Friday, 6 January 2012
INCOME FROM SALARY-DIRECT TAX
WHAT DOES “SALARY” INCLUDE
Section 17(1) of the Income tax Act gives an inclusive and
not exhaustive definition of “Salaries” including therein (i) Wages
(ii) Annuity or pension (iii) Gratuity (iv) Fees, Commission,
perquisites or profits in lieu of salary (v) Advance of Salary (vi)
Amount transferred from unrecognized provident fund to
recognized provident fund (vii) Contribution of employer to a
Recognised Provident Fund in excess of the prescribed limit (viii)
Leave Encashment (ix) Compensation as a result of variation in
Service contract etc. (x) Contribution made by the Central
Government to the account of an employee under a notified
pension scheme.
DEDUCTION FROM SALARY INCOME
The following deductions from salary income are admissible
as per Section 16 of the Income-tax Act.
(i) Professional/Employment tax levied by the State Govt.
(ii) Entertainment Allowance- Deduction in respect of this
is available to a government employee to the extent of Rs.
5000/- or 20% of his salary or actual amount received,
whichever is less.
It is to be noted that no standard deduction is available
from salary income w.e.f. 01.04.2006 i.e. A.Y.2006-07
onwards.
PERQUISITES
“Perquisite” may be defined as any casual emolument or
benefit attached to an office or position in addition to salary or
wages.
“Perquisite” is defined in the section17(2) of the Income tax
Act as including:
(i) Value of rent-free/concessional rent accommodation provided
by the employer.
(ii) Any sum paid by employer in respect of an obligation which
was actually payable by the assessee.
(iii) Value of any benefit/amenity granted free or at concessional
rate to specified employees etc.
(iv) 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 assesssee.
(v) The amount of any contribution to an approved superannuation
fund by the exployer in respect of the assessee, to the extent
it exceeds one lakh rupees; and
(vi) the value of any other fringe benefit or amenity as may be
prescribed.
VALUATION OF PERQUISITES
As a general rule, the taxable value of perquisites in the hands
of the employees is its cost to the employer. However, specific
rules for valuation of certain perquisites have been laid down in
Rule 3 of the I.T. Rules. These are briefly given below.
Valuation of residential accommodation provided
by the employer:-
(a) Union or State Government Employees- The
value of perquisite is the license fee as determined
by the Govt. as reduced by the rent actually paid
by the employee.
(b) Non-Govt. Employees- The value of perquisite
is an amount equal to 15% of the salary in cities
having population more than 25 lakh, (10% of
salary in cities where population as per 2001 census
is exceeding 10 lakh but not exceeding 25 lakh and
7.5% of salary in areas where population as per
2001 census is 10 lakh or below).
In case the accommodation provided is not owned by the
employer, but is taken on lease or rent, then the
value of the perquisite would be
the actual amount of lease rent paid/payable by the employer or
15% of salary, whichever is lower.
In both of above cases, the value of the perquisite would be
reduced by the rent, if any, actually paid by the
employee.
Value of Furnished Accommodation- The value
would be the value of unfurnished accommodation
as computed above, increased by 10% per annum
of the cost of furniture (including TV/radio/
refrigerator/AC/other gadgets).
In case such furniture is hired from a third party, the value of
unfurnished accommodation would be increased
by the hire charges paid/payable by the employer.
However, any payment recovered from the
employee towards the above would be reduced
from this amount.
Value of hotel accommodation provided by the
employer- The value of perquisite arising out of
the above would be 24% of salary or the actual
charges paid or payable to the hotel, whichever is
lower. The above would be reduced by any rent
actually paid or payable by the employee. It may
be noted that no perquisite would arise, if the
employee is provided such accommodation on
transfer from one place to another for a period of
15 days or less.
Perquisite of motor car provided by the
employer- W.e.f. 1-4-2008, if an employer
providing such facility to his employee is not liable
to pay fringe benefit tax, the value of such perquisite
shall be :
a) Nil, if the motor car is used by the employee
wholly and exclusively in the performance of
his official duties.
b) Actual expenditure incurred by the employer
on the running and mainenance of motor car,
including remuneration to chauffeur as
increased by the amount representing normal
wear and tear of the motor car and as reduced
by any amount charged from the employee
for such use (in case the motor car is
exclusively for private or personal purposes
of the employee or any member of his
household).
c) Rs. 1800- (plus Rs. 900-, if chauffeur is also
provided) per month (in case the motor car is
used partly in performance of duties and partly
for private or personal purposes of the
employee or any member of his household if
the expenses on maintenance and running of
motor car are met or reimbursed by the
employer). However, the value of perquisite
will be Rs. 2400- (plus Rs. 900-, if chauffeur
is also provided) per month if the cubic
capacity if engine of the motor car exceeds
1.6 litres.
d) Rs. 600- (plus Rs. 900-, if chauffeur is also
provided) per month (in case the motor car is
used partly in performance of duties and partly
for private or personal purposes of the
employee or any member of his household if
the expenses on maintenance and running of
motor car for such private or personal use
are fully met by the employee). However, the
value of perquisite will be Rs. 900- (plus
Rs. 900-, if chauffeur is also provided) per
month if the cubic capacity of engine of the
motor car exceeds 1.6 litres.
If the motor car or any other automotive conveyance is owned
by the employee but the actual running and maintenance charges
are met or reimbursed by the employer, the method of valuation
of perquisite value is different. (See Rule 3(2)).
Perquisite arising out of supply of gas, electric
energy or water: This shall be determined as the
amount paid by the employer to the agency
supplying the same.
If the supply is from the employer’s own resources, the value of the
perquisite would be the manufacturing cost per unit
incurred by the employer. However, any payment
received from the employee towards the above
would be reduced from the amount [Rule 3(4)]
Free/Concessional Educational Facility: Value of
the perquisite would be the expenditure incurred
by the employer. If the education institution is
maintained & owned by the employer, the value
would be nil if the value of the benefit per child is
below Rs. 1000/- P.M. or else the reasonable cost
of such education in a similar institution in or near
the locality. [Rule 3(5)].
Free/Concessional journeys provided by an
undertaking engaged in carriage of passengers or
goods: Value of perquisite would be the value at
which such amenity is offered to general public as
reduced by any amount, if recovered from the
employee. However, these provisions are not
applicable to the employees of an airline or the
railways.
Provision for sweeper, gardener, watchman or
personal attendant: The value of benefit resulting
from provision of any of these shall be the actual
cost borne by the employer in this respect as
reduced by any amount paid by the employee for
such services. (Cost to the employer in respect
to the above will be salary paid/payable).
[Rule 3(3)].
Value of certain other fringe benefits:
(a) Interest free/concessional loans- The value of the
perquisite shall be the excess of interest payable
at the prescribed interest rate over, interest, if any,
actually paid by the employee or any member of
his household. The prescribed interest rate would
be the rate charged by State Bank of India as on
the 1st Day of the relevant Previous Year in respect
of loans of the same type and for same purpose
advanced by it to general public. Perquisite to be
calculated on the basis of the maximum
outstanding monthly balance method. However,
loans upto Rs. 20,000/-, loans for medical
treatment specified in Rule 3A are exempt
provided the same are not reimbursed under
medical insurance.
(b) Value of free meals- The perquisite value in respect
of free food and non-alcoholic beverages provided
by the employer, not liable to pay fringe benefit
tax, to an employee shall be the expenditure
incurred by the employer as reduced by the amount
paid or recovered from the employee for such
benefit or amenity. However, no perquisite value
will be taken if food and non-alcoholic beverages
are provided during working hours and certain
conditions specified under Rule 3(7)(iii) are
satisfied.
(c) Value of gift or voucher or token- The perquisite
value in respect of any gift, or voucher, or taken
in lieu of which such gift may be received by the
employee or member of his household from the
employer, not liable to pay fringe benefit tax, shall
be the sum equal to the amount of such gift,
voucher or token. However, no perquisite value
will be taken if the value of such gift, voucher or
taken is below Rs. 5000- in the aggregate during
the previous years.
