Shyam Mikshra.docx

A PROJECT ON: “STUDY ON INCOME UNDER THE HEAD SALARY” SUBMITTED BY: SHYAM G. MISHRA TY.BAF SEMESTER VI

UNDER THE GUIDE: PROF. TUSHAR RAUT

SUBMITTED TO: UNIVERSITY OF MUMBAI

ST.GONSALO GARCIA COLLEGE OF ARTS AND COMMERCE VASAI, PALGHAR- 401202 ACADEMIC YEAR – 2018-19

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A PROJECT ON: “STUDY ON INCOME UNDER THE HEAD SALARY” SUBMITTED BY: SHYAM G. MISHRA TY.BAF SEMESTER VI

UNDER THE GUIDE: PROF. TUSHAR RAUT

SUBMITTED TO: UNIVERSITY OF MUMBAI

ST.GONSALO GARCIA COLLEGE OF ARTS AND COMMERCE VASAI, PALGHAR- 401202 ACADEMIC YEAR – 2018-19

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CERTIFICATE

This is to certify that MR. SHYAM MISHRA has worked and duly completed his project work for the degree of bachelor in commerce (Accounting and finance) under the faculty of commerce in the subject of and his project is entitled, “STUDY ON INCOME UNDER THE HEAD OF SALARY” under my supervision. I further certify that the entire work has been done by the learner under my guidance and that no part of it has been submitted previously for any degree or diploma of any university. It’s is his own work and facts reported by his personal findings and investigation

______________

______ _____________

PRINCIPAL (DR. SOMNATH VIBHUTE)

COORDINATOR (ASS. PROF. RUBINA D’MELLO)

_______________

_____ _____________

PROJECT GUIDE:

EXTERNAL EXAMINER

(PROF. TUSHAR RAUT)

____________________ INTERNAL EXAMINER Date of submission:

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DECLATION BY LEARNER

I the undersigned MR.SHYAM MISHRA Here by, declare that the work embodied in this project work “STUDY ON INCOME UNDER THE HEAD OF SALARY” forms my own conditioned to the research work carried out by under the guidance of CMA.TUSHAR RAUT is a result of my own research work and has not been previously submitted to any university for any other degree/diploma to this or any other university Wherever reference has been made to previous work of others, it has been clearly indicated as such and included in the bibliography. I, here by further declare that all information of this document has been obtained and presented in accordance with academic rules and ethical conduct

DATE:

__________________ SIGNATURE OF STUDENT (SHYAM G. MISHRA)

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Acknowledgment

To list who all have helped me is difficult because they are so numerous and the depth is so enormous. I would like to acknowledge the following as being idealistic channels and fresh dimensions in the completion of this project. I take this opportunity to thank the University of Mumbai for giving me chance to do this project. I would like to thank my principal,“D.R SOMNATH VIBHUTE”for providing the necessary facilities required for completion of this project. I take this opportunity to thank our Coordinator “for her moral support and guidance. I would also like to express my sincere gratitude towards my project guide “TUSHAR RAUT” Whose guidance and care made the project successful. I would like to thank my College Library, for having provided various reference books and magazines related to my project. Lastly, I would like to thank each and every person who directly or indirectly helped me in the completion of the project especially my Parents and Peers who supported me throughout my project.

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Sr. No.

INDEX

Page No.

1.1

INTRRODUCTION

1.2

HISTORY

2.1

OBJECTIVE OF THE STUDY

3.1

REVIEW OF LITRATURE

4.1

DATA ANALYSIS

4.2

MEANING OF SALARY

4.3

DEFINATION OF SALARY

4.4

CHARACHTERISTIC OF SALARY

4.5

GROSS SALARY

4.6

COMPONENTS THAT FORM A PART OF GROSS SALARY

4.7

COMPONENTS THAT DO NOT FORM PART OF GROSS SALARY

4.8

DIFFERNCE BETWEEN GROOS SALARY & NET SALARY

4.9

TAXABILITY OF VARIOUS COMPONENTS OF SALARY

4.10

PROVIDENT FUND

4.11

DEDUCTION FROM SALARY

4.12

LEAVE TRAVEL ALLOWANCE

4.13

RETIREMENT BENEFIT

4.14

LEAVE SALARY

5.1

CONCLUSION

5.2

REFERENCE

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1 INTRODUCTION TO THE PROJECT

A salary is a form of payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis. From the point of view of running a business, salary can also be viewed as the cost of acquiring and retaining human resources for running operations, and is then termed personnel expense or salary expense. In accounting, salaries are recorded in payroll accounts.

Salary is a fixed amount of money or compensation paid to an employee by an employer in return for work performed. Salary is commonly paid in fixed intervals, for example, monthly payments of one-twelfth of the annual salary.

Salary is typically determined by comparing market pay rates for people performing similar work in similar industries in the same region. Salary is also determined by levelling the pay rates and salary ranges established by an individual employer. Salary is also affected by the number of people available to perform the specific job in the employer's employment locale. Salaries are fixed cost in nature. So, I chosen this topic to understand various factors which affect the taxability of salary In India. Factors like perquisite and allowance various deductions and exemption under the head salary which could be beneficial to the individual To understand various retirement benefit like pension and gratuity retrenchment benefit live encashment leave salary etc.

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HISTORY First paid salary While there is no first pay stub for the first work-for-pay exchange, the first salaried work would have required a society advanced enough to have a barter system which allowed for the even exchange of goods or services between tradesmen. More significantly, it presupposes the existence of organized employers—perhaps a government or a religious body—that would facilitate work-for-hire exchanges on a regular enough basis to constitute salaried work. From this, most infer that the first salary would have been paid in a village or city during the Neolithic Revolution, sometime between 10,000 BC and 6000 BC.[2]

A cuneiform inscribed clay tablet dated about 3100 BC provides a record of the daily beer rations for workers in Mesopotamia. The beer is represented by an upright jar with a pointed base. The symbol for rations is a human head eating from a bowl. Round and semi-circular impressions represent the measurements. [3]

By the time of the Hebrew Book of Ezra (550 to 450 BC), salt from a person was synonymous with drawing sustenance, taking pay, or being in that person's service. At that time, salt production was strictly controlled by the monarchy or ruling elite. Depending on the translation of Ezra 4:14,[4] the servants of King Artaxerxes I of Persia explain their loyalty variously as "because we are salted with the salt of the palace" or "because we have maintenance from the king" or "because we are responsible to the king".[5]

Salarium The Latin word salarium originally "salt money" (Lat. sal, salt), i.e., the sum paid to soldiers for salt.[6][7] ( The dictionary definition of salarium at Wiktionary) or the price of having soldiers conquer salt supplies and guard the Salt Roads (Via Salaria) that led to Rome.[8][9] But there is no evidence for this assertion at all.[10] Some people even claim that the word soldier itself comes from the Latin sal dare (to give

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salt),[11] but mainstream sources disagree, noting that the word soldier more likely derives from the gold solidus introduced by Diocletian in 301 AD.[12]

Roman empire and medieval and pre-industrial Europe Regardless of the exact connection, the salarium paid to Roman soldiers has defined a form of work-for-hire ever since in the Western world, and gave rise to such expressions as "being worth one's salt".[13]

Within the Roman Empire or (later) medieval and pre-industrial Europe and its mercantile colonies, salaried employment appears to have been relatively rare and mostly limited to servants and higher status roles, especially in government service. Such roles were largely remunerated by the provision of lodging, food, and livery clothes (i.e., "food, clothing, and shelter" in modern idiom). Many courtiers, such as valets de chambre, in late medieval courts were paid annual amounts, sometimes supplemented by large if unpredictable extra payments. At the other end of the social scale, those in many forms of employment either received no pay, as with slavery (although many slaves were paid some money at least), serfdom, and indentured servitude, or received only a fraction of what was produced, as with sharecropping. Other common alternative models of work included self- or co-operative employment, as with masters in artisan guilds, who often had salaried assistants, or corporate work and ownership, as with medieval universities and monasteries.[13]

Commercial Revolution Even many of the jobs initially created by the Commercial Revolution in the years from 1520 to 1650 and later during Industrialisation in the 18th and 19th centuries would not have been salaried, but, to the extent they were paid as employees, probably paid an hourly or daily wage or paid per unit produced (also called piece work).[13]

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Share in earnings In corporations of this time, such as the several East India Companies, many managers would have been remunerated as owner-shareholders. Such a remuneration scheme is still common today in accounting, investment, and law firm partnerships where the leading professionals are equity partners, and do not technically receive a salary, but rather make a periodic "draw" against their share of annual earnings.[13]

Second Industrial Revolution From 1870 to 1930, the Second Industrial Revolution gave rise to the modern business corporation powered by railroads, electricity and the telegraph and telephone. This era saw the widespread emergence of a class of salaried executives and administrators who served the new, large-scale enterprises being created.

New managerial jobs lent themselves to salaried employment, in part because the effort and output of "office work" were hard to measure hourly or piecewise, and in part because they did not necessarily draw remuneration from share ownership.[13]

As Japan rapidly industrialized in the 20th century, the idea of office work was novel enough that a new Japanese word (salaryman) was coined to describe those who performed it, as well as referencing their remuneration.[13]

20th century In the 20th century, the rise of the service economy made salaried employment even more common in developed countries, where the relative share of industrial production jobs declined, and the share of executive, administrative, computer, marketing, and creative jobs—all of which tended to be salaried—increased.[13]

Salary and other forms of payment today

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Today, the concept of a salary continues to evolve as part of a system of the total compensation that employers offer to employees. Salary (also now known as fixed pay) is coming to be seen as part of a "total rewards" system which includes bonuses, incentive pay, commissions, benefits and perquisites (or perks), and various other tools which help employers link rewards to an employee's measured performance.[13]

Compensation has evolved considerably. Consider the change from the days of and before the industrial evolution, when a job was held for a lifetime, to the fact that, from 1978 to 2008, individuals who aged from 18 to 44, held an average number of 11 jobs.[14] Compensation has evolved gradually moving away from fixed short-term immediate

compensation

towards

fixed

+

variable

outcomes-based

compensation.[citation needed] An increase in knowledge-based work has also led to pursuit of partner (as opposed to employee) like engagement.

By country Botswana In Botswana, salaries are almost entirely paid on a monthly basis with pay dates falling on different dates of the second half of the month. Pay day usually ranges from the 15th of the month to the last day. The date of disbursement of the salary is usually determined by the company and in some cases in conjunction with the recognized Workers Union.

The Botswana Employment Act Cap 47:01 Chapter VII regulates the aspect of protection of wages in the contracts of employment. The minimum and maximum wage payment period with the exception of casual employees should not be less than one week or more than a month, and where not expressly stipulated a month is the default wage period per section 75 of the Act payable before the third working day after the wage period. The wages are to be paid during working hours at the place of employment, or in any other way, such as through a bank account with the consent of the employee. Salaries should be made in legal tender, however, part payment in kind is not prohibited provided it is appropriate for the personal use and benefit of employee and his family, and the value attributable to such payment in kind is fair and

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reasonable. The payment in kind should not exceed forty per cent of the total amount paid out to the employee.

The minimum wage is set, adjusted and can even be abolished by the Minister on the advice of the Minimum Wages Advisory Board for specified trade categories. The stipulated categories include building, construction, hotel, catering, wholesale, watchmen, the domestic service sector, the agricultural sector etc. The current minimum wages set for these sectors are set out in the Subsidiary legislation in the Act.

Women on maternity leave are entitled to 25% of their salaries as stipulated by the Employment Act but the majority of the companies pay out at about 50% for the period.[15]

DENMARK By working for the Danish Government, it has been agreed under political agreements, that the salary is dependent on the seniority, education, and of a qualification allowance.

EUROPEAN UNION According to European law, the movement of capital, services and (human) resources is unlimited between member states. Salary determination, such as minimum wage, is still the prerogative of each member state. Other social benefits, associated with salaries are also determined on member-state level.[16]

INDIA In India, salaries are generally paid on the last working day of the month (Government, Public sector departments, Multi-national organisations as well as majority of other private sector companies). According to the Payment of Wages Act, if a company has less than 1,000 Employees, salary is paid by the Company on 7th of

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every month. If a company has more than 1,000 Employees, salary is paid by the 10th of every month.[17]

Minimum wages in India are governed by the Minimum Wages Act, 1948.[18] Employees in India are notified of their salary being increased through a hard copy letter given to them.[19]

ITALY In Italy, the Constitution guarantees a minimum wage, as stated in Article 36, Paragraph 1[20]

"Workers have the right to remuneration commensurate to the quantity and quality of their work and in any case such as to ensure them and their families a free and dignified existence." This constitutional guarantee is implemented not through a specific legislation, but rather through collective bargaining which sets minimum wage standards in a sector by sector basis. Collective bargaining is protected by trade unions, which have constitutional rights such as legal personality. The Constitution also guarantees equal pay for women, as stated in Article 37, Paragraph 1[20]

"Working women are entitled to equal rights and, for comparable jobs, equal pay as men."

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2. RESERCH AND METHODOLOGY 2.1 Objectives of the Study The study was conducted with the following objectives: 1. To review the tax reforms being introduced by the Government in respect of Income Tax Laws and ascertain its impact on the salaried class. 2. To assess the efficiency of the administrative machinery for collection of income tax and management of taxation matters as per the Income Tax Act. 3. To understand and evaluate the tax planning measures being adopted by the salaried class of the State. 4. To assess whether there is significant differences in the tax planning measures adopted by different segments of the salaried class of the State, based on level of income and type of organisation. 5. To ascertain the level of awareness of the salaried class on various tax planning measures available under the Income Tax Act. 6. To analyse the impact of tax planning on savings habits and investment pattern of the assessees belonging to the salaried class.

