INDEX

INTRODUCTION TO INCOME Tax

Introduction to income TAX

Income tax is an annual tax on income. The Indian Income Tax Act (Section 4) provides that in respect of the total income of the previous year of every person, income tax shall be charged for the corresponding assessment year at the rates laid down by the Finance Act for that assessment year. Section 14 of the Income tax Act further provides that for the purpose of charge of income tax and computation of total income all income shall be classified under the following heads of income: A. Salaries B. Income from house propertyC. Profits and gains of business or profession. D. Capital gains E. Income from other sources. The total income from all the above heads of income is calculated in accordance with the provisions of the Act as they stand on the first day of April of any assessment year. In this booklet an attempt is being made to discuss the various provisions relevant to the salaried class of taxpayers as well as pensioners and senior citizens.The definition of income as per the Income-tax Act, 1961, begins with the words Income includes. Therefore, it is an inclusive definition and not an exhaustive one. Such a definition does not confine the scope of income but leaves room for more inclusions within the ambit of the term. Certain important principles relating to income are enumerated below Income, in general, means a periodic monetary return which accrues or is expected to accrue regularly from definite sources. However, under the Income-tax Act, 1961, even certain incomes which do not arise regularly are treated as income for tax purposes e.g. Winnings from lotteries, crossword puzzles. Income normally refers to revenue receipts. Capital receipts are generally not included within the scope of income. However, the Income-tax Act, 1961 has specifically included certain capital receipts within the definition of income.e.g. Capital gains i.e. gains on sale of a capital asset like land. Income means net receipts and not gross receipts. Net receipts are arrived at after deducting the expenditure incurred in connection with earning such receipts. The expenditure which can be deducted while computing income under each head is prescribed under the Income-tax Act, 1961. Income is taxable either on due basis or receipt basis. For computing income under the heads Profits and gains of business or profession and Income from other sources, the method of accounting regularly employed by the assessee should be considered, which can be either cash system or mercantile system. Income earned in a previous year is chargeable to tax in the assessment year. Previous year is the financial year, ending on 31st March, in which income has accrued/ received. Assessment year is the financial year (ending on 31st March) following the previous year. The income of the previous year is assessed during the assessment year following the previous year. For instance, income of previous year 2012-13 is assessed during the year 2013-14. Therefore, 2013-14 is the assessment year for assessment of income of the previous year 2012-13.

INCOME FROM THE FIVE HEADS OF INCOMENow we are going further discuss on INCOME FROM SALARY one of the Heads of Income from where government generates its direct tax which are used by government in Development of Country.

Income from Salaries

The meaning of the term salary for purposes of income tax is much wider than what is normally understood. Every payment made by an employer to his employee for service rendered would be chargeable to tax as income from salaries. The term salary for the purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans etc).GENERAL POINTS: (1)Employer-employee relationship: Before an income can become chargeable under the head salaries, it is vital that there should exist between the payer and the payee, the relationship of an employer and an employee. Examples: (a) Sujatha, an actress, is employed in Chopra Films, where she is paid a monthly remuneration of ` 2 lakh. She acts in various films produced by various producers. The remuneration for acting in such films is directly paid to Chopra Films by the different producers. In this case, ` 2 lakh will constitute salary in the hands of Sujatha, since the relationship of employer and employee exists between Chopra Films and Sujatha.(b) In the above example, if Sujatha acts in various films and gets fees from different producers, the same income will be chargeable as income from profession since the relationship of employer and employee does not exist between Sujatha and the film producers. (c) Commission received by a Director from a company is salary if the Director is an employee of the company. If, however, the Director is not an employee of the company, the said commission cannot be charged as salary but has to be charged either as income from business or as income from other sources depending upon the facts. (d) Salary paid to a partner by a firm is nothing but an appropriation of profits. Any salary, bonus, commission or remuneration by whatever name called due to or received by partner of a firm shall not be regarded as salary. The same is to be charged as income from profits and gains of business or profession. This is primarily because the relationship between the firm and its partners is not that of an employer and employee.(2) Full-time or part-time employment: It does not matter whether the employee is a full- time employee or a part-time one. Once the relationship of employer and employee exists, the income is to be charged under the head salaries. If, for example, an employee works with more than one employer, salaries received from all the employers should be clubbed and brought to charge for the relevant previous years.(3) Foregoing of salary: Once salary accrues, the subsequent waiver by the employee does not absolve him from liability to income-tax. Such waiver is only an application and hence, chargeable to tax. Ex: Mr. A, an employee instructs his employer that he is not interested in receiving the salary for April 2013 and the same might be donated to a charitable institution. In this case, Mr. A cannot claim that he cannot be charged in respect of the salary for April 2013. It is only due to his instruction that the donation was made to a charitable institution by his employer. It is only an application of income. Hence, the salary for the month of April 2013 will be taxable in the hands of Mr. A. He is however, entitled to claim a deduction under section 80G for the amount donated to the institution.(4)Surrender of salary: However, if an employee surrenders his salary to the Central Government under section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered would be exempt while computing his taxable income. (5) Salary paid tax-free: This, in other words, means that the employer bears the burden of the tax on the salary of the employee. In such a case, the income from salaries in the hands of the employee will consist of his salary income and also the tax on this salary paid by the employer.(6)A Member of Parliament or State legislature is not treated as an employee of Government: Salary and Allowance received by him are therefore, chargeable to tax under the head of INCOME FROM OTHER SOURCES. (7)Salary and Wages: Conceptually there is no difference between salary and wages. Both are compensation for work done or services rendered, though ordinary salary is paid in connection with service of non-manual type of work, while wages are paid in connection to manual service, therefore, remuneration received by an individual is taxable under the head Salaries whether the remuneration is termed as salary or wages.