(d) Credit card provided by the employer- The
perquisite value in respect of expenses incurred
by the employee or any of his household members,
which are charged to a credit card provided by the
employer, not liable to pay fringe benefit tax,
which are paid or reimbursed by such employer
to an employee shall be taken to be such amount
paid or reimbursed by the employer. However, no
perquisite value will be taken if the expenses are
incurred wholly and exclusively for official purposes
and certain conditions mentioned in Rule 3(7)(v)
are satisfied.
(e) Club membership provided by the employer- The
perquisite value in respect of amount paid or
reimbursed to an employee by an employer, not
liable to pay fringe benefit tax, against the expenses
incurred in a club by such employee or any of his
household members shall be taken to be such
amount incurred or reimbursed by the employer as
reduced by any amount paid or recovered from
the employee on such account. However, no
perquisite value will be taken if the expenditure is
incurred wholly any exclusively for business
purposes and certain conditions mentioned in Rule
3(7)(vi) are satisfied.
The value of any other benefit or amenity provided
by the employer shall be determined on the basis
of cost to the employer under an arms’ length
transaction as reduced by the employee’s
contribution.
The fair market value of any specified security or
sweat equity share, being an equity share in a
company, on the date on which the option is
exercised by the employee, shall be determined
as follows:-
(a) In a case where,on the date of exercising of the
option, the share in the company is listed on a
recognized stock exchange, the fair market value
shall be the average of the opening price and closing
price of the share on the date on the said stock
exchange.
(b) In a case where, on the date of exercising of the
option, the share in the company is not listed on a
recognized stock exchange, the fair market value
shall be such value of the share in the company as
determined by a merchant banker on the specified
date.
(c) The fair market value of any specified security,
not being an equity share in a company, on the date
on which the option is exercised by the employee,
shall be such value as determined by a merchant
banker on the specified date.
PERQUISITES EXEMPT FROM INCOME TAX
Some instances of perquisites exempt from tax are given
below:
Provision of medical facilities (Proviso to Sec. 17(2)): Value
of medical treatment in any hospital maintained by the Government
or any local authority or approved by the Chief Commissioner of
Income-tax. Besides, any sum paid by the employer towards
medical reimbursement other than as discussed above is exempt
upto Rs.15,000/-.
Perquisites allowed outside India by the Government to a
citizen of India for rendering services outside India (Sec. 10(7)).
Rent free official residence provided to a Judge of High Court
or Supreme Court or an Official of Parliament, Union Minister or
Leader of Opposition in Parliament.
No perquisite shall arise if interest free/concessional loans
are made available for medical treatment of specified diseases in
Rule 3A or where the loan is petty not exceeding in the aggregate
Rs.20,000/-
No perquisite shall arise in relation to expenses on telephones
including a mobile phone incurred on behalf of the employee by
the employer.
ALLOWANCES
Allowance is defined as a fixed quantity of money or other
substance given regularly in addition to salary for meeting specific
requirements of the employees. As a general rule, all allowances
are to be included in the total income unless specifically exempted.
Exemption in respect of following allowances is allowable to the
exent mentioned against each :-
2.7.1 House Rent Allowance:- Provided that expenditure
on rent is actually incurred, exemption available
shall be the least of the following :
(i) HRA received.
(ii) Rent paid less 10% of salary.
(iii) 40% of Salary (50% in case of Mumbai, Chennai,
Kolkata, Delhi) Salary here means Basic +
Dearness Allowance, if dearness allowance is
provided by the terms of employment.
2.7.2 Leave Travel Allowance: The amount actually
incurred on performance of travel on leave to any
22 23
place in India by the shortest route to that place is
exempt. This is subject to a maximum of the air
economy fare or AC 1st Class fare (if journey is
performed by mode other than air) by such route,
provided that the exemption shall be available only
in respect of two journeys performed in a block of
4 calendar years.
2.7.3 Certain allowances given by the employer to the
employee are exempt u/s 10(14). All these exempt
allowance are detailed in Rule 2BB of Incometax
Rules and are briefly given below:
For the purpose of Section 10(14)(i), following allowances
are exempt, subject to actual expenses incurred:
(i) Allowance granted to meet cost of travel on tour or on
transfer.
(ii) Allowance granted on tour or journey in connection with
transfer to meet the daily charges incurred by the employee.
(iii) Allowance granted to meet conveyance expenses incurred
in performance of duty, provided no free conveyance is
provided.
(iv) Allowance granted to meet expenses incurred on a helper
engaged for performance of official duty.
(v) Academic, research or training allowance granted in
educational or research institutions.
(vi) Allowance granted to meet expenditure on purchase/
maintenance of uniform for performance of official duty.
Under Section 10(14)(ii), the following allowances have
been prescribed as exempt.
Type of Allowance
(i) Special Compensatory
Allowance for hilly
areas or high altitude
allowance or climate
allowance.
(ii) Border area allowance
or remote area
allowance or a difficult
area allowance or
disturbed area
allowance.
(iii) Tribal area/Schedule
area/Agency area
allowance available in
M.P., Assam, U.P.,
Karnataka, West
Bengal, Bihar, Orissa,
Tamilnadu, Tripura
(iv) Any allowance granted
to an employee
working in any
transport system to
meet his personal
expenditure during duty
performed in the course
of running of such
transport from one
place to another place.
Amount exempt
Rs.800 common for various
areas of North East, Hilly areas
of U.P., H.P. & J&K and Rs.
7000 per month for Siachen area
of J&K and Rs.300 common
for all places at a height of 1000
mts or more other than the
above places.
Various amounts ranging from
Rs.200 per month to Rs.1300
per month are exempt for
various areas specified in
Rule 2BB.
Rs.200 per month.
70% of such allowance upto a
maximum of Rs.6000 per
month.
(v) Children education
allowance.
(vi) Allowance granted to
meet hostel expenditure
on employee’s child.
(vii) Compensatory field
area allowance
available in various
areas of Arunachal
Pradesh, Manipur
Sikkim, Nagaland,
H.P., U.P. & J&K.
(viii) Compensatory modified
field area allowance
available in specified
areas of Punjab,
Rajsthan, Haryana,
U.P., J&K, H.P., West
Bengal & North East.
(ix) Counter insurgency
allowance to members
of Armed Forces.
(x) Transport Allowance
granted to an employee
to meet his expenditure
for the purpose of
commuting between the
place of residence &
duty.
(xi) Transport allowance
granted to physically
disabled employee for
the purpose of
Rs.100 per month per child upto
a maximum 2 children.
Rs.300 per month per child upto
a maximum two children.
Rs.2600 per month.
Rs.1000 per month
Rs.3900 Per month
Rs.800 per month.
Rs.1600 per month.
24 25
commuting between
place of duty and
residence.
(xii) Underground allowance
granted to an employee
working in under ground
mines.
(xiii) Special allowance in the
nature of high altitude
allowance granted to
members of the armed
forces.
(xiv) Any special allowance
granted to the members
of the armed forces in
the nature of special
compensatory highly
active field area
allowance
(xv) Special allowance
granted to members of
armed forces in the
nature of island duty
allowance.
(in Andaman & Nicobar
& Lakshadweep Group
of Islands)
Rs.800 per month.
Rs. 1060 p.m. (for altitude of
9000-15000 ft.) Rs.1600 p.m.
(for altitude above 15000 ft.)
Rs. 4,200/- p.m.
Rs. 3,250/- p.m.
