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Income from salary 1.3
Income under the head ‘salary’ comprises of remuneration in any form
(including perquisites) received by an employee from employer. Thus,
there should be contractual employer-employee relationship. The contract
may be express, oral or implied. Salary is chargeable
on due or receipt basis. Arrears
of salary paid or allowed are includible if not charged to income tax
for any earlier previous year [section 15 of Income Tax Act] ‘Salary’ includes * wages * dearness allowance * Bonus *
gratuity * annuity or
pension * advance of salary * Fees / Commissions perquisites/ profits
received from employer in addition to salary * Leave encashment while in
service * Employer’s contribution to provident fund in excess of 12%
of salary of employee * profit in lieu of salary [section 17(1) of
Income Tax Act] In Karamchari
Union v. UOI 2000 AIR SCW 806 = AIR 2000 SC 1226 = (2000) 109
Taxman 1 = 2000 LLR 897 = 243
ITR 143 (SC), it has been held that CCA (City Compensatory Allowance),
DA (Dearness Allowance) and HRA (House Rent Allowance) are in nature of
income forming part and parcel of salary and are taxable. 1.3-1 Allowances House rent
allowance - Exemption will
be lowest of (a) 50% of salary where residential accommodation is
in Mumbai, Kolkata, Delhi or Chennai and 40% of at other place (b)
Excess of rent paid over 10% of salary (c) Actual allowance paid. There
will be no exemption if the residential accommodation is owned by
employee or employee has not paid any rent for residential accommodation
used by him [section 10(13A)
of Income Tax Act and rule 2A] Salary means basic
plus DA (if forming part of retirement benefits) plus commission (if
fixed as a percentage of turnover). Gratuity
- Gratuity for Government employees is fully exempt [section 10(10)(i)].
In case of employees covered under Payment of Gratuity Act, exemption is
upto Rs 3,50,000 to be reduced by such exemptions claimed in the past or
15 days salary for every completed year of service, whichever is lower..
Salary means basic plus DA (if forming part of retirement benefits)
[section 10(10)(ii) of Income Tax Act]
Any other gratuity is also exempt to same extent [section
10(10(iii)]of Income Tax Act] Leave
encashment - Encashment of
earned leave on retirement of employees of Central/State Govt is fully
exempt [section 10(10AA)(i) of Income Tax Act] . Leave encashment while
in service is treated as part of salary. In other cases, leave
encashment of earned leave on retirement will be lowest of 10 months’
salary, Rs three lakhs or actual sum received [section 10(10AA)(ii) of
Income Tax Act] LTA/LTC
- Leave Travel Assistance/Leave Travel Concession is allowed twice in a
block of four years. It is limited to amount actually spent on
travelling of employee and his family members. It is limited to economy
class of air fare or AC first class fare [section 10(5) of Income Tax
Act and rule 2B] The allowance is
exempt subject to amount of expenses actually incurred by the employee
for such travel. The employee will have to keep account of actual
expenses incurred. It appears that actual travel by air or AC is not
required, but the overall ceiling on expenses is subject to limit of air
fare / rail fare. VRS (Voluntary
Retirement) - It is exempt
upto Rs five lakhs if VRS is as per prescribed conditions. Medical
treatment - Reimbursement
of amount actually spent for medical treatment upto Rs 15,000 is exempt
in a financial year. In addition, reimbursement of insurance premium for
self, spouse, children and dependent brothers, sisters and parents is
exempt. In case of treatment
in Government or approved hospital, or expenditure on medical treatment
outside India, reimbursement of medical expenses is exempt without any
ceiling. 1.3-2
Valuation of perquisites
- The employer often gives some perquisites to the employees. Value of
these perquisites is added to the income of employees. The valuation of
perquisites is done as follows : Rent Free
unfurnished Accommodation
- - In case of private
sector employees, value of perquisite of rent free unfurnished
accommodation is taken as follows - (a) If owned by employer - If
population of city exceeds 25 lakhs - 15%, if population exceeds 10
lakhs but below 25 lakhs - 10% (c) In other cases - 7.5%. In case of Government
Employees, value will be rent as per rules framed by Government, as
reduced by sum actually paid Salary includes
basis, DA (if taken into account for retirement benefit), bonus,
commission, fees and all taxable allowances. Valuation of
