other fund to the extent it does not consist of contributions by the assessee or interest on such contributions or any sum/bonus received under a Keyman Insurance Policy. 3. Any amount whether in lump-sum or otherwise, due to or received by an assessee from his employer, either before his joining or after leaving the employment. Tax on Salary borne by employer: When the salary is paid ‘tax free’, that is, the tax due on the salary is paid in to government account by the employer, the employee has to return in his total income the gross salary i.e. the aggregate of the net salary received plus the amount of tax paid on his behalf by the employer. It does not make any difference whether the tax is borne by the employer voluntarily or under a contractual obligation. RECEIPT IN THE NATURE OF EXEMPT FROM INCOME TAX There are few receipts under head of salary income which are exempt subject to certain conditions. Those terms and conditions are not explained here in details because the purpose of writing this term is only to give brief and basic idea of income tax act for learners. Following are few receipts which are exempt from income tax:1. Leave Travel Concession 2. Gratuity 3. Commuted pension

4. Leave encashment 5. Retrenchment compensation 6. Payment on Voluntary retirement 7. Traveling allowance on tour or on transfer, including any sum paid for packing and transportation of

personal effects on transfer.

8. Daily allowance or tour or for the period of journey on transfer. 9. Conveyance Allowance – Rs.1600/= per month. 10. Transport allowance

@ Rs.3200/= per month granted to an employee, who is

blind or orthopaedically handicapped with disability of lower extremities to meet his expenditure for the purpose of commuting between the place of his residence and the place of duty. 11. Any allowance granted to meet the expenditure incurred on a helper where such helper is engaged for the performance of official duties. 12. Any allowance granted for encouraging the academic research and training pursuits, in educational and research institution. 13. Uniform allowance.

14. Children education allowance Rs.100/= per month maximum for 2 children. 15. Any allowance to meet the expenditure on hostel on his child Rs. 300/= per month, maximum for 2 children. 16. Gratuitous payment to widow/legal heirs if the employee who dies while in service. 17. Any income by way of pension received by Government employees or family pension received by any member of family, who has been awarded Param Vir Chakra/Maha Vir Chakra/Vir Chakra/other notified gallantry award. 18. Any allowance in lieu of rent free accommodation paid to High Court Judges or Supreme Court Judges. 19. House Rent Allowance (HRA) exemption (u/s10) is entitled least of the following :•

Actual HRA received, or

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Rent paid in excess of one-tenth of salary or

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50% of salary if the accommodation is situated at Delhi, Mumbai, Kolkata, or Chennai or

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40% of salary if the accommodation is situated at any other place. Note: HRA will not be exempt if the residential accommodation is occupied by the assessee, is owned by him or the assessee has not actually spent any expenses on account of rent. The employee who is receiving the HRA up to a certain limit, is not required to produce the rent receipts. However, at the time of regular assessment, the employee has to produce the rent receipt. For this purpose of calculation of exemption of HRA, Salary includes Dearness Allowance if the terms & conditions of employment so provide i.e. where Dearness Allowance is taken into account while calculating Provident Fund & Allowance etc. Note: Conveyance allowance is not exempted from tax for financial year 2018-19 (assessment year 2019-20) PERQUISITES: Perquisites are a gain or profit incidentally made from employment in addition to regular salary. TAXABLE PERQUISTES: Following are few perquisites which are taxable under head ‘salary income’:-

1. Value of rent free accommodation. 2. Value of any accommodation provided by employer at concessional rent. 3. Any sum paid by the employer in respect any obligation which but for such payment, would have been payable by the assessee. 4. Value of any other benefits or amenity as may be prescribed, such as free meals, club facility, credit card, gift, interest free or concessional loans, etc.

PERQUISITES NOT TAXABLE: There are certain perquisites which are not taxable and not added in ‘salary income’. Following are such perquisites which are exempt from income tax:•

Value of medical treatment provided to an employee or his family member in a hospital maintained by his employer.

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Reimbursement of expenditure incurred on medical treatment of an employee or his family member in a Government approved hospital (like CHS or CGHS)

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Reimbursement

of expenditure incurred by the employee in a hospital

approved by the Chief Commissioner in connection with the medical treatment of the employee or any member of his family. This concession will be admissible for treatment of prescribed diseases or ailments. The employee is required to attach with his return of income:• • •

A certificate from hospital of disease. A receipt of amount paid to hospital

Medical insurance premium paid by the employer for the health of the employee or his family member under a scheme approved by the Central Government.

