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Basis of charge of Salary

Any salary due from an employer whether paid or not Any salary paid or allowed though due or not Any arrears of salary paid or allowed in the previous year Salary is taxable on due or receipt basis whichever is earlier

Place of accrual of salary

Salary accrues or arises in India when sevices rendered in India Pension taxable for services rendered in India Leave salary taxable when leave earned in India Salary paid to Indian National by Central Govt for services rendered outside India is taxable in India. All other benefits exempted from tax
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Meaning of Salary
Salary includes [section17(1)] :i. Wages ii. Any annuity or pension iii. Any gratuity iv. Any fees, commission, bonus, perquisite or profits in lieu of or in addition to any salary or wages v. Any advance of salary vi. Any earned leave ( leave salary ) vii. Employers contribution (taxable) towards recognized provident fund viii.Transferred balance ix. Contribution by Central govt. to notified pension scheme

Forms of Salary
1.Advance Salary 2.Arrears of Salary Both of them are taxable on receipt or due basis but relief can be claimed under sec. 89

Forms of Salary
3.Leave Salary
Encashment of leave by surrendering leave standing to ones credit is known as leave salary.
LEAVE ENCASHMENT

During Employment

Retirement / Leaving the Job

Chargeable to Tax

Government Employee

Non-Government Employee

Fully Exempt

Least of following is exempt :1) Period of Earned Leave in months x Average monthly Salary 2) 10 x Average monthly salary 3) Rs. 300000 4) Actual Leave Salary Received
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Forms of salary
Period of earned leave Period of service in years ( fraction of year ignored ) x Rate of earned leave per year ( Approved period-30 days or 1 month for every year of actual service ) Earned leave actually taken in no. of days / 30 Average monthly salary-10 months Salary means basic salary plus dearness allowances if terms of employment so provides. It also includes commission based

on fixed percentage of turnover achieved by an employee.

Forms of Salary
4.Gratuity [Sec.10(10)] Gratuity is a retirement benefit. It is generally payable
at the time of cessation of employment and on the basis of duration of service. Tax treatment of gratuity is given below:
Status of Employee

Government Employee

Non-government employee covered by the payment of Gratuity Act, 1972

Non-government employee not covered by the payment of Gratuity Act, 1972

It is fully exempt from tax under section 10(10)(i)

Least of following is exempt: 1) 15 days salary x Length of service 2) Rs. 3, 50, 000, Rs 10,00,000 from 2010 3) Gratuity actually received.

Least of following is exempt: 1) month avg. salary for each completed year of service 2) Rs. 3, 50, 000, Rs.10,00,000 3) Gratuity actually received.
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Forms of salary
Salary means salary last drawn and includes only D.A. 15 days salary- salary last drawn / 26 x 15 Length of service is calculated by ignoring less than 6 months and considering more than 6 months Third case- non-govt. employee Average monthly salary 10 months Salary- same as in Leave salary for non-government employee

Forms of salary
5. PENSION [SEC. 17(1)(ii)] - Pension is chargeable to tax as follows :PENSION

COMMUTED

UNCOMMUTED

Government Employee

Non-Government Employee
If Gratuity Received If Gratuity not Received Taxable for Government as well as Non-Government employees

Entire Commuted Pension is exempt whether or not Gratuity received.

1/3 of commuted pension is exempt

1/2 of commuted pension is exempt

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Forms of salary
Pension scheme for employees joining after Jan 1,2004 To contribute 10 % of monthly salary (Basic +D.A.) Equal contribution by employer and to be included in salary of employee Contributions to be deductable Pension received on retirement is taxable

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Forms of salary
6. Annuity [Sec. 17(1)(ii)] An annuity payable by a present employer is taxable as salary even if it is paid voluntarily without any contractual obligation of the employer. An annuity received from an ex-employer is taxed as profit in lieu of salary. 7. Retrenchment compensation [Sec. 10(10B)] Compensation received by a workman at the time of retrenchment is exempt from tax to the extent of the lower of the following:
a. b. c. an amount calculated in accordance with the provisions of sec. 25F(b) of the Industrial Disputes Act, 1947; or such amount as notified by the Government (i.e., Rs, 5, 00, 000); or the amount received.

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Forms of salary
8.
Compensation received at the time of Voluntary Retirement [sec.10 (10C)] - Compensation received at the time of voluntary retirement is exempt from tax, subject to certain conditions. Maximum amount of exemption is Rs. 5,00,000.