Definition of SalaryThe term salary has been defined differently for different purposes in the Act. The definition as to what constitutes salary is very wide. As already discussed earlier, it is an inclusive definition and includes monetary as well as non-monetary items. There are different definitions of salary say for calculating exemption in respect of gratuity, house rent allowance etc.Salary under section 17(1), includes the following:(i) Wages,(ii) Any annuity or pension,(iii) Any gratuity,(iv) Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages,(v) Any advance of salary,(vi)Any payments received in respect of any period of leave not availed by him i.e. leave salary or leave encashment,(vii) The portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund to the extent it is taxable and(viii) Transferred balance in recognized provident fund to the extent it is taxable,(ix) The contribution made by the Central Government or any other employer in the previous year to the account of an employee under a pension scheme referred to in section 80CCD.

Basis of charge

1. Section 15 deals with the basis of charge. Salary is chargeable to tax either on due basis or on receipt basis, whichever is earlier.2. However, where any salary, paid in advance, is assessed in the year of payment, it cannot be subsequently brought to tax in the year in which it becomes due.3. If the salary paid in arrears has already been assessed on due basis, the same cannot be taxed again when it is paid.

Examples:i. If A draws his salary in advance for the month of April 2014 in the month of March 2014 itself, the same becomes chargeable on receipt basis and is to be assessed as income of the P.Y.2013-14 i.e., A.Y.2014-15. However, the salary for the A.Y.2015-16 will not include that of April 2014.ii. If the salary due for March 2014 is received by A later in the month of April 2014, it is still chargeable as income of the P.Y.2013-14 i.e. A.Y.2014-15 on due basis. Obviously, salary for the A.Y.2015-16 will not include that of March 2014.

Place of accrual of salary Under section 9(1) (ii), salary earned in India is deemed to accrue or arise in India even if it is paid outside India or it is paid or payable after the contract of employment in India comes to an end. Example: If an employee gets pension paid abroad in respect of services rendered in India, the same will be deemed to accrue in India. Similarly, leave salary paid abroad in respect of leave earned in India is deemed to accrue or arise in India. Suppose for example, Mr. A, a citizen of India is posted in the United States as our Ambassador. Obviously, he renders his services outside India. He also receives his salary outside India. He is also a non-resident. The question, therefore, arises whether he can claim exemption in respect of his salary paid by the Government of India to him outside India. Under general principles of income tax such salary cannot be charged in his hands. For this purpose, section 9(1)(iii) provides that salaries payable by the Government to a citizen of India for services outside India shall be deemed to accrue or arise in India. However, by virtue of section 10(7), any allowance or perquisites paid or allowed outside India by the Government to a citizen of India for rendering services outside India will be fully exempt.

Profits in lieu of salary [Section 17(3)]It includes the following:(1) The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment.(2) The amount of any compensation due or received by an assessee from his employer at or in connection with the modification of terms and condition of employment; assessee can however, claim relief in term of section 89.(3) Any payment, other than payments in form of Gratuity, Commuted pension, Retrenchment compensation, or House rent allowance due to or received by an assesse from his employer or former employer or from provident fund or from other funds to extent to which it does not consist contribution by assesse or interest on such contribution or any sum received under Keyman Insurance Policy including the sum allocated by way of bonus or such policy.(4) Any sum received in lumpsum or otherwise, by an assessee from any person before joining any employment, or after cessation of such employement.Example: A would be employer or an ex-employer giving some money to an assessee so that he does not join anywhere else.Advance Salary Advance salary is taxable when it is received by the employee irrespective of the fact whether it is due or not. It may so happen that when advance salary is included and charged in a particular previous year, the rate of tax at which the employee is assessed may be higher than the normal rate of tax to which he would have been assessed. Section 89(1) provides for relief in these types of cases.Loan or Advance against salary

Loan is different from salary. When an employee takes a loan from his employer, which is repayable in certain specified instalments, the loan amount cannot be brought to tax as salary of the employee. Similarly, advance against salary is different from advance salary. It is an advance taken by the employee from his employer. This advance is generally adjusted with his salary over a specified time period. It cannot be taxed as salaryArrears of salaryNormally speaking, salary arrears must be charged on due basis. However, there are circumstances when it may not be possible to bring the same to charge on due basis. For example if the Pay Commission is appointed by the Central Government and it recommends revision of salaries of employees, the arrears received in that connection will be charged on receipt basis. Here, also relief under section 89(1) is available.

