SALARY INCOME

(Sec15,16 & 17)

 What is salary?
• Payer & Payee
• More than one source
• Foregoing salary is salary income
• Tax free salary should include the tax paid
by the employee
 Basis of Charge
• Salary is chargeable to tax when it is due to
be paid whether it is paid or not
• Salary is chargeable to tax when any amount
is paid whether it is due or not
• Arrears of salary paid to employee is
chargeable to tax.
 CHART SHOWING COMPUTATION OF INCOME FROM
SALARIES
• Salary/wages
• Advance salary
• Dearness Pay
• Dearness allowance
• Bonus
• Fees
• Commission
• Perquisite in lieu of or in addition to salary/wages
• Amt. rec. in respect of Encashment of earned leave
salary during service
• Contribution of employer in RPF in excess of 12% of
salary
• Interest on RPF in excess of 9.5%
Cont.
On retirement of employee: add
• Unrecognised provident fund
(a) Share of employer
(b) Interest on share of employer
• Taxable part of gratuity
• Taxable part of encashment of earned leave
• If retrenched- taxable part of retrenchment
compensation
• In case of voluntary retirement- taxable part of
voluntary retirement compensation
CONT.
• Pension:
(a) Taxable part of commuted pension
(b) Pension from the date of retirement till the
end of P.Y.
Gross salary income
LESS:
• Entertainment allowance-Max rs.5000
• Professional tax
Taxable salary
 House Rent Allowance
The least of the following is exempt from tax:
1.50% of Salary where the assessee lives in Mumbai,
Delhi ,Chennai & Calcutta and 40% in other cases
2.Actual HRA received
3.Excess of rent paid over 10% of Salary.
Exempted Amount= least of the above
Taxable Amount= Actual HRA Rec.- Exempted amt.
(Salary for HRA means basic salary , commission if
based on fixed percentage of sale & DA ,if it is part of
retirement benefits)
 Allowances:
• Conveyance: Exempted upto Rs.800 per month if
used for travel between home and place of work
• Medical expenses: Exempted when it is a
reimbursement of actual expenses upto Rs.15000
.Beyond this limit, it is taxable.
• Fixed Medical allowance is taxable
• City compensatory allowance is taxable in all cases
 Allowances(cont.)
• Tiffin allowance: It is taxable
• Tea & snacks during office hours are not
charged to tax as perquisite while free meals
in excess of Rs50 per meal is a perquisite
• Servant allowances: It is taxable
• Gifts: Perquisite in respect of gift where it is
below Rs.5000, the value is taken as nil
 LEAVE TRAVEL CONCESSION
Sec. 10(5)
• This exemption is available to indians as well as
foreigners
• The amount exempt under this clause shall in no
case exceed the amount of expenses actually
incurred for the purpose of such travel
• The value of any L.T.C. received by or due to an
individual,
(a) From his employer for himself & his family in
connection with his proceeding on leave to any
place in india is exempt
 Cont.
• (b) From his employer or former employer for
himself & his family in connection with his
proceeding on leave to any place in india after
retirement from his service or after the termination
of his service is exempt
• Amount of exemption is the actual fare paid for
travel anywhere in India by the economy class airfare
of national carrier by shortest route, or first class air
conditioned rail fare, or any other mode not
exceeding the shortest first class rail fare.
 PROVIDENT FUND
Statutory provident Recognised Unrecognised
fund provident fund provident fund

Employees Ded u/s 80 C Ded u/s 80 C No ded

contribution

Employer’s cont. & exempted Annual accretion is Not exempted per

interest taxable year
(a)employer’s cont.-
in excess of 12% of
salary
(b)interest-in excess
of 9.5%
Lumpsum at the exempt exempt Employer’s cont. &
time of retirement Interest thereon-
taxable
 PERQUISITES
It means any benefit in addition to salary and wages.
Any sum paid by the employer which otherwise
would have been payable by the employee.
• Eg. Rent free house accommodation,
car, amenities provided free of cost,
• concessional interest on housing loan, etc
•The benefit should be from the employer to be
charged as salary
•It could be in cash or kind
•It should have a legal origin
 Perquisites taxable (Category A
Perquisites taxable in the hands of all employees
(fringe benefit tax whether payable or not by
employer)
 Furnished /Unfurnished house without rent or at a
concession (not in a remote area, house for MPs, and
stay in hotel on transfer not exceeding 15 days)
 Service of sweeper, gardener( not taxable for non
specified employee)
 Education facility to employees family members (not
taxable for non specified employee)
Perquisites taxable (with or without FBT)
Contribution by employer to effect an
assurance on the life of the employee or to
effect an annuity
Interest free loan( exempted for loan not
exeeding Rs.20000, or loan for medical
treatment)
Use of Employers movable assets are taxable
except laptop, desktop & car
 Perquisites taxable (Category B)
B1.Car or other automotive conveyance ( not taxable
for non specified employee)
B2. Transport facility by a Transport undertaking( not
railways & airlines)
B3 Traveling touring accomodation
B4 Free Food & Beverage ( Rs.50 within office hours
exempted)
B5 Gift voucher beyond Rs.5000
B6 Club Membership & credit Card
 SPECIFIED EMPLOYEE