2.2 Scope of the Study Taxation is considered as a complex matter affecting financial planning of each individual income tax assessees. The scope of the present study is limited to the tax planning measures adopted by the salaried income tax assessees of the State. The study also evaluates the extent of awareness of employees on tax laws and tax planning measures. The savings habits, investment pattern, repayment of liabilities, tax planning measures adopted for the period under study and the level of awareness of employees on tax laws and tax planning measures were studied and evaluated.

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3. REVIEW OF LITERATURE Boothalingam (1968) was appointed by the Government of India to examine the structure of direct and indirect taxes in India. He recommended to abolish the classification of income under various heads for determination of total income and to allow setting off losses against any kind of income for improvement in income tax structure. He highlighted that arrears of salary received when spread over a number of past years, resulted in reopening of many assessments. Thus, he recommended spreading the arrears of salary received over the future years rather than past years. He suggested for stablisation in tax rate structure over the years, elimination of surcharge and raising the exemption limit to Rs. 7500 for individuals and Rs. 10000 for HUF and discontinuation of personal allowances. He was of the opinion that number 53 of Public Relation Officers should be increased for the convenience of the taxpayers. Singh (1971) examined depreciation provisions under the Income Tax

Direct Tax Laws Committee (1978) was appointed by the Government of India on June 25, 1977 under the chairmanship of N.A. Palkhiwala. Later on C.C. Choksi took over the Chairmanship as Palkhiwala had to leave. The committee (also known as Choksi Committee) was directed to recommend measures for simplifying and rationalising the direct tax laws and improvement in administration. Committee observed that frequent amendments in tax laws led to uncertainty and confusion among tax payers and tax collectors. The committee made following suggestion in its final report: The various provisions relating to computation of income under the head salary and deductions should be grouped together in the sections dealing with computation of income under the head salary.

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Lall (1982)in his study analysed the impact of direct taxes on individual and business income. The study of average income tax rates for assessees in different income brackets from 1974-75 to 1978-79 revealed that average tax rates increased progressively with the increase in income bracket. But average tax rate was substantially lower than marginal tax rate applicable to that income bracket and trend showed a downward movement. The researcher suggested that statutory tax rates should not be reduced further for giving relief to assessees in the lower income brackets rather it should be done by raising the level of deductions, exemptions and rebates. The study also showed that annual average tax rate for five year period (1974-75 to 1978-79) for central government employees, state government employees and for non government employees was 7.8 per cent, 9 per cent and 11.8 per cent respectively. The reasons identified for such differences were the composition of salary income and discriminatory treatment of house rent allowance. The author also opined that saving schemes and concessions available under income tax law might not 64 increase total level of savings in the economy but rather reallocated of the existing level of savings. As a result of it the funds would flow from private sector to public sector. He opined that a thorough reform of corporate and personal income tax system should be undertaken. Economic Administrative Reforms Commission (1983) was constituted by Government of India to review income tax law, procedure and organization of the income tax department in 1981 under the chairmanship of L. K. Jha. Some important recommendations made by the commission were as follows: The employers should be permitted to deduct from the salary payable, tax on the employees incomes from sources like house property, interest on deposits etc., if the employees made a specific request to the employer and furnished necessary particulars.

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Shome, Aggarwal and Singh (1996) studied the system of Tax Deduction at Source (TDS) on income from salary, securities, lottery and payment to contractors in India. The authors opined that TDS was an effective instrument for quick and smooth collection of taxes. The study showed that 79 TDS as a percentage of net collection of income tax increased from 26.45 per cent in 1980-81 to 44.74 per cent in 1989-90 and then declined to 37.15 per cent in 1994-95. The ratio of refund varied between 11 to 22 per cent of the gross income tax collection. In the end, the researchers suggested that the scheme of TDS should be extended to cover activities where black money had been invested like the transfer of immoveable property and transaction of shares.

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4DATA ANALYSIS Income under the head Salaries 4.1 INTRODUCTION: Income from salary is the income or remuneration received by an individual for services he is rendering or a contract undertaken by him. This clause essentially assimilates the remuneration received by a person for the services provided by him under the contract of employment. This amount of remuneration will be considered as income for the purposes of Income Tax Act only if there is an Employer and employee relationship between the person who is making the payment and the person who is receiving the payment. Employer and Employee Relationship –Any payment that is received by a person will be treated as Income under Income Tax Act if there exist an Employer and employee relationship between the payer and payee. For the purpose of qualifying income as income from salary, their relationship should be that of a master and servant. Where a master is a person who directs his employee that what is to be done and how it is to be done and servant is the person who is liable to conduct that work in the manner told by his employer.

4.2Meaning of salary: Salary is defined to include: Wages; Pension; Annuity; Gratuity; Advance Salary paid; Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages; Annual accretion to the balance of Recognized Provident Fund; Leave Encashment; Transferred balance in Recognized Provident Fund;

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Contribution by Central Govt. or any other employer to Employees Pension A/c as referred in Sec. 80CCD

4.3Definition of salary [U/s 12]: Any salary received by an employee in a tax year, other than exempt salary under the Income Tax Ordinance 2001, shall be chargeable to tax in that year under the head salary. A person is salaried person where taxable salary exceeds 50% of taxable income from all heads of income.

Salary means: any amount received by an employee from any employment whether of a revenue or capital nature: "Employee" means any individual engaged in employment [including an employed director (Rule 6)]. [U/s 2(20)] "Employer" means any person who engages and remunerates an employee. [U/s 2(21)]“Employment” includes: [U/s 2(22)]. (1) A directorship or any other office involved in the management of a company; (2) A position entitling the holder to a fixed or ascertainable remuneration; or (3)The Holding or acting in any public office.

4.4Characteristics of Salary

1. The relationship of payer and payee must be of employer and employee for an income to be categorized as salary income. For example: Salary income of a Member of Parliament cannot be specified as salary, since it is received from Government of India which is not his employer.

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2. The Act makes no distinction between salary and wages, though generally salary is paid for non-manual work and wages are paid for manual work.

3. Salary received from employer, whether one or more than one is included in this head.

4. Salary is taxable either on due basis or receipt basis which ever maturesearlier: I) Due basis – when it is earned even if it is not received in the previous year. ii) Receipt basis – when it is received even if it is not earned in the previousyear. iii) Arrears of salary- which were not due and received earlier are taxablewhen due or received, whichever is earlier. 5. Compulsory deduction from salary such as employees’ contribution toprovident fund, deduction on account of medical scheme or staff welfarescheme etc. is examples of instances of application of income. In thesecases, for computing total income, these deductions have to be addedback. Example:SammiKhurana is an employee of a company. He comes to office only 5 hours in a day. He received Rs.20000 salary from the company. Explain with reasons that he is considered as an employee of a company or not. Solution: Although he is a part time employee of a company, however the amount so received shall be treated as salary income for the year.

4.5Gross Salary: Gross salary has many components to it and is the yearly or monthly salary before deductions have been made. There are differences between gross and net salary as well as basic and gross salary. Employees who are paid for their services are generally offered gross salary as their CTC, which is short form for cost to company. Cost to company is a term that implies the expense that the company will have to incur on an employee for a specific year. However, cost to company is an amount that is never equal to the amount of money you get to take home.

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What is Meant by Gross Salary? Gross salary is the monthly or yearly salary of an individual before any deductions are made from it. Components such as basic salary, house rent allowance, provident fund, leave travel allowance, medical allowance, Professional Tax etc. are some of the most prominent components of gross salary.

4.6Components that Form a Part of Gross Salary: Listed below are the various components that together make up the gross salary.

Basic salary, pension component, gratuity component, salary arrears, fee or remuneration, payment for overtime, ex-gratia and performance-related cash awards Allowance such as house rent allowance, medical allowance, leave travel allowance, dearness allowance and other such special allowances Perquisites like rent for accommodation, electricity, water and fuel charges Pension received from former employer

4.7Components that do not Form Part of Gross Salary: Following are the few things that do not form part of gross salary paid by an employer to an employee. Reimbursement for medical expenses Leave Travel Concession Leave encashment rolled out at the time of retirement of employee Free meals or snacks or refreshment provided by the employer to its employees, during office hours

4.8Difference between Gross Salary and Net Salary? The difference between gross salary and net salary is that while gross salary is your salary before any deductions are made from the salary, net salary is the salary an employee takes home after all deductions have been made.

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Gross Salary Under Section 17(1) According to Section 17(1) salary includes the following amounts received by an employee from his employer, during the previous year Wages; Any annuity or pension; (Family pension received by heirs of an employee is taxable under income from other sources); Any gratuity; Any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages; Any advance of salary; Any payment received by an employee in respect of any period of leave not availed of by him; (Leave encasement or salary in lieu of leave); The annual accretion to the balance at the cr. of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under Rule 6 of part A of the Fourth Schedule; and The aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of Rule 1] of Part A of the Fourth Schedule, of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax, under sub-rule (4) there, i.e., taxable portion of transferred balance from unrecognised provident fund to recognised provident fund. The contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in Section 8OCCD. Taxation Process of Gross Salary: For calculation of Income Tax, gross salary minus the eligible deductions are considered. For example, you will have to deduct HRA exemption, any home loan EMI, investments under section 80C and 80D and similar such things for calculation of taxable income. This taxation process is different for self-employed and salaried individuals.

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4.9 TAXABILITY OF VARIOUS COMPONENTS OF SALARY: ALLOWANCE: MEANING:

Allowance is a fixed monetary amount paid by the employer to the employee for meeting some particular expenses, whether personal or for the performance of his duties. These allowances are generally taxable and are to be included in the gross salary unless a specific exemption has been provided in respect of any such allowance.

(A). FULLY TAXABLE ALLOWANCE: (1). Dearness Allowance: (A). MEANING: dearness

allowance is defined as the cost of living adjustment

allowance which the government offers to public sector employees, as well as pensioners of the same. Dearness Allowance is a component of the salary which is applicable to employees in India as well as Bangladesh. Basically, Dearness Allowance is understood as a component of salary which is a fixed percentage of an employee’s basic salary, which aims to hedge the impact of inflation. Since, this allowance is related to the cost of living, the Dearness Allowance component differs for various employees based on their location. This implies that Dearness Allowance is different for employees working in the urban sector, semi-urban sector and the rural sector.

(B). INCOME TAX AND EXEMTION LIMIT OF DEARNESS ALLOWANCE: According to the Assessment Year 2017-18, Dearness Allowance is fully taxable for individuals who are salaried employees. In case the said employees are offered rent free accommodation by the employer, which is unfurnished, wherein all prerequisites are met, dearness allowance becomes part of the salary to the extent wherein it forms a component of the retirement benefit salary.

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(C).CALCULATION OF DEARNESS ALLOWANCE: For Central Government employees: Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 12 months- (115.76/115.76*100) For Central public sector employees after 1/1/2007: Dearness Allowance % = ((Average of AICPI (Base Year 2001=100) for the past 3 months(126.33/126.33*100)

(D). HIKE IN DEARNESS ALLOWANCE UNDER RECENT BUDGET 2018: It was quite a relief to most central government employees when the hike in the Dearness Allowance was announced. The Union Cabinet raised the Dearness Allowance of government employees by 2% recently. This move was spearheaded by Indian Prime Minister, Mr. Narendra Modi, and is aimed at benefiting almost50 lakh Central Government employees and around55 lakh pensioners. In an effort to reduce the inflation effects on the salaries of these employees, dearness allowance hike is generally offered to pensioners and staffers. 2018 has been the year of drastic changes on the taxation ecosystem. The new budget brought a number of new advancements and developments. The Dearness Allowance was increased to 7% from an earlier rate of 5%, for almost more than11 million government employees. As per the proposed changes, this increase in DA in all probability, will work in the favour of more than48.41 lakh central employees and61.17 lakh pensioners and staffers.

(2).Entertainment Allowance: This deduction is allowed only to a Government employee. Non-Government employees shall not be eligible for any deduction on account of any entertainment allowance received by them. In case of entertainment allowance, the assesses is not entitled to any exemption but he is entitled to a deduction under section 16(ii) from gross salary. Therefore, the

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entire entertainment allowance received by any employee is added in computation of the gross salary. The Government employee is, then, entitled to deduction from gross salary under section 16(ii) on account of such entertainment allowance to the extent of minimum of the following3limits. Actual entertainment allowance received during the previous year. 20% of his salary exclusive of any allowance, benefit or other perquisite. 5,000

(3).Overtime Allowance: Employers may provide an overtime allowance to employees working over and above the regular work hours. This is called overtime and any allowance received for this is fully taxable.

(4).City Compensatory Allowance: City Compensatory Allowance is paid to employees in an urban centre which may be highly expensive and to cope with the inflated living costs in the cities. This allowance is fully taxable.

(5).Interim Allowance: When an employer gives any Interim Allowance in lieu of final allowance, this becomes fully taxable.

(6). Project Allowance: When an employer provides an allowance to employees to meet project expenses, this is also fully taxable. Hu

(7). Tiffin/Meals Allowance: Sometimes employers may provide Tiffin/Meals Allowance to the employees. This is fully taxable.

(8). Cash Allowance: When the employer provides a cash allowance like marriage allowance, bereavement allowance or holiday allowance, it becomes fully taxable.

(9). Non-Practicing Allowance: When physicians are attached to Clinical Centre’s of the various Laboratories/Institutes, any non-practicing allowance paid to them become fully taxable

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(10). Warden Allowance: When an employer pays an allowance to an employee working as a Warden i.e. Keeper in an educational Institute, the allowance received is fully taxable.