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Forms of salary
9.Profit in lieu of salary
Compensation for termination of service Compensation for modification of terms & conditions of sevices Any payment from employer except certain items like HRA,gratuity,Commutted pension,PF etc

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Forms of Salary
Provident Fund The following included in Salary and Taxable Contribution of employer in RPF in excess of 12% of salary Interest on RPF in excess of 9.5%

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Allowances
Allowance is generally defined as a fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the services rendered by the employee or as compensation for unusual conditions of that service. Three types Taxable Exempted upto specified limit Fully exempted .
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Allowances
Taxable Allowances Dearness allowance,Dearness Pay Fixed medical allowances Tiffin allowance ( meal or refreshment allowance ) Servant allowance Non-practising allowances for govt doctors Hill allowance for less than 1000 meters height from sea level Warden allowance and Proctor allowances Deputation allowance Overtime allowance
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Allowances
Allowances exempted with limit 1 House Rent Allowance
Exemption In Respect of House Rent allowance is regulated by rule 2A. The least of the three given below is Exempt from Tax.

An Amount Equal to 50 % of Salary. Where Residential House in situated at Bombay, Calcutta, Delhi or Madras and An Amount Equal to 40 % of Salary where Residential House is situated at any Other Place.

House Rent Allowance received by the Employee in respect of the Period during which Rental Accommodation is occupied by the Employee during the Previous Year.

The Excess of Rent Paid over 10 % of Salary.

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Allowances
Salary means Basic pay and D A if the terms of employment so provides plus commission at fixed % on turnover Exemption denied when an employee lives in his own house or in a house for which he does not pay any rent or pays rent which does not exceed 10 % of salary

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Allowances
2.Entertainment allowance [sec.169(ii)]Entertainment allowance is first included in salary income under the head salaries and thereafter a deduction is given on the basis enumerated below:
Status of Employee

Non- Government

Government

Nothing is deductible

Least of the Following is deductible : 1. Rs. 5000 2. 20 % of basic salary 3. Amount of entertainment allowance granted during the previous year
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Allowances
Salary excludes any allowances or benefits Amount actually expended not to consider No exemption for non-govt. employee

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Allowances
3.Special allowances prescribed as exempt under section 10(14) In the cases given below the amount of exemption under section 10(14) is :
i. ii. The amount of the allowance ; or The amount utilized for the specific purpose for which allowance is given. Whichever is lower.

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Allowances
Exemption is available on the aforesaid basis in the case of following allowances

:-

NAME OF ALLOWANCE Travelling Allowance/ Transfer Allowance

NATURE OF ALLOWANCE Any allowance granted to meet the cost of travel on tour or on transfer (including sum paid in connection with transfer, packing and transportation of personal effects on such transfer).

Conveyance Allowance

Conveyance allowance granted to meet the expenditure on conveyance in performance of duties of an office (expenditure for covering the journey between office and residence is not to be included).

Daily Allowance

Any allowance whether granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from this normal place of duty.

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Allowances
4.When exemption does not depend upon expenditure In the cases given below, the amount of exemption does not depend upon expenditure incurred by the employee. Regardless of the amount of expenditure, the allowances given below are exempt to the extent of
i. the amount of allowance ; or ii. the amount specified in rule 2BB,

Whichever is lower.
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Allowances
Name of allowance Special Compensatory (Hill Areas) Allowance Border area allowance Tribal areas/ scheduled areas allowance Allowance for transport employees Children education allowance Exemption as specifiedin rule 2BB Amount exempt from tax varies from Rs. 300 per mount to Rs. 7,000 per month The amount of exemption varies from Rs. 200 Per month to Rs. 1,300 per month Rs. 200 Per Month The amount of exemption isa.70 per cent of such allowance; or b.Rs. 6,000 per month, whichever is lower. The amount exempt is limited to Rs. 100 per month per child up to a maximum of two children. It is exempt from tax to the extent of Rs. 300 per month per child up to a maximum of two children.

Hostel expenditure allowance

Compensatory field area allowance

Exemption is limited to Rs. 2,600 per month in some cases.

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Allowances
Name of Allowance Compensatory modified area allowance Exemption as Specified in Rule 2BB Exemption is limited to Rs.1,000 per month in some cases.

Counter insurgency allowance

Transport allowance Underground allowance High altitude allowance Highly active field area allowance

Exemption is limited to Rs.3,900 per month in some cases.