Thursday, 5 January 2012
income from salary
1 WHAT CONSTITUTES SALARY INCOME?
2 IS RELATIONSHIP OF EMPLOYER AND EMPLOYEE NECESSARY
3 WHAT IS THE PLACE OF ACCRUAL OF SALARY?
4 PENSIONS TO BE TAXED AS SALARY?
5 IS ADVANCE SALARY TO BE TAXED IN THE YEAR OF RECEIPT?
6 WHAT IS TAX FREE SALARY AND HOW IS IT TAXED?
7 IS SALARY PAYABLE FOR LEAVE-PERIOD TO NONRESIDENTS TAXABLE EVEN IF LEAVE IS SPENT OUTSIDE INDIA?
8 EXEMPTIONS OF INCOME
9 RELEVANT FOR THE HEAD "SALARIES"
10 WHAT ARE PERQUISITES?
WHAT CONSTITUTES SALARY INCOME ?
"Salary" is the remuneration received by or accruing periodically to an individual for service rendered as a result of expressed or implied contract.
Compensation or remuneration even in the following circumstances is chargeable to Income-tax under the head 'Salaries': -
a) When due from the former employer or present employer in the previous year, whether paid or not.
b) When paid or allowed in the previous year, by or on behalf of a former employer or present employer, though not due or before it becomes due.
c) When arrears of salary are paid in the previous year by or on behalf of a former employer or present employer, if not charged to tax in the period to which it relates.
It is, therefore, clear that apart from current years salary, even advance salary and/or arrears of salary may be taxed in the year of receipt. More specifically and elaborately, the Income-tax Act has stipulated that salary includes :-
a) Salary, including advance/arrears of salary;
b) Wages;
c) Fees;
d) Commission;
e) Pension;
f) Annuity;
g) Perquisite;
Receipts from Provident Fund chargeable to tax; Profit in lieu of or in addition to salary or wages; Gratuity;
Contribution of employer to Recognised Provident Fund in excess of prescribed limit; Interest on credit balance of Recognised Provident Fund in excess of notified rates;
i) Encashment of leave.
definition of 'salary' is inclusive and not exclusive.
IS RELATIONSHIP OF EMPLOYER AND EMPLOYEE NECESSARY ?
No, payment can be taxed under this section unless the relationship of employer and employee exists between the payer and payee. The employer and employee relationship is the relationship of a master and servant, and it distinctly differs from that existing between a principal and agent. Primarily, the degree of control of the employer over the employee would be a deciding factor, as the agent is generally not under the complete Control and supervision of his principal.
That is why even the emoluments received by an Member if Parliament/ M.L.A. are not taxable under the head "Salary" because of the absence of employer and employee relationship.
WHAT IS THE PLACE OF ACCRUAL OF SALARY?
The golden rule is that it accrues where the service is rendered. Leave salary paid to a person employed in India on leave to a foreign country is treated to be the arisen in India. However, if a citizen of India service outside India and receives salary from the of India, it would be taxable as salary to have accrued in India.
PENSIONS TO BE TAXED AS SALARY?
Pensions are taxed under the head 'Salaries'. The of standard deduction is also available on them.
IS ADVANCE SALARY TO BE TAXED IN THE YEAR OF RECEIPT?
The I.T. Act contemplates tax on salary which is due, whether paid or not, tax is attracted at the latest possible point of time which is the date when the salary accrues or becomes due. However, where any salary paid in advance is assessed in the year of payment, it cannot be taxed again when it becomes due. Similarly, if arrears of salary have been assessed on the 'due' basis in the past, they are not liable to be taxed again when they are paid.
WHAT IS TAX FREE SALARY AND HOW IS IT TAXED?
When the salary is paid 'tax-free' the employee has to return in his total income the gross salary, i.e. aggregate of the net-salary received plus the amount of tax paid on his behalf by the employer. It does not make any difference whether the tax is borne by the employer voluntarily or under a contractual obligation.
IS SALARY PAYABLE FOR LEAVE-PERIOD TO NONRESIDENTS TAXABLE EVEN IF LEAVE IS SPENT OUTSIDE INDIA?
Yes. The salary paid for services rendered in India is regarded as income earned in India, so as to specifically provide that any salary payable for rest period or leave period which is both proceeded or succeeded by service in India forms part of the service contract of employment will also be regarded as income earned in India and so is to be taxed.
EXEMPTIONS OF INCOME
RELEVANT FOR THE HEAD "SALARIES"
It is not true that every income received by an employee from his employer is taxable. Any income falling within any of the following paragraphs shall not be included in computing the income from salaries: -
(1) The value of any travel concession or assistance received by or due to an employee from his employer or former employer for himself and his family, in connection with his proceeding
(a) on leave to any place in India or
(b) on retirement from service, or, after termination of service to any place in India is exempt under clause (5) of Section 10 subject, however, to the conditions prescribed in rule 2B of the I.T. Rules, 1962.
(2) Death-cum-retirement gratuity or any other gratuity which is exempt to the extent specified from inclusion in computing the total income.
(3) Any payment in commutation of pension received under the Civil Pension (Commutation) Rules of the Central Government or under any similar scheme applicable to the members of the Civil/Defense services under the Union/State/Local Authority or a Corporation established by a Central, State or Provincial Act. Payments in commutation of pension received under any scheme of any other employer, exemption will be governed by the provisions of Section 10(10A) (ii).
(4) Any payment received by an employee of the Central /State Government, as cash-equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement on superannuation or otherwise, is exempt. In the case of other employees it is subject to a maximum of ten month's leave. This exemption has an overall max. limit of Rs. 2,40,000 [S.0.1015 (E) dated 27.11.97).
(5) Under Section 10(10B), the retrenchment compensation received by a workman is exempt from income-tax subject to certain limits.
(6) Under Section 10(10C), any payment received by an employee of the notified bodies at the time of his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in the case of public sector company, a scheme of voluntary separation, is exempted to the extent that such amount does not exceed five lakh rupees
(7) Any sum received under a Life Insurance Policy, including the sum allotted by way of bonus on such policy other than any sum received under sub-section (3) of Section 80DDA.
(8) Any payment from a Provident Fund to which the Provident Funds Act, 1925 (19 of 1925), applies.
(9) Under Section 10(13AJ of the Income-tax Act, 1961, any special allowance specifically granted to an assessee by his employer to meet expenditure incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee is exempt from Income-tax to the extent as may be prescribed.
(10) Under section 10(14) exemption of notified allowances is provided. The CBDT has prescribed guidelines for the purpose of classes (i) and (ii) of Section 10(14) vide Notification No.SO617(E) dated 7th July/ 1995 (F.No.l42/9/95TPL)which has been amended vide Notification SO No.403(E) dated 24.4.2000 (F,No.l42/34/99-TPL).
11) Under Section 10(15)(iv)(i) of the Income-tax Act, interest payable by the Government on deposits made by an employee of the Central Government or a State Government or a public sector company from out of his retirement benefits, in a notified scheme, is exempt.
(12) Income by way of pension received by an individual or family pension received by any member of the family of an individual who has been in the service of the Central Government or State Government and has been awarded 'Param Vir Chakra" or "Maha Vir Chakra" or "Vir Chakra" or such notified gallantry award, is exempt.
(13) Under Section 17 of the Act, exemption from tax will also be available, under prescribed conditions, in respect of any medical treatment provided to an employee or any member of his family or premium paid by the employer in respect of approved medical insurance taken for his employees or reimbursement of insurance premium to the employees for such medical insurance for the employee or his family members.
WHAT ARE PERQUISITES?
A 'perquisite' is defined in the Oxford as 'any casual emolument, or profit attached to an office or position in addition to the salaries or wages'. In sunlit words, perquisites are the benefits in addition to normal salary to which the employee has a right to by virtue his employment. In simple language, 'perquisites 1 are benefits or amenities provided in kind by the employer free of cost or at a concessional rate. Their value, to the extent these go to reduce expenditure that the employee normally would have otherwise incurred in obtaining these benefits and amenities, is regarded as part of taxable salary. As a golden rule, the taxable value of perquisites in the hands of the employee, is its cost to the employer.