(11). Servant Allowance: When an employer pays an employee to engage services of a servant, such an allowance is taxable.

(B). PARTIALLYEXEMPTED ALLOWANCES: This category includes allowances which are exempt up to certain limit specified in Income Tax Rules. For certain allowances, exemption is dependent on amount of allowance spent for the purpose for which it was received and for other allowances, there is a fixed limit of exemption. They are as follows:

HRA (House Rent Allowance): House Rent Allowance, or commonly known as HRA, is an amount which is paid by employers to employees as a part of their salaries. This is basically done as it helps provide employees with tax benefits towards the payment for accommodations every year. The decision of how much HRA needs to be paid to the employee is made by the employer on the basis of a number of different criteria such as the salary and the city of residence. Regulated by the provisions of Section 10(13A) of the IT Act, the house rent allowance serves to be quite beneficial to salaried employees in India. As per law, only salaried employees can claim HRA and self-employed individuals are exempt from doing the same. HRA, as an exemption is provided, only if the employee is living in rented accommodations. However, also in case the employee lives in his or her own house and does not pay any rent, he or she cannot claim HRA to save on taxes.

(a). Basis on which HRA is decided: Primarily, HRA is decided based on the salary. However, there are some other factors that also affect HRA, such as the city in which the employee resides. In case the individual resides in a metro city, then he/she is entitled to an HRA equal to 50% of the salary. For cities other than a metro, the entitlement is 40% of the salary.

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In order to calculate the HRA, the salary is defined as the sum of the basic salary, dearness allowances and any other commissions. If an employee does not receive a commission or a dearness allowance, then the HRA will be around 40% - 50% of his/her basic salary. The actual HRA offered, in all probability, will be the lowest of the following three provisions: The actual rent that is paid should be less than 10% of the basic salary. In case you’re staying in a metro, 50% of the basic salary and 40% if you live in a non-metro city. The actual amount received as the HRA from the employer.

(b)How is HRA Calculated? HRA or The House Rent Allowance serves as a crucial component of an individual's salary. It defines the total amount allotted by the employer towards the employee's accommodation as rent. The amount allotted for HRA proves to be beneficial for an employee as it is calculated for tax deductions for a particular financial year. HRA also helps in reducing the taxable income that you are liable to pay. The tax benefits associated with HRA are only applicable for those salaried individuals who stay in a rental accommodation. If an employee stays in his or her own house, he or she is not eligible to claim the amount for tax deductions. Calculation of HRA is based on a number of factors, such as the entitlement to 50% of the basic salary, if the employee is residing in a metro city and 40% in case, he/she stays in any of the other cities. The calculation of HRA for tax benefit is considered from any of the following three listed provisions: The actual rent that is paid should be less than 10% of the basic salary. In case you’re staying in a metro, 50% of the basic salary and 40% if you live in a non-metro city. The actual amount allotted by the employer as the HRA. The least of the aforementioned amount will be considered for tax deduction from HRA Calculation of HRA is based on a number of factors, such as the entitlement to 50% of the basic salary, if the employee is residing in a metro city and 40% in case, he/she

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stays in any of the other cities. The calculation of HRA for tax benefit is considered from any of the following three listed provisions: The actual rent that is paid should be less than 10% of the basic salary. In case you’re staying in a metro, 50% of the basic salary and 40% if you live in a non-metro city. The actual amount allotted by the employer as the HRA.

Example: In order to understand how to calculate HRA for an employee, let us consider an example of Mr. RAHUL GANDHI. RAHUL resides in New Delhi in a rented accommodation, paying a rent of Rs. 10,000 per month. Here’s what his payslip looks like-

EMPLOYEE

NUMBER-

RAHUL

1008

GANDHI

AMOUNTS

Basic

30,000

PF

2000

HRA

13,000

Professional Tax

200

Conveyance

3,000

Special Allowance

2,000

Medical expenses

1,250

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The least of the aforementioned amount will be considered for tax deduction from HRA For the purpose of calculating Rahul Gandhi HRA that is exempt from Income Tax, we have the following information: His basic salary is Rs. 30,000 per month, which will be considered since there is no commission or dearness allowance HRA provided by company is Rs. 13,000 per month 10% of the annual basic salary comes to Rs. 36,000 Now, let’s calculate the same in the following three scenarios: Amount received as HRA from employer = Rs. 13,000 X 12 (months) = Rs. 1,56,000 Or, Actual rent paid less 10% of basic = (Rs. 10,000 X 12) – Rs. 36,000 = Rs. 84,000 50% of basic salary since he lives in a metro = Rs. 1,80,000 Hence, based on the above calculation, it is evident that the HRA amount, which will be exempt from tax for M. Rahul, will be Rs. 84,000 as that comes to be the least of the three amounts in the scenarios stated above.

(c). Claim Rules for HRA:The rules that are applicable for HRA claims are listed as followsYour allotted HRA cannot exceed more than 50% of your basic salary. As a salaried employee, you cannot claim for the full rental amount you are paying. Your exemption will be based on the least of the below mentioned options: The actual amount allotted by the employer as the HRA. Actual rent paid less 10% of the basic salary. 50% of the basic salary, if the employee is staying in a metro city (40% for a nonmetro city). You can also avail tax benefits of HRA along with a home loan. In case you stay with your parents, you are eligible to pay rent to your parents and collect a receipt for HRA claim. However, similar rules don't allow you to pay rent to your spouse and claim a tax exemption.

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If the annual rent of your accommodation exceeds Rs.1,00,000, then presenting the landlord's PAN card is mandatory. Also, in case the landlord does not have a PAN card, he/she can provide a self-declaration.

House Rent Allowance (HRA) Tax Benefits – Lose without Landlord’s Pan The Circular (08/2013) states that “an employee claiming exemption from tax with respect to House Rent Allowance received is now required to report the PAN of the landlord to the employer, if the rent paid by the employee to the landlord exceeds Rs. 1 Lakh per annum, along with the rent receipt. “In simple words, if the annual rent is above Rs. 1 Lakh, then the employee must report the PAN details of the landlord to the employer. If the landlord is not having a PAN then the landlord must submit a declaration to this effect along with his name and address. House Rent Allowance (HRA) – Factors Deciding Exemption From the above rules, it is clear that there are 4 factors which decide your eligibility for House Rent Allowance (HRA) exemption. They are: Actual HRA received by you Actual Rent paid by you Your city of residence Your salary (Basic Pay & DA) The step is to plug 2 loopholes in the system: To stop the abuse of House Rent Allowance (HRA) claims Furnish the correct rent income information by the landlord

House rent accommodation and rent-free accommodation are different things. Rent free accommodation is residential space given by employer to employee without or with partial rent. Rent free accommodation is perquisites u/s. Rent free accommodation is nonmonetary benefit and HRA is monetary benefit. Both are covered under salary head. Self-employed person cannot avail HRA exemption benefit. But he can avail deduction u/s 80GG for rent paid during the year if he has not owned house.

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You can pay rent to your parents and claim it for HRA exemption. The parents should show the rent amount as income for income tax purpose. But you cannot claim HRA for rent paid to spouse. You can avail home loan interest and principal exemption simultaneously with HRA exemption (3) Special Allowances to meet personal expenses: There are certain allowances given to the employees for specific personal purposes and the amount of exemption is fixed i.e. not dependent on actual expenditure incurred in this regard. These allowances include

Allowance name

Exemption limit

Children education allowance (maximum 2 children) Children hostel allowance (maximum 2 children)

Rs. 100/- p.m. Per child

Transport allowance

Rs.

Any allowance granted to an employee working in any transport system

Rs. 10,000/p.m. Or 70% of allowance (whichever is lower) Rs. 200/- p.m. Rs. 800/- p.m. Rs. 2,600/- p.m. Rs. 1,000/- p.m.

Tribal area allowance Underground allowance Compensatory field area allowance Compensatory modified field area allowance Counter-insurgency allowance to members of armed forces

Rs. 300/- p.m. Per child 800/p.m. Or Rs. 1600/- p.m. (for handicapped)

Rs. 3,900/-p.m.

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Table: For the purpose of easy comparison, we can put the allowances and their taxability in the following table: Taxable allowances Dearness allowance Entertainment allowance Overtime allowance City compensatory allowance Interim allowance Project allowance Tiffin/meals allowance Cash allowance Non-practicing allowance Warden allowance Servant allowance

Partly-taxable allowances Tax-exempt allowances

HRA Fixed medical allowance Special allowance

Govt. employees posted abroad Sumptuary allowance Allowance for UNO employees City compensatory allowance

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(C). FULLY EXEMPT ALLOWANCES: The following allowances prescribed by the Central Board of Direct Taxes under Rule 2BB of the Income-tax rules are fully exempt to the extent actually incurred by the employee and any saving out of such allowance will be fully taxable Some of the allowances, usually paid to Government servants, judges and employees of UNO are not taxable. These are: Allowances paid to Govt. servants abroad: When servants of Government of India are paid an allowance while serving abroad, such income is fully exempt from taxes. Sumptuary allowances: Sumptuary allowances paid to judges of HC and SC is not taxed. Allowance paid by UNO: Allowances received by employees of UNO are fully exempt from tax. Compensatory allowance paid to judges: When a judge receives compensatory allowance, it is not taxable. Illustration (based on different allowances received by employee) From the following particulars, compute gross salary of Mr X for the assessment year 2006-07. He is employed in textile industry in Mumbai at a monthly salary of Rs.4000. He is entitled to commission of 1% on sales achieved by him, which were Rs.10 lakh for the year. In addition, he received the following allowances from the employer during the previous year: 1. Dearness Allowance Rs.2000 per month which is granted under terms of employment and counted for retirement benefits. 2. Bonus Rs.3200 3. House Rent Allowance Rs.1000 per month (Rent paid for house in Mumbai Rs.1200 per month) 4. Entertainment Allowance Rs.1000 per month

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5. Children Education Allowance Rs.500 per month 6. Transport Allowance Rs.1000 per month 7. Medical Allowance Rs.500 per month 8. Servant Allowance Rs.200 per month 9. City Compensatory Allowance Rs.300 per month 10. Research Allowance Rs.500 per month (amount spent on research Rs.3000)

Solution: Computation of Income from Salary of Mr. X for the Assessment Year 2006-07 Particular

Rs.

Basic Salary

48,000

Dearness Allowance

24,000

Commission

10,000

Bonus

32,000

House Rent Allowance (Rs.1000 x 12 – Amount exempt Rs.6200)

5,800

Entertainment Allowance

12,000

Children Education Allowance (Rs.500 x 12 – Amount exempt Rs.100 3,600 x 2 x 12)

2,400

Transport Allowance (Rs.1000 x 12 – Amount exempt Rs.800 x 12)

6,000

Medical Allowance (fully taxable Servant Allowance (fully taxable)

2,400

City Compensatory Allowance (fully taxable)

3,600

Research Allowance (Rs.500 x 12 – Amount exempt Rs.3000)

3,000

Gross Salary

152,800

Amount of HRA exempt is least of 3 amounts a) 50% of Salary (Basic Salary + DA granted under terms of employment + Commission based on percentage of turnover – Rs.48,000 + Rs.24,000 + Rs.10,000 = Rs.82,000) = Rs.41,000

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b) Actual HRA received: Rs.1000 x 12 = Rs.12,000 c) Rent paid (Rs.1200 x 12) – 10% of Salary (Rs.82,000) Rs.14,400 – Rs.8,200 = Rs.6,200

SECTION 17(2) – PERQUISITES UNDER THE INCOME TAX ACT Perquisites are nothing but the benefits that are enjoyed by or entitles to a person on account of his position or job. This article deals with the taxability of additional benefits provided by the employers to their employees as provided and regulated by section 17(2) of the Income Tax Act, 1961. MEANING OFPERQUISITE: The term ‘perquisite’ indicates some extra benefit in addition to the normal salary provided to the employees. These may be provided free of cost or at concessional rates to the employees. Some examples of perquisites are: rent-free accommodation, provision of a motor car for personal use, use of health club, refreshment during office hours, etc. The questions that arise from a tax point of view is Whether such perks are taxable? If yes, how do we value the benefit received? Whether there are any exemptions available? Let us discuss the features and taxability of these perquisites and how can it impact your income tax return.

Definition: Under the Act, the term ‘perquisite’ is defined by section 17(2) to include the following: (a) the value of rent-free accommodation provided to the assessee by his employer [section 17(2)(I)]; (b) The value of any concession in the matter of rent respecting any accommodation

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provided to the assessee by his employer [section 17(2)(ii)]; (I) Under section 17(2)(ii), the value of any concession in the matter of rent arising to an employee in respect of any accommodation provided by his employer is considered as "perquisite" chargeable to tax in the hands of the employee. (ii) Rule 3(1) of the Income-tax Rules provides the basis of valuation of perquisites in respect of accommodation provided to an employee, as under: (a) 15% of salary in cities having population exceeding 25 lakhs (b) 10% of salary in cities having population above 10 lakhs up to 25 lakhs (c) 7.5% of salary in cities having population up to 10 lakhs. (iii) In case of furnished accommodation provided by an employer, the value arrived as above was to be further increased by 10 per cent of the cost of furniture, where the same is owned by the employer, or the actual hire charges paid by the employer in case the furniture is hired. (iv) This method of perquisite valuation resulted in genuine hardship to employees availing facility of residential accommodation in remote areas, as the value of perquisite was determined as a percentage of salary of the employee, irrespective of the fair rental value of the property (which may be much lower than 15%/10%/7.5% of salary in such cases). (v) Rule 3(1) was challenged as ultra vires before the Supreme Court in the case of Arun Kumar v. UofL (2006) 286 ITR 89. The Apex court, while holding that the provisions of Rule 3(1) were constitutionally valid, observed that the same would be applicable only if 'concession in the matter of rent' with respect to the accommodation provided by an employer accrues to the employee under the substantive provisions of section 17(2)(ii). The Assessing Officer, before applying Rule 3(1), was required to establish that there was 'concession in the matter of rent' provided to the employee. (vi) Further, as per the Apex court, the difference between the values as per Rule 3(1)

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and the rent recovered from the employee, could not per se be considered as ‘concession in the matter of rent’ provided to the employee. (1)

(2)

Type of accommodation

Deemed concession in the matter of rent

Accommodation owned by the employer In cities having a population exceeding 25 lakhs

15% of salary minus rent recoverable from employees

In cities having a population exceeding 10 lakhs 10% of salary minus rent recoverable from the but not exceeding 25 lakhs employee. In other cities

7½% of salary minus rent recoverable from employee

Accommodation taken on lease by the employer

Rent paid by the employer or 15% of salary, whichever is lower, minus rent recoverable from the employee.