It is exempt up to Rs. 800 per month (Rs. 1,600 per month in the case of an employee who is blind or orthopedically handicapped) Exemption is limited to Rs. 800 per month. It is exempt from tax up to Rs. 1,060 per month (for altitude of 9,000 to 15,000 feet) or Rs. 1,600 per month (for altitude above 15,000 feet). It is exempt from tax up to Rs. 4,200 per month.

Island duty allowance

It is exempt up to Rs. 3,250 per month.

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Allowances
Fully Exempted Allowances 1.Allowance to Government employees outside India [Sec. 10( 7)] - Any allowance paid or allowed outside India by the Government to an Indian citizen for rendering service outside India is wholly exempt from tax.

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Allowances
2.Allowance to High Court and Supreme Court Judges Any allowance paid to High Court & Supreme court Judges under section & 22C of the High Court Judges (Conditions of Service) Act, 1954 is not chargeable to tax. 3.Allowance received from United Nations Organization Allowance paid by a United Nations Organization to its employees is not taxable by virtue of section 2 of the UN (Privileges and Immunities) Act,1974.

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PERQUISITES
Perquisite may be defined as any Casual Emolument or Benefit attached to an office or position in Addition to Salary or Wages. It also denotes something that benefits a man by going in to his own pocket . Perquisites may be provided in cash or in kind . Perquisites are included in salary income only if they are received by an employee from his employer.

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Perquisites as defined u/s 17 (2)

The term perquisites is defined by section 17 (2) as including the following items:
1.The value of Rent-free Accommodation provided to the assessee by his employer 2.The value of any concession in the matter of rent with respect to any accommodation provided to the assessee by his employer

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Perquisites
3. The value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases :
i. ii. By a company to an employee who is a director thereof ; By a company to an employee, being a person who has substantial interest in the company ; ; ( owner of equity shares carrying not less than 20% of voting power ) iii. By any employer (including a company) to an employee to whom provisions of (i) and (ii) above do not apply and whose income under the head salaries exclusive of the value of all benefits or amenities not provided for by way of monetary benefits, ( in kind ) exceeds Rs. 50,000. Non-monetary benefits are not included

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Perquisites
4. Any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee. Obligation of Employee met by Employer. 5. Any sum payable by the employer, whether directly or through a fund other than a recognized provident fund or approved superannuation fund or a deposit-linked insurance fund, to effect an assurance on the life of the assessee or to effect a contract for an annuity 6. The value of any other fringe benefits or amenity as may be prescribed

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Perquisites
Three types
Perquisites taxable in case of all employees Perquisites taxable in the case of specified employees only Tax free perquisites

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Perquisites
Taxable for All employees Value of residential accommodation Any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee. Obligation of Employee met by Employer.

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Perquisites
Any sum payable by the employer, whether directly or through a fund other than a recognized provident fund or approved superannuation fund or a deposit-linked insurance fund, to effect an assurance on the life of the assessee or to effect a contract for an annuity Value of specified security or equity shares transferred at free or less cost by the employer to the assesse

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Perquisites
Amount exceeding Rs. 1 lac contributed by the employer to approved superannuation fund for the employee The value of any other fringe benefits or amenity as may be prescribed

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Perquisites
Taxable for Specified Employees
i. ii. an employee who is a director thereof ; an employee, being a person who has substantial interest in the company ; iii. an employee to whom provisions of (i) and (ii) above do not apply and whose income under the head salaries exclusive of the value of all benefits or amenities not provided for by way of monetary benefits, exceeds Rs. 50,000

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Perquisites
Facility of car Sweeper,watchman,gardener & personal attendent Gas,electricity & water Educational facility to the members of employees household Transport facility

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Perquisites
Tax-free perquisites Medical benefits
Expenditure in employers and approved hospital Health insurance premium Expenditure in private nursing home upto Rs.15,000 Expenditure for treatement outside India exempted on conditions

Tea or snacks provided at workplace Residential accommodation provided at site Expenses on telephones including mobile phones Employers contribution to Staff Group Insurance Scheme Scholarships to employees or to their children Tax paid on the value of perquisites Refresher courses Rent-free house & conveyance facility to High court & supreme Court judges
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Perquisites
Lap-tops & computers for personal use of employees or households Interest free or concessional loan ( not to exceed Rs.20000 ) Periodicals and journals required for work Rent-free furnished residence provided to Ministers, Special officers of Parliament or Leader of Opposition

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Valuation of Perquisites
Rule 3(1): Rent free accommodation The accommodation may be provided: In a hotel. Other than a hotel : Unfurnished or furnished accommodation o Which is owned by employer. o which is taken on lease/ rent by employer.