However, there are specific rules for valuation of certain perquisit
2 IS RELATIONSHIP OF EMPLOYER AND EMPLOYEE NECESSARY
3 WHAT IS THE PLACE OF ACCRUAL OF SALARY?
4 PENSIONS TO BE TAXED AS SALARY?
5 IS ADVANCE SALARY TO BE TAXED IN THE YEAR OF RECEIPT?
6 WHAT IS TAX FREE SALARY AND HOW IS IT TAXED?
7 IS SALARY PAYABLE FOR LEAVE-PERIOD TO NONRESIDENTS TAXABLE EVEN IF LEAVE IS SPENT OUTSIDE INDIA?
8 EXEMPTIONS OF INCOME
9 RELEVANT FOR THE HEAD "SALARIES"
10 WHAT ARE PERQUISITES?
WHAT CONSTITUTES SALARY INCOME ?
"Salary" is the remuneration received by or accruing periodically to an individual for service rendered as a result of expressed or implied contract.
Compensation or remuneration even in the following circumstances is chargeable to Income-tax under the head 'Salaries': -
a) When due from the former employer or present employer in the previous year, whether paid or not.
b) When paid or allowed in the previous year, by or on behalf of a former employer or present employer, though not due or before it becomes due.
c) When arrears of salary are paid in the previous year by or on behalf of a former employer or present employer, if not charged to tax in the period to which it relates.
It is, therefore, clear that apart from current years salary, even advance salary and/or arrears of salary may be taxed in the year of receipt. More specifically and elaborately, the Income-tax Act has stipulated that salary includes :-
a) Salary, including advance/arrears of salary;
b) Wages;
c) Fees;
d) Commission;
e) Pension;
f) Annuity;
g) Perquisite;
Receipts from Provident Fund chargeable to tax; Profit in lieu of or in addition to salary or wages; Gratuity;
Contribution of employer to Recognised Provident Fund in excess of prescribed limit; Interest on credit balance of Recognised Provident Fund in excess of notified rates;
i) Encashment of leave.
definition of 'salary' is inclusive and not exclusive.
IS RELATIONSHIP OF EMPLOYER AND EMPLOYEE NECESSARY ?
No, payment can be taxed under this section unless the relationship of employer and employee exists between the payer and payee. The employer and employee relationship is the relationship of a master and servant, and it distinctly differs from that existing between a principal and agent. Primarily, the degree of control of the employer over the employee would be a deciding factor, as the agent is generally not under the complete Control and supervision of his principal.
That is why even the emoluments received by an Member if Parliament/ M.L.A. are not taxable under the head "Salary" because of the absence of employer and employee relationship.
WHAT IS THE PLACE OF ACCRUAL OF SALARY?
The golden rule is that it accrues where the service is rendered. Leave salary paid to a person employed in India on leave to a foreign country is treated to be the arisen in India. However, if a citizen of India service outside India and receives salary from the of India, it would be taxable as salary to have accrued in India.
PENSIONS TO BE TAXED AS SALARY?
Pensions are taxed under the head 'Salaries'. The of standard deduction is also available on them.
IS ADVANCE SALARY TO BE TAXED IN THE YEAR OF RECEIPT?
The I.T. Act contemplates tax on salary which is due, whether paid or not, tax is attracted at the latest possible point of time which is the date when the salary accrues or becomes due. However, where any salary paid in advance is assessed in the year of payment, it cannot be taxed again when it becomes due. Similarly, if arrears of salary have been assessed on the 'due' basis in the past, they are not liable to be taxed again when they are paid.
WHAT IS TAX FREE SALARY AND HOW IS IT TAXED?
When the salary is paid 'tax-free' the employee has to return in his total income the gross salary, i.e. aggregate of the net-salary received plus the amount of tax paid on his behalf by the employer. It does not make any difference whether the tax is borne by the employer voluntarily or under a contractual obligation.
IS SALARY PAYABLE FOR LEAVE-PERIOD TO NONRESIDENTS TAXABLE EVEN IF LEAVE IS SPENT OUTSIDE INDIA?
Yes. The salary paid for services rendered in India is regarded as income earned in India, so as to specifically provide that any salary payable for rest period or leave period which is both proceeded or succeeded by service in India forms part of the service contract of employment will also be regarded as income earned in India and so is to be taxed.
EXEMPTIONS OF INCOME
RELEVANT FOR THE HEAD "SALARIES"
It is not true that every income received by an employee from his employer is taxable. Any income falling within any of the following paragraphs shall not be included in computing the income from salaries: -
(1) The value of any travel concession or assistance received by or due to an employee from his employer or former employer for himself and his family, in connection with his proceeding
(a) on leave to any place in India or
(b) on retirement from service, or, after termination of service to any place in India is exempt under clause (5) of Section 10 subject, however, to the conditions prescribed in rule 2B of the I.T. Rules, 1962.
(2) Death-cum-retirement gratuity or any other gratuity which is exempt to the extent specified from inclusion in computing the total income.
(3) Any payment in commutation of pension received under the Civil Pension (Commutation) Rules of the Central Government or under any similar scheme applicable to the members of the Civil/Defense services under the Union/State/Local Authority or a Corporation established by a Central, State or Provincial Act. Payments in commutation of pension received under any scheme of any other employer, exemption will be governed by the provisions of Section 10(10A) (ii).
(4) Any payment received by an employee of the Central /State Government, as cash-equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement on superannuation or otherwise, is exempt. In the case of other employees it is subject to a maximum of ten month's leave. This exemption has an overall max. limit of Rs. 2,40,000 [S.0.1015 (E) dated 27.11.97).
(5) Under Section 10(10B), the retrenchment compensation received by a workman is exempt from income-tax subject to certain limits.
(6) Under Section 10(10C), any payment received by an employee of the notified bodies at the time of his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in the case of public sector company, a scheme of voluntary separation, is exempted to the extent that such amount does not exceed five lakh rupees
(7) Any sum received under a Life Insurance Policy, including the sum allotted by way of bonus on such policy other than any sum received under sub-section (3) of Section 80DDA.
(8) Any payment from a Provident Fund to which the Provident Funds Act, 1925 (19 of 1925), applies.
(9) Under Section 10(13AJ of the Income-tax Act, 1961, any special allowance specifically granted to an assessee by his employer to meet expenditure incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee is exempt from Income-tax to the extent as may be prescribed.
(10) Under section 10(14) exemption of notified allowances is provided. The CBDT has prescribed guidelines for the purpose of classes (i) and (ii) of Section 10(14) vide Notification No.SO617(E) dated 7th July/ 1995 (F.No.l42/9/95TPL)which has been amended vide Notification SO No.403(E) dated 24.4.2000 (F,No.l42/34/99-TPL).
11) Under Section 10(15)(iv)(i) of the Income-tax Act, interest payable by the Government on deposits made by an employee of the Central Government or a State Government or a public sector company from out of his retirement benefits, in a notified scheme, is exempt.
(12) Income by way of pension received by an individual or family pension received by any member of the family of an individual who has been in the service of the Central Government or State Government and has been awarded 'Param Vir Chakra" or "Maha Vir Chakra" or "Vir Chakra" or such notified gallantry award, is exempt.
(13) Under Section 17 of the Act, exemption from tax will also be available, under prescribed conditions, in respect of any medical treatment provided to an employee or any member of his family or premium paid by the employer in respect of approved medical insurance taken for his employees or reimbursement of insurance premium to the employees for such medical insurance for the employee or his family members.
WHAT ARE PERQUISITES?
A 'perquisite' is defined in the Oxford as 'any casual emolument, or profit attached to an office or position in addition to the salaries or wages'. In sunlit words, perquisites are the benefits in addition to normal salary to which the employee has a right to by virtue his employment. In simple language, 'perquisites 1 are benefits or amenities provided in kind by the employer free of cost or at a concessional rate. Their value, to the extent these go to reduce expenditure that the employee normally would have otherwise incurred in obtaining these benefits and amenities, is regarded as part of taxable salary. As a golden rule, the taxable value of perquisites in the hands of the employee, is its cost to the employer.