(viii) This deeming provision is applicable to employees other than Government employees. In case of furnished accommodation provided to such employees, the excess of hire charges paid or 10% p.a. of cost of furniture, as the case may be, over and above the charges paid or payable by the employee would be added to the value determined in column (2) above for determining whether there is a concession in the matter of rent. Note – Once there is a deemed concession, the provisions of Rule 3(1) would be applicable in computing the taxable perquisite. (ix) “Salary” includes pay, allowances, bonus or commission payable monthly or otherwise or any monetary payment, by whatever name called, from one or more employers, as the case may be. However, it does not include the following, namely– (1) dearness allowance or dearness pays unless it enters into the computation of superannuation or retirement benefits of the employee concerned; (2) employer’s contribution to the provident fund account of the employee; (3) allowances which are exempted from the payment of tax; (4) value of the perquisites specified in section 17(2); (5) any payment or expenditure specifically excluded under the proviso to section

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17(2) i.e., medical expenditure/payment of medical insurance premium specified therein. (x) In case of Government employees, the excess of licence fees determined by the employer as increased by the value of furniture and fixture over and above the rent recovered/recoverable from the employee and the charges paid or payable for furniture by the employee would be deemed to be the concession in the matter of rent. (c) The value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases (i.e. in case of specified employees): (I) by a company to an employee in which he is a director; (ii) by a company to an employee being a person who has substantial interest in the Company (i.e. 20% or more of the voting rights of the company); (iii)By any employer (including a company) to an employee to whom the provisions of (I) & (ii) do not apply and whose income under the head ‘salaries’ (whether due From, or paid or allowed by, one or more employers) exclusive of the value of all Benefits or amenities not provided for by way of monetary benefits exceeds ` 50,000 [Section 17(2) (iii)]; (d) Any sum paid by the employer in respect of any obligation which, but for such payment, Would have been payable by the assessee [Section 17(2) (IV)]; (e) Any sum payable by the employer whether directly or through a fund, other than a Recognised provident fund or approved superannuation fund or deposit-linked insurance Fund to affect an assurance on the life of the assessee or to affect a contract for an Annuity [Section 17(2) (v)]; (f)The value of any specified security or sweat equity shares allotted or transferred, directly Or indirectly, by the employer or former employer, free of cost or at concessional rate to

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The assessee [Section 17(2) (VI)]; Specified security means “securities” as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956. It also includes the securities offered under employees Stock option plan or scheme. Sweat equity shares means equity shares issued by a Company to its employees or directors at a discount or for consideration other than cash For providing know-how or making available rights in the nature of intellectual property Rights or value additions, by whatever name called. The value of specified security or sweat equity shares shall be the fair market value of Such security or shares on the date on which the option is exercised by the assesse, as Reduced by any amount actually paid by, or recovered from, the assessee in respect of Such security or shares. The fair market value means the value determined in Accordance with the method as may be prescribed by the CBDT. “Option” means a Right but not an obligation granted to an employee to apply for the specified security or Sweat equity shares at a pre-determined price. (g)The amount of any contribution to an approved superannuation fund by the employer in Respect of the assessee, to the extent it exceeds ` 1 lakh [Section 17(2) (vii)];

(h)The value of any other fringe benefit or amenity as may be prescribed by the CBDT [Section 17(2) (viii)]. It can be noted that the aforesaid definition of perquisite is an inclusive one. More terms can

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Be added in.

Monetary perquisite:

Employer either reimburses the expenses incurred by the employee for such facilities or pays on behalf of the employee. Ex: personal gas bills of the employee are in the name of employee and the employer reimburses the amount of such gas bills to him or pays on his behalf to the gas agency, it is in monetary terms and taxable in case of all employees; on the other hand, if such bills are in the name of employer, it will be perquisite in case of specified employee only. Non-monetary perquisite:

Payments which can be called non-monetary payments are car facility, benefit on account of interest-free loans, rent-free accommodation, furniture provided to employees etc.

Features of a Perquisite

It may be provided in cash or in kind Reimbursement of expenses incurred during performance of official duty is not a perquisite Perquisite can be made taxable only if it has a legal origin. An undue advantage taken by the employee without the employer’s sanction cannot be considered as a perquisite

CATEGORIES OF A PERQUISITE

The perquisites received by an employee from his employer can be classified into 2 categories based on taxability: .

(1) Perquisites taxable in the case of all employees: The following perquisites are chargeable to tax in all cases.

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1) Value of rent-free accommodation provided to the assessee by his employer [Section 2) 17(2) (I)]. 3) Exception: Rent-free official residence provided to a Judge of a High Court or to a Judge 4) Of the Supreme Court is not taxable. Similarly, rent-free furnished house provided to an 5) Officer of Parliament is not taxable. [For valuation, refer to para 4.20] 6) Value of concession in rent in respect of accommodation provided to the assessee by his 7) Employer [Section 17(2) (ii)]. 8) Amount paid by an employer in respect of any obligation which otherwise would have 9) Been payable by the employee [Section 17(2) (IV)]. For example, if a domestic servant is 10) engaged by an employee and the employer reimburses the salary paid to the servant, it 11) becomes an obligation which the employee would have discharged even if the employer 12) Did not reimburse the same. This perquisite will be covered by section 17(2)(iv) and will 13) Be taxable in the hands of all employees. 14) Amount payable by an employer directly or indirectly to affect an assurance on the life of 15) the assessee or to affect a contract for an annuity, other than payment made to RPF or 16) approved superannuation fund or deposit-linked insurance fund established under the 17) Coal Mines Provident Fund or Employees’ Provident Fund Act. However, there are 18) schemes like group annuity scheme, employees state insurance scheme and fidelity

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19) insurance scheme, under which insurance premium is paid by employer on behalf of the 20) Employees. Such payments are not regarded as perquisite in view of the fact that the 21) Employees have only an expectancy of the benefit in such schemes. 22) the value of any specified security or sweat equity shares allotted or transferred, directly 23) or indirectly, by the employer or former employer, free of cost or at concessional rate to 24) The assessee. 25) the amount of any contribution to an approved superannuation fund by the employer in 26) Respect of the assessee, to the extent it exceeds ` 1 lakh. 27) The value of any other fringe benefit or amenity as may be prescribed by the CBDT.

(2)Perquisites exempt from tax in all cases: The following perquisites are exempt from tax in all cases 1) Telephone provided by an employer to an employee at his residence; 2) Goods sold by an employer to his employees at concessional rates; 3) Transport facility provided by an employer engaged in the business of carrying of 4) passengers or goods to his employees either free of charge or at concessional rate; 5) Privilege passes and privilege ticket orders granted by Indian Railways to its employees; 6) Perquisites allowed outside India by the Government to a citizen of India for rendering 7) services outside India; 8) Sum payable by an employer to an RPF or an approved superannuation fund or deposit-

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9) linked insurance fund established under the Coal Mines Provident Fund or the 10) Employees’ Provident Fund Act; 11) Employer’s contribution to staff group insurance scheme; 12) Leave travel concession; 13) Payment of annual premium by employer on personal accident policy effected by him on 14) the life of the employee; 15) Refreshment provided to all employees during working hours in office premises; 16) Subsidized lunch or dinner provided to an employee; 17) Recreational facilities, including club facilities, extended to employees in general i.e., not 18) restricted to a few select employees; 19) Amount spent by the employer on training of employees or amount paid for refresher 20) management course including expenses on boarding and lodging; 21) Medical facilities subject to certain prescribed limits; [Refer to point 10 of para 4.20] 22) Rent-free official residence provided to a Judge of a High Court or the Supreme Court; 23) Rent-free furnished residence including maintenance provided to an Officer of 24) Parliament, Union Minister and a Leader of Opposition in Parliament; 25) Conveyance facility provided to High Court Judges under section 22B of the High Court 26) Judges (Conditions of Service) Act, 1954 and Supreme Court Judges under section 23A 27) Of the Supreme Court Judges (Conditions of Service) Act, 1958.

(3) Perquisites taxable only in the hands of specified employees [Section 17(2) (iii)]: The value of any benefit or amenity granted or provided free of cost or at concessional rate which have

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Not been included in 1 & 2 above will be taxable in the hands of specified employees: Specified employees are: (I) Director Employee: An employee of a company who is also a director is a specified Employee. It is immaterial whether he is a full-time director or part-time director. It also does not Matter whether he is a nominee of the management, workers, financial institutions or the Government. It is also not material whether or not he is a director throughout the previous year. (ii) An employee who has substantial interest in the company: An employee of a Company who has substantial interest in that company is a specified employee. A person has A substantial interest in a company if he is a beneficial owner of equity shares carrying 20% or Beneficial and legal ownership: In order to determine whether a person has a substantial Interest in a company, it is the beneficial ownership of equity shares carrying 20% or more of The voting power that is relevant rather than the legal ownership.

Example: A, Karta of a HUF, is a registered shareholder of Bright Ltd. The amount for Purchasing the shares is financed by the HUF. The dividend is also received by the HUF. Supposing further that A is the director in Bright Ltd., the question arises whether he is a Specified employee. In this case, he cannot be called a specified person since he has no

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Beneficial interest in the shares registered in his name. It is only for the purpose of satisfying The statutory requirements that the shares are registered in the name of A. All the benefits Arising from the shareholding goes to the HUF. Conversely, it may be noted that an employee Who is not a registered shareholder will be considered as a specified employee if he has? Beneficial interest in 20% or more of the equity shares in the company. (iii) Employee drawing in excess of ` 50,000: An employee other than an employee Described in (I) & (ii) above, whose income chargeable under the head ‘salaries’ exceeds ` 50,000 is a specified employee. The above salary is to be considered exclusive of the value Of all benefits or amenities not provided by way of monetary payments. In other words, for computing the limit of ` 50,000, the following items have to be excluded or Deducted: (a) All non-monetary benefits; (b) Monetary benefits which are exempt under section 10. This is because the exemptions Provided under section 10 are excluded completely from salaries. For example, HRA or Education allowance or hostel allowance are not to be included in salary to the extent to Which they are exempt under section 10. (c) Deduction for entertainment allowance [under section 16(ii)] and deduction toward Professionaltax [under section 16(iii)] is also to be excluded. If an employee is employed with more than one employer, the aggregate of the salary

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Received from all employers is to be taken into account in determining the above ceiling limit of ` 50,000, i.e. Salary for this purpose = Basic Salary + Dearness Allowance + Commission, whether payable monthly or turnover Based + Bonus + Fees + Any other taxable payment + any taxable allowances + any Other monetary benefits – Deductions under section 16] VALUATION OF PERQUISITES:

Now that we are clear on which perquisites are required to be taxed, the next question that arises is how to calculate the value of the benefit received. Let us discuss the valuation of some important perquisites as covered in most of the pay packages. Valuation of Rent-Free Accommodation The valuation of the benefit received in respect of rent-free accommodation can be categorised as follows Where

the

employer

owns

the

accommodation

provided

the value in respect of such an accommodation would depend upon the population of the place where such accommodation is provided

Population

in

the

place

accommodation is provided

where

the

Value of Perquisite to be taxed

Less than 10 Lakhs

7.5% of salary

10 to 25 Lakhs

10% of salary

More than 25 Lakhs

15% of salary

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Salary would be calculated in respect of the period during which the said accommodation was occupied by the employee during the previous year Where

the

is

taken

on

lease

/

rent

by

the

employer

the value of perquisite in such a case would be lower of the two Actual rent paid / payable by the employer or 15% of the salary

Note: The above values are calculated in respect of unfurnished accommodation. However, if a furnished accommodation has been provided, the value of the furniture would be required to be added separately to the above-calculated values which can be ascertained as follows: If the furniture is owned by the employer – 10% of the cost of the furniture for each year If the furniture is hired from a third party – Actual hire charges payable for the same Where

the

accommodation

has

been

provided

in

a

hotel

the value of perquisite in such a case would be lower of the two Actual hotel charges paid / payable by the employer or 24% of the salary Note: Salary for the purpose of this section would mean Basic salary + Dearness allowance (if terms of employment so provide) + All taxable cash components of salary like bonus, commission, allowances, etc.