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Valuation of Perquisites
If accommodation is provided in a hotel room The valuation rule in this case is same for Government / other employer. The valuation is NIL if the accommodation is provided for upto 15

days on transfer of employee to another city

. The valuation in other cases will be lower of the following:

24% of salary.

Actual hotel charges.

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Valuation of Perquisites
If accommodation taken on lease/rent by employer For government employees, the value fixed as per central /state government rules. For other employees, lower of the following: o Actual lease rent. o 15% of salary.

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Valuation of Perquisites
If accommodation is owned by employer For government employees, the value fixed as per Central /state government rules. For other employees, the valuation will depend on the population of the city where accommodation is provided and it is: 7.5% of salary where population upto 10 lacs. 10% of salary where population exceeds 10 lacs but upto 25 lacs. 15% of salary where population exceeds 25 lacs.
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Valuation of Perquisites
Furnished & Concessional Accommodation Furnished accommodation If the accommodation owned / hired by employer is furnished, the valuation of perquisite will go up by: o 10% of the cost of furniture if furniture owned or, o actual hire charges paid for the furniture. Concessional accommodation Valuation as above, and If any amount is recovered from employee towards the accommodation, the same will be reduced from the valuation as done above.
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Valuation of perquisites
Salary for valuation of accommodation includes Basic pay D A ( if terms provide ) Bonus commission fees all taxable allowances and payments, and excludes Value of perquisites Employers contribution to RPF Non-taxable allowances

Valuation of Perquisites
Rule 3(2): Motor Car 1. Car owned/hired by employer, exclusively used for official purpose and expenses borne by the employer: Nil. 2. Car owned/hired by employer, exclusively used for private purpose by employee and expenses borne by the employer Actual exp incurred by employer, + 10% of cost p.a. towards wear & tear less amount recovered from employee, if any.

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Valuation of Perquisites
Rule 3(2): Motor Car 3.Used partially for work, then monthly valuation will be as per table given below

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Valuation of Perquisites
Rule 3(3): Services of sweeper, gardener, watchman or personal attendant Salary paid by employer Less amount actually paid by employee Rule 3(4): Supply of gas, electric energy or water for household consumption Actual amount paid by employer Less amount actually paid by employee. If such supply is made from resource owned by employer, then actual manufacturing cost per unit Less amount actually paid by employee

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Valuation of Perquisites
Rule 3(5): Free / concessional educational facility Actual expenditure incurred by employer Less amount actually paid by employee. Where educational institution is owned /maintained by employer,then cost of such education in similar institute. However if this cost is upto Rs. 1000 per child per month, then perquisite value will be taken as NIL.

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Valuation of Perquisites
Rule 3(6): Personal / private journey If employer is engaged in travel or transport business and such facility is offered to employee or family member, the value of perquisite will be value of such benefit , as offered to public Less amount actually paid by employee. This rule will not apply to employees of an airline or railways

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Valuation of Perquisites
Leave travel concession Financial assistance for travelling anywhere in India with family Exemption of Fare only Only two journeys in a block of four calendar years is exempt ( 2010-2013 ) Carry over permitted if concession is not availed in time and exempted if the concession is availed in the first calendar year of the immediately succeeding block of four calendar years

Valuation of Perquisites
PRESCRIBED FRINGE BENEFITS Rule 3(7)(i): Interest free / concessional Loan Any loan given free of interest or concessional interest shall be a taxable perquisite and calculated as follows: Interest calculated at the rate charged by State Bank of India as on 1st day of previous year on loan for the same purpose. This is to be calculated on maximum outstanding monthly balance. Less actual interest paid by employee. Exceptions Loan up to Rs. 20,000. Loan for medical purposes for prescribed diseases.

