Hey its a great opportunity for CA students & Commerce stream students to attend the Historical CA Convention to be held at Ludhiana on 11-12th of June 2010 at KUNDAN VIDYA MANDIR(K.V.M) SCHOOL ,CIVIL LINES,LUDHIANA.
The said Convention has lots for us to learn for, with some key points namely personality development,changes in commerce & Industry.Students interested can also give their presentations on the given topics.Lectures would be given by experts of their respective fields.
It would be followed by Punjabi Cultural programme & Solo Performances by CA Students.The convention also holds Breakfast, Lunch & Evening tea for all the attendants.
"CHIEF GUEST OF THE OCCASION
DR. RANBIR CHANDER SOBTI( V.C.,Punjab University)"
For more Details : Please contact immediately at ICAI Bhawan,Opp Silver Oak Garden,Pakhowal road, Ludhiana or can contact me for further inquiries.Hurry up for getting yourself registered for just Rs.250/- till 31st May.
NOTE : The Registration charges would be revised from 1st June Onwards, so avail the benefit and get yourself registered now. We have special benefits for outstation students also..
Promoting Council members :
AMANPREET KAUR
AMANJOT
ANSHUL
ANAND
NAVDEEP
AKRITI
RAHUL
RAJAT SHARMA
Contact No. 9872308182
Complete Pro gramme details are as below :
Theme " Changing Dimensions - Challenges and Opportunities"
Students are invited to contribute Paper Presentations(1500 to 2000 words) for the following Topics.
1.Modern Financial Instruments(Derivatives,Mutual funds,Money Market Instruments)
2.Role of Cost Accounting in Decision Making.
3.Service Tax
4.Value Added Tax
5.TDS under IT Act 1961
6.Labour Welfare Law & Schemes
7.CA's and Corporate Governance
8.Convergence with IFRS
9.Audit under EDP Environment
10.Accounting Standards
11.Making the Most of Articleship
12.Forms,Rules and Regulations for CA students
13.Economic Policies-" If i were the Prime Minister Of India"
14.CA Course- Development Of Lifestyle
The interested students can submit the soft copy of thier presentations at pslcpaper@icai.org and hard copy of the same can be submitted at ICAI BHAWAN,NEAR SILVER OAK GARDENS, PAKHOWAL ROAD, LUDHIANA last by 31st May 2010.Students Whose Papers are selected shall be given cash prize of Rs. 1500(Max.) also their expenses will be reimbursed subject to maximum of Rs.1500/-
CONVENTION PRO GRAMME :
DAY 1,Friday ,11 June 2010
(09.00 - 01.30 PM) -
Inaugral Session & Technical session I
(Accounting & Auditing)
*CA & Corporate Governance
*Convergense with IFRS
*Audit Under EDP Environment
(01.30 - 02.00 PM) -
LUNCH
(02.00 - 03.30 PM) -
Technical Session II
(Educating And Learning)
*Making the most Of Articleship
*Forms,Rules and Regulations for
the CA students in ICAI Act.
(03.30 - 05.00 PM) -
Technical Session III
(Development of Leadership Qualities/
Communication skills)
(05.00 - 07.00 PM) -
Culutral Evening
07.00 PM Onwards -
Tea
DAY 2,SATURDAY,12th JUNE,2010
(10.00 - 12.00 PM)-
Technical Session IV
(TDS,Indirect Taxes and Other Laws)
* VAT
* Service Tax
* TDS under I-TAX
* Labour Welfare,Laws & Schemes
(12.00 - 01.30 PM) -
Technical Session V
(Financial Management & Decision Making)
* Modern Financial Instruments
(Derivatives,MFS,MM Instruments)
* Role of Cost Accounting in Decision Making
(01.30 - 02.00 PM) -
LUNCH
(02.00 - 03.30 PM) -
Technical Session VI
(CA's in New Avtar)
* Economic Policies - If I were the Prime
Minister of India.
* CA Course - Development of Life styles
(03.30 - 05.00 PM) -
Technical Session VI
(How to prepare for the exams?)
(05.00 - 05.30 PM) -
Valedictory Session
(05.30 PM Onwards) -
TEA
HURRRY LAST DAY TO GET YOURSELF REGISTERED @RS.250.00 IS TODAY(31 ST MAY 2010). CHARGES TO CHANGE FROM TOMMOROW @ RS. 350.00.
Tuesday, May 25, 2010
Wednesday, July 22, 2009
RETIREMENT BENEFITS UNDER HEAD SALARIES
Here are the retirements benefits for the employees stated as under:
These benefits are provided by the employer to the employee for his future, either
while in service or on his retirement. These have different tax treatment. They
include:
a) Pension
Pension is a payment made by the employer after the retirement or death of
employee as a reward for past service. It is normally paid as a periodical payment
on monthly basis but certain employers may allow an employee to forgo a portion
of pension in lieu of lumpsum amount. This is known as commutation of pension.
The treatment of these two kinds of pension is as under:
(i) Periodical pension (or uncommuted pension).
It is fully taxable in the hands of all employee, whereas government or nongovernment.
(ii) Commuted pension
For employees of government organisations, local authorities and statutory
corporations, it is fully exempted from tax, hence not included in gross salary.
For other employees, commuted value of half of the total value of pension is
exempted from tax. Any amount received over and above this amount is taxable,
so included in gross salary.
If, however, the employee is also receiving gratuity (another retirement benefit)
along with pension, then one third of the total value of pension is exempted from
tax. Amount received in excess of this is taxable, so included in gross salary.
Pension received by employee is taxable under the head “Salaries”. However,
family pension received by legal heirs after death of employee is taxable under
‘Income from other sources’.
b) Gratuity
Gratuity is the payment made by the employer to an employee in appreciation of
past services rendered by the employee. It is received by the employee on his
retirement. Gratuity is exempted upto certain limit depending upon the category
of employee. For the purpose of exemption, employees are divided into 3
categories:
(i) Government employees and employees of local authority:
In case of such employees, the entire amount of gratuity received by then is
exempted from tax. Nothing will be added to gross salary.
(ii) Employees covered under Payment of Gratuity Act, 1972.
55
In case of employees who are covered under Payment of Gratuity Act, the
minimum of the following amounts are exempted from tax:
• Amount of gratuity actually received
• 15 days of salary for every completed years of service or part thereof in
excess of six months.
(15 / 26 x [basic salary + Dearness Allowance] x No. of years of service+1
[if fraction > 6 months]).
• Rs.3, 50,000 (amount specified by government).
(iii) Other employees.
In case of employees not falling in the above two categories, gratuity received
from the employers is exempt to the extent of minimum of following amounts:
• Actual amount of gratuity received.
• Half month average salary for every completed year of service
(1/2 x average salary of last 10 months x completed years of service).
• Rs.3, 50,000 (amount specified by government).
c) Leave Salary
Employees are entitled to various types of leave. The leave generally can be taken
(casual leave/medical leave) or it lapses. Earned leave is a kind of leave which an
employee is said to have earned every year after working for some time. This
leave can either be availed every year, or get encashment for it. If leave is not
availed or encashed, it is allowed to be carried forward. This leave keeps getting
accumulated and is encashed by employee on his retirement. The tax treatment of
leave encashment is as under:
(i) Encashment of leave while in service. This is fully taxable and so is added
to gross salary.
(ii) Encashment of leave on retirement. For the purpose of exemption of
accumulated leave encashment, the employees are divided into two
categories:
• State or Central Government employees.
Leave encashment received by government employees is fully exempted
from tax. Nothing is to be included in gross salary.
• Other employees
Leave encashment of accumulated leave at the time of retirement received
by other employees is exempted to the extent of minimum of four
amounts.
- Amount specified by Central Government (3, 00,000).
