SALARIEScontinued…

House Rent AllowanceCommonly known as HRA, exemption being

bestowed through section 10(13A) briefed as:

1. An amount equal to 50 per cent of salary, where residential house is situated at Mumbai, Kolkata, Delhi or Chennai and an amount equal to 40 per cent of salary, where residential house is situated at any other place.

2. 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.

3. Excess rent paid over 10 per cent of salary

HRA• Salary here means Basic+ D.A+ Commission based on fixed %

of turnover achieved by an employee. • MODE OF COMPUTATION OF EXEMPTION: Under section

10(13A), the amount of exemption in respect of house rent allowance received by an employee depends upon the following: - Salary of the employee; - House rent allowance; - Rent paid; and - The Place where house is taken on rent.

• When these four are same throughout the year, the exemption under section 10(13A) should be calculated on “ANNUAL” basis. When, however, there is a change in respect of any of the above factors will make the calculation to be done on “MONTHLY” Basis.

ENTERTAINMENT ALLOWANCE

• Exemption on receipt of this allowance is allowable only to Central/ State Govt. Employees and not to Private Sector employees.

• Exemption being calculated as least of the following:– Rs. 5,000/- – Entertainment allowance actually received. – 20% of Salary (Salary= Basic+ DA+ Commission based

on fixed % of turnover)

ALLOWANCES SPECIFICALLY EXEMPTED TO THE EXTENT OF EXPENDITURE INCURRED u/s 10(14)Traveling/ Transfer Allowance

– Any Allowance granted to meet the cost of travel on tour or on transfer including any sum paid on connection with transfer, packing and transportation of personal effects on such transfer.

Conveyance Allowance – Any Allowance whether granted on tour of for the period of

journey in connection with transfer to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.

Daily Allowance – Any Allowance granted to meet the expenditure incurred on

conveyance in performance of duties of an office or employment of profit, provided that free conveyance is not provided by the employer.

Sec 10(14) contd…

Helper Allowance – Any Allowance granted to meet the expenditure incurred on a

helper where such helper is engaged for performance of the duties of an office or employment of profit.

Research Allowance – Any Allowance granted for encouraging the academic, research

and training pursuits in educational and research institutions.

Uniform Allowance – Any Allowance granted to meet the expenditure incurred on the

purchase or maintenance of uniform for wear during the performance of duties of an office or employment of profit.

ALLOWANCES WHOSE EXEMPTION IS NOT DEPENDENT ON EXPENDITURE:

• Special Compensatory (Hill Areas) Allowance – Exemption may range from Rs. 300/- to Rs. 7000/- per

month

• Tribal Area Allowance – Exemption available in specified states upto Rs. 200/-p.m

• Allowance for Transport Employees – An employee working in any transport system for meeting

his personal expenditure during his duty performed in the course of running of such transport from one place to another place, provided that such employee is not in receipt of daily allowance – up to 70% of allowance subject to a maximum of Rs. 6,000 p.m.

• Children education allowance – Rs. 100 p.m. per child up to a maximum of 2

children.

• Children hostel allowance – Rs. 300 p.m. per child up to a maximum of 2

children.

• Compensatory Field Area Allowance. – In specified areas @ Rs. 2,600 p.m.

• Compensatory modified field area allowance – In specified areas @ Rs. 1,000 p.m.

• Transport Allowance – Exempt up to Rs. 800 p.m (in case of blind or

Orthopedically handicapped employees exempt up to Rs. 1600 p.m)

• Underground Allowance – For employees in underground coal mines @ Rs. 800

p.m • High Altitude Allowance – For members of armed forces operating in high

altitude areas @ Rs. 1,060 p.m. for Altitude of 9000 to 15000 feet and @ Rs. 1,600 for altitude above 15000 feet.

• Special Compensatory highly active field area allowance – Available to members of armed forces @ Rs. 4,200

p.m.

• Island duty Allowance – Available to members of armed forces @ Rs. 3,250

p.m.