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Reimbursement of expenditure incurred on medical treatment of an employee or his family member up to Rs.15000/=. Note: Family for this purposes means: The spouse, children of employee and the parents, brother & sisters, wholly or mainly dependent on individual.

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Free meal of value up to Rs.50/= per meal provided by the employer during office hours at business premises

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Gift or Gift Voucher up to a certain specified limit in a year. If the value of Gift Voucher is more than that specified limit then whole amount shall be taxable. The specified limit for this purpose for financial year 2016-17 is Rs.5000/=.

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Tea or snacks provided during office hours.

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Free meals during working hours provided in a remote area or a offshore installation. Note: Reimbursement of medical expenses is not exempted from tax for financial year 2018-19 (assessment year 2019-20) Difference Between Allowances and Perquisites::- From the point of view of employer, both are the expenses, incurred by employer for employees. But in case of allowances, these are received by the employee in cash to meet some specific expenses on regular basis whether these expenses are incurred or no by the employee.In case of perquisites, the expenses are incurred by the employer on behalf of employee. PERMISSIBLE DEDUCTIONS FROM SALARY INCOME

1. With effect from financial year 2018-19 (assessment year 2019-20), a standard deduction of Rs.40000/= or the aamount of salary, whichever is less, shall be allowed under section 16(ia). 2. Professional Tax 3. Interest on home loan taken. 4. Deduction under chapter VI-A of Indian Income Tax Act. Certain payments made by employees are permitted as deduction from salary income subject to certain terms and conditions. For example:•

Life Insurance Premium

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LIC Pension Plan (Jeevan Suraksha).

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Contribution of Notified Pension Scheme.

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Deposit in Public Provident Fund Account.

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Repayment of housing loan. (Principal amount only)

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Donation for charitable purposes subject to certain terms and conditions.

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Medical Insurance Premium for self up to Rs.25000/= (Rupees 30000/= in case he/she is senior citizen. With effect from financial year 2018-19 the Medical insurance premium for senior citizen is increased to Rs.50000/=.

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Additional deduction for medical insurance premium will be allowed for parent(s) for Rs.25000/= (Rs.30000/= if the insured person is senior citizen).With effect from financial year 2018-19 the Medical insurance premium for senior citizen is increased to Rs.50000/=.

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Expenses incurred on Preventive Health check up is allowed up to Rs.5000/=. This amount can be paid in cash also. Same rules for preventive health check up applies for parents also. Please note that the amount spent on preventive health check up will be included in amount on medical insurance premium. Total of preventive health check up expenses and medical insurance premium must not exceed the permissible limit under section 80D.

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With effect from 01.04.15, any expenses incurred for medical treatment of any parent or parents, who is very senior citizen and not covered under medical insurance, is allowed up to Rs.30000/=. Very senior citizen means the person who has completed 80 years in the relevant financial year.

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Interest on loan taken for higher education from any financial institution.

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Tution fees of the children

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Donation for charitable purpose subject to certain terms and conditions.

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Expenditure on rent if the employee is not in receipt of house rent allowance.

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Installment paid for home loan taken.

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Contribution to Public Provident Fund.

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Investment in Infrastructure bonds.

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Fix deposit with banks for five years under tax saving scheme.

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Investment in National Saving Certificate etc. Illustration:Mr. X was the employee of M/s XYZ during financial year 2016-17. He received the following amounts from his employer:1. Basic Salary Rs700000/= 2. Conveyance Allowance Rs.60000/=

3. House Rent Allowance Rs.240000/= Mr. X spent the following amounts against salary income:1. Rent paid Rs.300000/= 2. Medical Insurance Premium for self

Rs.8000/=

3. Expenses incurred in respect of preventive health check up of his wife Rs.4000/= 4. Deposit in Public Provident Fund Account Rs.100000/= Other Information:•

Mr. X does not own any residential accommodation.

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His Employer Had deducted Employee’s Contribution for Provident fund Rs.60000/=

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Mr. X lives in Delhi and he is 46 years old.. Compute his income from salary for financial year 2017-18. Solution: INCOME FROM SALARY 700000

Basic Salary Conveyance Allowance Less: Allowed as deduction @ Rs.800/= p.m. House Rent Allowance Less: Allowed as deduction

60000 19200

40800

240000 230000

10000

(see notes) Gross Total Income Less: Deductions under Chapter VI-A

750800

Contribution to P.F. (u/s 80-C) Deposit in PPF (u/s 80-C) Total

60000 100000 160000 150000

Gross deduction allowed u/s 80-C) Preventive health check Expenses of his wife(u/s 80-D)