- Leave encashment actually received.
- 10 months average salary (10 x average salary of 10 months preceeding
retirement).
Cash equivalent of unavailed leave.
(Leave entitlement is calculated on the basis of maximum 30 days leave
every year, cash equivalent is based on average salary of last 10 months).
d) Provident Fund
Provident Fund Scheme is a welfare scheme for the benefit of employees. Under
this scheme, certain amount is deducted by the employer from the employee’s
salary as his contribution to Provident Fund every month. The employer also
contributes certain percentage of the salary of the employee to the Fund. The
contributions are invested outside in securities. The interest earned on it is also
credited to the Provident Fund Account. At the time of retirement, the
accumulated balance is given to the employee.
Tax treatment of provident fund depends upon the type of provident fund being
maintained by the employer. Employee’s provident fund may be of the following
3 types:
(i) Statutory Provident Fund
This is set up under the provisions of Provident Fund Act, 1925 and is maintained
by Government and Semi-Government organisations, local authorities, railways,
universities and recognised educational institutions.
(ii) Recognised Provident Fund
This is set up under the Employee’s Provident Fund and Miscellaneous Provisions
Act, 1952 (PF Act, 1952) and is maintained by private sector employees. The
establishments covered under PF Act, 1952 have two options; either to follow the
same scheme at by the Government under the PF Act or draft their own scheme of
PF but get recognition from Commissioner of Income Tax.
(iii) Unrecognized Provident Fund
If a provident fund is not recognized by the Commissioner of Income Tax, it is
known as unrecognized PF.
Besides these 3 funds, a person can also become a member of Public Provident
Fund.
(iv) Public Provident Fund
The Central Government has established the Public Provident Fund for the
benefits of general public to mobilize personal savings. Any member of general
public (whether salaried or self employed) can participate in this fund by opening
a Provident Fund Account at the State Bank of India or its subsidiaries or other
nationalised banks. A salaried employee can simultaneously become member of
employees provident fund (whether statutory, recognized or unreconised) and
public provident fund. Any amount may be deposited (subject to minimum of
Rs.500 and maximum of Rs.70, 000 per annum) under this account. The
accumulated sum is repayable after 15 years. At present, it carries an interest rate
of 8% per annum which is credited every year but payable only the time of
maturity.
DEDUCTIONS FROM GROSS INCOME
The income chargeable under the head salaries is computed after making the
following deductions under Section 16:
1. Standard deduction [section 16(i)] of the Act: From assessment year 2006-
07, standard deduction has been withdrawn.
2. Entertainment Allowance [section 16(ii)] of the Act as given earlier,
entertainment allowance received from employer is first included in gross
salary and thereafter, a deduction is allowed to government employees
(State or Central Government) to the extent of least of following 3
amounts:
(i) Rs.5000
59
(ii) 20% of basic salary
(iii) Amount of Entertainment Allowance actually received during the
year.
3. Professional Tax [Section 16(iii)] of the Act.
Professional tax or tax on employment levied by a State under Article 276
of the Constitution is allowed as a deduction only in the year when it is
actually paid. If the professional tax is paid by the employer on behalf of
the employee, it is first included in gross salary as a perquisite (since it is
an obligation of employee fulfilled by employer) and then the same
amount is allowed as deduction on account of professional tax from gross
salary.
Illustration for ur reference:
Mr. X is working in a factory in Delhi since August 1970. He gets Rs.4000 per
month as basic salary, Rs.400 per month as dearness allowance and Rs.500 per
month as house rent allowance. He resides in his own house.
On 1st January, 2005 he retires and gets Rs.40, 000 as gratuity and Rs.50, 000 as
accumulated balance from unrecognized provident fund. His own contribution
and that of factory to the fund was equal. From January 2005 onwards, he starts
getting pension of Rs.1000 per month.
Compute Net Income of Mr X for the Assessment Year 2006-07.
Solution.
Computation of Net Salary of Mr. X
for the Assessment Year 2006-07
Rupees
Basic Salary (Rs.4000 x 9) 36,000
Dearness Allowance (Rs.400 x 9) 3,600
House Rent Allowance (Rs.500 x 9)
(No exemption since X resides in own house)
4,500
½ Lumsum received from unrecognized provident fund 25,000
Pension Rs.1000 x 3 3,000
Gratuity (Rs.40,000 – amount exempt Rs.68,000 NIL
Gross Salary 72,100
60
Less deductions -
Net Salary 72,100
Amount of gratuity exempt is least of following 3 amounts for other employees:
1. ½ months salary for completed years of service
(½ x 4000 x 34) = Rs.68, 000
2. Actual gratuity received (Rs.40, 000)
3. Limit by Central Government – Rs.3, 50,000
Amount exempt is Rs.68, 000; amount received is Rs.40, 000.
So, entire amount of gratuity is exempt
Example 2.
COMPUTATION OF INCOME FROM SALARIES
Computation of Net Salary of Mr. X
for the Assessment Year 2006 -2007
Rupees
Particulars Amount
Basic Salary
Fees, Commission and Bonus
Taxable value of cash allowances
Taxable value of perquisites
Retirement Benefits
GROSS SALARY
Less: Deductions from Gross Salary
1. Standard Deduction
2. Entertainment allowance deduction
3. Professional tax deduction
Illustration
Mr. X is a lecturer in a private college in Chennai. During the previous year
2005-06, he gets the following emoluments: Basic salary Rs.10, 000 per month,
dearness allowance: 10% of basic salary, city compensatory allowance: Rs.300
per month, children education allowance: Rs.500 per month (for 3 children),
house rent allowance: 20% of salary (rent paid Rs.2000 per month). He gets
Rs.18, 000.
a) Reimbursement from his employer in respect of medical expenditure incurred
on treatment of his wife in a private clinic. Besides, he gets Rs.11, 400 as
reimbursement from the employer in respect of books and journals purchased
by him in discharging his official work.
He contributes 11% of his salary to statutory provident fund to which a
matching contribution is made by the employer. During the year, he spends
Rs.15, 000 for maintaining a car for going to the college. Determine his net
income under the head salaries.
Solution:
Computation of Net Salary of Mr. X
for the Assessment Year 2006 -2007
Rupees
Particulars Amount
Basic Salary (Rs.10, 000 x 12) 1, 20,000
Dearness allowance (10% of 1, 20,000) 12,000
City compensatory allowance (Rs.300 x 12) 3,600
Children education allowance (Rs.500 x 12 less
amount exempt Rs.100 x 12 x 2)
3,600
House Rent Allowance (20% of 1, 20,000 less amount
exempt Rs.12, 000)
12,000
Reimbursement of medical expenses (Rs.18, 000 -
Rs.15, 000)
3,000
Reimbursement of expenses on books (not chargeable
to tax)
-
GROSS SALARY 1, 54,200
Less Standard deduction NIL
NET SALARY 1, 54,200
Working Notes:
1. Amount of HRA exempt is least of 3 figures:
a) 50% of Salary (1, 20,000) 60,000
b) Actual HRA received (20% of 1, 20,000) 24,000
c) Rent paid in excess of 10% of Salary
2000 x 12 - 10 / 100 x 1, 20,000 12,000
Amount of HRA exempt is 12,000
2. Expenditure on maintenance of car is an application of income, not
deductible.
3. Contribution of employer towards employee’s statutory provident fund is
exempt upto 12%.
4. Reimbursement of medical expenditure by employer in private clinic is
exempt upto Rs.15, 000.
5. Children education allowance is exempt to the extent of Rs.100 per month
per child for maximum 2 children
Summary:
1. Heads of Income: There are 5 heads of income into which income of
persons can be divided namely Income from salary, house property,
business or profession, capital gains and other sources.