However, there are specific rules for valuation of certain perquisit
income from salary
Salary’, the following three deductions are allowed under Section 16 of the Act to
arrive 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).
All employees are entitled to a basic salary which is fixed as per their respective
terms of employment either as a fixed amount or at a graded system of salary.
Under this graded system, apart from the basic salary at which the employee will
start, annual increments to be given to the employee are pre fixed in the grade.
For example, if a person is employed on 1st May, 2004 in the grade of 12000 –
300 – 15000, this means that he will start at a basic salary of Rs.12000 from 1st
May, 2004. He will get an annual increment of Rs.300 w.e.f. 1st May, 2005 and
onwards every year on the same date till his basic salary reaches Rs.15, 000. No
further increment is given thereafter till he is promoted and placed in other grade.
Advance Salary, if received in previous year for next year is taxable on receipt
basis in the same previous year.
Illustration 4.1:
X joins service in the grade of Rs.12000 – 300 – 13800 – 400 – 17800 on 1st June,
1999. Compute his basic salary for the previous year 2005-06.
Solution:
For the previous year 2005-06, basic salary of X will be calculated as follows:
1st June 1999 – 31st May 2000 12000 1st June 2003 – 31st May 2004 13200
1st June 2000 – 31st May 2001 12300 1st June 2004 – 31st May 2005 13500
1st June 2001 – 31st May 2002 12600 1st June 2005 – 31st May 2006 13800
1st June 2002 – 31st May 2003 12900
Basic Salary for April and May 2005 (Rs.13500 x 2) 27,000
Basic Salary for June 2005 – March 2006 (Rs.13800 x 10) 1, 38,000
Basic Salary for previous year 1, 65,000
4.4.2 FEES, COMMISSION AND BONUS
Any fees or commission paid or payable to an employee is fully taxable and is
included in salary. Commission payable may be at a fixed amount or a fixed
percentage of turnovers. In both the cases, it is taxable as salary only when it is
paid or payable by the employer to the employee. When commission is based on
fixed percentage of turnover achieved by employee, it is included in basic salary
for the purpose of grant of retirement benefits and for computing certain
exemptions that we will discuss later on.
4.4.3 TAXABLE VALUE OF ALLOWANCES
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 ALLOWANCES
This 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 Pay
As 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 Allowance
This 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 Allowance
It is fully taxable. It is given for lunch to the employees.
(iv) Non practicing Allowance
This 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 Allowance
These 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 Allowance
When 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 Allowance
When 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 Allowance
Medical allowance is fully taxable even if some expenditure has actually been
incurred for medical treatment of employee or family.
(ix) Servant Allowance
It is fully taxable whether or not servants have been employed by the employee.
(x) Other allowances
There 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 ALLOWANCES
This category includes allowances which are exempt upto 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, Chennai)
‘Or’ an amount equal to 40% of salary (if accommodation is situated in
any other place).
Salary for this purpose 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.
The exemption of HRA depends upon the following factors:
(1) Basic Salary (3) Rent paid
(2) Place of residence (4) HRA received
If an employee is living in his own house and receiving HRA, it will be fully
taxable.
(ii) Entertainment Allowance
This allowance is first included in gross salary under allowances and then
deduction is given to only central and state government employees under Section
16 (ii).
(iii) Special Allowances for meeting official expenditure
38
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 Allowance
This 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 Allowance
Any 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 Allowance
This 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 upto 70% of such allowance or
Rs.6000 per month, whichever is less.
III. FULLY EXEMPT ALLOWANCES
(i) Foreign allowance
This 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.
Classify these allowances into the following three categories:
Project allowance, Out of station allowance, Dearness allowance, Servant
allowance, Hostel allowance, Uniform allowance, Dress allowance, Marriage
allowance, Foreign allowance, overtime allowance:
1. Fully taxable allowances _______________________________________
___________________________________________________________
2. Partially exempt allowances ____________________________________
___________________________________________________________
3. Fully exempt allowances _______________________________________
___________________________________________
Match the exemption in the following cases:
Name of Allowance Exemption
1. Children Education Allowance Rs.300 per month per child for
maximum 2 children
2. Transport Allowance Rs.100 per month per child for
maximum 2 children
3. Hostel Allowance 70% of allowance subject to
maximum of Rs.6, 000 per month.
4. Out of station allowance Rs.800 per month
arrive 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).
All employees are entitled to a basic salary which is fixed as per their respective
terms of employment either as a fixed amount or at a graded system of salary.
Under this graded system, apart from the basic salary at which the employee will
start, annual increments to be given to the employee are pre fixed in the grade.
For example, if a person is employed on 1st May, 2004 in the grade of 12000 –
300 – 15000, this means that he will start at a basic salary of Rs.12000 from 1st
May, 2004. He will get an annual increment of Rs.300 w.e.f. 1st May, 2005 and
onwards every year on the same date till his basic salary reaches Rs.15, 000. No
further increment is given thereafter till he is promoted and placed in other grade.
Advance Salary, if received in previous year for next year is taxable on receipt
basis in the same previous year.
Illustration 4.1:
X joins service in the grade of Rs.12000 – 300 – 13800 – 400 – 17800 on 1st June,
1999. Compute his basic salary for the previous year 2005-06.
Solution:
For the previous year 2005-06, basic salary of X will be calculated as follows:
1st June 1999 – 31st May 2000 12000 1st June 2003 – 31st May 2004 13200
1st June 2000 – 31st May 2001 12300 1st June 2004 – 31st May 2005 13500
1st June 2001 – 31st May 2002 12600 1st June 2005 – 31st May 2006 13800
1st June 2002 – 31st May 2003 12900
Basic Salary for April and May 2005 (Rs.13500 x 2) 27,000
Basic Salary for June 2005 – March 2006 (Rs.13800 x 10) 1, 38,000
Basic Salary for previous year 1, 65,000
4.4.2 FEES, COMMISSION AND BONUS
Any fees or commission paid or payable to an employee is fully taxable and is
included in salary. Commission payable may be at a fixed amount or a fixed
percentage of turnovers. In both the cases, it is taxable as salary only when it is
paid or payable by the employer to the employee. When commission is based on
fixed percentage of turnover achieved by employee, it is included in basic salary
for the purpose of grant of retirement benefits and for computing certain
exemptions that we will discuss later on.
4.4.3 TAXABLE VALUE OF ALLOWANCES
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 ALLOWANCES
This 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 Pay
As 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 Allowance
This 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 Allowance
It is fully taxable. It is given for lunch to the employees.
(iv) Non practicing Allowance
This 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 Allowance
These 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 Allowance
When 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 Allowance
When 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 Allowance
Medical allowance is fully taxable even if some expenditure has actually been
incurred for medical treatment of employee or family.
(ix) Servant Allowance
It is fully taxable whether or not servants have been employed by the employee.
(x) Other allowances
There 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 ALLOWANCES
This category includes allowances which are exempt upto 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, Chennai)
‘Or’ an amount equal to 40% of salary (if accommodation is situated in
any other place).
Salary for this purpose 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.
The exemption of HRA depends upon the following factors:
(1) Basic Salary (3) Rent paid
(2) Place of residence (4) HRA received
If an employee is living in his own house and receiving HRA, it will be fully
taxable.
(ii) Entertainment Allowance
This allowance is first included in gross salary under allowances and then
deduction is given to only central and state government employees under Section
16 (ii).
(iii) Special Allowances for meeting official expenditure
38
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 Allowance
This 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 Allowance
Any 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 Allowance
This 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 upto 70% of such allowance or
Rs.6000 per month, whichever is less.
III. FULLY EXEMPT ALLOWANCES
(i) Foreign allowance
This 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.