4000

Medical Insurance premium (u/c 80-D)

8000

12000 162000 588800

Net Taxable Salary Income Working Notes:

1. Maximum Deduction Allowed u/s 80-C is Rs.150000/= 2. Maximum deduction allowed u/s 80-D Rs.25000/= 3. Conveyance Allowance granted to an employee u/s 10, to meet his/her expenditure for the purpose of commuting between the place of his/her residence and the place of his/her duty is allowed maximum Rupees 1600/= per month.. 4. HRA:- (u/s 10) Deduction against HRA u/s 10 will be allowed least of the followings: HRA RECEIVED 50% of Basic Salary RENT PAID Rent paid Rs.300000 minus 10% of basic salary Rs. 700000

240000 350000 300000 230000

Rupees 230000/= is the lowest amount among above figures. Therefore, Rupees 230000/= will be allowed as deduction against HRA received. Illustration:Mr. X had the following income during financial year 2016-17:-. Calculate the tax liability of Mr.X. PARTICULARS

AMOUNT (IN RUPEES)

SALARY FROM M/S XYZ LIMITED

2000000

INTEREST ON FDR FROM CITI BANK

60000

INTEREST FROM FDR – HDFC BANK

5000

INTEREST FROM PERSONAL LOAN

3000

INTEREST ON PPF ACCOUNT

30000

DIVIDEND RECD FROM MUTUAL FUNDS

20000

HIS EMPLOYER DEDUCTED HIS CONTRIBUTION TO

70000

P.F. HE DEPOSITED IN PUBLIC PROVIDENT FUND

80000

ACCOUNT HE MADE THE REPAYMENT OF HOUSE LOAN

300000

HE PAID INTEREST ON LOAN FOR RESIDENTIAL HOUSE PROPERTY HIS EMPLOYER DEDUCTED TDS ON SALARY

110000 420000

TDS DEDUCTED BY BANK ON INTEREST ON FDR Solution:NAME

MR. X

STATUS

INDIVIDUAL

ASS. YEAR

2017-18

6000

PAN

AAAAS1111K

DATE OF BIRTH

12.12.1980 COMPUTATION OF INCOME

INCOME FROM SALARY SALARY RECEIVED (AS PER

FORM – 16) –

2000000

XYZ LTD. INCOME FROM HOUSE PROPERTY INTEREST ON LOAN FOR RESIDENTIAL

-110000

HOUSE PROPERTY INCOME FROM OTHER SOURCES INTEREST ON FDR – CITI BANK

60000

INTEREST FROM FDR – HDFC BANK

5000

INTEREST FROM PERSONAL LOAN

3000

INTEREST ON PPF (EXEMPT) 30000/=

0

DIVIDEND RECD (EXEMPT) 20000/=

0

68000 1958000

GROSS TOTAL INCOME LESS : DEDUCTIONS (CHAPTER VI-A) SEC-80-C CONTRIBUTION TO P.F.

70000

PPF

80000

REPAYMENT OF HOUSE LOAN

300000

GROSS DEDUCTIONS

450000

DEDUCTIONS RESTRICTED TO NET TAXABLE INCOME TAX ON ABOVE ADD: EC + S&HEC @ 3%

150000 1808000 367400 11022

TOTAL TAX PAYABLE

378422

LESS: TAX PAID TDS ON SALARY

420000

TDS ON INTREST ON FDR

6000

426000

NET REFUND DUE

47578 CALCULATION OF INCOME TAX

PARTICULARS

INCOME

TAX RATE

TAX

UP TO 250000

250000

0

FROM 250001 TO 500000

250000

10%

25000

FROM 500001 TO 1000000

500000

20%

100000

1000001 ONWARDS

808000

30%

242400

TOTAL

1808000

0

367400

Example: Calculation of salary in respect of financial year 2017-18 and financial year 2017-18 as follows:-

PARTICULARS

F.Y. 2017-18

F.Y. 201819

BASIC SALARY

700000 700000

CONVEYANCE ALLOWANCE

0

19200

0

15000

REIMBURSEMENT OF MEDICAL EXP. GROSS INCOME FROM SALARY

700000 734200

LESS: STANDARD DEDUCTION 0 AMOUNT DEPOSITED IN PPF ACCOUNT

50000

40000 50000

NET TAXABLE INCOME

650000 644200

TAX ON ABOVE

42500

41340

EDUCATION CESS @ 2%

850

0

S & HEC @1%

425

0

0

1654

43775

42994

HEALTH & EDUCATION CESS @ 4%

TOTAL TAX PAYABLE Note:•

Conveyance allowance and reimbursement of medical expenses have been finished in financial year 2018-19.