Valuation of the Motor Car for Personal Use The valuation of benefit in respect of motor car provided can be categorised as follows Situation A: Employee’s Car and expense borne by the employer Situation B: Employer’s Car and expense borne by the employer Situation C: Employer’s Car and expense borne by the employee

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Scenario

Situation 1

Situation 2

Situation 3

Mixed usage of motor vehicle – Both private and personal use

Actual cost borne by employer less fixed amounts as below (Car<1.6cc: Rest 1800 per month Car>1.6cc: Rest 2400 per month) If the driver is provided by the employer, further Rest 900 per month in respect of driver to be reduced

Fixed amount per month as follows (Car<1.6cc: Rs 1800 per month Car>1.6cc: Rs 2400 per month) If the driver is provided by the employer, further Rs 900 per month in respect of driver to be added

A fixed amount per month as follows (Car<1.6cc: Rs 1800 per month Car>1.6cc: Rs 2400 per month) If the driver is provided by the employer, further Rs 900 per month in respect of driver to be added

Cost to Employer + additional wear and tear cost @ 10% per annum of the cost of vehicle

Cost to Employer + additional wear and tear cost @ 10% per annum of the cost of vehicle

Usage fully for private purpose

Cost to Employer

The value of taxable perquisite can be calculated as follows Usage of Movable Assets of the Employer

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Nature of Asset

Value of taxable perquisite

Computers and Laptops

Nil

Other assets owned by the employer

10% per annum of cost

Other assets taken on lease by the employer

Actual hire charges

The value of taxable perquisite can be calculated as follows Transfer of Movable Assets of the Employer The value of taxable perquisite can be calculated as follows: NATURE OF ASSET

VALUE OF TAXABLE PERQUISITE

Actual cost Less depreciation charged at 50% by WDV ELECTRONIC

ITEM method for each completed year of usage

AND COMPUTER

MOTOR CAR

Actual cost Less depreciation charged at 20% by WDV method for each completed year of usage

The valuation in respect of other perquisites would depend upon the actual benefit received by the employee / cost incurred by the employer for providing such a perquisite. Example Following are the details of income of Hamid Sarfraz for the financial year ended June 30, 2016, who is employed with a company as Senior Manager. PayRs. 60,000 per month House rent allowance Rs. 27,000 per month Utilities Rs. 8,000 per month

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He was provided with a company-maintained car of 800CC. Compute the taxable income of Hamid Sarfraz for the year if. The cost of the car to the company was Rs. 500,000 and car was provided for personal use only. The cost of the car to the company was Rs. 500,000 and car was provided for business use only. The cost of the car to the company was Rs. 500,000 and car was provided partly for personal and partly for business use. The car is acquired by company on lease of Rs.850, 000 and the FMV of the car is Rs.500, 000 and car was provided for personal use only.

Solution: Particular

Case 1 Rs.

Case 2 Rs.

Case 3 Rs.

Case 4 Rs.

720,000 324,000 96,000

720,000 324,000 96,000

720,000 324,000 96,000

720,000 324,000 96,000

Personal use only (500,000 x 10%)

-

-

-

50,000 Business use only Business and personal use (500,000 x 5%)

-

25,000

-

Personal use only (500,000 x 10%)

-

-

50,000

Salary (60,000 x 12) House Rent allowance (27,000 x 12) Utilities (8,000 x 12) Car provided for:

-

Differences between Allowances and Perquisites Allowances are paid in cash as a fixed amount of sum on a monthly basis to meet certain particular requirements for use in the course of the performance of duties. This amount may or may not be borne by the employee for that specified purpose whereas. The amount of allowances paid forms part of pay package of the employee whereas perquisites are additional benefits in addition to the normal salary received by an

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employee. This may or may not be provided in cash and the amount to be taxed depends on the value of the benefits received. Perquisite may or `may not form part of the pay package of the employee

PROFIT IN LIEU OF SALARY: 3.1 MEANING: (I)

the amount of any compensation due to or received by an assessee from his

employer or former employer at or in connection with... - (A) the termination of his employment or - (B) The modification of the terms and conditions relating thereto;

(ii) Any payment due to or received by an assessee - (A) from an employer or a former employer or - (B) From a provident or other fund to the extent to which it does not consist of contributions by the assessee or Interest on such contribution or

-(C) any sum received under a Key man Insurance Policy including the sum allocated by way of bonus on such policy;

(iii) Any amount due to or received, whether in lump sum or otherwise, by any assessee from any person –

(A) Before his joining any employment with that person; or (B) After cessation of his employment with that person.]

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Exceptions: - the following receipts will not be considered for these clauses. -

Any death cum gratuity; it is chargeable under section 17(1) (iii).

-

Commuted value of pension; it is chargeable under section 17(1) (ii).

-

Retrenchment compensation: - it is chargeable under sub section (I) of section

17(3) above.

Receipts treated as Profit in Lieu of Salary [Section 17(3)] for Computing Salary Income:

Section 17(3) gives an inclusive definition of "Profits in lieu of salary". As the name suggests, these payments are received by the employee in lieu of or in addition to salary or wages. These payments include the following:

(1) Terminal Compensation: The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto is regarded as profits in lieu of salary. The termination may be due to retirement, premature termination, and resignation or otherwise.

(2) Payment from an Unrecognised Provident Fund or an Unrecognized Superannuation Fund: The next category of such profit in lieu of salary is payment due to or received by an assessee from an unrecognised provident fund or an unrecognised superannuation fund to the extent to which such payment does not consist of contributions by the employee or interest on such employee's contribution.

In other words, total employer's contribution till date and interest on such employer's contribution would both be taxable. Employer's contribution and interest thereon and interest on the employee's contribution are not taxed during the period of

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employment. When the accumulated balance of such a fund is paid to the employee either on retirement or on termination of service, the untaxed portion, i.e. the employer's contribution and interest thereon is taxed as 'profit in lieu of salary'. The interest on employee's contribution is taxed as 'Income from other sources'.

(3) Payment under Key man Insurance Policy: Any payment due to or received by an employee, under a Keyman Insurance Policy including the sum allocated by way of bonus on such policy, will also be regarded as profit in lieu of salary.

(4) Any amount due or received before joining or after cessation of employment: Any amounts due to or received, whether in lump sum or otherwise by any assessee from any person--(A) Before his joining any employment with that person; or (B) After cessation of his employment with that person.

(5) Any other sum received by the employee from the employer: All other payments made by an employer to an employee, would be brought under the head "Profits in lieu of salary". This is a comprehensive provision by virtue of which all payments made by an employer to an employee whether made in pursuance of a legal obligation or voluntarily are brought under profit in lieu of salary. However, the following receipts, will not be termed as 'profits in lieu of salary' to the extent they are exempt under section 10. Death-cum-retirement gratuity — Section 10(10) Commuted value of pension — Section 10(10A) Retrenchment compensation received by a workman — Section 10(10B) Payment received from a statutory provident fund — Section 10(11) Payment received from recognised provident fund — Section 10(12) Any payment from an approved superannuation fund as per section 10(13) House rent allowance exempt under section 10(13A)

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In short, except for the terminal and other payments specifically exempted under clauses (10) to (13A) of section 10, all other payments received by an employee from an employer or former employer are liable to tax under this head.

4.10 PROVIDENT FUND: Provident fund scheme provides for monthly contributions from the employees as well as the employer to a provident fund a/c. the balance to the cr. of such accounts also earns interest. The entire balance is paid to an employee on his retirement. The taxability of…. (1). Employer’s contribution (2). Interest cried annually (3). Balance paid on retirement depends upon the type of provident fund

There are different types of provident fund.

Statutory Provident Fund (SPF / GPF) These are maintained by Government, Semi Govt bodies, Railways, Universities, Local Authorities etc. The contributions made by the employer are exempted from income taxes in the year in which contributions are made. The contributions made by the employee can be claimed as tax deductions under section 80c. Interest amount cr.ed during the financial year is not treated as income and hence it is exempted from income tax. The redemption amount at the time of retirement is exempted from tax. If an employee terminates the PF account, the withdrawal amount too is exempted from taxes.

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Recognized Provident Fund (RPF): Any establishment (business entity) which employs 20 or more employees can join RPF. Most of the individuals (who are salaried) generally contribute to this type of Provident Fund. This is one of the popular types of Employees Provident Funds (EPF). (Organizations which employ less than 20 employees can also join RPF if the employer and employees want to do so) The business entity can either joins the Govt. scheme set up by the PF Commissioner (or) the employer himself can manage the scheme by creating a PF Trust. All Recognized Provident Fund Schemes must be approved by The Commissioner of Income Tax (CIT). Employer’s contribution in excess of 12% of salary is treated as income of the employee and is taxable. In excess of 12%, the contributions are taxable in the year of contribution. Tax Deduction u/s. 80C is available for amount invested by the employee (up to Rs 1.5 Lakh in a Financial Year). Interest amount earned (up to 9.5% interest rate) on PF balance (employee’s + employer’s contributions) is tax free. In excess of 9.5%, the interest on contributions is taxable as ‘salary’ in the year in which it is accrued. Accumulated funds redeemed by the employee at the time of retirement / resignation are exempt from tax if he/she continues the service for 5years or more.

Unrecognized Provident Fund (UPF) These are not recognized by Commissioner of Income Tax. Employer’s contribution is not treated as income in the year of investment and hence not taxable in that specific year. So, it is tax free in the year of contribution. Tax deduction under section 80c is not available on Employees contributions. Interest earned is not treated as income in the year it is cr.ed and hence not taxable in the year of accrual.

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At the time of redemption / retirement, the employer’s contributions and interest thereon is treated as ‘salary income’ and chargeable to tax. However, employee’s contribution is not chargeable to tax. Interest on Employees contribution will be charged under income from other sources.

Public Provident Fund (PPF) Under PPF any individual from public, whether is in employment or not may contribute to this fund. The minimum contribution is Rs. 500 p.a. & maximum is Rs 1.5 Lakh Rs. p.a. The amount is repayable after 15 years. PPF can serve as an excellent retirement planning / savings tool, for those who do not come under any pension scheme. The PPF offers tax benefit under section 8OC and the interest earned is also exempt from tax. All the eligible withdrawals are exempted from taxes.

Amount

Statutory

Employers

P.F Recognised

P.F Unrecognised

[sec.10(11)]

[sec. 10(12)]

Exempt

Exempt up to 12% Exempt

contribution

of

during

excess is taxable

previous

basic

[sec.17(3)]

salary;

year Interest during year

cr.ed Exempt previous

Exempt if rate up Exempt to 9.5%; excess is taxable

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54

4.11 DEDUCTION FROM SALARY: Following are the threedeductionsfrom gross salary are allowed vide section 16 STANDARD DEDUCTION [S. 16(IA)]: The Standard Deduction is a deduction allowed as per the Income Tax irrespective of the expenses met or the investment made by the individual. An individual need not disclose any investment proofs or expense bills for this purpose, the Standard Deduction is allowed at a standard rate. An amount of Rs 40,000 which can be reduced by taxpayers receiving salary or pension income, from their gross salary. A similar provision of Standard Deduction from Salary Income was earlier available but was abolished in the Finance Act 2005(new provision as per Budget 2018-19). Standard Deduction @ 30% can be reduced from ‘Income from Rent receivables’ under the head ‘Income from House property‘ ENTERTAINMENT ALLOWANCE SEC. 16(II): Deduction allowable to Govt. employees only to the extent of the least of the following:

5,000 20% of Salary exclusive of any allowance, benefit or other perquisite Actual entertainment allowance received for the previous year Note: In case of entertainment allowance the assessee is not entitled to any exemption but he is entitled to a deduction u/s 16(ii). Therefor the entire entertainment allowance is added in the computation of gross salary and then the Government employee is entitled to deduction from gross salary.

PROFESSIONAL TAX DEDUCTION FROM SALARY-U/S16 (III)

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Section 16(iii): As per section 16(iii) of Income tax act, Professional tax on employment or tax on employment levied by state under article 276(2) of the Constitution is allowed as a deduction from the Salary income. Tax should be paidby the Employee: Profession tax should have been paid by the Employee then only he is eligible to get deduction of the same. IF he has not paid the same then no deduction is allowed. Deduction, if Tax paid by the employer on behalf of employee: If such tax is paid by the employer on behalf of the employee then same amount will be treated as perquisites and then deduction will also be available to the employee. Maximum amount under article 276(2): As per article 276(2) of the constitution, State Govt, municipality or other authority which is authorised under article 276(2) can impose professional tax on employment from a person maximum up to 2500/year. Deduction/exemptions [under sec. 10]:

DEDUCTION/EXCEPTION 4.12 LEAVE TRAVEL ALLOWANCE [S.10 (5)]: Leave Travel Allowance (LTA) is a type of allowance which is given to an employee from his employer to cover his travel expenses when he is on leave from work. Sometimes it is also known as Leave Travel Concession (LTC). LTA is exempt from tax u/s 10(5) of Income Tax Act, 1961. LTA can be broadly categorized into two parts: Any travel concession or assistance received by employee from his employer for himself and his family to cover expenses incurred in travelling while on leave. Any travel concession or assistance received by employee from his former employer for himself or his family to cover expenses incurred in travelling post retirement or termination of service. Note: For the purpose of this section, family includes:

Spouse of individual Children of individual Parents of individual (mainly or wholly dependent on the individual) Brothers and sisters of individual (mainly or wholly dependent on the individual)

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Leave Travel Concession rules:

People incur several kinds of expenses during their holiday trip but not all of them are covered by LTA. Expenses made on food, shopping, etc. are not tax deductible. Only the expenses made by employee on travelling are born by the employer for which he provides Leave Travel Allowance to the employee. The individual has to keep proof of travel as it can be required for tax auditing purposes. Exemption is allowed for only two travels within a block of four years. Depending on the mode of transportation chosen and connectivity of the place, amount of exemption is decided. List of Expenses Exempt under LTA: IN CASE OF TRAVEL BY AIR

The economy air fare of national carrier by the shortest route or the actual amount spent on travel whichever is less is exempt from tax.

