Salaries

Shankar Bose,

IITMSTU, Puri

Employer employee relationship.Written or implied contracts.Any benefit or receipt arising

from employment.

Whether director or managing director

of a company is an employee ?

Whether partner of a firm can be an

employee ?

As pension paid due to the previous employer employee relationships is taxed under salary .

If, after the death of such employee family pension received by spouse - comes under other sources, as there is no employer employee relationship.

Sec. 15 - Salaries. The following income shall be chargeable to income-tax under the head Salaries - (a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.

Explanation 1.-For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due.

Explanation 2.-Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as "salary" for the purposes of this section.

Sec. 16 - Deductions from salaries. The following deductions are available in computing income under the head Salaries, (ii) a deduction in respect of any entertainment allowance granted to a govt. assessee, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less;(iii) a deduction of any sum paid by the assessee on account of a tax on employment within the meaning of clause (2) of article 276 of the Constitution, leviable by or under any law.

Salary u/s 17(1) includes- Wages Any annuities or pension Any gratuity Any fees, commission, perquisites or

profits in lieu of or in addition to salary Advance of salary Amount received on encashment of leave

Employer’s contribution to recognised P.F. in excess of prescribed percentage of salary

Interest credited in a RPF in excess of prescribed percentage

Balance transferred from unrecognised PF to RPF(Rule 11 part A, Sc. IV)

The contribution by employer under notified pension scheme (Sec. 80CCD).

Perquisites u/s 17(2) includes-

Value of rent free accommodation

Value of rent concession

Value of any benefit provided free or at concession to specified employees

Any sum paid by employer for any obligation which would have been payable by employee

Any sum payable for life assurance of employees(other than RPF, superannuation fund, deposit linked insurance fund)

The value of any other fringe benefit as per Rule 3 on which employer is not liable to pay FBT

Specified employee-

(i) Director Employee,

(ii)Employee having substantial Interest [beneficial owner 20% or more equity shares, voting power, in the Employer company],

(iii)Employees having Salary Income exceeding Rs 50.000 /- (excluding all benefits & amenities not provided by way of monetary payments from one or more Employers in the P.Y.).

Profits in lieu of salary u/s 17(3)- (i) any payment for termination / modification

of terms of employment (ii) any payment other than those received ,

u/s 10 (10) / (10A) / (10B) / (11) / (12) / (13) / (13A) or from any U.P.F. / Unrecognized Superannuation fund or under Keymans’ Insurance Policy

(iii) any sum received from an employer before joining or after cessation of employment etc .

Please noteItems of Salary Wholly Taxable

i) Basic ii) D.A. iii) D.P. iv) Commission or Fees v) Bonus vi)Arrear or Advance Salary vii) and other taxable allowances

Items of Salary Partly Exempted and Partly Taxable

i) H.R.A. ii) T.A. iii) Education Allowance iv) Hostel

Allowance v) Perquisites vi) Excess Contribution &

Accrued Interest to R.P.F. vii) Retirement Benefits .

Retirement benefits

1. Leave encashment

2.Gratuity

3.Pension

4.Retrenchment compensation

Received while in service-Fully taxable( both govt. & Non govt. employees)

Received at the time of retirement

Govt employees (both central & state)

Exempted

Non government employee(including employees local authority and corporation)

(see next slide)

Least of the following:

a) 10 months average salary*.

b) Amount specified by the govt. Rs.3,00,000.

c) Actually received at the time of retirement.

d) Period of leave on 30-day basis for every completed year of service(-) leave availed during service(-)leave encashed during service] x (average salary of last 10 months)*

*Average salary-Basic + DA if in employment terms +fixed % of comm.

(i) In case of employee of Central, State, Local authority it is fully exempt.

(ii) In case of employees covered by the Payment of Gratuity Act, 1972 , where 10 or more persons are employed during any time in preceding 12 months :

Least of the following is exempt :

(a) 15 days salary ( 7 days in the case of seasonal establishment ) based on salary last drawn for each completed year of service or part thereof in excess of 6 months. [ 15 / 26 X Salary last drawn X No: of Years of service ]

(b) Rs. 3,50,000/-

(c) Gratuity actually received.