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Education cess ad S & HEC is also removed in financial year 2018-19

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Health Education cess is being introduced @ 4% on income tax and surcharge.

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Standard deduction of Rs.40000/= is being allowed in financial year 2018-19 irrespective of amount of salary. But if the amount of salary is less than Rs.40000/= then the amount of standard deduction will be the actual amount of salary.

INCOME FROM HOUSE PROPERTY The annual value of a property, consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner, is chargeable to tax under the head ‘Income from house property’. However, if a house property, or any portion thereof, is occupied by the assessee, for the purpose of any business or profession, carried on by him, the profits of which are chargeable to income-tax, the value of such property is not chargeable to tax under this head. Thus, three conditions are to be satisfied for property income to be taxable under this head: 1. The property should consist of buildings or lands appurtenant thereto. 2. The assessee should be the owner of the property. 3. The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to income-tax. Ownership of house property It is only the owner (or deemed owner) of house property who is liable to tax on income under this head. Owner may be an individual, firm, company, co-operative society or association of persons. The property may be let out to a third party either for residential purposes or for business purposes. Annual value of property is assessed to tax in the hands of the owner even if he is not in receipt of the income. For tax purposes, the assessee is required to be the owner in the previous year only. Owner: An Individual shall be considered as owner of a property when the document of title to the property is registered in his name. Deemed Owner [Section 27] under the following circumstances, Income from House Property is taxable in the hands of the Individual, even if the property is not registered in his name — (a) Where the Property has been transferred to spouse for inadequate consideration other than in pursuance of an agreement to live apart. (b) Where the Property is transferred to a minor child for inadequate consideration (except a transfer to minor married daughter) (c) Where the Individual holds an impartible estate. (d) Where the Individual is a member of Co-operative Society, Company, or other Association and has been allotted a house property by virtue of his being a member, even though the property is registered in the name of the Society / Company / Association. (e) Where the property has been transferred to the individual’s name as part-performance of a contract u/s 53A of the Transfer of Property Act, 1882. (i.e. Possession of the Property has been transferred to Individual, but the Title Deeds have not yet been transferred).

(f) Where the Individual is a holder of a Power of Attorney enabling the right of possession or enjoyment of the property. (g) Where the property has been constructed on a leasehold land. (h) Where the ownership of the Property is under dispute. (i) )Where the property is taken on a lease for a period of not less than 12 years, then the lessee shall be deemed as the owner of the property.

House Property Income Is Exempt from Tax to Certain Persons

1. An Ex-Ruler for his occupation (palace) 2. Local Authority. 3. Approved Scientific Research Association. 4. Institution for the development of Khadi and Village Industries. 5. Khadi and Village Industries Boards. 6. A body or authority for administering religious or charitable Trust or endowments. 7. Certain Funds, educational institutions, hospitals etc. 8. Registered Trade Union. 9. Statutory Corporation or an institution or association financed by the Government for promoting in the interests of members of SC or ST. 10. Co-operative Society for promoting the interest of the members of SC or ST. 11. Charitable Trust. 12. Political Parties DETERMINATION OF ANNUAL VALUE The basis of calculating Income from House property is the ‘annual value’. This is the inherent capacity of the property to earn income and it has been defined as the amount for which the property may reasonably be expected to be let out from year to year. It is not necessary that the property should actually be let out. The municipal value of the property, the cost of construction, the standard rent, if any, under the Rent Control Act, the rent of similar properties in the same locality, are all pointers to the determination of annual value.