IN CASE OF TRAVEL BY RAIL The A.C. first class rail fare by shortest route or actual amount spent on travel whichever is less is exempt from tax. If the origin and destination spots of journey are connected by rail but journey is performed by other mode of transport and not air or rail The A.C. first class rail fare by shortest route or actual amount spent on travel, whichever is less is exempt from tax.

If the origin & destination points are not connected by rail or air (partly/fully) but connected by other recognized Public transport system The first class or deluxe class fare of such transport by shortest route or actual amount spent on travel, whichever is less is exempt from tax. If the place of origin & destination is not connected by rail or air (partly/fully) and also not connected by other recognized Public transport system

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The AC first class rail fare by shortest route (assuming that the journey was performed by rail) or the amount actually spent on travel, whichever is less is exempt from tax.

Carry Over Concession: If the assessee did not use LTA provided by his employer either once or twice (the permitted limit) in a 4 years block period, then he can still claim LTA exemption by using LTA in the year immediately succeeding the 4 years block period. It is known as carry over concession. The current or on-going block year is the 9th block year. The 4 years in this block are the years 2018, 2019, 2020 and 2021.

Limitations or Restrictions Applicable under LTA Leave Travel Allowance covers only domestic travel, i.e. only within India. International travel is not covered under this. To claim LTA, the mode of travel should be air, railway or public transport. LTA is provided for only travel expenses. Tax exemption on LTA cannot be claimed for more than 2 children on an individual. This restriction is not applicable if children are born before October 1st 1998. Children born out of multiple births after the first child will be treated as one child only. So, the above-mentioned restriction will not be applicable in this case also.

RETRENCHMENT COMPENSATION -SECTION 10(10B): Section 10(10B) of the Income Tax Act provides for Exemption on Retrenchment Compensation. Income Tax Section 10(10B) shall be read in association with Section 89. When an Undertaking is being closed down, the workmen will be paid a compensation for the act of Retrenchment. Such amount paid to workers shall be exempt under section 10(10B) of the Income Tax act. You should note that the scope of Section 10(10B) is very limited. Scope of Section 10(10B) Income Tax Act

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Any compensation received by a workman under the Industrial Disputes Act, 1947 or under any other Act or rules, orders or notifications issued thereunder or under any standing orders or under any award, contract of service or otherwise, at the time of his retrenchment. The amount is exempt under this clause to the extent of least of the following limits:

Actual amount received. Amount specified by Central Government i.e. Rs.5, 00,000. An amount calculated in accordance with the provisions of clause (b) of Section 25F of the Industrial Disputes Act, 1947 i.e. 15 day’s average pay for every completed year of services or part thereof in excess of 6 months Meaning u/s 10(10B) Income Tax Act

For this purpose retrenchment includes the closing down of the undertaking and transfer of the ownership or management of the undertaking provided the service of the workman has been interrupted by transfer; or the new terms and conditions of service are less favourable to him; or the new employer is, under the terms of transfer or otherwise legally not liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer. “Wages”, in the context of Section 10(10B), means: All remuneration capable of being expressed in terms of money, which would be payable to a workman in respect of employment or of work done in such employment, if the terms of employment, express or implied, were fulfilled. Wages under section 10(10B) Income Tax Act The term “Wages” also include (I) such allowances, including DA as the workman is entitled to; (ii) the value of any house accommodation, or supply of light, water, medical attendance or other amenity, or of any other service, concessional supply of food grains, or other articles; and (iii) any travel concession However, “wages do not include: (I) any bonus; (ii) contribution to a retirement benefit scheme; (iii) any gratuity payable on the termination of his service Tax on Non-monetary Perquisites, paid by Employer Section 10(10CC) – Tax may be paid by the employer, on a Perquisite provided to the employee (other than by way of monetary payment), within the meaning of section 17(2). Such tax actually paid by the employer, at the option of the employer, on behalf of such

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employee, (notwithstanding anything contained in section 200 of the Companies Act, 1956), shall be exempt in the hands of employee. The Companies Act, 1956 defined remuneration under section 198 by way of an explanation and provided for the certain specific inclusions that would be construed as remuneration. Section 200 of the 1956 Act specifically prohibited “tax free payments”. The High court clearly distinguished payment of “tax free remuneration” by an employer which is prohibited under the company’s act, 1956 vis-s-vis the “payment of specified benefits free of tax” which is specifically permitted by the tax law providing an overriding effect on the provisions of companies act. Also, to be noted that, as per the New Companies Act, 2013, Definition of remuneration has undergone few changes. Section 2(78) of the 2013 Act, defines “Remuneration” as any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the income tax Act, 1961. The remuneration thus defined includes reimbursement of any direct taxes to managerial personnel

4.13RETIREMENT BENEFIT: THE PAYMENT OF GRATUITY ACT, 1972 INTRODUCTION [21st August, 1972] An Act to provide for a scheme for the payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments and for matters connected therewith or incidental thereto. Be it enacted by Parliament in the Twenty-third Year of the Republic of India as follows:

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1. Short title, extent, application and commencement. - (1) This Act may be called the Payment of Gratuity Act, 1972. It extends to the whole of India: Provided that in so far as it relates to plantations or ports, it shall not extend to the State of Jammu and Kashmir. It shall apply toEvery factory, mine, oilfield, plantation, port and Railway Company; every shop or establishment within the meaning of any law for the time being in force in relation to shops and establishments in a State, in which ten or more persons are employed, or were employed, on any day of the preceding twelve months; Such other establishments or class of establishments, in which ten or more employees are employed, or were employed, on any day of the preceding twelve months, as the Central Government may, by notification, specify in this behalf. [(3-A) A shop or establishment to which this Act has become applicable shall continue to be governed by this Act, notwithstanding that the number of persons employed therein at any time after it has become so applicable falls below ten.] It shall come into force on such dates the Central Government may, by notification, appoint

GRATUITY [S. 10(10)]: Gratuity is a monetary benefit given by the employer to his employee on the occurrence of any of the following events:

a. On superannuation (means an employee who attains the age of retirement is said to be in superannuation) b. On retirement or resignation c. On death or disablement due to accident or disease (the time limit of 5 years shall not apply in the case of death or disablement of the employee) It is mandatory for the employee to have completed minimum of five years in service to be able to receive gratuity. It is not applicable to interns or temporary employees. Gratuity is not paid as part of your regular monthly salary; it is only payable on the

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occurrence of any of the above events. The provisions of gratuity are governed by the Payment of Gratuity Act, 1972.

Section 94 of that Code.] Recovery of Gratuity.- If the amount of gratuity payable under this Act is not paid by the employer, within the prescribed time, to the person entitled thereto, the controlling authority shall, on an application made to it in this behalf by the aggrieved person, issue a certificate for that amount to the Collector, who shall recover the same, together with compound interest thereon [at such rate as the Central Government may, by notification, specify] from the date of expiry of the prescribed time, as arrears of land revenue and pay the same to the person entitled thereto: [Provided that the Controlling Authority shall, before issuing a certificate under this section, give the employer a reasonable opportunity of showing cause against the issue of such certificate: Provided further that the amount of interest payable under this section shall, in no case, exceed the amount of gratuity payable under this Act]. Penalties. - (1) Whoever, for the purpose of avoiding any payment to be made by himself under this Act or of enabling any other person to avoid such payment, knowingly makes or causes to be made any false statement or false representation shall be punishable with imprisonment for a term which may 11 Extend to six months, or with fine which may extend to [ten thousand rupees] or with both. (2) An employer who contravenes, or makes default in complying with, any of the provisions of this Act or any rule or order made thereunder shall be punishable with imprisonment for a term [which shall not be less than three months but which may extend to one year, or with fine which shall not be less than ten thousand rupees but which may extend to twenty thousand rupees, or with both]: Provided that where the offence relates to non-payment of any gratuity payable under this Act, the employer shall be punishable with imprisonment, for a term which shall not be less than six months but which may extend to two years] unless the Court

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trying the offence, for reasons to be recorded by it in writing, is of opinion that a lesser term of imprisonment or the imposition of a fine would meet the ends of justice.

Exemption of employer from liability in certain cases.- Where an employer is charged with an offence punishable under this Act, he shall be entitled, upon complaint duly made by him and on giving to the complainant not less than three clear days' notice in writing of his intention to do so, to have any other person whom he charges as the actual offender brought before the Court at the time appointed for hearing the charge; and if, after the commission of the offence has been proved, the employer proves to the satisfaction of the CourtThat he has used due diligence to enforce the execution of this Act; and That the said other person committed the offence in question without his knowledge, consent or connivance, That other person shall be convicted of the offence and shall be liable to the like other punishment as if he were the employer and the employer shall be discharged from any liability under this Act in respect of such offence: Provided that in seeking to prove as aforesaid, the employer may be examined on oath and his evidence and that of any witness whom he calls in his support shall be subject to cross-examination on behalf of the person he charges as the actual offender and by the prosecutor: Provided further that, if the person charged as the actual offender by the employer cannot be brought before the Court at the time appointed for hearing the charge, the Court shall adjourn the hearing from time to time for a period not exceeding three months and if by the end of the said period the person charged as the actual offender cannot still be brought before the Court, the Court shall proceed to hear the charge against the employer and shall, if the offence be proved, convict the employer.

Cognizance of Offence. - (1) No Court shall take cognizance of any offence punishable under this Act save on a complaint made by or under the authority of the appropriate Government:

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Provided that where the amount of gratuity has not been paid, or recovered, within six months from the expiry of the prescribed time, the appropriate Government shall authorise the controlling authority to make a complaint against the employer, whereupon the controlling authority shall, within fifteen days from the date of such authorisation, make such complaint to a Magistrate having jurisdiction to try the offence. Sec. 12 (2) No Court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the first class] shall try any offence punishable under this Act.

Protection of action taken in good faith. - No suit or other legal proceeding shall lie against the Controlling Authority or any other person in respect of anything which is in good faith done or intended to be done under this Act or any rule or order made thereunder.

Protection of gratuity. - No gratuity payable under this Act and no gratuity payable to an employee employed in any establishment, factory, mine, oilfield, plantation, port, railway company or shop exempted under Section 5] shall be liable to attachment in execution of any decree or order of any civil, revenue or criminal court.

Validation of payment of gratuity.- Notwithstanding anything contained in any judgement, decree or order of any court, for the period commencing on and from the 3rd day of April, 1997 and ending on the day on which the Payment of Gratuity (Amendment) Act, 2009, receives the assent of the President, the gratuity shall be payable to an employee in pursuance of the notification of the Government of India in the Ministry of Labour and Employment vide number S.O. 1080, dated the 3rd day of April, 1997 and the said notification shall be valid and shall be deemed always to have been valid as if the Payment of Gratuity (Amendment) Act, 2009 had been in force at all material times and the gratuity shall be payable accordingly: Provided that nothing contained in this section shall extend, or be construed to extend, to affect any person with any punishment or penalty whatsoever by reason of the non-

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payment by him of the gratuity during the period specified in this section which shall become due in pursuance of the said notification.]

Act to override other enactments, etc.- The provisions of this Act or any rule made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any enactment other than this Act or in any instrument or contract having effect by virtue of any enactment other than this Act.

Power to make rules. - (1) the appropriate Government may, by notification, make rules for the purpose of carrying out the provisions of this Act. (2) Every rule made by the Central Government under this Act shall be laid, as soon as may be after it is made, before each House of Parliament while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the rule or both Houses agree that the rule should not be made, the rule shall, thereafter, have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule.

Employees Covered Under the Payment of Gratuity Act: Every person working in a factory, mine, oil field, port, railways, plantation, shops & establishments, or educational institution having 10 or more employees on any day in the preceding 12 months is entitled to gratuity. Once the Act becomes applicable to an employer – even if the number of employees goes below 10, gratuity is still applicable. Calculation of amount of gratuity exempted from tax The least of the following is exempt from tax:

Last salary (basic + DA) *number of years of employment* 15/26; Rs. 20 lakhs (which has been hiked from Rs. 10 Lakh as per the amendment); Gratuity actually received

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Let us understand this impact through an illustration: The last salary drawn by Rohan is Rs.1 Lakh per month (basic + DA). He is entitled to receive a gratuity of Rs. 11 Lakhs. He has been in employment for the last 19 years and 7 months. Points to note:

15 days salary based on the salary last drawn for every completed year of service or part thereof i.e. 15/26. Number of years in service is rounded off to the nearest full year

Employees Not Covered Under the Payment of Gratuity Act There is no law that restricts an employer from paying gratuity to his employees, even if the organization is not covered under the Payment of Gratuity Act. The amount of gratuity payable to the employee can be calculated based on half month’s salary for each completed year. Calculation of amount of gratuity exempted from tax The least of the following are exempt from tax:

Last 10 month’s average salary (basic + DA) * number of years of employment* 1/2; Rs. 10 lakhs (the hike to Rs 20 lakhs is not applicable for employees not covered under the Payment of Gratuity Act) Gratuity actually received

GOVERNMENT EMPLOYEES Gratuity paid by the government to government employees is fully exempt from tax.