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Valuation of Perquisites
Rule 3(7)(ii): Travelling expenses on holidays Actual amount paid/reimbursed towards travelling expenses, including accommodation charges for any holiday availed by employee or family members. Where such facility is maintained by the employer, and is nonavailable uniformly to all employees, the value of benefit shall be value at which such facilities are offered by other agencies to the public.Where the employee is on official tour and the expenses are incurred in respect of any member of his household accompanying him, the amount of expenditure so incurred shall also be a fringe benefit or amenity.Where any official tour is extended as a vacation, the value of such fringe benefit shall be limited to the expenses incurred in relation to such extended period of stay or vacation. The perquisite value is to be reduced by amount actually paid by Employee Exception Leave travel concession as per Rule 2B.
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Valuation of Perquisites
Rule 3(7)(iii): Free food / meal vouchers Amount of expenditure towards value of free food and non-alcoholic beverages provided by the employer to an employee as reduced by any amount paid by employee. Exception Free food and non-alcoholic beverages provided by such employer during working hours at work place up to Rs. 50 /- per meal. Paid vouchers which are not transferable and usable only at eating joints, up to Rs. 50/- per meal Tea or snacks provided during working hours. Free food and non-alcoholic beverages during working hours provided in a remote area or an offshore installation.
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Valuation of Perquisites
Rule 3(7)(iv): Free Gift Amount of any gift, or voucher, or token in lieu of which such gift may be received by the employee or by member of his household on ceremonial occasions or otherwise from the employer. Exception Gift up to Rs. 5000/- in aggregate during previous year

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Valuation of Perquisites
Rule 3(7)(v): Credit Card expenses The amount charged to credit card used by the employee or family member, provided by the employer, or otherwise, paid for or reimbursed by such employer. This will include membership fees and annual fees. Exceptions Where expenses are incurred wholly and exclusively for official purposes and the following conditions are fulfilled: (a ) complete details in respect of such expenditure are maintained by the employer which may, inter alia, include the date of expenditure and the nature of expenditure. (b ) the employer gives a certificate for such expenditure to the effect that the same was incurred wholly and exclusively for the performance of official duties.
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Valuation of Perquisites
Rule 3(7)(vi): Club membership Actual amount of expenditure paid / reimbursed to employee towards (including the amount of annual or periodical fee) amount spent in a club by him or family member. Any amount recovered from employee will be reduced from such Value

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Valuation of Perquisites
Rule 3(7)(vi): Club membership Exceptions where the employer has obtained corporate membership of the club and the facility is enjoyed by the employee or family member , the value of perquisite shall not include the initial fee paid for acquiring such corporate membership. if such expenditure is incurred wholly and exclusively for business purposes and the following conditions are fulfilled: (a ) complete details in respect of such expenditure are maintained by the employer which may inter alia, include the date of expenditure, the nature of expenditure and its business expediency; (b ) the employer gives a certificate for such expenditure to the effect that the same was incurred wholly and exclusively for the performance of official duties. Use of health club, sports and similar facilities provided uniformly to all employees by the employer.

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Valuation of Perquisites
Rule 3(7)(vii): Use of movable asset For use by the employee or family member of any movable asset the value of perquisite will be 10% per annum of the actual cost of such asset ,if the asset is owned by employer or the amount of rent or charge paid or payable by the employer, Any amount recovered from employee will be reduced from such value Exceptions Use of laptops and computers

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Valuation of Perquisites
Rule 3(7)(viii): Transfer of movable asset When any movable asset owned by employer is directly / indirectly transferred to employee or family member the value of benefit will be calculated as follows: Actual Cost Less Depreciation Less amount actually paid by employee. Depreciation will be calculated. @ 50% on reducing balance for computers and electronic items. @ 20% on reducing balance for motor car. @ 10% on cost for other assets.

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Valuation of Perquisites
Rule 3(7)(ix): Value of any other benefit The value of any other benefit or amenity, service, right or privilege provided by the employer shall be determined on the basis of cost to the employer under an arm's length transaction Exceptions Expenses on telephones including a mobile phone actually incurred on behalf of the employee by the employer.
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Provident Fund
Provident Fund Scheme is a welfare scheme for the benefit of employees. The employee contributes certain sum to this fund every month and the employer also contributes certain sum to the provident fund in employees A/c. the employers contribution to the extent of 12% is not chargeable to tax.

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Provident Fund
Included the following in Salary and Taxable
Contribution of employer in RPF in excess of 12% of salary Interest on RPF in excess of 9.5%

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Deductions Admissible in Computing Income under head SALARIES

1. Entertainment allowance granted by employer [Sec.16(ii)]: This deduction is available in case of Government employees only. 2. Employment Tax / Professional Tax [Sec.16(iii)]: Any sum paid by assessee on account of a tax on employment within the meaning of Article 276(2). Under the said article employment tax cannot exceed Rs. 2500 p.a.

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Relief in respect of Advance or Arrears of Salary u/s 89

When an assessee is in receipt of a sum in the nature of salary, being paid in arrears or in advance, due to which his total income is assessed at a rate higher than that at which it would otherwise have been assessed ,Relief is granted on an application made by the assessee to the assessing officer.

Index

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