Classify these allowances into the following three categories:
Project allowance, Out of station allowance, Dearness allowance, Servant
allowance, Hostel allowance, Uniform allowance, Dress allowance, Marriage
allowance, Foreign allowance, overtime allowance:
1. Fully taxable allowances _______________________________________
___________________________________________________________
2. Partially exempt allowances ____________________________________
___________________________________________________________
3. Fully exempt allowances _______________________________________
___________________________________________
Match the exemption in the following cases:
Name of Allowance Exemption
1. Children Education Allowance Rs.300 per month per child for
maximum 2 children
2. Transport Allowance Rs.100 per month per child for
maximum 2 children
3. Hostel Allowance 70% of allowance subject to
maximum of Rs.6, 000 per month.
4. Out of station allowance Rs.800 per month
income rom salary
Salary, in simple words, means remuneration of a person, which he has received
from his employer for rendering services to him. But receipts for all kinds of
services rendered cannot be taxed as salary. The remuneration received by
professionals like doctors, architects, lawyers etc. cannot be covered under salary
since it is not received from their employers but from their clients. So, it is taxed
under business or profession head. In order to understand what is included in
salary, let us discuss few characteristics of salary.
Characteristics of Salary
1. The relationship of payer and payee must be of employer and employee
for an income to be categorized as salary income. For example: Salary
income of a Member of Parliament cannot be specified as salary, since it is
received from Government of India which is not his employer.
2. The Act makes no distinction between salary and wages, though generally
salary is paid for non-manual work and wages are paid for manual work.
3. Salary received from employer, whether one or more than one is included
in this head.
4. Salary is taxable either on due basis or receipt basis which ever matures
earlier:
i) Due basis – when it is earned even if it is not received in the previous
year.
ii) Receipt basis – when it is received even if it is not earned in the previous
year.
iii) Arrears of salary- which were not due and received earlier are taxable
when due or received, which ever is earlier.
5. Compulsory deduction from salary such as employees’ contribution to
provident fund, deduction on account of medical scheme or staff welfare
scheme etc. are examples of instances of application of income. In these
cases, for computing total income, these deductions have to be added
back.
INCOMES FORMING PART OF SALARY: I
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 Benefits
Although, 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
from his employer for rendering services to him. But receipts for all kinds of
services rendered cannot be taxed as salary. The remuneration received by
professionals like doctors, architects, lawyers etc. cannot be covered under salary
since it is not received from their employers but from their clients. So, it is taxed
under business or profession head. In order to understand what is included in
salary, let us discuss few characteristics of salary.
Characteristics of Salary
1. The relationship of payer and payee must be of employer and employee
for an income to be categorized as salary income. For example: Salary
income of a Member of Parliament cannot be specified as salary, since it is
received from Government of India which is not his employer.
2. The Act makes no distinction between salary and wages, though generally
salary is paid for non-manual work and wages are paid for manual work.
3. Salary received from employer, whether one or more than one is included
in this head.
4. Salary is taxable either on due basis or receipt basis which ever matures
earlier:
i) Due basis – when it is earned even if it is not received in the previous
year.
ii) Receipt basis – when it is received even if it is not earned in the previous
year.
iii) Arrears of salary- which were not due and received earlier are taxable
when due or received, which ever is earlier.
5. Compulsory deduction from salary such as employees’ contribution to
provident fund, deduction on account of medical scheme or staff welfare
scheme etc. are examples of instances of application of income. In these
cases, for computing total income, these deductions have to be added
back.
INCOMES FORMING PART OF SALARY: I
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 Benefits
Although, 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
Under Income Tax Act following types of allowance are defined
House Rent Allowance:
Under sections 10(13A) of Income Tax Act, 1961 allowance is defined as an amount received by an employee paid by his/ her employer as a rent of his/her house. It is a taxable income. There is no exemption in tax if he is living in his own house or house for which he is not paying rent. There are following amount which are exempt from tax:
Actual house rent paid by that individual
Rent paid for the accommodation over 10% of the salary
50% of the salary if house is placed at Delhi, Mumbai, Kolkata, Chennai or 40% of the salary in it is placed in any other city
Entertainment Allowance:
It is the amount paid by employer for availing entertainment services. Under section 16(ii) of Income Tax Act, 1961 it is entitled to deduction in tax from is salary. But in this case deduction is given to his gross salary which also includes entertainment allowance. Deduction in tax against this allowance can be divided into two parts :
In case of Government employee entitled to minimum deduction of
Entertainment allowance received
20% of basic salary excluding any other allowance
Rs. 5000 In case of other employee entitled to minimum deduction of
(a) Entertainment allowance received
20% of basic salary excluding any other allowance
Rs. 7500
Entertainment allowance received during 1954-1955
Other Special Allowances
Children Education Allowance
Tribal Area Allowance
Hostel Expenditure Allowance
Remote Area Allowance
Compensatory Field Area Allowance
Counter Insurgency Allowance
Border Area Allowance
Hilly Area Allowance
Allowances for there is a provision of exempt in income tax are:
Allowance given to a citizen of India, who is a government employee, for rendering services outside India
Allowances given to Judges of High Courts
Allowance given Judges of Supreme Court
Allowances received by an employee of UNO
What is Perquisite
Under section 17(2) of Income Tax Act, 1961 perquisite is defined as:
Amount paid for the rent-free accommodation provided to the assessee by his employer
Any concession in the matter of rent respecting any accommodation provided to the assessee by his employer
Any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:
1. By a company to an employee, who is a director thereof
2. By a company to an employee being a person who has a substantial interest in the company
3. By any employer to an employee whose income under the head 'Salaries' exceeds Rs.24000 excluding the value of non monetary benefits or amenities
4. Any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee
5. Any sum payable by the employer whether directly or through a fund, other than a recognised provident fund or EPF, to effect an assurance on the life of the assessee or to effect a contract for an annuity
There are following perquisites which are tax free:
Medical facility
Medical reimbursement
Refreshments
Subsidised Luch/ Dinner provided by employer
Facilities For Recreation
Telephone Bills
Products at concessional rate to employee sold by his/ her employer
Insurance premium paid by employer
Loans to employees by given by employer
Transportation
Training
House without rent
Residence Facility to member of Parliament, judges of High Court/ Supreme Court
Conveyance to member of Parliament, judges of High Court/ Supreme Court
Contribution of employers to employee's pension, annuity schemes and group insurance
Deductions from Salary income
Certain deductions are available while determining the taxable salary income.
A) Standard Deduction
Income tax slabs 2009-2010 (for Men) in India:
Income Tax Slab (in Rs.) Tax
0 to 1,60,000 No Tax
1,60,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%
Income tax slabs 2009-2010 (for Women) in India:
Income Tax Slab (in Rs.) Tax
0 to 1,90,000 No Tax
1,90,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%
Income tax slabs 2009-2010 (for Senior Citizens) in India:
Income Tax Slab (in Rs.) Tax
0 to 2,40,000 No Tax
2,40,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%
B) Professional Tax
Professional tax, which is paid, is allowed as deduction.
C) Arrears salary
If salary is received in arrears or in advance, it can be spread over the years to which it relates and be taxed accordingly as per section 89(1) of the Income tax Act.