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GRATUIT GRATUITY Y RECEIVED AT THE TIME OF RETIREMENT/DEATH

RECEIVED DURING SERVICE

FULLY TAXAB LE

GOVERNMENT EMPLOYEES FULLY EXEMP T

NON-GOVT. EMPLOYEES

Covered under payment of gratuity ACT,1972

Least of the following would be exempt: RS. 20 LAKHS GRATUITY RECEIVED 15 DAYS SALARY (Based on last drawn salary) every completed year of service or part in excess of 6 month (no of month to be taken as 26)

NOT Covered under payment of gratuity ACT,1972

Least of the following would be exempt: RS. 20 LAKHS GRATUITY RECEIVED Half month salary (based on average of last 10 month’s salary) for every completed year of service (No. of days in a month to be taken as 30)

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8.2 PENSION Per section 10(10A), any commuted pension, i.e., accumulated pension in lieu of monthly pension received by a Government employee is fully exempt from tax. Exemption is available only in respect of commuted pension and not in respect of uncommuted, i.e., monthly pension Pension can be divided into two types: Uncommuted Pension Commuted Pension Uncommuted Pension – It is taxable as salary under section 15 in the hands of a Government employee as well as a non - Government employee. Commuted Pension Is received in one time rather in instalments. In case of employees of Central & State Govt. or Local Authority or statutory corporation, the entire commuted value of pension is exempt 10(10A) (I). Payment in commutation of pension received by any other employeeIn case of any other employee, if the employee receives gratuity, the commuted value of one third (1/3) of the pension is exempt, otherwise, the commuted value of ½ of the pension is exempt. If payment in commutation of pension received by the employee exceeds the aforesaid limits. Such excess is liable to tax in the assessment year relevant to the previous in which it is due or paid .The assessee can, however, claim relief in term of section 89 read with rule 21A . National Pension scheme in case of an employee joining Central Government on or after January 1, 2004 or any other employer- These provisions are given below1. Contribution by the Central Government or any other employer to the National Pension System (NPS) is first included under the head ''Salaries" in the hands of the employee.

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2. Such contribution is deductible (to the extent of 10 percent of the salary of the employee) under section 80CCD (2). 3. Employee’s contribution to NPS (to the extent of 10 percent of the salary of the employee orRS 100, 0001, whichever is less) is deductible under section 80CCD (1)2 4. When pension is received out of the aforesaid amount, it will be chargeable to tax in the hands of recipient. 5.The

aggregate

amount

of

deduction

under section

80C ,80CCC and 80CCD(1) (contribution by employee (or any other individual ) towards NPS) cannot exceed RS 150,000*. 6. ‘‘Salary” means basic salary and dearness allowance (if the term of employment so provide) but excludes all other allowance and perquisites. It also includes commission if commission is payable at a fixed percentage of turnover achieved by an employee. * From the assessment year 2012-2013 employer 'contribution towards NPS is not considered for the purpose of monetary ceiling of RS 150,000. 1.

This ceiling of RS 100,000 is not applicable from the assessment year

2016-2017. 2. From the assessment year 2016-2017 ,a new sub section (1B) has been inserted in section 80CCD so as to provide for an additional deduction in respect of any amount paid (up to RS 50000) for contribution made by any individual assessee under the NPS . On this additional contribution, the Ceiling of RS 1, 50,000(as given above) will not applicable.

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Pension

commuted

Uncommuted Fully taxable

Employee of the central govt./ local authorities/ statutory corporation/ member of defence service

Non-govt. employees

If employee is in receipt of gratuity

1/3 x (commuted pension received/ commutation %) x 100, would be exempt

If employee does not receive any gratuity

1/2 x (commuted pension received/ commutation %) x 100, would be exempt

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4.14 LEAVE ENCASHMENT / LEAVESALARY: Meaning: Leave Salary or Leave Encasement means the amount receives by the employee against the leaves he was given but he has not utilized. The taxability of the leave encashment amount comes under the ambit of section 10(10AA), which depends upon the fulfilment of certain conditions given under the income tax act. Let’s dig this section deeper: LEAVE ENCASHMENT ON RESIGNATION IS NOT TAXABLE According to section 10(10AA) of the Income Tax Act the tax treatment on leave encashment amount received by employee depend upon the following two situations:

LEAVE ENCASHMENT WHILE BEING EMPLOYED IN THE COMPANY

While in service leave salary is fully taxable in the hands of employee under Section 17(1) (VA), irrespective of the sector the employee is employed with i.e. Government Sector or Private sector.

LEAVE

ENCASHMENT

WHEN

EMPLOYEE

IS

LEAVING

THE

ORGANIZATION: For a Government Employee: The entire amount of leave encashment is tax-free for government employee (central or state) under Section 10(10AA) (I) For a Private Sector Employee: Leave encashment is partly exempted (under Section10 (10AA) up to the least of the following: Leave encashment actually received at the time of retirement. Standard Limit of Rs. 3, 00,000/Ten months’ average salary from the date of retirement;

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Cash equivalent of 30 days average salary for every completed year of service as reduced by actual leave availed or encashed during the tenure of service. Note: The period of 30 days is the maximum ceiling. If employer allows leave for less than 30 days p.a. then such lesser days shall be considered. Average salary means Basic + DA (forming part of retirement benefit) + Commission (as a fixed percentage on turnover) being last 10 months average salary from the date of retirement. While calculating completed year of service, ignore any fraction of the year. While claiming the statutory amount (i.e. Rs.300000) any deduction claimed earlier as leave encashment shall be reduced from Rs.300000 Assessee can claim Relief u/s 89(1) Is the Leave encashment exempt only on retirement or also on resignation? Section 10(10AA) clearly states, ’on retirement or otherwise’’; the key word here is ‘otherwise’, which suggest there are certain exemptions in the case of a person leaving his job for reasons other than retirement. It is, therefore, clear that if on retirement, even on resignation by the employee, an employee gets by way of leave encashment any amount, Sec. 10(10AA) would apply and the assessee will be entitled to the benefit of the said clause to the extent mentioned therein. Tax on Leave Encashment / salary paid to the legal heir

Leave salary paid to the legal heir of deceased employee is not taxable as salary. The Act is silent on treatment of leave encashment received after death of employee. However, on following grounds, it can be concluded that leave salary received by a legal heir shall not be taxable in the hands of the recipient. a) A lump sum payment made gratuitously to widow or legal heir of employee, who dies while in service, by way of compensation or otherwise is not taxable under the head ‘Salaries’. b) Unutilized deposit under the capital gains deposit account scheme shall not be taxable in the hands of legal heir

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c) Legal representative is not liable for payment of tax on income that has not accrued to the deceased till his death. d) Leave salary paid to the legal heir of deceased employee is not taxable as salary.]. Further, leave salary by a legal heir of the Government employee who died in harness is not taxable in the hands of the recipient

'Retirement Compensation' from a Public Sector Company or any other Company is Exempt from Tax [Section 10(10C)] Based on the employer’s leave encashment policy and income of an individual, tax planning can be made by deciding whether it is beneficial to encash leave year on year or to receive lump sum at the time of retirement or resignation. One may consider cost of inflation as well before deciding on the same. If an employee receives compensation (whether in one go or in instalments) on voluntary retirement or separation, Section 10(10C) provides for exemption for such amount, subject to a maximum of Rs. 5,00,000. This exemption is available to employee of any of the following: (I) a public sector companies (ii) Any other company (iii) An authority established under a Central, State or Provincial Act (iv) A local authority (v) a co-operative society (vi) a University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University under section 3 of the University Grants Commission Act, 1956 (vii) an Indian Institute of Technology within the meaning of clause (g) of section 378 of the Institutes of Technology Act, 1961 (59 of 1961) (viii) any State Government (ix) the Central Government

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73

(x) an institution, having importance throughout India or in any State or States, as the Central Government may, by notification in the Official Gazette82, specify in this behalf (xi) such institute of management as the Central Government may, by notification83 in the Official Gazette, specify in this behalf Conditions for claiming exemption [Rule 2BA] It applies to an employee who has completed 10 years of service or completed 40 years of age. (This condition doesn’t apply to employees of public sector company) It applies to all employees including workers and executives except directors of a company or co-operative society. Such scheme has been drawn to result in overall reduction in no. of employees The vacancy caused by voluntary retirement is not to be filled up. The retiring employees of a company shall not be employed in another company or concern belonging to the same management. Amount receivable on account of voluntary retirement does not exceed either of the following amounts 3 months x salary last drawn x completed year of service Salary last drawn x balance of months left before the date of retirement or superannuation Salary includes basic pay, dearness allowance (if it forms part of the retirement benefits) and percentage wise fixed commission on turnover

Notes: - If the assessee has already taken relief under section 89, then exemption under this section is not available. Deduction under section 10(10C) can be taken once only, therefore if deduction under this section is taken once then deduction is not available in any subsequent years

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74

ILLUSTRATIONS ON INCOME FROM SALARIES

Illustration 1. Mr. has joined ICC Ltd. on 1st July 2008 in the scale of `15,000-1,500-21,000-2,50031,000. Compute gross salary for the previous year 2011-12. Solution: Previous Year: 2011-12 Salary for(I) April 2011 to June 2011 = 18,000 × 3 = (ii) July 2011 to March 2012 = 19,500 × 9 = Gross Salary

54,000 1,75,500 2,29,500

Workings: Previous Year

April to June

July to March

2008-09

Nil

15,000

2009-10

15,000

16,500

2010-11

16,500

18,000

2011-12

18,000

19,500

Illustration 2. Mr. Kabir is getting a salary of `12,000 p.m. w.e.f. 1.4.2010. He is promoted w.e.f. 31.12.2010 and got arrears of `75,000. Bonus for the year 2011-12 is ` 15,000 remains outstanding but bonus of ` 12,000 for the year 2010-11 was paid on 1st January 2012. In March 2012, he got two months’ salary i.e. April and May 2012 in advance. Compute the gross salary for the assessment year 2012-13.

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75

Solution:

Computation of Gross Salary for the Assessment Year 2012-13 Salary:` 12,000 × 12 Arrears of Salary Bonus for the year 2011-12: (Receivable) Bonus for the year 2010-11: (Received) Advance of Salary: April & May 2012 (12,000 × 2) Gross Salary

1,44,000 75,000 — 12,000 24,000 2,55,000

Illustration 3.Anal Kumar, an Indian citizen, is posted in the Indian High Commission at Nairobi during the previous year 2011-12. His emoluments consist of Basic Pay of `1, 50,000 per month and overseas allowance of ` 60,000 per month. Besides, he is entitled to &for journey to India and also use Government’s car at Nairobi. He has no taxable income except salary income stated above. Compute tax liability if (I) he is a non-resident during the previous year 2011-12 and (ii) he is a foreign citizen. Solution: (1)

U/s 9(1)(iii), Salary paid by the Government of India to an Indian

citizen for services rendered outside India is deemed to accrue or arise in India and is therefore taxable in India. (2)

U/s 10(7), allowances or perquisites paid by the Government of India

to an Indian citizen or services rendered outside India, is fully exempt from tax.

ST. GONSALO GARCIA COLLEGE.

76

Computation of Taxable Salary for the Previous Year 2011-12

(3)

Particulars

Rs

Salary

(1,50,000 × 12)

Overseas Allowance

(60,000 × 12)

Less: Exempt u/s 10(7)

Rs 18,00,000

7,20,000 7,20,000

Nil

Gross Salary

18,00,000

Less: Deduction u/s 16

Nil

Income under the head Salaries

18,00,000

HOUSE RENT ALLOWANCE [Sec.10 (13A) Rule 2A] Illustration 4. A, is entitled to a basic salary of `5,000 p.m. and dearness allowance of `1,000p.m., 40% of which forms part of retirement benefits. He is also entitled to HRA of `2,000 p.m. He actually pays `2,000 p.m. as rent for a house in Delhi. Compute the taxable HRA. Solution: Salary for HRA= Basic Pay + D.A. (considered for retirement benefits) + Commission (if received as a fixed percentage on turnover as per terms of employment) = (5,000 × 12) + (40% × 1,000 × 12) = 64,800 Taxable HRA: `

Particulars Amount received during the financial year for HRA

ST. GONSALO GARCIA COLLEGE.