Annuity1. As per the definition, annuity is treated as salary. Annuity is a sum payable in respect of a particular year. It is a yearly grant. If a person invests some money entitling him to series of equal annual sums, such annual sums are annuities in the hands of the investor. 2. Annuity received by a present employer is to be taxed as salary. It does not matter whether it is paid in pursuance of a contractual obligation or voluntarily. 3. Annuity received from a past employer is taxable as profit in lieu of salary. 4. Annuity received from person other than an employer is taxable as income from other sources.

Computation of Taxable SalaryParticularsAmount(Rs)Amount(Rs)

BasicXX

Dearness AllowanceDA(R)DA(O)XXXX

XX

CommissionOn Turnover (%)NormalXXXX

XX

WagesXX

AnnuityXX

PensionXX

BonusXX

Advance salaryXX

Arrears of SalaryXX

80CCDXX

Profit in term of SalaryXX

Perquisites (to the extent taxable)XX

Leave Travel Concession LESS: Exempt u/s 10(5)XX(X)XX

Gratuity LESS: Exempt u/s 10(10)XX(X)XX

PensionA) Non Commuted (Periodic)Fully Taxable before& after commutation in the hands of government as well as non government employees B) Commuted (Lumpsum) Received upon commutation XX LESS: Exempt u/s 10(10A) (X)

XX

XX

XX

Leave Enchasment received upon Retirement LESS: Exempt u/s 10(10AA)XX(X)

XX

Retrenchment Compensation received LESS: Exempt u/s 10(10B)XX(X)XX

Voluntary Compensation LESS: Exempt u/s 10(10C)XX(X)XX

Allowance LESS: Exempt u/s 10(7)/(13A)/(14)XX(X)XX

Gross Salary 17(1)XX

LESS: Deduction u/s 16

(A) Entertainment Allowance deduction available to Central and State Government Employees (MAX Rs 5000 only)

X

(B) Professional Tax paid (allowance to all employees)X(XX)

Net Taxable SalaryXXX

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 BenefitsAlthough, 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 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 Section 16(iii).

Deduction u/s 16The Income Chargeable under the head Salaries is computed after making the following deductions:16(ii) Entertainment Allowance:In the case of a government employee, the least of:(a) Maximum Rs5,000/-(b) 20% of basic salary.(c) Actual amount of entertainment allowance granted during the previous year. Actual expenditure spent or not towards entertainment is absolutely irrelevant. Entertainment allowance granted to non-government employees is fully taxable. 16(iii) Professional tax or tax on employment: Professional tax or tax on employment levied by a state is allowed as deduction to all employees, if paid. If any amount is borne by employer towards Professional tax/Employment Tax of employee it will be added to salary u/s 17(2)(iv).

Various Exemptions from Salary

Sec 10(5): Leave Travel Concession: Value of any concession or assistance received or due by the individual.(a) From his employer for himself and his family members in connection with his preceding on leave to any place in India.(b) From his employer or former employer for himself and his family in connection with his proceeding to any place in India after retirement or termination of his service.Family means:Assessee spouse& children*(dependent or independent)parents, brothers & sisters of assessee if dependent (i.e., no in laws, grand children or grand parents even if dependent).*Children:

Conditions as per rule 2B:The exemption u/s 10(5) is least of: Actual expenses incurred on travel.or Maximum amount of exemption as per rule 2B Qualifying distance: Always from origin to destination (farther point from origin) by the shortest possible route.

Important point: Exemption on the aforesaid basis is available in respect of 2 journeysPerformed in a block of four calendar years commencing from 1986Ex: 1st Block 1986,87,88,89 2nd Block 1990,91,92,93 3rd Block 1994,95,96,97 & so on.Where travel concession is not availed(whether both or one) during any block of four years ,an amount in respect of travel concession, if any, first availed during the first calendar year of the immediate succeeding block will be exempt. This is known as Cary Over Concession.

Sec 10(7): Foreign Allowance:Any allowance or perquisite paid or allowed outside India by the Government to an Indian citizen for rendering service outside India, is wholly exempted from tax.Sec 10(10): GratuityIt is exempt from tax only if received on retirement (i.e. fully taxable if received during service period).1) For Government Employees:Government employee means State & Central Government Employees, Employees from Local Authorities but not Employees of Statutory Corporation.2) In the Case of Employees covered by the Payment of Gratuity Act 1972. Gratuity received by an employee covered by the payment of Gratuity Act, is exempt from tax to the extent of least of the following:a) *15 days salary based on last salary drawn for every completed year of service or part thereof in excess of 6 months.b) Rs 10,00,000/-c) Gratuity actually received.Salary = Basic+ D.A only (whether in term or not in term) 15 days salary=salary last drawn x 15 days 26 days3) In case of any other employee: Gratuity received by any other employee is exempt from the tax to the extent of least of the following.a) Rs 10,00,000/- maximum over a life of an assessee.b) Half month average salary for each completed year of service (fraction of service period at the end ignored).c) Gratuity actually received.Half months Average Salary= Average SALARY of last 10 completed months preceding the month of retirement/2*SALARY=Basic+ D.A. (in terms) + Fixed % commission on turnover.