2. Meaning of Salary: Any remuneration paid by an employer to an
employee in consideration of his services is called salaries. It includes
monetary value of those benefits and facilities which are provided by the
employer and are taxable.
3. Income forming part of salary: They include basic salary, advance salary,
fees, commission, and bonus, taxable value of cash allowances, perquisites
and retirement benefits.
4. Allowances: These are of three types
(a) Taxable Allowances: Dearness allowance, Medical allowance, Servant
allowance, Warden Allowance, Family allowance, City Compensatory
allowance etc.
(b) Allowances exempt upto specified limit: House rent allowances,
Entertainment allowance, Certain Special allowances, etc.
(c) Fully exempted allowances: Foreign allowance, sumptuary allowance to
High Court / Supreme Court Judges, Allowances from U.NO.
5. Perquisites: These are of three types:
(a) Taxable perquisites for all employees: Facility of rent-free house or house
at concessional rent, payment of employee’s obligations, payment of life
insurance premium of the employee, etc.
(b) Perquisites taxable in specified cases only: Facility of servant, gardener,
gas, electricity, water, education, etc.
(c) Tax-free perquisites: Free Medical facility or reimbursement of medical
expenses, free facility of refreshments, entertainment, telephone, family
planning, scholarship, leave travel concession, free motor car, club
facility, gifts etc.
6. Valuation of perquisites: See Rule 3 of Income Tax Rules.
7. Deductions: Following three deductions are admissible:
(a) Standard Deduction: This has been withdrawn from Assessment Year
2006-07.
65
(b) Entertainment Allowance:
(i) Government employees – 1/5th of salary or Rs.5, 000, whichever is
less.
(ii) Others - Nil
(c) Employment Tax – Full Amount
8. Provident Funds: These are of four types:
(a) Statutory provident fund
(b) Recognized provident fund
(c) Unrecognized provident fund and
(d) Public provident fund
These benefits are provided by the employer to the employee for his future, either
while in service or on his retirement. These have different tax treatment. They
include:
a) Pension
Pension is a payment made by the employer after the retirement or death of
employee as a reward for past service. It is normally paid as a periodical payment
on monthly basis but certain employers may allow an employee to forgo a portion
of pension in lieu of lumpsum amount. This is known as commutation of pension.
The treatment of these two kinds of pension is as under:
(i) Periodical pension (or uncommuted pension).
It is fully taxable in the hands of all employee, whereas government or nongovernment.
(ii) Commuted pension
For employees of government organisations, local authorities and statutory
corporations, it is fully exempted from tax, hence not included in gross salary.
For other employees, commuted value of half of the total value of pension is
exempted from tax. Any amount received over and above this amount is taxable,
so included in gross salary.
If, however, the employee is also receiving gratuity (another retirement benefit)
along with pension, then one third of the total value of pension is exempted from
tax. Amount received in excess of this is taxable, so included in gross salary.
Pension received by employee is taxable under the head “Salaries”. However,
family pension received by legal heirs after death of employee is taxable under
‘Income from other sources’.
b) Gratuity
Gratuity is the payment made by the employer to an employee in appreciation of
past services rendered by the employee. It is received by the employee on his
retirement. Gratuity is exempted upto certain limit depending upon the category
of employee. For the purpose of exemption, employees are divided into 3
categories:
(i) Government employees and employees of local authority:
In case of such employees, the entire amount of gratuity received by then is
exempted from tax. Nothing will be added to gross salary.
(ii) Employees covered under Payment of Gratuity Act, 1972.
55
In case of employees who are covered under Payment of Gratuity Act, the
minimum of the following amounts are exempted from tax:
• Amount of gratuity actually received
• 15 days of salary for every completed years of service or part thereof in
excess of six months.
(15 / 26 x [basic salary + Dearness Allowance] x No. of years of service+1
[if fraction > 6 months]).
• Rs.3, 50,000 (amount specified by government).
(iii) Other employees.
In case of employees not falling in the above two categories, gratuity received
from the employers is exempt to the extent of minimum of following amounts:
• Actual amount of gratuity received.
• Half month average salary for every completed year of service
(1/2 x average salary of last 10 months x completed years of service).
• Rs.3, 50,000 (amount specified by government).
c) Leave Salary
Employees are entitled to various types of leave. The leave generally can be taken
(casual leave/medical leave) or it lapses. Earned leave is a kind of leave which an
employee is said to have earned every year after working for some time. This
leave can either be availed every year, or get encashment for it. If leave is not
availed or encashed, it is allowed to be carried forward. This leave keeps getting
accumulated and is encashed by employee on his retirement. The tax treatment of
leave encashment is as under:
(i) Encashment of leave while in service. This is fully taxable and so is added
to gross salary.
(ii) Encashment of leave on retirement. For the purpose of exemption of
accumulated leave encashment, the employees are divided into two
categories:
• State or Central Government employees.
Leave encashment received by government employees is fully exempted
from tax. Nothing is to be included in gross salary.
• Other employees
Leave encashment of accumulated leave at the time of retirement received
by other employees is exempted to the extent of minimum of four
amounts.
- Amount specified by Central Government (3, 00,000).
- Leave encashment actually received.
- 10 months average salary (10 x average salary of 10 months preceeding
retirement).
Cash equivalent of unavailed leave.
(Leave entitlement is calculated on the basis of maximum 30 days leave
every year, cash equivalent is based on average salary of last 10 months).
d) Provident Fund
Provident Fund Scheme is a welfare scheme for the benefit of employees. Under
this scheme, certain amount is deducted by the employer from the employee’s
salary as his contribution to Provident Fund every month. The employer also
contributes certain percentage of the salary of the employee to the Fund. The
contributions are invested outside in securities. The interest earned on it is also
credited to the Provident Fund Account. At the time of retirement, the
accumulated balance is given to the employee.
Tax treatment of provident fund depends upon the type of provident fund being
maintained by the employer. Employee’s provident fund may be of the following
3 types:
(i) Statutory Provident Fund
This is set up under the provisions of Provident Fund Act, 1925 and is maintained
by Government and Semi-Government organisations, local authorities, railways,
universities and recognised educational institutions.
(ii) Recognised Provident Fund
This is set up under the Employee’s Provident Fund and Miscellaneous Provisions
Act, 1952 (PF Act, 1952) and is maintained by private sector employees. The
establishments covered under PF Act, 1952 have two options; either to follow the
same scheme at by the Government under the PF Act or draft their own scheme of
PF but get recognition from Commissioner of Income Tax.
(iii) Unrecognized Provident Fund
If a provident fund is not recognized by the Commissioner of Income Tax, it is
known as unrecognized PF.
Besides these 3 funds, a person can also become a member of Public Provident
Fund.
(iv) Public Provident Fund
The Central Government has established the Public Provident Fund for the
benefits of general public to mobilize personal savings. Any member of general
public (whether salaried or self employed) can participate in this fund by opening
a Provident Fund Account at the State Bank of India or its subsidiaries or other
nationalised banks. A salaried employee can simultaneously become member of
employees provident fund (whether statutory, recognized or unreconised) and
public provident fund. Any amount may be deposited (subject to minimum of
Rs.500 and maximum of Rs.70, 000 per annum) under this account. The
accumulated sum is repayable after 15 years. At present, it carries an interest rate
of 8% per annum which is credited every year but payable only the time of
maturity.
DEDUCTIONS FROM GROSS INCOME
The income chargeable under the head salaries is computed after making the
following deductions under Section 16:
1. Standard deduction [section 16(i)] of the Act: From assessment year 2006-
07, standard deduction has been withdrawn.
2. Entertainment Allowance [section 16(ii)] of the Act as given earlier,
entertainment allowance received from employer is first included in gross
salary and thereafter, a deduction is allowed to government employees
(State or Central Government) to the extent of least of following 3
amounts:
(i) Rs.5000
59
(ii) 20% of basic salary
(iii) Amount of Entertainment Allowance actually received during the
year.