Gross Annual value The Gross Annual Value is the municipal value, the actual rent (whether received or receivable) or the fair rental value, whichever is highest. If, however, the Rent Control Act applies to the property, the gross annual value Fair rental value or municipal value whichever is higher or Standard rental value whichever is less. If the property is let out but remains vacant during any part or whole of the year and due to such vacancy, the rent received is less than the reasonable expected rent, such lesser amount shall be the Annual value. The principle of determining GAV is: Expected Rental Value OR Actual Rent received for full year, whichever is more Here, Expected Rental Value is calculated as follows: If the let out property is not subject to Rent Control Act ERV is: FRV or MRV whichever is higher. If the let out property is subject to Rent Control Act ERV is: FRV or MRV whichever is higher OR Standard Rental Value, Whichever is less. Municipal Tax Municipal Tax includes services tax like Water Tax and Sewerage Tax levied by any local authority. It can be claimed as a deduction from the Gross Annual Value of the Property. Conditions: (a) Paid by Owner. The tax shall be borne by the owner and tie same was paid by him during the previous year. (b) Property let out: Municipal Tax can be claimed as a deduction only in respect of let out or deemed to be let out properties (i.e. more than one property self occupied). (c) Year of payment: Municipal Tax relating to earlier previous years, but paid during the current previous year can be claimed as deduction only in the year of payment. (d) Advance Taxes: Advance Municipal Tax paid shall not be allowed as deduction in the year of payment, but can be claimed in the year in which it falls due. (e) Borne by Tenant: Municipal taxes met by tenant are not allowed as deduction. Unrealized Rent Unrealized Rent means the rent not paid by the tenant to the owner and the same shall be deducted from the Actual Rent Receivable from the property before computing income from that property, provided the following conditions are satisfied: 1. The tenancy is bonafide 2. The defaulting tenant should have vacated the property 3. The assessee has taken steps to compel the defaulting tenant to vacate the property 4. The defaulting tenant is not in occupation of any other property owned by the assessee

5. The assessee has taken all reasonable steps for recovery of unrealized rent or satisfies the Assessing Officer that such steps would be useless. Deduction from Net Annual Value A. Standard Deduction u/s 24(a): Standard deduction of 30% of NAV (Net Annual Value) shall be allowed to the assessee. B. Interest on Loan u/s 24(b): Income From Self – Occupied House Property The annual value of one self-occupied house property is taken as ‘Nil’. From the annual value, only the interest on borrowed capital is allowed as a deduction under section 24. The amount of deduction will be: 1. Either the actual amount accrued or Rs.30,000/- whichever is less if loan or borrowed capital taken before 1/4/99 2. When borrowal of money or acquisition of the property is after 1.4.1999 - deduction is Rs.2,00,000/applicable to A.Y 2017-18 and onwards. 1. Purpose of loan: The loan shall be borrowed for the purpose of acquisition, construction, repairs, renewal or reconstruction of the house property. 2. Accrual basis: The interest will be allowed as a deduction on accrual basis, even though it is not paid during the financial year. 3. Interest on interest: Interest on unpaid interest shall not be allowed as a deduction. 4. Brokerage: Any brokerage or commission paid for acquiring the loan will not be allowed as a deduction.

Deduction of interest in connection with house let-out on rent If any loan from the financial institution has been taken for constructing, reconstructing, repairing of house interest is to be paid on such loans. The amount is deducted out of net annual value of the house. There is no maximum limit of deduction of interest in case of loan taken for house let for rent

Raju is the owner of 2 houses. From the following, find out Income from house property: House-1 House-2 House1

House2

Municipal value

30,000

35,000

Actual rent

40,000

32,000

FRV

36,000

30,000

SRV

30,000

36,000

Municipal tax paid

4,000

3,500

Insurance Expenses paid

7,000

7,000

Interest on borrowings

11,000

7,000

The following information is available in respect of two houses of owned by Neeraj. He let out the first house for a yearly rent of Rs: 11,000. He paid Rs:1,000 as interest on borrowings. He paid Rs: 100 as insurance premium. He let out his second house at a monthly rent of Rs:1,200. It is not rented out for 3 months. The unrealized rent for the past 5 years was Rs: 13,000. Compute the income from house property of Mr. Neeraj for the AY 2013-14 House 2nd Actual Rent received

14,400

Less: 30% Stanadard Deduction

4320

Less Unrelized rent for three month

3600

Add unrealized rent for the past 5 years was Rs:

13,000

Income from house property

Mr. Abhinand constructed one house in 2010. Half of the portion is let out and the remaining half is used for his residence. The following particulars are available: MRV Rs: 12,500; Rent received Rs:10,000 ; Municipal taxes Rs:2,500 ; Ground rent Rs; 250 ; Repairs Rs:2,000 ; Interest on loan taken for construction Rs: 2,500. Compute income from house property of Mr. Abhinand for the AY 2013-14.

Income from house property Annual Value of let out property (MRV or Rent received whichever is higher)

10,000

Less: Muncipal Taxes paid

1250

Net Annual Value

8,750

Less; Deduction U/S 24 30% Standard Deduction of NAV

2625

Interest on borrowings

1250

Income from house property

3875 4875

Income from self occupied property Net Annual Value Less U/S 24 Interest on borrowings

1250

Income from house property

3625