Sec 10(10A): Pension:There are two types of pension1) Non-Commuted i.e. periodic pension which is given normally on a monthly basis, from the month of retirement till the assessee lives. It is fully taxable before and after commutation.2) Commuted i.e. Lump-sumIn place of periodic, the assessee with the consent of employer,may opt for lump-sum payment known as commuted value.Commuted Value is determined having regards to the age of the recipient, the state of his health, the rate of interest and the officially recognized tables of mortality (i.e. normal age at which a person dies).Exempt u/s 10(10A) is in relation to commuted pension only (which can be 100% or part commutation such as 40% or 2/3rd etc.) as under: For Government Employees(Central Government, State Government, Local Authority and Statutory Corporation employees).Fully exempt 10(10A) For Non Government Employees>> If he has received gratuity of any type on retirement (i.e. rich employee) 1/3 of Total Commute Value (T.C.V) is exempt u/s10(10A)

T.C.V= Amount received upon commutation % commuted>> If he has not received gratuity on retirement (i.e. poor employees) of T.V.C is exempt u/s 10(10A). The taxable portion (if positive) of pension is = Amount received / commutation (-) Amount exempt u/s 10(10A)Note : There is a possibility of exemption received being more than amount received, since the base for exemption is taken at T.C.V in which case the entire commuted pension is fully exempt u/s 10(10A).Pension paid by United Nations Organisations is exempt- Pension amount received by U.N Pensioners is exempt from tax, since such pension is nothing but salary CIT v. K. Ramaiah[1980] 126 ITR 638 (Kar.)

Case Law: Commissioner of Income Tax Vs Dr P.L. Narula on 1st Dec 1983

Equivalent citation : 1984 150 ITR 21 DelhiBench: H Goel, S ChadhaJudgement Chadha J.1) Under Sec256(1) of the IT act,1961 (for short called as the Act), at the instance of the department, raise one common question for the opinion of the court namely;Whether, on the facts and the circumstances of the case, the Tribunal was legally right in holding the amounts received by the assessed as pensionable remuneration from the United Nations Joint Staff Pension Fund after retirement, is exempt from Taxation?2) It is necessary to state the facts mentioned in the statement of the cases. The mentioned in the statement of the cases. The decision of Income tax Appellate Tribunal, Delhi, in the case of assessed in the case was considered by a Bench of Karnataka High Court in CIT V RAMIAH (1980) 126 ITR 638. The Karnataka High Court held that the interpreted the relevant statutory provision of the Act as well as the United Nations (Privileges and Immunities) Act, 1947read with s.18, clause (b) of article V of the Schedule thereto. After the decision of the Karnataka High Court, The Central Board of Direct Taxes issued circular no 293 dates 10.02.1981 ( sec (1981) 130 ITR (St.) 5) reading as follows :Section2 of the U.N (Privileges and Immunities) Act, 1947, read with section 18, clause (b) of article V of the schedule thereto, inter alia, grants exemption from taxation to salaries and emoluments paid by the United Nations to its officials. The question whether pension received by the erstwhile officials of the United Nations form it would be exempt from Income tax was considered by Karnataka High Court in the case of Commissioner of Income Tax v. K Ramaiah (1980) 126 ITR 638. The High Court held that since under s.17 of the Income Tax Act 1961, salary has been defined from tax, so shall be pension. The board have accepted the decision of the Karnataka High Court.In view of the foregoing, apart from salary received by employees of United Nations Organisation or any person covered under the U.N. (Privileges and Immunities) Act,1947, pension received by them from U.N will also be exempted from income tax. Pending appeals on this point may be conceded and reference application withdrawn.Not only the Department accepted the decision of the Karnataka High Court, but issued a circular for the guidance of the authorities under the Act. It is unfortunate authorities under the Act. It is unfortunate that the Department has withdrawn the reference application in the case of assessed.The view taken by the Tribunal in these references is correct. We accordingly answer these references against department and in the favor of the assessed with no order as to costs.