3. Professional Tax [Section 16(iii)] of the Act.
Professional tax or tax on employment levied by a State under Article 276
of the Constitution is allowed as a deduction only in the year when it is
actually paid. If the professional tax is paid by the employer on behalf of
the employee, it is first included in gross salary as a perquisite (since it is
an obligation of employee fulfilled by employer) and then the same
amount is allowed as deduction on account of professional tax from gross
salary.
Illustration for ur reference:
Mr. X is working in a factory in Delhi since August 1970. He gets Rs.4000 per
month as basic salary, Rs.400 per month as dearness allowance and Rs.500 per
month as house rent allowance. He resides in his own house.
On 1st January, 2005 he retires and gets Rs.40, 000 as gratuity and Rs.50, 000 as
accumulated balance from unrecognized provident fund. His own contribution
and that of factory to the fund was equal. From January 2005 onwards, he starts
getting pension of Rs.1000 per month.
Compute Net Income of Mr X for the Assessment Year 2006-07.
Solution.
Computation of Net Salary of Mr. X
for the Assessment Year 2006-07
Rupees
Basic Salary (Rs.4000 x 9) 36,000
Dearness Allowance (Rs.400 x 9) 3,600
House Rent Allowance (Rs.500 x 9)
(No exemption since X resides in own house)
4,500
½ Lumsum received from unrecognized provident fund 25,000
Pension Rs.1000 x 3 3,000
Gratuity (Rs.40,000 – amount exempt Rs.68,000 NIL
Gross Salary 72,100
60
Less deductions -
Net Salary 72,100
Amount of gratuity exempt is least of following 3 amounts for other employees:
1. ½ months salary for completed years of service
(½ x 4000 x 34) = Rs.68, 000
2. Actual gratuity received (Rs.40, 000)
3. Limit by Central Government – Rs.3, 50,000
Amount exempt is Rs.68, 000; amount received is Rs.40, 000.
So, entire amount of gratuity is exempt
Example 2.
COMPUTATION OF INCOME FROM SALARIES
Computation of Net Salary of Mr. X
for the Assessment Year 2006 -2007
Rupees
Particulars Amount
Basic Salary
Fees, Commission and Bonus
Taxable value of cash allowances
Taxable value of perquisites
Retirement Benefits
GROSS SALARY
Less: Deductions from Gross Salary
1. Standard Deduction
2. Entertainment allowance deduction
3. Professional tax deduction
Illustration
Mr. X is a lecturer in a private college in Chennai. During the previous year
2005-06, he gets the following emoluments: Basic salary Rs.10, 000 per month,
dearness allowance: 10% of basic salary, city compensatory allowance: Rs.300
per month, children education allowance: Rs.500 per month (for 3 children),
house rent allowance: 20% of salary (rent paid Rs.2000 per month). He gets
Rs.18, 000.
a) Reimbursement from his employer in respect of medical expenditure incurred
on treatment of his wife in a private clinic. Besides, he gets Rs.11, 400 as
reimbursement from the employer in respect of books and journals purchased
by him in discharging his official work.
He contributes 11% of his salary to statutory provident fund to which a
matching contribution is made by the employer. During the year, he spends
Rs.15, 000 for maintaining a car for going to the college. Determine his net
income under the head salaries.
Solution:
Computation of Net Salary of Mr. X
for the Assessment Year 2006 -2007
Rupees
Particulars Amount
Basic Salary (Rs.10, 000 x 12) 1, 20,000
Dearness allowance (10% of 1, 20,000) 12,000
City compensatory allowance (Rs.300 x 12) 3,600
Children education allowance (Rs.500 x 12 less
amount exempt Rs.100 x 12 x 2)
3,600
House Rent Allowance (20% of 1, 20,000 less amount
exempt Rs.12, 000)
12,000
Reimbursement of medical expenses (Rs.18, 000 -
Rs.15, 000)
3,000
Reimbursement of expenses on books (not chargeable
to tax)
-
GROSS SALARY 1, 54,200
Less Standard deduction NIL
NET SALARY 1, 54,200
Working Notes:
1. Amount of HRA exempt is least of 3 figures:
a) 50% of Salary (1, 20,000) 60,000
b) Actual HRA received (20% of 1, 20,000) 24,000
c) Rent paid in excess of 10% of Salary
2000 x 12 - 10 / 100 x 1, 20,000 12,000
Amount of HRA exempt is 12,000
2. Expenditure on maintenance of car is an application of income, not
deductible.
3. Contribution of employer towards employee’s statutory provident fund is
exempt upto 12%.
4. Reimbursement of medical expenditure by employer in private clinic is
exempt upto Rs.15, 000.
5. Children education allowance is exempt to the extent of Rs.100 per month
per child for maximum 2 children
Summary:
1. Heads of Income: There are 5 heads of income into which income of
persons can be divided namely Income from salary, house property,
business or profession, capital gains and other sources.
2. Meaning of Salary: Any remuneration paid by an employer to an
employee in consideration of his services is called salaries. It includes
monetary value of those benefits and facilities which are provided by the
employer and are taxable.
3. Income forming part of salary: They include basic salary, advance salary,
fees, commission, and bonus, taxable value of cash allowances, perquisites
and retirement benefits.
4. Allowances: These are of three types
(a) Taxable Allowances: Dearness allowance, Medical allowance, Servant
allowance, Warden Allowance, Family allowance, City Compensatory
allowance etc.
(b) Allowances exempt upto specified limit: House rent allowances,
Entertainment allowance, Certain Special allowances, etc.
(c) Fully exempted allowances: Foreign allowance, sumptuary allowance to
High Court / Supreme Court Judges, Allowances from U.NO.
5. Perquisites: These are of three types:
(a) Taxable perquisites for all employees: Facility of rent-free house or house
at concessional rent, payment of employee’s obligations, payment of life
insurance premium of the employee, etc.
(b) Perquisites taxable in specified cases only: Facility of servant, gardener,
gas, electricity, water, education, etc.
(c) Tax-free perquisites: Free Medical facility or reimbursement of medical
expenses, free facility of refreshments, entertainment, telephone, family
planning, scholarship, leave travel concession, free motor car, club
facility, gifts etc.
6. Valuation of perquisites: See Rule 3 of Income Tax Rules.
7. Deductions: Following three deductions are admissible:
(a) Standard Deduction: This has been withdrawn from Assessment Year
2006-07.
65
(b) Entertainment Allowance:
(i) Government employees – 1/5th of salary or Rs.5, 000, whichever is
less.
(ii) Others - Nil
(c) Employment Tax – Full Amount
8. Provident Funds: These are of four types:
(a) Statutory provident fund
(b) Recognized provident fund
(c) Unrecognized provident fund and
(d) Public provident fund
INCOME UNDER THE HEAD SALARIES
INTRODUCTION
Income means a receipt in the form of money or
money’s worth which is derived from definite source with some sort of regularity
or expected regularity. These definite sources of income are salaries, house
property, business or profession, capital gains and any other source. If an income
is not derived from any of these sources, it is not taxable under the Income Tax
Act, 1961 (hereinafter referred as ‘Act’). For example, if a person finds a purse
containing Rs.1000 on road, it is not treated as income since it is not received
from any definite source.
We have also learnt that scope of total income is determined with reference to
residential status of a person i.e. total income of each person is based on his
residential status. Once we know what incomes of a person are taxable, then we
need to know how to compute total taxable income according to the provisions of
Income Tax Act.
