Income from Salary

• Basic Conditions– Master And servant or employer and

employee relationship– Contract of employment is important

BASIS OF CHARGE

• Either accrual or receipt (which ever is earlier)

• Salary due from an existing and/or former employer

• Salary paid or allowed by the employer though not due

• Arrears of salary paid or allowed

SALARY COMPONENTS

• Basic salary• Advance salary• Arrears of salary• Bonus• Allowances• Leave encashment on retirement

COMPONENTS

• Retrenchment compensation• Pension• Gratuity• Voluntary retirement payments • Perquisites• Provident fund payments

CONCEPT

• Gross salary• Deductions such as G.P.F., P.T.• Net salary

COMPUTATION• Gross salary• Less:- exemption us. 10• Less:-deduction us. 16• Net salary• Deduction under chapter VI-A• Net taxable salary

EXEMPTION UNDER SECTION 10 FOR SALARY

• LEAVE ENCASHMENT 10(10AA)• GRATUITY 10(10)• PENSION 10(10A)• HOUSE RENT PAID 10(13A)• TRANSPORT ALLOWANCE 10(14) –

RULE 2BB• LEAVE TRAVEL CONCESSION 10(5)

Leave Encashment Sec.10(10AA)

• Meaning – Leave Salary– Salary standing / accumulated to the

credit of an employee at the time of retirement is Leave Salary

– Encashment of the same at the time of retirement is referred to as leave encashment

– Tax treatment for the same – next slide

Leave encashment – tax treatment

Nature of Leave encashment

Status of the employee

Tax treatment

Leave encashment during continuity of employment

Government/ Non- government

Taxable

Leave encashment at the time of retirement or leaving of job

Government

Fully Exempt

Leave encashment at the time of retirement or leaving of job

Non-government

Fully or partly exempt

Non government Employee exemption - detail

1 Period of earned leave to the credit of the employee * average monthly salary

2 10 * average monthly salary

3 Rs.300000 (specified amount by government)

4 Leave encashment actually received

• In case of non-government employee (including an employee of local authority or public sector undertaking – exemption is least of the followings.

Gratuity – Section 10 (10)

• It is a retirement benefit.• Payable at the time of cessation of

employment & on the duration of service.

• Government employees i.e. Central Government employees, State government employees, employees of local authority but not of statutory corporations

• Tax treatment - next slide

Tax treatment

Status of the employee

Whether Gratuity is taxable

Government employee

Fully exempt U/s. 10(10)(i)

Non Government employee covered by Payment of Gratuity Act , 1972

Fully or partly exempt from tax U/s. 10(10)(ii)

Non Government employee not covered by Payment of Gratuity Act , 1972

Fully or partly exempt from tax U/s. 10(10)(iii)

Employees covered by Payment of Gratuity Act,

1972• Any gratuity received is exempt to the

least of the following:

1. 15 days salary (7 days in case of seasonal establishment) based on salary last drawn for each year of service.(15 days salary * length of service) (6 months & above = full year) (Salary= last drawn salary =Basic + D.A.) (days in month=26)

2. Rs.350000

3. Gratuity actually received

Employees not covered by Payment of Gratuity Act, 1972

• In case of other employee gratuity received is exempt to the least of the following:

1. Rs.3500002. Half month’s Salary for each

completed year of service ( only complete year, part of the year to be ignored; salary based on average salary for last 10 months immediately preceding; Salary=Basic + D.A.)

3. Gratuity actually received

Pension

• Pension received from UNO by an employee or his family members is not chargeable to tax.

• Family pension received by the family members of armed forces is exempt under section 10(19).

• Family pension received by others (not covered in 2 above) after the death of the employee is taxable in their hands under section 56 – income from other sources.

Contd.• Un-commuted Pension – It is periodical payment

of pension- i.e. monthly pension• Commuted Pension – It is the lump sum

payment in lieu of periodical payment.

Pension Status of the employee

Is it chargeable to tax?

Un-commuted

Government / non government

It is chargeable to tax

Commuted Government

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

Commuted Non government

It is fully or partly exempt from tax under 10(10A)(ii)

Commuted pension & non government employee

Non government employee

Gratuity is received

1/3rd of the pension received is exempt

Non government employee

Gratuity is not received

½ of the pension received is exempt.

HRA Section 10(13A) & Rule 2A• Least of the following is exempt

• Salary = Basic + D.A.( if terms of employment so provide)

1 An amount equal to 50% of Salary (For Metro cities) and 40% of Salary ( For non- Metro cities)

2 The HRA received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year

3 The excess of rent paid over 10% of Salary

Transport Allowance –10(14) Rule 2BB

• Allowance is granted to an employee to meet his expenditure for the purposes of commuting between the place of his residence and the place of his duty

• It is exempt up to Rs.800 per month • In case of blind or orthopaedically

handicapped it is Rs.1600 per month.

Leave Travel Concession 10(5)• Leave Travel assistance extended by

an employer for going anywhere in India along with his family is exempt on the basis of the provisions given in table.

• Family includes spouse, children, parents , brothers and sisters (who are dependent on the employee)

• Only two journeys in a Block of Four years is exempt.

• Amount of exemption is limited to the actual expenditure

Contd.Where journey is performed by air

Amount of economy class air fare of the national carrier by the shortest route or the amount spent whichever is less

Where journey is performed by rail

Amount of air conditioned first class rail fare by the shortest route or amount spent whichever is less

Where the places of origin & destination of journey are connected by rail and the journey is performed by any other mode of transport

Amount of air conditioned first class rail fare by the shortest route or amount spent whichever is less

Where the places are not connected by rail & recognized public transport system exist

First class or deluxe class fare by the shortest route or amount spent which ever is less

Perquisites - Taxable• Any residential accommodation

given to the employee without charging any rent or at a concessional rate

• Free supply of gas , electricity or water for household consumption

• Wages paid by the employer for the domestic servants employed by the employee

• Value of free boarding & lodging expenses.

• Free educational facilities to the children

Contd.• Subscription & Bills paid to the club

houses by the employer• Vacation at the holiday homes or

holiday trips at the cost of the employer

• Income tax due on salary but paid by employer

• Use of motor car with or without a driver at the cost of the employer for personal use.

DEDUCTIONS FROM SALARY

• ENTERTAINMENT ALLOWANCE [16(2)]– If granted by the employer it is included

in the Salary income – From A.Y. 2002-03 the allowance

deduction is allowed only to Government employees.

– The least of the following is exempt• Actual amount received• Rs.5000 per year• 1/5th of the basic salary

DEDUCTIONS FROM SALARY

• PROFESSIONAL TAX [16(3)]– Tax deducted from the Salary under

Maharashtra State Tax on professions, trade, callings and Employment Act 1975.