Pension from Employer Non Commuted (Periodic) Commuted sec 10(10A) (Lumpsum) Fully Taxable in the hand of all employees Government Employee Non Government Employee (Fully exempt u/s 10(10A) a) If gratuity received Computed pension XX LESS: Exempted 1/3rd x Amount Received % of Commutation b) Gratuity not received. Commuted Pension XX LESS: Exempted 1/2th x Amount Received % of Commutation

Sec 10(10AA): Leave Salary :1) Leave Salary to Central/State Government Employees:Any amount received as cash equivalents of leave salary in respect of period of earned leave at his credit at the time of retirement/superannuation (automatic retirement at specified age i.e. normally 60 years of age) is fully exempt from tax.2) Leave Salary to other employees:In case of non-government employees (it includes employees of Local Authority or Public sector undertaking and statutory Corporation) leave salary is exempt from tax to the extent of least of the following:a) Balance of Leave as per income tax * Average Salary.For Calculation of period of Earned Leave Balance= Due (-) leave actually availed while in service (Due Leave Cannot Exceed 1 month for each completed year of service).[Average Salary=Actual Basis + Actual D.A. (in terms)+ Actual Fixed % commission on turnover of past 10 completed months immediately preceding the date of retirement, divided by 10].b) 10 months average salaryc) Rs 3,00,000/- maximum over a life time of an assessee.d) Leave Salary Actually received.It is worthwhile to note that: Leave Encashment received while in service is fully taxable. If the employee has retired under the voluntary retirement scheme he is entitled to the exemption u/s 10(10AA). Leave Salary- Sec10 (10AA)

Government Employee Others Fully Exempt Least of the Followingsa) Balance of leave as per income tax* Average Salary.b) 10 months Average Salary.c) Actual Leave Salary Received.d) Maximum over lifetime of employee Rs 3,00,000/-Average Salary= {Basic Salary + DA (in terms) +Fixed % Commission on turnover}Leave Salary received during service period shall be taxable

Sec 10(10B): Retrenchment Compensation:Retrenchment Compensation is exempt from tax to the extent of least of following:a) The amount is calculated in accordance with provision of section 25F(b) of the Industrial Dispute Act,1947 [The is similar to P.O.G.A. 15 days Salary and normally given in exams]b) Rs 5,00,000/-c) Actual Amount Received.Sec10 (10C): Payment on Voluntary Retirement:Any amount received or receivable (i.e. payments in instalments are also covered),by an employee of :a) Public Sector Company ORb) Any other company ORc) Any authority established under a Central, State or Provisional Act ORd) Local authority ORe) A Co-operative Society orf) A university incorporated or established under a Central, State or Provincial Act and should be declared as University as per section 3 of University Grant Commission Act, 1956 ORg) India Institute of Technology ORh) State Government ORi) Central Government ORj) An institution having importance throughout India or in any State or States, as the Central Government may, by notification in the Official Gazette, specify in his behalf ORk) Notified Institute of management;On his voluntary retirement or termination of his service in accordance with any scheme or schemes of voluntary retirement or in the case of a public sector company, a scheme of voluntary separation, to the extent such amount does not exceed Rs 5,00,000/-. Such scheme should be in accordance with prescribed guidelines under Rule 2BA of Income Tax Rules, 1962.Guidelines- The Guidelines for the purpose of Section 10(10C) have been laid down in Rule 2BA of the income tax rules. The guidelines provide that the scheme of voluntary retirement should be in accordance with the following requirements, namely-a) It applies to an employee who has completed 10 years of service or completed 40 years of age, whichever matures early.b) It applies to all employees (by whatever name called), including worker and executives of a company or authority or co-operative society.c) The scheme of Voluntary retirement has been drawn to result in overall reduction in the existing strength of the employees & not in reducing the salary bill.d) The vacancy caused by voluntary retirement is not to be filled up, nor the retiring employees is to be employed in another company or concern belonging to the same management; ande) The amount receivable on account of voluntary retirement of the employees does not exceed the amount equivalent to 3 months of salary for each completed year of service of salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation.The following point should also be kept in view.a) Employers can frame different schemes of voluntary retirement for different classes of their employees. However, these schemes have to conform to the aforesaid guidelines prescribed in rule 2BA of the Income-tax Rules.b) If the exemption is allowed to an employee u/s 10(10C) in a particular assessment year of the first time, then exemption u/s 10(10C) shall not be allowed for such assessment year of relief or any subsequent year.c) SALARY here means Basic+ D.A (R)+ fix % commission on turnover.(Only on due basis i.e. advance or arrears considered). Salary last drawn is considered only.Exemption is least of-1. Salary X 3 months X Completed Years of Service.2. Salary X balance months to retire at superannuation.3. Actual Compensation Amount.4. Maximum Rs 5,00,000/-Case Study of Babu v. Chairman and Managing Director, Syndicate Bank [2002] 253 ITR 1 (Ap)Where the assessee took up voluntary retirement from a bank under a scheme which is provide for payment of only 50 % f the ex gratia payment in the year of retirement and the balance 50 % in annual instalments over the succeeding years, the entire ex gratia amount must be treated as salary which as accrued to the assesse in the year of retirement.Sec 10(10CC) : In the case of employee, being an individual deriving income in the nature of a non-monetary perquisite as per sec 17(2), the tax on such income actually paid by his employer at the option of the employer, on behalf of such employee is exempt in the hands of employee. However such a tax paid by the employer will not be allowed to him as a business expenditure/deduction.