Under sections 10(13A) of Income Tax Act, 1961 allowance is defined as an amount received by an employee paid by his/ her employer as a rent of his/her house. It is a taxable income. There is no exemption in tax if he is living in his own house or house for which he is not paying rent. There are following amount which are exempt from tax:
Actual house rent paid by that individual
Rent paid for the accommodation over 10% of the salary
50% of the salary if house is placed at Delhi, Mumbai, Kolkata, Chennai or 40% of the salary in it is placed in any other city
Entertainment Allowance:
It is the amount paid by employer for availing entertainment services. Under section 16(ii) of Income Tax Act, 1961 it is entitled to deduction in tax from is salary. But in this case deduction is given to his gross salary which also includes entertainment allowance. Deduction in tax against this allowance can be divided into two parts :
In case of Government employee entitled to minimum deduction of
Entertainment allowance received
20% of basic salary excluding any other allowance
Rs. 5000 In case of other employee entitled to minimum deduction of
(a) Entertainment allowance received
20% of basic salary excluding any other allowance
Rs. 7500
Entertainment allowance received during 1954-1955
Other Special Allowances
Children Education Allowance
Tribal Area Allowance
Hostel Expenditure Allowance
Remote Area Allowance
Compensatory Field Area Allowance
Counter Insurgency Allowance
Border Area Allowance
Hilly Area Allowance
Allowances for there is a provision of exempt in income tax are:
Allowance given to a citizen of India, who is a government employee, for rendering services outside India
Allowances given to Judges of High Courts
Allowance given Judges of Supreme Court
Allowances received by an employee of UNO
What is Perquisite
Under section 17(2) of Income Tax Act, 1961 perquisite is defined as:
Amount paid for the rent-free accommodation provided to the assessee by his employer
Any concession in the matter of rent respecting any accommodation provided to the assessee by his employer
Any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:
1. By a company to an employee, who is a director thereof
2. By a company to an employee being a person who has a substantial interest in the company
3. By any employer to an employee whose income under the head 'Salaries' exceeds Rs.24000 excluding the value of non monetary benefits or amenities
4. Any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee
5. Any sum payable by the employer whether directly or through a fund, other than a recognised provident fund or EPF, to effect an assurance on the life of the assessee or to effect a contract for an annuity
There are following perquisites which are tax free:
Medical facility
Medical reimbursement
Refreshments
Subsidised Luch/ Dinner provided by employer
Facilities For Recreation
Telephone Bills
Products at concessional rate to employee sold by his/ her employer
Insurance premium paid by employer
Loans to employees by given by employer
Transportation
Training
House without rent
Residence Facility to member of Parliament, judges of High Court/ Supreme Court
Conveyance to member of Parliament, judges of High Court/ Supreme Court
Contribution of employers to employee's pension, annuity schemes and group insurance
Deductions from Salary income
Certain deductions are available while determining the taxable salary income.
A) Standard Deduction
Income tax slabs 2009-2010 (for Men) in India:
Income Tax Slab (in Rs.) Tax
0 to 1,60,000 No Tax
1,60,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%
Income tax slabs 2009-2010 (for Women) in India:
Income Tax Slab (in Rs.) Tax
0 to 1,90,000 No Tax
1,90,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%
Income tax slabs 2009-2010 (for Senior Citizens) in India:
Income Tax Slab (in Rs.) Tax
0 to 2,40,000 No Tax
2,40,001 to 3,00,000 10%
3,00,001 to 5,00,000 20%
Above 5,00,000 30%
B) Professional Tax
Professional tax, which is paid, is allowed as deduction.
C) Arrears salary
If salary is received in arrears or in advance, it can be spread over the years to which it relates and be taxed accordingly as per section 89(1) of the Income tax Act.
Wednesday, 4 January 2012
income from salary
As per the income tax law in India any income that is generated under the territory of the country is subjected to the income tax. Salary is taxed differently than the products as income tax is applicable on salary where as on commodities there is service tax and value added tax is applicable on it. The term salary is defines as any kind of remuneration that is generated through professional services, personal services and from different jobs in the organization.
Allowances:
Section 17 of the income tax act includes:
Basic salary
Wages
Annuity
Provident fund (PF)
House rent allowance (HRA)
Gratuity
Cess tax and incentives generated from the salary
Miscellaneous amount
Finance tax
Any encashment of leave salary
Transport allowance
The essential conditions to notify the income as the salary income:
The employee and the employer relationship are of servant and master. There should be a relationship. It is different than the principal and agent as agent won�t come under the full control of the employer. In India M.L.A is not come under the head salary due to the fact that it not comes under employee and employer relation ship bracket.
In all the government organizations pension is deducted as it is mandatory to do so.
Any salary that is generated outside India is taxable as per Indian income tax law.
Provident fund is mandatory in government as well as in the private organization.
As per Provident fund rule half of the amount is deducted from the salary of the employee and half of the amount will be added by the company or government. Most of the time employee claims their provident fund after leaving the job, however there is an exceptional clause under which employee can claim half of his provident fund amount at the time of buying a property or his/her wedding.
Exemption of tax in the salary:
This is a myth that every income is taxable that is received from an employer:
Any traveling facility provided by an employer to its employee such as train or airplane passes is not come under the tax bracket.
Gratuity amount is also not subjected to the income tax.
Any payment received by the employee of central or state government from the encashment of his/her leave balance is entitled of exemption from tax.
As per the provident fund act 1925. Provident fund amount is also exempted from the tax list.
Any sum received under life Insurance policy is exempted from the list as per sub section (3) of section 80DDA.
Income received by way of pension received by an individual or family for a member who was employed with central government/state government is also exempted from a tax list.
Armed force professional who won the gallantry award for their services towards the country are exempted from the list of income tax. Employees of central or state government who have won Param vir Chakra, Maha vir chakra and any other notified gallantry awards are exempted from the tax list
What is Salary:
Income under heads of salary is defined as remuneration received by an individual for services rendered by him to undertake a contract whether it is expressed or implied. According to Income Tax Act there are following conditions where all such remuneration are chargeable to income tax:
When due from the former employer or present employer in the previous year, whether paid or not
When paid or allowed in the previous year, by or on behalf of a former employer or present employer, though not due or before it becomes due.
When arrears of salary is paid in the previous year by or on behalf of a former employer or present employer, if not charged to tax in the period to which it relates.
What Income Comes Under Head of Salary:
Under section 17 of the Income Tax Act, 1961 there are following incomes which comes under head of salary:
Salary (including advance salary)
Wages
Fees
Commissions
Pensions
Annuity
Perquisite
Gratuity
Annual Bonus
Income From Provident Fund
Leave Encashment
Allowance
Awards
What is Leave Encashment:
Leave encashment is the salary received by an individual for leave period. It is a chargeable income whether he is a government employee or not. Under section 10(10AA) (i) there is also a provision of exemption in case of leave encashment depending upon whether he is a government employee or other employees.
What is Annuity:
It is an annual income received by the employee from his employer. It may be paid by the employer as voluntarily or on account of contractual agreement. It is not taxable until the right to receive the same arises. Under section 56, Income Tax Act, 1961 other annuities come under a will or granted by a life insurance company or accruing as a result of contract which comes as income under from other sources.
What is Gratuity:
It is salary received by an individual paid by the employee at the time of his retirement or by his legal heir in the case of death of the employee.
What is Allowance:
It is the amount received by an individual paid by his/her employer in addition to salary. Under section 15 of the Income Tax Act, 1961 these allowance are taxable excluding few condition where they are entitled of deduction/ exemptions.
Allowances:
Section 17 of the income tax act includes:
Basic salary
Wages
Annuity
Provident fund (PF)
House rent allowance (HRA)
Gratuity
Cess tax and incentives generated from the salary
Miscellaneous amount
Finance tax
Any encashment of leave salary
Transport allowance
The essential conditions to notify the income as the salary income:
The employee and the employer relationship are of servant and master. There should be a relationship. It is different than the principal and agent as agent won�t come under the full control of the employer. In India M.L.A is not come under the head salary due to the fact that it not comes under employee and employer relation ship bracket.
In all the government organizations pension is deducted as it is mandatory to do so.
Any salary that is generated outside India is taxable as per Indian income tax law.
Provident fund is mandatory in government as well as in the private organization.
As per Provident fund rule half of the amount is deducted from the salary of the employee and half of the amount will be added by the company or government. Most of the time employee claims their provident fund after leaving the job, however there is an exceptional clause under which employee can claim half of his provident fund amount at the time of buying a property or his/her wedding.
Exemption of tax in the salary:
This is a myth that every income is taxable that is received from an employer:
Any traveling facility provided by an employer to its employee such as train or airplane passes is not come under the tax bracket.
Gratuity amount is also not subjected to the income tax.
Any payment received by the employee of central or state government from the encashment of his/her leave balance is entitled of exemption from tax.
As per the provident fund act 1925. Provident fund amount is also exempted from the tax list.