The present lesson starts with the classification of incomes into various heads. A
detailed study of these heads of income is made lesson wise. This lesson is
devoted to the first and most important head of income “Salaries”. The lesson is
divided into various sections. First we define the concept of salary income i.e.
what are the characteristics, which make an income fall under this head. Then,
incomes falling under this head are enumerated, followed by the detailed descriptions of income tax provisions regarding three of these incomes. The
description of remaining two incomes forming part of salary will be covered in
the next lesson along with procedure for computation of salary income. Finally,
all the provisions covered in this lesson are summarized for the sake of
convenience.
MEANING OF SALARY
Salary, in simple words, means remuneration of a person, which he has received
from his employer for rendering services to him. But receipts for all kinds of
services rendered cannot be taxed as salary. The remuneration received by
professionals like doctors, architects, lawyers etc. cannot be covered under salary
since it is not received from their employers but from their clients. So, it is taxed
under business or profession head. In order to understand what is included in
salary, let us discuss few characteristics of salary.
Characteristics 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.
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 matures
earlier:
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 previous
year.
iii) Arrears of salary- which were not due and received earlier are taxable
when due or received, which ever is earlier.
5. Compulsory deduction from salary such as employees’ contribution to
provident fund, deduction on account of medical scheme or staff welfare
scheme etc. are examples of instances of application of income. In these
cases, for computing total income, these deductions have to be added
back.
INCOMES FORMING PART OF SALARY
Section 17 of the Act gives an inclusive definition of salary. Broadly, it includes:
1. Basic salary
2. Fees, Commission and Bonus
3. Taxable value of cash allowances
4. Taxable value of perquisites
5. Retirement Benefits
Although, all the components of salary income are included in salary, there are
certain incomes in each of these categories, which are either fully exempt or
exempt upto a certain limit. The aggregate of the above incomes, after the
exemption(s) available, if any, is known as ‘Gross Salary’. From the ‘Gross
33
Salary’, the following three deductions are allowed under Section 16 of the Act to
arrive at the figure of Net Salary:
1. Standard deduction - Section 16 (i)
2. Deduction for entertainment allowance – Section 16 (ii)
3. Deduction on account of any sum paid towards tax on employment –
BASIC SALARY
All employees are entitled to a basic salary which is fixed as per their respective
terms of employment either as a fixed amount or at a graded system of salary.
Under this graded system, apart from the basic salary at which the employee will
start, annual increments to be given to the employee are pre fixed in the grade.
For example, if a person is employed on 1st May, 2004 in the grade of 12000 –
300 – 15000, this means that he will start at a basic salary of Rs.12000 from 1st
May, 2004. He will get an annual increment of Rs.300 w.e.f. 1st May, 2005 and
onwards every year on the same date till his basic salary reaches Rs.15, 000. No
further increment is given thereafter till he is promoted and placed in other grade.
Advance Salary, if received in previous year for next year is taxable on receipt
basis in the same previous year.
FEES, COMMISSION AND BONUS
Any fees or commission paid or payable to an employee is fully taxable and is
included in salary. Commission payable may be at a fixed amount or a fixed
percentage of turnovers. In both the cases, it is taxable as salary only when it is
paid or payable by the employer to the employee. When commission is based on
fixed percentage of turnover achieved by employee, it is included in basic salary
for the purpose of grant of retirement benefits and for computing certain
exemptions that we will discuss later on.
TAXABLE VALUE OF ALLOWANCES
Allowance is a fixed monetary amount paid by the employer to the employee
(over and above basic salary) for meeting certain expenses, whether personal or
for the performance of his duties. These allowances are generally taxable and are
to be included in gross salary unless specific exemption is provided in respect of
such allowance. For the purpose of tax treatment, we divide these allowances into
3 categories:
I. Fully taxable cash allowances
II. Partially exempt cash allowances
III. Fully exempt cash allowances
I. FULLY TAXABLE ALLOWANCES
This category includes all the allowances, which are fully taxable. So, if an
allowance is not partially exempt or fully exempt, it gets included in this category.
The main allowances under this category are enumerated below:
(i) Dearness Allowance and Dearness Pay
As is clear by its name, this allowance is paid to compensate the employee against
the rise in price level in the economy. Although it is a compensatory allowance
against high prices, the whole of it is taxable. When a part of Dearness
Allowance is converted into Dearness Pay, it becomes part of basic salary for the
grant of retirement benefits and is assumed to be given under the terms of
employment.
(ii) City Compensatory Allowance
This allowance is paid to employees who are posted in big cities. The purpose is
to compensate the high cost of living in cities like Delhi, Mumbai etc. However,
it is fully taxable.
(iii) Tiffin / Lunch Allowance
It is fully taxable. It is given for lunch to the employees.
(iv) Non practicing Allowance
This is normally given to those professionals (like medical doctors, chartered
accountants etc.) who are in government service and are banned from doing
private practice. It is to compensate them for this ban. It is fully taxable.
(v) Warden or Proctor Allowance
These allowances are given in educational institutions for working as a Warden of
the hostel or as a Proctor in the institution. They are fully taxable.
(vi) Deputation Allowance
When an employee is sent from his permanent place of service to some place or
institute on deputation for a temporary period, he is given this allowance. It is
fully taxable.
(vii) Overtime Allowance
When an employee works for extra hours over and above his normal hours of
duty, he is given overtime allowance as extra wages. It is fully taxable.
(viii) Fixed Medical Allowance
Medical allowance is fully taxable even if some expenditure has actually been
incurred for medical treatment of employee or family.
(ix) Servant Allowance
It is fully taxable whether or not servants have been employed by the employee.
(x) Other allowances
There may be several other allowances like family allowance, project allowance,
marriage allowance, education allowance, and holiday allowance etc. which are
not covered under specifically exempt category, so are fully taxable.
II. PARTIALLY EXEMPT ALLOWANCES
This category includes allowances which are exempt upto certain limit. 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.
(i) House Rent Allowance (H.R.A.)
An allowance granted to a person by his employer to meet expenditure incurred
on payment of rent in respect of residential accommodation occupied by him is
exempt from tax to the extent of least of the following three amounts:
a) House Rent Allowance actually received by the assessee
b) Excess of rent paid by the assessee over 10% of salary due to him
c) An amount equal to 50% of salary due to assessee (If accommodation is
situated in Mumbai, Kolkata, Delhi, Chennai)
‘Or’ an amount equal to 40% of salary (if accommodation is situated in
any other place).
Salary for this purpose includes Basic Salary, Dearness Allowance (if it forms
part of salary for the purpose of retirement benefits), Commission based on fixed
percentage of turnover achieved by the employee.
The exemption of HRA depends upon the following factors:
(1) Basic Salary (3) Rent paid
(2) Place of residence (4) HRA received
If an employee is living in his own house and receiving HRA, it will be fully
taxable.
Example for Reference:
Mr. X is employed in A Ltd. getting basic pay of Rs.20, 000 per month and
dearness allowance of Rs.7, 000 per month (half of the dearness allowance forms
part of salary for the purpose of retirement benefits). The employer has paid
bonus @Rs.500 per month, Commission @1% on the sales turnover of Rs.20
lakhs, and house rent allowance of Rs.6, 000 per month. X has paid rent of Rs.7,
000 per month and was posted at Agra.
Compute his gross salary for the assessment year 2006-07
Solution:
Computation of Gross Salary Amount / Rs.
Basic Salary (Rs.20,000 x 12) 2,40,000
Dearness Allowance (Rs.7,000 x 12) 84,000
Bonus (Rs.500 x 12) 6,000
Commission (1% of Rs.20,00,000) 20,000
House Rent Allowance
(Rs.6,000 x 12 – Amount exempt Rs.53,800)
18,200
Gross Salary: 3,68,200
Amount of HRA exempt is least of 3 amounts:
1. 40% of Salary (Rs.2,40,000 + Rs.42,000 + Rs.20,000) = Rs.3,02,000
2. Actual HRA received (Rs.6, 000 x 12) = Rs. 72,000
3. Rent paid (Rs.7, 000 x 12 – 10% of salary Rs.30, 200) = Rs. 53,800
Amount of HRA exempt is = Rs. 53,800
(ii) Entertainment Allowance
This allowance is first included in gross salary under allowances and then
deduction is given to only central and state government employees under Section
16 (ii).