• A director is a specified employee

• An employee who holds 20% or more voting power
(called substantial interest)
• Where an employee is drawing salary of more than
Rs.50,000 per year ( without considering non
monetary benefit and exemptions like HRA) but ,
since the minimum exemption limit is Rs.1,10,000,
practically all tax payers are specified employees.
Rent Free Unfurnished Accomodation
• Classified as Central & State Government
Employees
• Private Sector Employees
 Central & State Govt. Employees
• Accomodation provided to MPs, judges of
High court & Supreme Courts, employees who
are in Govt. service being provided
accomodation by virtue of their employment
is exempted from any tax
 Valuation of Rent Free Unfurnished
Accommodation (private sector)
Population Property owned by Leased or rent
as per 2001 Employer
census
Above 25 15% of salary for Amount of lease
lakhs the period rent or 15% of
salary
Between 10% of salary for Same as above
10- 25 lakhs the period

Any other 7.5% of salary for Same as above

the period
Meaning of salary for House accomodation

• Salary includes –
- basic salary
- DA ( if terms of employment provide)
- bonus, commission, fees
- all other taxable allowances
- any monetary payment chargeable to tax, but
not monetary payments in the nature of
perquisite
 Exception to accomodation rules
• It is not applicable to an accomodation
located in a remote area( 40 kms from town)
and in a mining, project ,oil exploration site
• Where on account of transfer, an employee is
given two accomodation , only one will be
taxed for 90 days. Beyond that the lesser of
the two will be taxed.
 Furnished accomodation
• Step 1: Find out the value of the
accomodation without the value of the
furniture
• Add 10% of the value of furniture if owned by
employer or actual hire charges when hired
( Furniture includes TV, fridge, radio and any
household appliances)
Furnished accomodation in a Hotel
It Includes accomodation in a motel, guest
house.
The value of perquisite is the lower of the two.
• 24% of salary paid during the period when
accomodation is taken or
• Actual paid by the employer
(not taxable if provided for 15 days in a P.Y. and
when an employee is transferred)
Accomodation at a concessional value
Value is determined as follows:
• Find out the value of accomodation as if it is
not provided at a concession
• Deduct the value of rent charged from the
employee
 Perquisite of free domestic servants
• When servants are engaged by employee and
reimbursed by employer, taxable in all cases
• When engaged by employer only specified
employees are taxable
• Servant allowances are always taxable
• If servants are provided in a rent free
accomodation , they are not valued separately
 Valuation of gas, electric energy or water
supply
• All assesses are taxable except non specified
employees
 Perquisite of Motor Car
Perquisite in respect of motor car is taxable only when
the employer is not liable to fringe benefit tax (like
sole proprietor, charitable institutions, etc) Private
company employees will not pay any tax.
• 1.Car is owned by Employee
• 2. Car is owned or hired by Employer
a) Expenses met by Employer
b) Expenses met by Employee
 Motor car perquisite
• Car owned by Employee
a) Expenses met by Employee - No Tax
b) Expenses met or reimbursed by Employer
- Official purpose only No tax
- Used for private purpose-actual expenses
less recovery taxable
-Partly used for private purpose (cont. next
slide)
 Motor car perquisite( Cont.)
Car owned by employee (cont.)
-Partly used for private purpose

SMALL CAR LARGE CAR

EXPENDITURE INCURRED BY
EMPLOYER
Less: 1800 p.m.
Add: 900 p.m. for chauffer(if
any)
Value of perquisite
EXPENDITURE INCURRED BY
EMPLOYER
Less: 2400 p.m.
Add: 900 p.m. for chauffer(if
any)
Value of perquisite
 2.When Car is owned or hired by Employer

• I CASE: Car is used wholly for official duties

value of perquisite is nil

• II CASE: Car is used wholly for private or personal purposes of

employee or any member of his household

Car owned by Car taken on lease

employer by employer
Actual amount of expenditure on running & Actual amt. of expenditure on running &
maintenance of car maintenance of car
add: remuneration, if any, paid to chauffeur add: remuneration,if any, paid to chauffeur
Add: depreciation @ 10%p.a. of actual cost of car less: amt. charged from employee
Less: amt. charged from employee
VALUE OF PERQUISITE VALUE OF PERQUISITE
 III CASE:

CAR IS USED PARTLY IN THE

PERFORMANCE OF DUTIES AND
PARTLY FOR PRIVATE OR PERSONAL
PURPOSES OF EMPLOYEE OR ANY
MEMBER OF HIS HOUSEHOLD

IF EXPENSES BORNE BY PRIVATE EXPENSES BORNE

EMPLOYER BY EMPLOYEE

SMALL CAR LARGE CAR

SMALL CAR LARGE CAR
1800 p.m+ 900 2400 p.m + 900
600 p.m + 900 900 p.m + 900
p.m(if p.m (if
p.m(if p.m (if
chauffeur) chauffeur)
chauffeur) chauffeur)
 IV CASE:

EMPLOYEE USES
MORE THAN 1 CAR
FOR PRIVATE
PURPOSES

IN RESPECT OF OTHER
IN RESPECT OF 1 CAR
CAR(S)

SMALL CAR LARGE CAR

1800 p.m + 900 p.m(if II Case will apply
2400 p.m + 900 p.m(if
chauffeur) chauffeur)
 Deductions from salary

• Professional Tax paid BY THE ASSESSEE [Sec.16(iii)]

• Entertainment allowance: available only for
Government employees [sec.16(ii)]
 actual amt. received
 1/5 th of basic salary
 limit- rs. 500000
The least of the above will be the amount for deduction
 INCOME FROM SALARIES
(RETIREMENT)
• PENSION
• COMMUTED PENSION
• LEAVE ENCASHMENT SALARY
• GRATUITY
• RETRENCHMENT COMPENSATION
• COMPENSATION ON VOLUNTARY RETIREMENT
 PENSION[sec.10(10A)]

1.Pension from UNO It is not chargeable to tax

2.Pension received
by the family of Exempted
armed forces
3.Family pension
received by family Taxable as in the hands
members after the of recipient as income from
death of employee other sources
 PENSION (cont.)

• Pension received in case of non govt.

employee -Taxable
 COMMUTED PENSION

• Uncommuted Govt. /Non Govt Taxable

Pension Employee
• Commuted Govt. Employee Exempted
Pension from Tax
Commuted Non-Govt. It is fully or partly
Pension Employee exempted
 COMMUTED PENSION (cont.)

Central /state Govt, With or without Exempted

Local authority Gratuity Fully
employee
Non Govt. Gratuity is received 1/3 of normal
Employee Exempted

Gratuity is not ½ of normal

Non Govt.
received is exempted
Employee
GOVERNMENT EMPLOYEES GETTING LEAVE ENCASHMENT
AT TIME OF RETIREMENT:

 Govt employee at that time is exempted from tax.

 While leave encashment while in service is taxable

NON GOVERNMENT EMPLOYEES are chargeable to tax on
leave encashment while in service
LEAVE ENCASHMENT AT TIME OF RETIREMENT:
He is exempted on basis of least of the following:
1.period of earned leave (in no.of months) to the credit of
employee at the time of his retirement or leaving the job)* average
monthly salary
2.10 months *average monthly salary
3. the amt. specified by the government Rs.3,00,000
4. leave encashment actually received at the time of retirement
HOW TO FIND OUT
AVERAGE MONTHLY SALARY?

•Salary for this purpose means

1.basic salary and includes
2 .dearness allowances if terms of employment so provide
3.Commision if it is fixed % based on turnover

•It is calculated on the basis of average salary

drawn
during the period of 10 months immediately preceding the
retirement.( date wise)
 GRATUITY [SEC10(10)]
1. GRATUITY WHILE IN SERVICE IS FULLY TAXABLE
2. GRATUITY AS RETIREMENT BENEFITS
• Government employee –fully exempt
• Non-government employee-fully or partially exempt
under section 10
• Non-government employees not covered by the
Payment of Gratuity Act ,1972- fully or partially
exempt under section 10
 GRATUITY (cont.)
• IN CASE OF GOVT EMPLOYEES:
– wholly exempt
• IN CASE OF EMPLOYEES COVERED UNDER PAYMENT
OF GRATUITY ACT:
– 15 days salary based on last drawn for each year of service
(26 days a month as working days)
– Rs.10 LACS
– gratuity actually received
(the least of the above 3 is exempt from tax and the balance
is taxable)
 GRATUITY (cont.)

• how to find length of service -if 6mths or less

then ignored else taken as 1 full year
• what is salary: Salary means last drawn by
employee and includes dearness
allowance,dearness pay, comm. on sales
• how to determine 15 days salary -calculated
by dividing salary last drawn by 26 days
 RETRENCHMENT COMPENSATION [SEC 10(10B)]
• Years of job * avg. Salary *15
• Limit – rs 5lac
• Amount received
least of the above will be exempt
Taxable amount = amt received – exempted amount.
NOTE-
• Years of job= completed years + 1year for excess over
6months.
• Average salary- (a) in case of monthly salary- on the basis of
salary of last 3months pay
(b)in case of weekly wages- on the basis of
wages of last 4 weeks
(c) in case of daily wages – on the basis of
wages of last 12 full working days
.
Cont.
Salary means
• Remuneration in money.
• Allowances
• Value of house accommodation, supply of
light, water, medical attendance, other
amenity or service or any concessional supply
of food grains or other articles.
• Travel concessions
Salary does not exclude
Bonus, contribution to pension fund or
provident fund, gratuity
 COMPENSATION ON VOLUNTARY RETIREMENT
[Sec.10(10C)]

• The amount equivalent to 3 month’s salary for each

completed year of service
• Salary at the time of retirement*balance months of
service left before the date of his retirement
• Amount receieved
• Maximum statutory limit-rs 500000
Meaning of salary- basic salary, D.A. if it is given as per
terms of employment, comm. Based upon fixed % of
turnover