Sec 10(11) and 10(12): Taxability of Provident Fund- Recognised, Unrecognised & Statutory. Sec 10(11) & 10(12) of the Act deal with exemption on payment from provident funds, while section 80c of the act deals with allowance of deductions on contributions to provident funds. The following are types of Provident Funds.1) Recognised Provident Fund (RPF): This scheme is applicable to an organisation which employees 20 or more employees. An organisation can also voluntary opt for this scheme. All RPF scheme must be approved by The Commissioner of Income Tax. Here by company can either opt for government approved scheme or the employer and the employee can together start a PF scheme by forming a trust. The Trust so created shall be invests fund in a specific manner. The income of the trust shall also be exempt from income taxes.2) Unrecognised Provident Funds (UPF): Such Schemes are those that are started by employer and employees in an establishment, but are not approved by the Commissioner of Income Tax. Since, they are not recognised, URF schemes have a different tax treatment as compared to RPF3) Statutory Provident Fund: The Fund is mainly meant for Government/University/Educational Institutes (affiliated to university) employees.4) Public Provident Fund: This is a scheme under The Public Provident Fund Act 1968. In this scheme even self-employed person can make a contribution. The minimum contribution is Rs.500 per annum and the maximum contribution is Rs.1,50,000pa. The Contribution made along with interest earned is repayable after 15 years, unless extended.Tax treatment of Provident Fund can be discussed under two scenarios:1) During continuity of job2) Upon receipt of accumulated balance of provident fund at the time of retirement or resignation.In the Below table

*SALARY= BASIC+ DA(R)+ FIXED COMMISSION ON TURNOVER.*IFOS=INCOME FROM OTHER SOURCESalary Includes:80 CCD XXEmployers Contribution to RPF XX(-) Exempt upto 12% of salary (XX) XXInterest Accrued on RPF XX(-) Exempt upto 9.5% (XX) XX

** Taxable (Lumpsum of UPF)

Employees Cont Int on Employees Employers Int on Employers Cont. Cont. ContNot Taxable *IFOS Income from salary sec17 (3) Profit in lieu of salary.

ParticularsSPFRPFUPFPPF

1Employees ContributionDeduction u/s 80C availableDeduction u/s 80C availableNO deduction u/s 80CDeduction u/s 80C available

2Employers ContributionExempt from TaxExempt up to 12% of salaryExcess Shall be added to *SalaryExempt From Tax InitiallyEmployer Does not Contribute

3Interest on Employee ContributionExemptExempt up to 9.5% p.a. Excess shall be added to *Salary.Exempt from Tax InitiallyExempt from tax

4Interest on Employers ContributionExempt-Exempt from tax initially-

5LumpsumExempt u/s 10(11)Exempt u/s 10(12)Taxable**Exempt u/s 10(11).

Sec 10(13): Payment from an approved superannuation fund: Any Payment from an approved superannuation fund (i.e. approved by Chief Commissioner or Commissioner of Income tax) shall be fully exempted if the payment is made to:1) The legal heirs on the death of beneficiary.2) An employee in lieu or in communication of an annuity on his retirement at or a specified age on or his becoming incapacitated prior to such retirement.3) An Employee on his leaving the service in connection with his fund is established otherwise than, in the circumstances mentioned in point 2 above i.e. leaving employment for better pay etc then lump sum received will be fully taxable.It means a superannuation fund which has been and continues to be approved by the Commissioner in accordance with the rules contained in Part B of the VIth Schedule to the Income-tax Act, 1961. The tax treatment of contribution and exemption of payment from tax are as follows:(i) Employers contribution is exempt from tax in the hands of employee (upto ` 1,00,000 per employee per annum). Only such contribution exceeding ` 1,00,000 is taxable in the hands of the respective employee; (ii) Employees contribution qualifies for deduction under section 80C;(iii) Interest on accumulated balance is exempt from tax. Section 10(13) grants exemption in respect of payment from the fund (a) to the legal heirs on the death of beneficiary (e.g. payment to widow of the beneficiary) or (b) to an employee in lieu of or in commutation of an annuity on his retirement at or after the specified age or on his becoming incapacitated prior to such retirement, or (c) by way of refund of contribution on the death of the beneficiary or, (d) by way of refund of contribution to an employee on his leaving the service in connection

Taxable Value of Allowance: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 ALLOWANCESThis 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 PayAs 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 AllowanceThis 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 AllowanceIt is fully taxable. It is given for lunch to the employees.(iv) Non -practicing AllowanceThis 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 AllowanceThese 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 AllowanceWhen 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 AllowanceWhen 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 AllowanceMedical allowance is fully taxable even if some expenditure has actually been incurred for medical treatment of employee or family.(ix) Servant AllowanceIt is fully taxable whether or not servants have been employed by the employee.(x) Other allowancesThere 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 ALLOWANCESThis category includes allowances which are exempt up to 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 and Chennai) Or Amount equal to 40% of salary (if accommodation is situated in any other place).Salary 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.*SALARY=BASIC+DA(R)+FIXED % COMMISSION OF TURNOVERThe exemption of HRA depends upon the following factors:(1) Basic Salary (2) Place of residence (3) Rent paid (4) HRA received.