(iii) Special Allowances for meeting official expenditure
Certain allowances are given to the employees to meet expenses incurred
exclusively in performance of official duties and hence are exempt to the extent
actually incurred for the purpose for which it is given. These include travelling
allowance, daily allowance, conveyance allowance, helper allowance, research
allowance and uniform allowance.
(iv) 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:
a) Children Education Allowance
This allowance is exempt to the extent of Rs.100 per month per child for
maximum of 2 children (grand children are not considered).
b) Children Hostel Allowance
Any allowance granted to an employee to meet the hostel expenditure on his child
is exempt to the extent of Rs.300 per month per child for maximum of 2 children.
c) Transport Allowance
This allowance is generally given to government employees to compensate the
cost incurred in commuting between place of residence and place of work. An
amount uptoRs.800 per month paid is exempt. However, in case of blind and
orthopaedically handicapped persons, it is exempt up to Rs. 1600p.m.
d) Out of station allowance
An allowance granted to an employee working in a transport system to meet his
personal expenses in performance of his duty in the course of running of such
transport from one place to another is exempt upto 70% of such allowance or
Rs.6000 per month, whichever is less.
III. FULLY EXEMPT ALLOWANCES
(i) Foreign allowance
This allowance is usually paid by the government to its employees being
Indian citizen posted out of India for rendering services abroad. It is
fully exempt from tax.
(ii) Allowance to High Court and Supreme Court Judges of whatever
nature are exempt from tax.
(iii) Allowances from UNO organisation to its employees are fully exempt
from tax.
Example for Computation & Treatment of various allowances
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.32000
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
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
Amount / Rs.
Basic Salary 48,000
Dearness Allowance 24,000
40
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 x 2 x 12)
3,600
Transport Allowance
(Rs.1000 x 12 – Amount exempt Rs.800 x 12)
2,400
Medical Allowance (fully taxable) 6,000
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
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
And Finally the brief up as under:
1. Heads of Income: There are 5 heads of income into which income of
persons can be divided namely Income from salary, house property,
business or profession, capital gains and other sources.
2. Meaning of Salary: Any remuneration paid by an employer to an
employee in consideration of his services is called salaries. It includes
monetary value of those benefits and facilities, which are provided by the
employer and are taxable.
3. Income forming part of salary: They include basic salary, advance salary,
fees, commission, bonus, taxable value of cash allowances, perquisites and
retirement benefits.
4. Allowances: These are of three types
(a) Taxable Allowances: Dearness allowance, Medical allowance, Servant
allowance, Warden Allowance, Family allowance, City Compensatory
allowance etc.
(b) Allowances exempt upto specified limit: House rent allowances,
Entertainment allowance, Certain Special allowances, etc.
(c) Fully exempted allowances: Foreign allowance, sumptuary allowance to
High Court / Supreme Court Judges, Allowances from U.NO
Income means a receipt in the form of money or
money’s worth which is derived from definite source with some sort of regularity
or expected regularity. These definite sources of income are salaries, house
property, business or profession, capital gains and any other source. If an income
is not derived from any of these sources, it is not taxable under the Income Tax
Act, 1961 (hereinafter referred as ‘Act’). For example, if a person finds a purse
containing Rs.1000 on road, it is not treated as income since it is not received
from any definite source.
We have also learnt that scope of total income is determined with reference to
residential status of a person i.e. total income of each person is based on his
residential status. Once we know what incomes of a person are taxable, then we
need to know how to compute total taxable income according to the provisions of
Income Tax Act.
The present lesson starts with the classification of incomes into various heads. A
detailed study of these heads of income is made lesson wise. This lesson is
devoted to the first and most important head of income “Salaries”. The lesson is
divided into various sections. First we define the concept of salary income i.e.
what are the characteristics, which make an income fall under this head. Then,
incomes falling under this head are enumerated, followed by the detailed descriptions of income tax provisions regarding three of these incomes. The
description of remaining two incomes forming part of salary will be covered in
the next lesson along with procedure for computation of salary income. Finally,
all the provisions covered in this lesson are summarized for the sake of
convenience.
MEANING OF SALARY
Salary, in simple words, means remuneration of a person, which he has received
from his employer for rendering services to him. But receipts for all kinds of
services rendered cannot be taxed as salary. The remuneration received by
professionals like doctors, architects, lawyers etc. cannot be covered under salary
since it is not received from their employers but from their clients. So, it is taxed
under business or profession head. In order to understand what is included in
salary, let us discuss few characteristics of salary.
Characteristics 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.
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 matures
earlier:
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 previous
year.
iii) Arrears of salary- which were not due and received earlier are taxable
when due or received, which ever is earlier.
5. Compulsory deduction from salary such as employees’ contribution to
provident fund, deduction on account of medical scheme or staff welfare
scheme etc. are examples of instances of application of income. In these
cases, for computing total income, these deductions have to be added
back.
INCOMES FORMING PART OF SALARY
Section 17 of the Act gives an inclusive definition of salary. Broadly, it includes:
1. Basic salary
2. Fees, Commission and Bonus
3. Taxable value of cash allowances
4. Taxable value of perquisites
5. Retirement Benefits
Although, all the components of salary income are included in salary, there are
certain incomes in each of these categories, which are either fully exempt or
exempt upto a certain limit. The aggregate of the above incomes, after the
exemption(s) available, if any, is known as ‘Gross Salary’. From the ‘Gross
33
Salary’, the following three deductions are allowed under Section 16 of the Act to
arrive at the figure of Net Salary:
1. Standard deduction - Section 16 (i)
2. Deduction for entertainment allowance – Section 16 (ii)
3. Deduction on account of any sum paid towards tax on employment –
BASIC SALARY
All employees are entitled to a basic salary which is fixed as per their respective
terms of employment either as a fixed amount or at a graded system of salary.
Under this graded system, apart from the basic salary at which the employee will
start, annual increments to be given to the employee are pre fixed in the grade.
For example, if a person is employed on 1st May, 2004 in the grade of 12000 –
300 – 15000, this means that he will start at a basic salary of Rs.12000 from 1st
May, 2004. He will get an annual increment of Rs.300 w.e.f. 1st May, 2005 and
onwards every year on the same date till his basic salary reaches Rs.15, 000. No
further increment is given thereafter till he is promoted and placed in other grade.
Advance Salary, if received in previous year for next year is taxable on receipt
basis in the same previous year.
FEES, COMMISSION AND BONUS
Any fees or commission paid or payable to an employee is fully taxable and is
included in salary. Commission payable may be at a fixed amount or a fixed
percentage of turnovers. In both the cases, it is taxable as salary only when it is
paid or payable by the employer to the employee. When commission is based on
fixed percentage of turnover achieved by employee, it is included in basic salary
for the purpose of grant of retirement benefits and for computing certain
exemptions that we will discuss later on.
TAXABLE VALUE OF ALLOWANCES
Allowance is a fixed monetary amount paid by the employer to the employee
(over and above basic salary) for meeting certain expenses, whether personal or
for the performance of his duties. These allowances are generally taxable and are
to be included in gross salary unless specific exemption is provided in respect of
such allowance. For the purpose of tax treatment, we divide these allowances into
3 categories:
I. Fully taxable cash allowances
II. Partially exempt cash allowances
III. Fully exempt cash allowances
I. FULLY TAXABLE ALLOWANCES
This category includes all the allowances, which are fully taxable. So, if an
allowance is not partially exempt or fully exempt, it gets included in this category.