• Counter Insurgency Allowance – Available to members of Armed forces @ 3,900 p.m

• Border Area Allowance – Available to members of Armed forces @ 200 p.m to

1,300 p.m

ANY OTHER ALLOWANCES BY WHATSOEVER NATURE/ NAME CALLED, OTHER THAN THOSE COVERED ABOVE AND THOSE DEPENDENT ONEXPENDITURE INCURRED ARE FULLY TAXABLE UNDER THE HEAD “SALARIES”.• Allowance to govt employees outside of India• Tiffin allowance• Fixed medical allowance• Allowance to SC/HC judges• Allowance from UNO

Deductions from Salaries

Entertainment Allowance:Exemption is calculated as dealt earlier and the – Actual allowance is first added back in the salary &– then exemption is deducted for calculation of Taxable

value of Entertainment Allowance.Professional Tax Deduction is available on PAID basis up to a

-maximum of Rs. 2,500/- [article 276 of Constitution]- if tax is paid by employer on behalf of employee first it is added back in salary & then deducted on paid basis.

Types of PFs

• Statutory– PF Act,1925

• RPF– EPFMPA 1952

• UPF• PPF– SBI– Rs 500-70000 pa– 8% pa– 15 year lockin

• As salary is 10k pm.• A contributes 15% salary to PF• Company matches it

PROVIDENT FUND

Particulars Statutory P.F Recognized P.F. Unrecognized P.F. Public PF

Employer’s contribution to P.F.

Exempt from tax

Not treated as income up to 12 per cent of salary- excess of employers contribution over 12 per cent of salary is taxable

Not treated as income of the year in which contribution is made

Employer does not contribute

Deduction under section 80C on employee’s contribution

Available Available Not Available   Available  

Interest credited to P.F. Exempt from tax

Exempt if rate of interest is LT notified rate(i.e. 9.5 per cent), excess of interest over the notified rate is, however, taxable

Exempt from tax Exempt from tax

Lump sum payment at the time of retirement or termination of service

Exempt from tax

Exempt from tax in some cases. When not exempt P.F. will be treated as an unrecognized fund from the beginning.

Only employees contrib is exempt—bal taxable (Int under Other inc and employers contrib under Salaries)

Exempt from tax

PROVIDENT FUND

Particulars SPF RPF UPF PPF

Employer’s contribution to P.F.

Exempt from tax

Not treated as income up to 12% of salary- excess of employers contribution over 12 per cent of salary is taxable

Not treated as income of the year in which contribution is made

Employer does not contribute

Deduction U/S 80C on employee’s contribution

Available

Available Not Available

  Available  

Particulars SPF RPF UPF PPF

Interest credited to P.F.

Exempt from tax

Exempt if rate of interest is LT notified rate(i.e. 9.5 per cent), excess of interest over the notified rate is, however, taxable

Exempt from tax

Exempt from tax

Lump sum payment at the time of retirement or termination of service

Exempt from tax

Exempt from tax in some cases. When not exempt P.F. will be treated as an unrecognized fund from the beginning.

Only employees contrib is exempt—bal taxable (Int under Other inc and employers contrib under Salaries)

Exempt from tax

RPF

Exemption at time of retirement/termination of service only if :

• Continuous service for 5 yrs or more– Include service to former employers (if PF bal incl

transfered bal)

• Unavoidable discontinuity in service– Termination/ill health/liquidation

• Transfer to another RPF

Case study

Below are the details of Salary earned by Mr. D aged 33 years working in the capacity of Regional Business Development Head with SINEWAVE COMPUTER SERVICES PRIVATE LIMITED at PUNE. Mr. D has no idea as to what income earned by him during the Previous Year 2007-08 will be chargeable to Income Tax in Assessment Year 2009-10.

You being a renowned Tax Consultant in the town have been entrusted the task of computation of Taxable Income of Mr. D for A.Y. 2009-10.

Particulars Amount (Rs.)

Basic Salary 6,00,000.00

Dearness Allowance 3,00,000.00

Conveyance Allowance 60,000.00

House Rent Allowance1 1,80,000.00

Uniform Allowance2 30,000.00

Research Allowance3 85,000.00

Children Education Allowance4 25,000.00

Advance Salary taken 1,50,000.00

Salary of Watchman and Maid Servant paid by the Co.5

72,000.00

Value of Interest Free Concessional Loan6 34,000.00

Value of Medical Facilities at a Hospital maintained by the Co.