` 24,000

77

Less: Exemption u/s 10(13A) Rule 2A Least of the followings: (a) Actual amount received

24,000

(b) 50% of Salary of `64,800

32,400

(c) Rent paid less 10% of Salary [2,000 × 12 – 10% of 64,800]

17,520

17,520

Taxable HRA

6,480

Illustration 5. X, is employed at Delhi as Finance Manager of R Ltd. The particulars of his salary for the previous year 2011-12 are as under: Basic Salary `16,000 p.m. Dearness allowance `12,000 p.m. Conveyance Allowance for personal purpose `2,000p.m.; Commission @2% of the turnover achieved which were`9, 00,000 during the previous year and the same was evenly spread. HRA `6,000 pm. The actual rent paid by him `5,000 pm for an accommodation at till 31.12.11. From 1.1.12 the rent was increased to `7,000 pm. Compute taxable HRA. Note: If there is an increase in rent paid, it is advisable to calculate the exemptions separately based on the time period. Rent before and after increase. Solution: Salary for HRA (for 9 months) = Basic Pay + DA (considered for retirement benefits) + Commission (if received as a fixed percentage on turnover as per terms of employment) = (16,000 × 9) + (12,000 × 9) + (2% of 9, 00,000 × 9/12) = 2, 65,500 Taxable HRA: (April to December 2011). Total time=9 months

Particulars

RS

Amount received during the financial year for HRA

RS 54,000

Less: Exemption u/s 10 (13A) Rules 2A. Least of the followings: (a) Actual amount received

54,000

(b) 50% of Salary

1,32,750

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78

(c) Rent paid less 10% of Salary

18,450

18,450

[5,000 × 9 – 10% of 2,65,500] Taxable HRA

35,550

Salary for HRA (for 3 months) = Basic Pay + DA (considered for retirement benefits) + Commission (if received as a fixed percentage on turnover as per terms of employment) = (16,000 × 3) + (12,000 × 3) + (2% of 9, 00,000 × 3/12) = 88,500 Taxable HRA: Particulars

Rs

Amount received during the financial year for HRA

Rs 18,000

Less: Exemption u/s 10(13A) Rule 2A Least of the followings: (a) Actual amount received

18,000

(b) 50% of Salary

44,250

(c) Rent paid less 10% of Salary [7,000 × 3 – 10% of 88,500]

12,150

Taxable HRA

12,150 5,850

Illustration 6. Z is employed in A Ltd. As on 31.3.11, his basic salary ` 6,000 p.m. He is also entitled to a dearness allowance of 50% of basic salary. 70% of the dearness allowance is considered for retirement benefits. The company gives him HRA ` 3,000pm. With effect from 1.1.11 he receives an increment of ` 1,000 in his basic salary. was staying with his parents till 31.10.2011. From 1.11.10 he takes an accommodation on rent in Delhi and pays ` 2,500 pm as rent for the accommodation. Compute taxable HRA for the assessment year 2012-13. Solution:

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79

Salary for the purpose of HRA shall cover the time period for which the assesse, who is in receipt of HRA, resided in a rented accommodation and the rent paid by such assessee, is more than 10% of salary. Salary for HRA (for 5 months) = Basic Pay + DA (considered for retirement benefits) + Commission (if received as a fixed percentage on turnover as per terms of employment) Basic Pay = (5,000 × 2) + (6,000 × 3)

=28,000

DA = 50% of Basic Pay × 70% forming part of retirement benefits [50 % × 28,000 × 70%]

= 9,800

Total Salary for HRA

37,800

Taxable HRA: `

Particulars Amount received during the financial year for HRA (3,000 ×

` 36,000

12) Less: Exemption u/s 10 (13A) Rules 2A. Least of the followings: (d) Actual amount received

36,000

(e) 50% of Salary

18,900

(f) Rent paid less 10% of Salary [2,500x 5 – 10% of 37,800]

8,720

Taxable HRA

8,720 27,280

GRATUITY Illustration7. Mr. Hari retires on 15th October 2011, after serving 30 years and 7 months. He gets `3, 80,000 as gratuity. His salary details are given below: Determine his gross salary in the following cases:

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80

(i)

He retires from government service

(ii)

He retires from seasonal factory in a private sector, covered under Payment of

Gratuity Act, 1972. (iii)

He retires from non-seasonal factory, covered by Payment of Gratuity Act,

1972 (iv)

He retires from private sector, not covered by payment of Gratuity Act

Solution: The amount of gratuity received as a Government employee is fully

(i)

exempt from tax u/s 10(10)(I) As an employee of a seasonal factory, in a private sector, covered

(ii)

under the Payment of Gratuity Act, 1972

(iii)

FY 2011-

D.A. 50% of salary. 40% forms part of retirement

12

Salary `16,000 pm

benefits.

FY 2010- Salary `15,000 pm

D.A. 50% of salary. 40% forms part of retirement

11

benefits

As an employee of a non-seasonal factory, covered by Payment of Gratuity Act, 1972 As an employee of a private sector, not covered by Payment of Gratuity Act, 1972

Computation of Taxable Gratuity

`

Particulars Amount received as Gratuity Less: Exemption u/s 10(10)(ii) Least of the followings: (I) Actual amount received (ii) 15/26 × Last drawn salary × No. of years of completed service or part thereof in excess of 6 months [15/26 × 31 × 24,000] (iii) Maximum Limit Taxable Gratuity

` 3,80,000

3,80,000 4,29,231

10,00,000

ST. GONSALO GARCIA COLLEGE.

3,80,000 NIL

81

`

Particulars Amount received as Gratuity

` 3,80,000

Less: Exemption u/s 10(10)(iii) Least of the followings: (I) Actual amount received

3,80,000

(ii) 1/2 × Average salary × No. of fully completed years of service [½ × 18,720 × 30]

2,80,800

(iii) Maximum Limit

10,00,000 2,80,800

Taxable Gratuity 99,200 Note: Salary = Basic Pay + Dearness Allowance In case of seasonal employment, instead of 15 days, 7 days shall be considered. Note: Salary = 10 months average salary preceding the month of retirement. = Basic Pay + Dearness Allowance considered for retirement benefits + commission (if received as a fixed percentage on turnover) Salary for the months December ’10 till September ’11 shall have to be considered. Basic Salary: December ’10 to March ’11 = 15,000 × 4 April ’11 to September ’11 = 16,000 × 6

` = 60,000 = 96,000 1,56,000

Total Basic Salary Add: D.A. [50% of 1,56,000 × 40%, forming part of superannuation benefits] 31,200 1,87,200 Salary for 10 months Therefore, Average salary for 10 months = 1, 87,200/10 = 18,720 Illustration 8. Rosaria was an employee of Z Ltd. After 38 years of service, he retired on 28.2.12. He was drawing a monthly salary of `18,000. On retirement he received a

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82

gratuity of `4, 00,000. Compute taxable gratuity. Solution: Assuming employee not covered by Payment of Gratuity Act, 1972

Computation of Taxable Gratuity `

Particulars Amount received as Gratuity

` 4,00,000

Less: Exemption u/s 10(10)(iii) Least of the followings: (I) Actual amount received

4,00,000

(ii) 1/2 × Average salary × No. of fully completed years of service [½ ×18,000×38]

3,42,000

(iii) Maximum Limit

10,00,000

Taxable Gratuity

3,42,000 58,000

Note: Salary = 10 months average salary preceding the month of retirement. = Basic Pay + Dearness Allowance considered for retirement benefits + commission (if received as a fixed percentage on turnover) In this case, Average salary for 10 months preceding the month of retirement is ` 18,000 only. PENSION Illustration 9. Mr. King is getting a salary of `5,400 pm since 1.1.10 and dearness allowance of `3,500 pm, 50% of which is a part of retirement benefits. He retires on 30th November 2011 after 30 years and 11 months of service. His pension is fixed at ` 3,800 pm. On 1st February 2012 he gets 3/4ths of the pension commuted at `1, 59,000. Compute his gross salary for the previous year 2011-12 in the following cases: (i)

If he is a government employee, getting gratuity of ` 1,90,000

(ii)

If he is an employee of a private company, getting gratuity of ` 1,

90,000 (iii) If he is an employee of a private company but gets no gratuity.

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83

Solution: Previous Year 2011-12. Tenure of Service: 1.4.11 to 30.11.11 = 8 months Post-retirement period: December ’11 to March ‘12 = 4 months

Particulars

Case (I)

Case (ii)

Case (iii)

Salary

43,200

43,200

43,200

D.A

28,000

28,000

28,000

Taxable Gratuity

Exempted

82,750

Nil

Uncommuted Pension [(3,800×2) +(950×2)]

9,500

9,500

9,500

Commuted Value of Pension

Exempted

88,333

Gross Salary

Case (ii) Gratuity received by an employee of a private company

PARTICULARS

RS.

Actual amount received

RS. 1,90,000

Less: Exempted amount (least of the followings): (I) Actual amount received (ii) ½ x Vascular x No. of years of Completed service [½ × 7,150 × 30]

1,90,000 1,07,250

(iii) Maximum Limit

10,00,000 1,07,250 82,750

Taxable Gratuity Commuted Value of Pension (Non-govt employee, gratuity received) Actual commuted value of pension received Less: Exempted u/s 10(10A) 1/3rd of Full Value of Commuted Pension [1/3 × 2,12,000] Full Value of Commuted Pension Amount received on commutation1,59,000 Percentage of pension commuted75% of 2,12,000

ST. GONSALO GARCIA COLLEGE.

1,59,000 70,667

88,333

84

Taxable Commuted Value of Pension,

Case (iii) Commuted Value of Pension (Non-govt employee, gratuity not received) Actual commuted value of pension received

1,59,000

Less: Exempted u/s 10(10A)

1,06,000

1/2 of Full Value of Commuted Pension [1/2 × 2,12,000] Full Value of Commuted Pension Amount received on commutation1,59,000 =

= 2,12,000

Percentage of pension commuted 75% Taxable Commuted Value of Pension

53,000

LEAVE ENCASHMENT Illustration 10 Ms. Parineeti retired from service after 28 years from ABC Ltd. Leave sanctioned by employer 45 days p.a. Leave availed during service 400 days. Leave encashment received: ` 4, 30,000. Average salary for 10 months preceding the month of retirement `15,000. Compute taxable amount of Leave encashment for the Previous year 201112.

Solution:

`

Particulars

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85

(I) Leave cr. available on the date of retirement = Total Leave sanctioned during tenure of employment – Total leave availed during service = [(28 x 45) – 400] Less: Excess leave sanctioned by the employer [(45– 30 days) per year x 28) Leave cr. on the basis of 30 days cr. for completed years of service (ii) Leave salary on the basis of 30 days cr. = Step (I) × Average Salary = 440 × (15,000/30) Since leave sanctioned by the employer is more than 30days p.a., the following

860 420 440 2,20,000

calculation is required, to determine the amount of leave cr. on the date of retirement Taxable Leave Salary on Retirement `

Particulars Amount Received on Leave Encashment

` 4,30,000

Less: Exemption u/s 10(10AA) Least of the followings: (I) Actual amount of Leave encashment received (ii) Average salary of the individual for the past 10 months × 10 months

4,30,000 1,50,000

(iii) Maximum Limit

3,00,000

(iv) Leave at cr. at the rate of 30 days p.a. for every Completed year of service as calculated in Step (ii) Taxable Leave Encashment

2,2,000

1,50,000 2,80,000

RETRENCHMENT COMPENSATION Illustration 11. Mr. Fleming was retrenched from service of “GO SLOW Ltd”. Retrenchment compensation received `6, 00,000. Amount determined under the Industrial Disputes Act, 1948 `4, 75,000. What is the taxability? Solution: Computation of Taxable Retrenchment Compensation `

Particulars Amount received as Retrenchment Compensation

ST. GONSALO GARCIA COLLEGE.

` 6,00,000

86

Less: Exemption u/s 10(10B): Least of the followings: (I) Actual amount received

6,00,000

(ii) Amount determined under the Industrial

4,75,000

Disputes Act, 1948 (iii) Maximum Limit

5,00,000

Taxable Retrenchment Compensation

ST. GONSALO GARCIA COLLEGE.

4,75,000 1,25,000

87

VOLUNTARY RETIREMENT COMPENSATION Illustration 12. Mr. Hitesh, after serving Z Ltd. for 23 years 7 months, opted the Voluntary Retirement Scheme. Total tenure of service: 30 years Compensation received ` 8, 00,000. Last drawn Salary (i.e. Basic pay + D.A, forming part of retirement benefits) ` 15,000. Compute exemption & taxable value of VRS compensation.

Solution: Computation of Exemption: Total tenure of service = 30 × 12=360 months Actual length of service = 23 years 7 months = 283 months No. of months of service left= (360 – 283) months = 77 months Taxable VRS compensation `

Particulars Amount received as VRS Compensation

` 8,00,000

Less: Exemption u/s 10(10C): Least of the followings: (I) Actual amount received

8,00,000

(ii) Maximum Limit

5,00,000

(iii) The highest of the following: Last drawn salary x 3 x No. of fully completed years of service =15,000 x 3 x 23= 10,35,000 • Last drawn salary x Balance of no. of months of service left.

11,55,000

= 15,000 x 77 months= 11,55,000

5,00,000

Taxable VRS Compensation

3,00,000

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88

DEDUCTIONS AGAINST SALARY Illustration 13. Ms. Neha is a Senior Accountant in the Ministry of Defense, Govt. of India. She received entertainment allowance `5,000 p.m. Her basic salary is `35,000 p.m. Professional tax paid `5,000. Compute Income from Salary.

Basic Salary: 35,000 x 12

= 4,20,000 = 60,000 4,80,000

Entertainment Allowance: 5,000 x 12 Gross Income from Salary Less: Deduction u/s 16(ii): Entertainment allowance: Least of the following will be allowed as a deduction: (I) Actual amount of entertainment allowance received (ii) 20% of Basic salary of the Individual [20% of 4,20,000] (iii) Statutory limit:

60,000 84,000 5,000

Exempted amount being the least Less: Professional Tax paid u/s 16(iii) Income from Salary

ST. GONSALO GARCIA COLLEGE

5,000 5,000 4,70,000

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5 Conclusion: The taxation of income received from salaries is not just a concept to learn only but practically it put lots of challenges in front of tax return prepares so as to ensure that correct provision are applied while computing the net salary income Income from salary seems to be a very small portion but it contains lots of provisions to study of which is must before practically applying it. Salaried people have to incur certain expenses for performing their duty for which standard deduction was given to them till the A.Y. 2005-06. However, the Finance Act 2006 abolished the standard deduction on the grounds of raising the exemption limit as well as broadening of slabs of income for rate purpose 1.8 Limitations of the Study Since personal income taxation is a very sensitive matter, people generally were reluctant to disclose information relating to their savings, investments and tax planning measures adopted for the period under study. Hence, more time and effort had to put to collect the data. Secondary data for the study was collected mainly from the reports of Comptroller and Auditor General (Union Taxes), annual reports of All India Income Tax Statistics, Reserve Bank of India Bulletin and circulars and notifications of Central Board of Direct Taxes. Often there were discrepancies in the data available from various sources. The current statistics relating to some of the aspects of direct tax administration is still lacking. In spite of the above limitations, all efforts were made to ensure correctness in the data collection.

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5.2 REFERENCES

Weblography:

1 .taxguru.com

2 .salarieschapter4.in

3 .investopedia.com

4.deductionfrom salary.com

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