The main allowances under this category are enumerated below:
(i) Dearness Allowance and Dearness Pay
As is clear by its name, this allowance is paid to compensate the employee against
the rise in price level in the economy. Although it is a compensatory allowance
against high prices, the whole of it is taxable. When a part of Dearness
Allowance is converted into Dearness Pay, it becomes part of basic salary for the
grant of retirement benefits and is assumed to be given under the terms of
employment.
(ii) City Compensatory Allowance
This allowance is paid to employees who are posted in big cities. The purpose is
to compensate the high cost of living in cities like Delhi, Mumbai etc. However,
it is fully taxable.
(iii) Tiffin / Lunch Allowance
It is fully taxable. It is given for lunch to the employees.
(iv) Non practicing Allowance
This is normally given to those professionals (like medical doctors, chartered
accountants etc.) who are in government service and are banned from doing
private practice. It is to compensate them for this ban. It is fully taxable.
(v) Warden or Proctor Allowance
These allowances are given in educational institutions for working as a Warden of
the hostel or as a Proctor in the institution. They are fully taxable.
(vi) Deputation Allowance
When an employee is sent from his permanent place of service to some place or
institute on deputation for a temporary period, he is given this allowance. It is
fully taxable.
(vii) Overtime Allowance
When an employee works for extra hours over and above his normal hours of
duty, he is given overtime allowance as extra wages. It is fully taxable.
(viii) Fixed Medical Allowance
Medical allowance is fully taxable even if some expenditure has actually been
incurred for medical treatment of employee or family.
(ix) Servant Allowance
It is fully taxable whether or not servants have been employed by the employee.
(x) Other allowances
There may be several other allowances like family allowance, project allowance,
marriage allowance, education allowance, and holiday allowance etc. which are
not covered under specifically exempt category, so are fully taxable.
II. PARTIALLY EXEMPT ALLOWANCES
This category includes allowances which are exempt upto certain limit. 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.
(i) House Rent Allowance (H.R.A.)
An allowance granted to a person by his employer to meet expenditure incurred
on payment of rent in respect of residential accommodation occupied by him is
exempt from tax to the extent of least of the following three amounts:
a) House Rent Allowance actually received by the assessee
b) Excess of rent paid by the assessee over 10% of salary due to him
c) An amount equal to 50% of salary due to assessee (If accommodation is
situated in Mumbai, Kolkata, Delhi, Chennai)
‘Or’ an amount equal to 40% of salary (if accommodation is situated in
any other place).
Salary for this purpose includes Basic Salary, Dearness Allowance (if it forms
part of salary for the purpose of retirement benefits), Commission based on fixed
percentage of turnover achieved by the employee.
The exemption of HRA depends upon the following factors:
(1) Basic Salary (3) Rent paid
(2) Place of residence (4) HRA received
If an employee is living in his own house and receiving HRA, it will be fully
taxable.
Example for Reference:
Mr. X is employed in A Ltd. getting basic pay of Rs.20, 000 per month and
dearness allowance of Rs.7, 000 per month (half of the dearness allowance forms
part of salary for the purpose of retirement benefits). The employer has paid
bonus @Rs.500 per month, Commission @1% on the sales turnover of Rs.20
lakhs, and house rent allowance of Rs.6, 000 per month. X has paid rent of Rs.7,
000 per month and was posted at Agra.
Compute his gross salary for the assessment year 2006-07
Solution:
Computation of Gross Salary Amount / Rs.
Basic Salary (Rs.20,000 x 12) 2,40,000
Dearness Allowance (Rs.7,000 x 12) 84,000
Bonus (Rs.500 x 12) 6,000
Commission (1% of Rs.20,00,000) 20,000
House Rent Allowance
(Rs.6,000 x 12 – Amount exempt Rs.53,800)
18,200
Gross Salary: 3,68,200
Amount of HRA exempt is least of 3 amounts:
1. 40% of Salary (Rs.2,40,000 + Rs.42,000 + Rs.20,000) = Rs.3,02,000
2. Actual HRA received (Rs.6, 000 x 12) = Rs. 72,000
3. Rent paid (Rs.7, 000 x 12 – 10% of salary Rs.30, 200) = Rs. 53,800
Amount of HRA exempt is = Rs. 53,800
(ii) Entertainment Allowance
This allowance is first included in gross salary under allowances and then
deduction is given to only central and state government employees under Section
16 (ii).
(iii) Special Allowances for meeting official expenditure
Certain allowances are given to the employees to meet expenses incurred
exclusively in performance of official duties and hence are exempt to the extent
actually incurred for the purpose for which it is given. These include travelling
allowance, daily allowance, conveyance allowance, helper allowance, research
allowance and uniform allowance.
(iv) 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:
a) Children Education Allowance
This allowance is exempt to the extent of Rs.100 per month per child for
maximum of 2 children (grand children are not considered).
b) Children Hostel Allowance
Any allowance granted to an employee to meet the hostel expenditure on his child
is exempt to the extent of Rs.300 per month per child for maximum of 2 children.
c) Transport Allowance
This allowance is generally given to government employees to compensate the
cost incurred in commuting between place of residence and place of work. An
amount uptoRs.800 per month paid is exempt. However, in case of blind and
orthopaedically handicapped persons, it is exempt up to Rs. 1600p.m.
d) Out of station allowance
An allowance granted to an employee working in a transport system to meet his
personal expenses in performance of his duty in the course of running of such
transport from one place to another is exempt upto 70% of such allowance or
Rs.6000 per month, whichever is less.
III. FULLY EXEMPT ALLOWANCES
(i) Foreign allowance
This allowance is usually paid by the government to its employees being
Indian citizen posted out of India for rendering services abroad. It is
fully exempt from tax.
(ii) Allowance to High Court and Supreme Court Judges of whatever
nature are exempt from tax.
(iii) Allowances from UNO organisation to its employees are fully exempt
from tax.
Example for Computation & Treatment of various allowances
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.32000
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
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
Amount / Rs.
Basic Salary 48,000
Dearness Allowance 24,000
40
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 x 2 x 12)
3,600
Transport Allowance
(Rs.1000 x 12 – Amount exempt Rs.800 x 12)
2,400
Medical Allowance (fully taxable) 6,000
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
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
And Finally the brief up as under:
1. Heads of Income: There are 5 heads of income into which income of
persons can be divided namely Income from salary, house property,
business or profession, capital gains and other sources.
2. Meaning of Salary: Any remuneration paid by an employer to an
employee in consideration of his services is called salaries. It includes
monetary value of those benefits and facilities, which are provided by the
employer and are taxable.
3. Income forming part of salary: They include basic salary, advance salary,
fees, commission, bonus, taxable value of cash allowances, perquisites and
retirement benefits.
4. Allowances: These are of three types
(a) Taxable Allowances: Dearness allowance, Medical allowance, Servant
allowance, Warden Allowance, Family allowance, City Compensatory
allowance etc.
(b) Allowances exempt upto specified limit: House rent allowances,
Entertainment allowance, Certain Special allowances, etc.