(iii) In other cases least of the following :

(a)Rs.3,50,000/-. (b) 1/2 month’s average salary for each completed year of service. (c) Gratuity actually received.

Average Salary means the average of 10 months Salary immediately preceding the month of retirement Salary - Basic + DA ( forming part of Salary if in terms of employment) + Commission at fixed % on turnover.

Regular pension received by the employee himself after the retirement is taxable as salary.

Family pension comes under income from other sources as there is no employer and employee relationship after the death of employee.

Commuted pension is exempt as follows : i) Govt./Local authority employee : Entire

commuted pension is exempt u/s 10(10A)(i) ii) Non-Govt. employee : a. If Gratuity received – Maximum 1 / 3

rd of the Full Value of Pension

b. If Gratuity not received – Maximum 1 / 2 of the Full Value of Pension

Applicable for those join on or after 1st Jan 2004.

Contribution made by employer –taxable. Employer and employee’s contribution to the

extent of 10% is deductible as saving U/S80CCD.

When pension received –fully taxed in the hands of recipient

Salary=Basic +DA if it comes for retirement benefit.

Voluntary Retirement scheme Maximum amount of exemption is

Rs.5,00,000. Up to Rs. 5,00,000 is exempted

Conditions: The same employee can not be re-employed

in the same or any other company comes under the same management.

Salary means the last salary drawn for computation of compensation

Basic+ DA which comes for retirement + fixed % of commission on sales.

HRA received is taxable after allowing an exemption u/s 10(13A) read with Rule 2A

Least of the following:

i) H R A actually received

ii) Rent Paid - 10% of Salary

iii) 50% (for Delhi/ Kolkata / Mumbai / Chennai) OR 40% of Salary for other places)

Salary*= Basic+DA+Comn. at fixed % of turnover.

[Gestetner Duplicator (P) Ltd Vs C.I.T (1979) 1 Taxman 1 /117 ITR (SC)]

Government(central & state) employees:

Least of the following is deductible:

1. Rs. 5,000,

2. 20% of salary,

3.Amount of entertainment allowance granted during the previous year.Non government employees are not exempted

Salary excludes allowances benefit or other perquisites.

Education Allowance received for education

Of employees own children is taxable after

allowing an exemption of Rs 100/- p.m. per

child for a maximum of two children.

Accommodation

City with population exceeding 25 lakhs

City with population exceeding 10 lakhs but upto25 lakhs

City with population not exceeding 10 akhs

Owned by employer

15% of salary 10% of salary 7.5% of salary

Taken on lease or rent

Lease or rent or 15% of salary - Least

Lease or rent or 10% of salary – Least

Lease or rent or7.5% of salary- Least

Furnished- 10% of cost of furniture or actual hire charges. Concessional rate- Perquisite-amount recovered. Salary- Includes pay, allowances, bonus, commission etc. but excludes DA, DP conditionally, exempted allowances, perquisites and employer’s contribution to PF.

Education Allowance received for education

Of employees own children is taxable after

allowing an exemption of Rs 100/- p.m. per

child for a maximum of two children.

(i) Interest Free Loan- The following are not taxable (a) If the Loan is for medical treatment of diseases specified in Rule 3A [ i.e. Cancer , Tuberculosis , AIDS , Disease of Heart / Blood / Lymph Gland / Bone Marrow / Respiratory , Nervous , Urinary , Digestive system / Liver / Gall Bladder / Skin involving surgical operation ]

(b) If the aggregate amount of loan does not exceed Rs 20.000/-

The Perquisite value of such Interest free Loan to be calculated

at the rates applicable in S B I for the respective loan on the

maximum outstanding balance” on the last day of each month .

The Perquisite value for use of movable assets :-

(I) Use of Computer , Laptop is not taxable perquisite.

(II) Use of Other Movable Assets:

a) If Owned by employer - 10 % of Actual Cost.

b) If Hired by employer - Actual Hire Charges.

(iii) The Perquisite value for Transfer or Sale of M.A.

a) Electronic appliances including Computers & Cars to be valued at W D V depreciated @ 50% & 20%

b) Other Assets to be valued at Actual Cost as depreciated by 10% of actual cost for each year .

THANK YOU