If an employee is living in his own house and receiving HRA, it will be fully taxable.Example: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. Solution:Computation of Gross SalaryAmount(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 Salary3,68,200

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

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 AllowanceThis 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 AllowanceAny 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 AllowanceThis 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 up to 70% of such allowance or Rs.6000 per month, whichever is less.III. FULLY EXEMPT ALLOWANCES(i) Foreign allowanceThis 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.

Allowance

Sec-17(2) Perquisite

Perquisite may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages. In essence, these are usually non-cash benefits given by an employer to employees in addition to cash salary or wages. However, they may include cases where the employer reimburses expenses or pays for obligations incurred by the employee. Perquisites are also referred to as fringe benefits. Broadly, perquisite is defined in the section 17(2) of the Income-tax Act as including:1) Value of rent-free or concessional rent accommodation provided by the employer.2) Value of any benefit/amenity granted free or at concessional rate to specified employees etc. 3) Any sum paid by employer in respect of an obligation, which was actually payable by the assessee. 4) Any sum paid by the employer for assurance on life of the employee or to effects a contract for an annuity. 5) Value of any other fringe benefit as may be prescribed.

Taxable Perquisite:a) u/s 17(2)(i) : The value of Rent Free Accommodation provided to the assessee, taxable in the hands of all employees, i.e. specified as well as non-specified employees u/s 17(2)(i).b) u/s 17(2)(ii) : The value of any concession in the matter of rent in respect of any accommodation provided to the assessee by his employer , taxable in hands of all employees i.e. specified employer, taxable in the hands of all employees i.e. specified as well as non-specified u/s 17(2)(ii).c) u/s 17(2)(iii) : The value of any benefit or amenity granted or provided free of cost or at concessional rate by the employer to the employee, these are in the nature of mere facilities such as servants, gas-water-electricity, education & medical, which are taxable in the hands of only specified employees u/s 17(2)(iii)The word provided signifies that once such facility is made available by the employer to the employee, it will be taxable whether the employee actually uses this facility or not, provided the employee has not foregone or waived his right there to.d) u/s 17(2)(iv) : Any amount paid an employer in respect of any obligation which otherwise would have been payable by the employee, i.e. Employees liability met by the employer. For Example, if the servant is appointed by employee or Gas, water electricity bills are in the name of employee; and subsequently such payments by employee is reimbursed by employer or directly paid by employer it is taxable perquisite in the hands of all employees, i.e. specified as well as non-specified employees u/s 17(2)(iv).The word paid signifies that the perquisite will be taxable in the year of actual payment / reimbursement.e) u/s 17(2)(v) : Any sum payable by the employer to the effect an assurance on the life of the assessee or to effect a contract for an annuity, taxable in the hand of all employees, i.e. specified as well as non-specified u/s 17(2)(v).The word payable signifies that such a perquisite will be taxable in the year in which it was due, even if the same is actually paid in the next year.f) u/s 17(2)(vi) : The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee, which is taxable in the hands of all employees i.e. specified as well as non-specified u/s 17(2)(vi)g) u/s 17(2)(vii) : The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees, which is taxable in the hands of all employees i.e. specified as well as non-specified u/s 17(2)(vii).h) u/s17(2)(viii): The value of any other fringe benefit or amenity as may be prescribed, which is taxable in the hands of all employees i.e.specified as well as non-specified u/s 17(2)(viii). Who are Specified employees? Director employee Employee who has substantial interest in the employer company (Having 20% or more of the voting power) Employee drawing total monetary salary exceed of Rs.50,000/- . In ascertaining the total monetary salary of Rs 50,000/- , we have to deduct the following non-monetary items and deduction from gross salary:Gross Salary Less:a) Value of any Perquisiteb) Employers Contribution to RPF taxable portion (i.e. n excess of 12% of SALARY)c) Interest Credited to RPF-taxable portion (i.e. in excess of 9.5% p.a.)d) Deduction u/s 16(ii) for entertainment allowance, if applicable.e) Deduction u/s 16(iii) for professional tax.Net Total monetary salary, if exceeding Rs. 50,000/- , then specified employee non-else specified employee.PERQUISITES1) Rent-free Accommodation2) Education Facility3) Car Facility6) Medical Facility9) Sweat equity shares allotted to employee under ESOP (Market Value Issued Price)10) Employers Contribution to Approved Superannuation Fund, in excess of `1,00,00011) Other Facilitiesa. Lunch Facility (Refreshment tax-free; Lunch in office = in excess of ` 50 per meal)b. Interest free Loanc. Transport Facility (Rail or Aircraft exempt; otherwise = Market Value)d. Holiday Facilityg. Free Voucher Facility (Market Value is exceeds ` 5,000)h. Use of Movable Assets (10% P.A. of Original Cost or Rent except computer or mobile)i. Movable Asset sold at Concessional rate.