(c) Fully exempted allowances: Foreign allowance, sumptuary allowance to
High Court / Supreme Court Judges, Allowances from U.NO
Monday, June 15, 2009
Deduction Available under Section 80-C (Upto a Maximum of Rs.1,00,000):
The following deductions are available under section 80-C subject to a Max. of 1,00,000 a year.I hope the below mentioned list would help u to invest accordingly and would help the eliglble people in claiming deductions.Check that out.
a) Subscription to Provident Fund (GPF/CPF)
b) LIC premium paid
c) Postal Life Insurance (PLI)
d) Contribution to Public Provident Fund (PPF)
e) Group Insurance Scheme (GIS)
f) Subscription to 6 year NSC Issues.
g) Accrued interest on the issue of NSC
h) Subscription to National Savings Scheme
i) Unit Linked Insurance Plan 1971 (ULIP) of UTI
j) Accrued Interest in respect of NSC
k) HBA Principal
l) Contribution to Post Office 10 year/15 year CTD accounts
m) Subscription to any units of a Mutual Fund
n) Contribution to a notified pension fund set up by any notified Mutual Fund
o) Infrastructure Bonds
All the Best .....
a) Subscription to Provident Fund (GPF/CPF)
b) LIC premium paid
c) Postal Life Insurance (PLI)
d) Contribution to Public Provident Fund (PPF)
e) Group Insurance Scheme (GIS)
f) Subscription to 6 year NSC Issues.
g) Accrued interest on the issue of NSC
h) Subscription to National Savings Scheme
i) Unit Linked Insurance Plan 1971 (ULIP) of UTI
j) Accrued Interest in respect of NSC
k) HBA Principal
l) Contribution to Post Office 10 year/15 year CTD accounts
m) Subscription to any units of a Mutual Fund
n) Contribution to a notified pension fund set up by any notified Mutual Fund
o) Infrastructure Bonds
All the Best .....
Deduction of Income Tax at Source from the Salary for the F.Y. 2006-07
Deduction of Income Tax at Source from the Salary for the Financial Year 2006-07 (Assessment Year 2007-08) under Section 192 of I.T.Act, 1961.
Under Section 192 of I.T. Act,1961 the Drawing and Disbursing Officer is
required to deduct Income Tax at source while making the payment of salary
etc.during the financial year.
In order to assess the Income Tax liability, after allowing admissible
deductions and rebates under various sections of Income Tax Act, all staff
members of the Institute are requested to submit declaration of their savings
(other than Salary savings viz., GPF/CPF, Life Insurance Premia/HBA principal etc., recovered from salary) in the prescribed pro-forma (Annexure A).
Latest Updated
Under Section 192 of I.T. Act,1961 the Drawing and Disbursing Officer is
required to deduct Income Tax at source while making the payment of salary
etc.during the financial year.
In order to assess the Income Tax liability, after allowing admissible
deductions and rebates under various sections of Income Tax Act, all staff
members of the Institute are requested to submit declaration of their savings
(other than Salary savings viz., GPF/CPF, Life Insurance Premia/HBA principal etc., recovered from salary) in the prescribed pro-forma (Annexure A).
Latest Updated
Sunday, May 24, 2009
Scientific Research (Sec 35)
The organization Barasat Cancer Research & Welfare Centre, Kolkata has been approved by the Central Government for the purpose of clause (ii) of sub-section (1) of section 35 of the Income-tax Act, 1961 (said Act), read with Rules 5C and 5E of the Income-tax Rules, 1962 (said Rules), with effect from 1-4-2009 in the category of 'other Institution', partly engaged in research activities subject to the following conditions are fulfilled, namely:-
(a) The sums paid to the approved organization shall be utilized for scientific research;
(b) The approved organization shall carry out scientific research through its faculty members or its enrolled students;
(c) The approved organization shall maintain separate books of account in respect of the sums received by it for scientific research, reflect therein the amounts used for carrying out research, get such books audited by. an accountant as defined in the explanation to sub-section (2) of section 288 of the said Act and furnish the report of such audit duly signed and verified by such accountant to the Commissioner of Income-tax or the Director of Income-tax having jurisdiction over the case, by the due date of furnishing the return of income under sub-section (1) of section 139 of the said Act;
(d) The organization shall maintain a separate statement of donations received and amounts applied for scientific research and a copy of such statement duly certified by the auditor shall accompany the report of audit referred to above.
2. The Central Government shall withdraw the approval if the approved organization fails in the following regards:-
(i) Fails to maintain separate books of account referred to in sub-paragraph (c) of paragraph 1; or
(ii) Fails to furnish its audit report referred to in sub-paragraph (c) of paragraph 1; or
(iii) fails to furnish its statement of the donations received and sums applied for scientific research referred to in sub paragraph (d) of paragraph 1; or
(iv) Ceases to carry on its research activities or its research activities are not found to be genuine; or
(v) Ceases to conform to and comply with the provisions of clause (ii) of sub-section (1) of section 35 of the said Act read with rules 5C and 5E of the said Rules.
Notification No. - 27/2009(March 16,2009, C.B.D.T)
(a) The sums paid to the approved organization shall be utilized for scientific research;
(b) The approved organization shall carry out scientific research through its faculty members or its enrolled students;
(c) The approved organization shall maintain separate books of account in respect of the sums received by it for scientific research, reflect therein the amounts used for carrying out research, get such books audited by. an accountant as defined in the explanation to sub-section (2) of section 288 of the said Act and furnish the report of such audit duly signed and verified by such accountant to the Commissioner of Income-tax or the Director of Income-tax having jurisdiction over the case, by the due date of furnishing the return of income under sub-section (1) of section 139 of the said Act;
(d) The organization shall maintain a separate statement of donations received and amounts applied for scientific research and a copy of such statement duly certified by the auditor shall accompany the report of audit referred to above.
2. The Central Government shall withdraw the approval if the approved organization fails in the following regards:-
(i) Fails to maintain separate books of account referred to in sub-paragraph (c) of paragraph 1; or
(ii) Fails to furnish its audit report referred to in sub-paragraph (c) of paragraph 1; or
(iii) fails to furnish its statement of the donations received and sums applied for scientific research referred to in sub paragraph (d) of paragraph 1; or
(iv) Ceases to carry on its research activities or its research activities are not found to be genuine; or
(v) Ceases to conform to and comply with the provisions of clause (ii) of sub-section (1) of section 35 of the said Act read with rules 5C and 5E of the said Rules.
Notification No. - 27/2009(March 16,2009, C.B.D.T)
Saturday, May 23, 2009
Income Tax (Ninth Amendments) Rules,2009
In Adherence of the powers conferred by section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:
(1) These rules may be called the Income-tax (9th Amendment) Rules, 2009.
(2) They shall come into force on the 1st day of April, 2009.
2. In the Income-tax Rules, 1962,
(a) in rule 12,-
(i) in sub-rule (1), for the words, figures and letters "on the 1st day of April, 2008", the words, figures and letters "on the 1st day of April, 2009" shall be substituted;
(ii) in sub-rule (5), for the words, figures and letters "on the 1st day of April, 2007", the words, figures and letters "on the1st day of April, 2008" shall be substituted;
(b) in Appendix- II, for Form ITR 1, Form ITR 2, Form ITR 3, From ITR 4, Form ITR 5, Form ITR 6, Form ITR 7, Form ITR 8, and ITR V, the following forms shall be substituted.
Notification No. - 32/2009 (C.B.D.T-March 27,2009)
(1) These rules may be called the Income-tax (9th Amendment) Rules, 2009.
(2) They shall come into force on the 1st day of April, 2009.
2. In the Income-tax Rules, 1962,
(a) in rule 12,-
(i) in sub-rule (1), for the words, figures and letters "on the 1st day of April, 2008", the words, figures and letters "on the 1st day of April, 2009" shall be substituted;
(ii) in sub-rule (5), for the words, figures and letters "on the 1st day of April, 2007", the words, figures and letters "on the1st day of April, 2008" shall be substituted;
(b) in Appendix- II, for Form ITR 1, Form ITR 2, Form ITR 3, From ITR 4, Form ITR 5, Form ITR 6, Form ITR 7, Form ITR 8, and ITR V, the following forms shall be substituted.
Notification No. - 32/2009 (C.B.D.T-March 27,2009)
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