27,000.00

TOTAL 1,563,000.00

Also consider the following adjustments to be made in the above Income of Mr. D

1. Rent paid by Mr.D during the Previous year amounts to Rs. 1,80,000.

2. Expenditure incurred on maintenance of Uniform amounts to Rs. 35,000.

3. Expenditure amounting to Rs. 70,000 has been incurred on Research & Development of an Advanced Programming language.

4. Mr. D has only one daughter. 5. The services of Watchman and Maid Servant

have been engaged by the Company itself.6. The value determined above is as per provisions

of the Income Tax Act' 1961.

Mr. D has the made the following payments during the previous year:a. LIC Premium paid amounting to Rs. 30,000.b. National Savings Certificate purchased amounting to Rs. 20,000.c. Units of Reliance Mutual Fund [as referred u/s 10 (23 D)] purchased amounting to Rs. 77,000.d.Medical Insurance Premia paid through a bearer cheque amounting to Rs. 14,000, on his spouse's life.

8. Advance Tax paid amounting to Rs. 50,000 on 1st January' 2008

9. Tax Deduction at Source under Section 192 amounting to Rs. 1,33,000.

Particulars Rs. Rs.

INCOME FROM SALARIES

Basic Salary - 6,00,000

Dearness Allowance - 3,00,000

Children Education Allowance 25,000

Less: Exempt under Section 10 (14) [Note-1] 1,200.00 23,800.00

Conveyance Allowance 60,000.00

Less: Exempt under Section 10 (14) [Note-2] 9,600.00 50,400.00

House Rent Allowance 1,80,000.00

Less: Exempt under Section 10 (13 A) [Note-3] 90,000.00 90,000.00

Uniform Allowance 30,000.00

Less: Exempt under Section 10 (14) [Note-4] 30,000.00 -

Research Allowance 85,000.00

Less: Exempt under Section 10 (14) [Note-5] 70,000.00 15,000.00

Advance Salary taken - 1,50,000.00

Salary of Watchman and Maid Servant paid by the Company - 72,000.00

Value of Interest Free Concessional Loan - 34,000.00

Value of Medical Facilities at a Hospital maintained by the Co. 27,000.00

Less: Exemption available [Note-6] 27,000.00 -

GROSS TOTAL INCOME 1,335,200

Life Insurance Premium 30,000

NSC Purchased 40,000

Units of Reliance Mutual Fund 77,000

Deduction u/s 80C [Note- 7] 1,00,000

Deduction u/s 80D [Note- 8] 14,000

Sub Total 1,14,000

TOTAL INCOME 12,21,200

NOTES:-

1. Children Education Allowance is exempt upto Rs. 100 per month per child upto a maximum of two children, so here it is exempted for one child since Mr. D has only one daughter.

2.Conveyance Allowance is exempt upto Rs. 800 per month only, so for 12 months it amounts to Rs. 9,600.

3.House Rent Allowance is Exempt to the least of the following three:

[a] HRA Actually received = 1,80,000.[b]40% of Salary* = 3,60,000.[c] Rent paid less 10% of Salary* = 90,000.

{Rs. 1,80,000 - (10% × 6,00,000 + 3,00,000)}. Hence Rs. 90,000 being the least of the following three is exempt from tax u/s 10 (13 A). * Salary for the purpose of HRA exemption calculation will include only Basic + Dearness Allowance."

4.Uniform Allowance is exempted to the extent of expenditure incurred on Uniform maintenance but restricted to the maximum of Uniform Allowance received.

5.Research Allowance is exempted to the extent of expenditure incurred on Research & Development relating to the employer's business.

6. Medical Facilities at a Hospital maintained by the Employer is fully exempted from tax.

7. Deduction under Section 80 C is restricted to a maximum limit of Rs. 1,00,000, since here it amounts to Rs. 1,47,000.

8. Deduction u/s 80D for Payment of Medical Insurance Premia can be availed only if premia is paid through a cheque whether Bearer or Crossed. The Deduction is allowable to a maximum limit of Rs. 15,000 in case of a person of less than 65 years of age.

9. Calculated as per normal Slab rates applicable for an Individual male below 65 years of age.

10. Tax Deducted at Source under Section 192 for Salaried Individuals is equivalent to Advance Tax paid and deductible from Gross tax Liability.