VALUATION OF PERQUISITES Rent Free AccommodationFor Employee of Central Government or State Government:Value will be equal to the License fees, which would have been determined by the CG/SG in accordance With the Govt. Rules.

For Other Employee: If accommodation is owned by employer: 7.5%, or 10% or 15% of salary.City Having Population up to 10 lacs7.5% of Salary

City Having Population eceeds10 lacs but upto 25 lacs 10% of Salary

City Having Population exceed 25 lacs15% of salary

If accommodation is taken on lease rent by employer: 15% of salary or lease rent payable by employer, whichever is lower.

Note1: Where House is owned by Employer valuation will be done as under Note2: The Value determined above, shall be reduced by rent, if any actually paid by employee.Note 3: When the accommodation is provided by employer (Govt. As well as other) in a hotel: The Value is24% of Salary or actual charge paid or payable to such hotel, whichever is lower.[Note no.2 is also applicable in this case].Exception to Note 3:- There will be no perquisite value if the accommodation is provided in a hotel if the following conditions are fulfilled :- (i) Such accommodation is provided for a period 15 days or less, and (ii) It has been provided on the transfer of the employee from one place to anotherNote 4: Salary means Basic salary Dearness allowance, if terms of employment Bonus Commission (both) All other taxable allowances Leave Encashment (Current Year) Salary to be calculated on DUE basis Salary from ALL Employers will be taken Monetary payments, which are in the nature of perquisites, shall not be includedValue of Rent Free Furnished AccommodationValue of unfurnished accommodation XXXAdd: 10% of original cost of furniture is owned by employerOR Actual hire charges payable, if furniture is hired by the employer XXX Value of RFA (furnished) XXX

Education facility Valuation:-(1) If School is owned by Employer;Valuation = Fair fees in similar school in near locality.(2) If Employer has reserved sum seats in any School or Institution;Valuation = Fair fees in same school.(3) If education fees is paid by employee and later on reimbursed from employer;Valuation = Amount of reimbursement. However, if education facilities are provided to the CHILDREN of the employee, in point no. (1) and (2) then value of perquisite will be exempted up to Rs. 1000/-p.m. per child.Note: Where any amount is paid or recovered from the employee on that account, the value of benefit shall be reduced by the amount so paid or recovered.

Education

Facility 17(2)(iii) Reimbursement sec17(2)(iv)

Specified Employee For All Employee Employee not taxable *MOH(incl child) Expenses reimbursed by *ER Less: Amount Recovered by *EE Employee Children of employeeOther MOHNot Taxable (as mentioned in above para) Expenses incurred by ER Less: Amount recovered by EE (same as children of employee)

*MOH- Member of Household*EE- Employee*ER- Employer

Interest free Loan or Loan at Concessional rate:

Valuation: - Rate as prescribed by State Bank of India as on 1st day of the relevant previous year in which loan has been given.Note 1:- The above valuation should be reduced by the interest, if any paid by employee or his family member.Note 2:- Value of perquisite shall not be charged to tax in following cases:-(i) When the amount of loan not exceeding in the aggregate Rs.20,000; or(ii) Where loan is for medical treatment under Rule 3A

Valuation of Car Facility:

Movable Assets sold at Concessional rate Valuation:- WDV of such assets (-) Amount charged from employee WDV means Actual Cost of the Employerxxx

Less: Depreciationxxx

WDVxxx

Rate of Depreciation:-Computer : 50% on WDV Motor Car : 20% on WDVOther assets : 10% on SLM Note: - While calculating depreciation part of the year will be ignored Perquisites for medical facilities:

Valuation of Gas, Water, ElectricityConnection EmployeeEmployer

Use EmployeeEmployee

Obligation EmployeeEmployer

Pay by Employer Employer Taxable in case Taxable in case Of all employees of specified Employee

Valuation of PerquisiteOwned resourcesoutside Resource Cost of Production Amount paid by EmployerLESS : Amount received from employer LESS: Amount Received from Employer Valuation of Watchmen/ Gardener/ Sweeper/ Personal Assistants/ Domestic Servants

Appointed byEmployeeEmployer

Use byEmployeeEmployee

ObligationEmployeeEmployer

Paid byEmployerEmployerTaxable in case ofTaxable in case of specified All employeesEmployees

Valuation of PerquisiteAmount paid by employer XXLess: Amount received from employee XX

Valuation of Sweat equity under ESOP/ESOS

Fair Market Value on the Date of OptionXXLess: Issue price (XX)Value of taxable perquisite to be taxed XXIn the year of allotment of sweat equity shares scheme