furnished accommodation -
If accommodation is furnished, in addition to above, 10% of cost of
furniture (including TV, radio, refrigerator, AC etc.), if owned by
employer, will be treated as perquisite. If the furniture is hired from
third party, actual hire charges less any amount recovered from employee
will be the perquisite. Gas electricity
or water supply - Some
benefits like gas, electricity, water are valued at actual cost to
employer. If these are provided from own sources, value will be
manufacturing cost incurred per unit, less amount recovered from
employee. Domestic
servants - Actual cost to
employer for sweeper, gardener, watchman or personal attendant will be
value of perquisite. Use of movable
assets - If some movable
asset is provided to employee, perquisite will be @ 10% of the cost of
asset or rent paid, as reduced by sum paid by employee. Loans to
employees at concessional rate -
Calculate interest on basis of SBI lending rates, reduced interest paid
by employee and difference will be the value of perquisite. 1.3-3 Perquisites
which will not be added to salary if employer covered under FBT Remaining
perquisites will be considered
as Fringe Benefit and will be considered for FBT. Hence, perquisites
like motor car, lunch, refreshment, travelling, touring, gift, credit
card, club etc. will be added to salary only in cases where employer in
individual or HUF and is not liable to FBT. Valuation of
motor car -.If car is
owned or hired by employer and provided for personal purposes of
employees, valuation will be expenditure incurred by employer on running
and maintenance plus remuneration of chauffer plus normal wear and tear
@ 10% on actual cost less amount charged to employees. If motor is partly
for official and partly for personal purposes and expenses are
reimbursed by employer, perquisite value per month is Rs 1,2000 per
month if engine cubic capacity is upto 1.6 liters and Rs 1,600 per month
if cubic capacity of engine exceeds 1.6 liters. If motor is partly
for official and partly for personal purposes and expenses are
reimbursed by employer, perquisite value per month is Rs 1,200 per month
if engine cubic capacity is upto 1.6 liters and Rs 1,600 per month if
cubic capacity of engine exceeds 1.6 liters. If
chauffer is provided, value of perquisite will be Rs 600 per
month. If motor is partly
for official and partly for personal purposes and expenses are met by
employee, perquisite value per month is Rs 400 per month if engine cubic
capacity is upto 1.6 liters and Rs 600 per month if cubic capacity of
engine exceeds 1.6 liters. If chauffer
is provided, value of perquisite will be Rs 600 per month. Other amounts
paid - Club fees paid on
behalf of employee, insurance premiums paid on behalf of employee,
income tax paid on behalf of employee are all treated as perquisites and
its cost is added to income of employee. Gifts
- Gifts upto Rs 5,000 per year are exempt. 1.3-4
Deductions from Salary Income - Following deductions are
permissible from salary income - Professional Tax paid
to State Government is allowable as deduction Entertainment
allowance upto Rs 5,000 is allowable to Government employees. 1.3-3
Exemptions for salary income - Following are exempt from
income tax- Transport allowance
upto Rs 800 per month granted to an employee to meet his expenditure for
the purpose of commuting between place of residence and the place of his
duty. Conveyance and
transport allowance granted to employee to meet cost of travel on tour
are exempt. Allowance granted to meet expenditure incurred on conveyance
in performance of duties of an office or employment are exempt. In LIC
Officers v. LIC of India (2000) 112 Taxman 227 (Bom HC DB),
it was held that conveyance allowance is exempt only if expended for
meeting expenses wholly and necessarily incurred or to be incurred in
performance of duties of office. Conveyance allowance at flat rate
irrespective of place of residence, work and posting will not be
exempt from income tax. Conveyance and
transport allowance granted to employee to meet cost of travel on
transfer are exempt. Expenses granted to meet cost of travel on transfer
and cost of packing and transportation of personal effects on such
transfer are exempt. Use
of employer’s vehicle or transport provided for journey of employee
from residence to his place of work and back is not treated as
perquisite and its cost is not treated as income. Refreshments during office hours to employees and recreational facilities provided to group of employees are not treated as perquisites. |