Any sum received under life Insurance policy is exempted from the list as per sub section (3) of section 80DDA.
Income received by way of pension received by an individual or family for a member who was employed with central government/state government is also exempted from a tax list.
Armed force professional who won the gallantry award for their services towards the country are exempted from the list of income tax. Employees of central or state government who have won Param vir Chakra, Maha vir chakra and any other notified gallantry awards are exempted from the tax list
What is Salary:
Income under heads of salary is defined as remuneration received by an individual for services rendered by him to undertake a contract whether it is expressed or implied. According to Income Tax Act there are following conditions where all such remuneration are chargeable to income tax:
When due from the former employer or present employer in the previous year, whether paid or not
When paid or allowed in the previous year, by or on behalf of a former employer or present employer, though not due or before it becomes due.
When arrears of salary is paid in the previous year by or on behalf of a former employer or present employer, if not charged to tax in the period to which it relates.
What Income Comes Under Head of Salary:
Under section 17 of the Income Tax Act, 1961 there are following incomes which comes under head of salary:
Salary (including advance salary)
Wages
Fees
Commissions
Pensions
Annuity
Perquisite
Gratuity
Annual Bonus
Income From Provident Fund
Leave Encashment
Allowance
Awards
What is Leave Encashment:
Leave encashment is the salary received by an individual for leave period. It is a chargeable income whether he is a government employee or not. Under section 10(10AA) (i) there is also a provision of exemption in case of leave encashment depending upon whether he is a government employee or other employees.
What is Annuity:
It is an annual income received by the employee from his employer. It may be paid by the employer as voluntarily or on account of contractual agreement. It is not taxable until the right to receive the same arises. Under section 56, Income Tax Act, 1961 other annuities come under a will or granted by a life insurance company or accruing as a result of contract which comes as income under from other sources.
What is Gratuity:
It is salary received by an individual paid by the employee at the time of his retirement or by his legal heir in the case of death of the employee.
What is Allowance:
It is the amount received by an individual paid by his/her employer in addition to salary. Under section 15 of the Income Tax Act, 1961 these allowance are taxable excluding few condition where they are entitled of deduction/ exemptions.
Calculation of Cash Price, if Cash Price is not given
Some times in a problem of hire-purchase, cash price of goods sold is not given. Only hire-purchase price is given under such situation first of all, cash price is to be calculated in order to find out the amount of interest included in each instalment. the cash price can be calculated under following two situations.
(a)By Annuity Method, if the annity value of Re. 1 is given:
Cash Price = (Annuity, Value of Re.1 x Amt. of one instalment) + down payment if, any.
Calculation of Cash Price by Annuity Method
Worked out Example-4
On 1st April,2005 a manufacturing company buys on Hire-purchase system a machinery for Rs. 60,000, payable by three equal annual instalments combining principal and interest, the rate of interest was 5% per annum. Calculate the amount of cash price and interest. The present value of an annuity of one rupee for three years at 5% interest is Rs. 2,72325.
Solution:
Calculation of Cash Price – The present value of an annuity of Re. 1 paid for 3 year @ 5% = Rs. 2,72325 Then the present value of Rs. 20,000 for 3 years = 2,72325 x 20,000 = Rs. 54,465 Cash Price Rs. 54,465
(b) By Arithmetic Method, if the annuity value of Re. 1 is not given:
? First take the last instalment and calculate interest included in that instalment. Interest: = (Amount of instalment x Rate of Int) / 100+Rate of Int.
Thereafter interest included in last but one instalment should be calculated. Interest = [(Amt. of last but one instalment + principal price included in the last instalment) x Rate of Interest] / 100+ Rate of Int.
? Interest included in all proceeding instalment should be calculated in the same manner.
? In the end, interest included in each instalment should be added. It should be remembered that down payment does not include any interest.
? Finally cash price = Hire purchse price – Total interest included in various instalments.
Calculation of Cash Price by Arithmetic Method
Worked out Example-5
Mr. X purchased a machine on Hire-Purchase system on 1st April,2005. He paid Rs. 5,000 at spot and then three annual instalments of Rs. 5,000 each. The rate of interest was 5% per annum. Find out the amount of interest included in instalments and cash price of the machine.
Solution:
(1)First of all Interest included in the 3rd instalment is to be calculated.
Interest=(5000x5)/105=Rs. 238,Principal= 5000-238=4762
(2)Interest included in second instalment = [(5000+4762)x5]/105 = 465, Principal=4535
(3)Interest included in 1st instalment = [(5000+4762+4535)x5]/105 = 681,Principal=4319
Cash Price = 4762+4535+4319+down payment Rs.5000 = Rs.=18616
Total Interest=Rs20000-18616=1384. I Yr. rs.681, IIYr. Rs465, III Yr.Rs238
Note: Now you can make the interest table in the usual manner as explained in worked out example-1 and check your calculation of amount of interest.
1.9 Calculation of Amount of Interest, if Rate of Interest is not given
Wherever, rate of interest is not given in the problem, again there can be two situations.
(a) When cash price and the amounts of instalments are given and the amount of each instalment is same. the following worked out example will make the calculation clear.
Worked out Example-6
(Calculation of Interest When Rate of Interest is not given) A machine was sold on hire-purchase system on 1st April,2005 Rs. 10,000 was paid at spot and rest was paid by four equal quarterly instalments of 22,000 each. The cash price of machine was Rs. 90,000. Find out the amount of interest included in each instalment.
Soluton:
Hire-purchase Price = 10,000 + (22,000 x 4) = Rs.98,000 Less: Cash Price Rs.90,000 Total Interest= Rs.8,000
The total Interest of Rs 8,000 is to be apportioned among the various instalments i.e. 4th, 3rd, 2nd and 1st instalment in the ratio of 1:2:3:4 (i.e. among 1st, 2nd, 3rd and 4th instalment in the ratio of 4:3:2:1)
(1)Share of 1st instalment in the Interest= 8,000x4/10 = Rs.3,200
(2)Share of 2nd instalment in the Interest= 8,000x3/10 = Rs.2,400
(3)Share of 3rd instalment in the interest= 8,000x2/10 = Rs.1,600
(4)Share of 2nd instalment in the interest= 8,000x1/10 = Rs. 800
(b) When cash price and amounts of instalments are given but the amount of each instalment is not equal: The following worked out example will clear the doubts.
Rate of Interest not known and Instalments of different amounts
Worked out Example-7
Cash price of a machine is Rs. 37,400 on 1st January,2003. Its hire-purchase price is Rs. 50,000. This hire-purchase price is paid in five annual instalments in the following manner: Rs. 15,000 at the end of the first year Rs. 12,000 at the end of second year; Rs. 10,000 at the end of third year, Rs. 8,000 at the end of fourth year, Rs. 5,000 at the end of fifth year. Calculate interest and cash price included in each instalment.
Solution:
Calculation of Interest Included in each Instalment
Total Interest= Hire-purchase price-Cash Price
Total Interest=Rs.50,000-37,400=12600
Total Interest of Rs12,600 is to be apportioned among the five instalments in the following manner:
Instalment No Unpaid Amount(Rs.) Calculation of Int.(Rs.)
First 50000 (12600x50000)/126000=5000
Second 50000-15000=35000 (12600x35000)/126000=3500
Third 35000-12000=23000 (12600x23000)/126000=2300
Fourth 23000-10000=13000 (12600x13000)/126000=1300
Fifth 13000-8000=5000 (12600x5000)/126000=500
Total 126000
Calculation of Cash Price included in each instalment
Instalment No. Instalment(Rs.) Interest(Rs.) Cash Price(Rs.)
First 15000 5000 10000
Second 12000 3500 8500
Third 10000 2300 7700
Fourth 8000 1300 6700
Fifth 5000 500 4500
Total 50000 12600 37400
Some times in a problem of hire-purchase, cash price of goods sold is not given. Only hire-purchase price is given under such situation first of all, cash price is to be calculated in order to find out the amount of interest included in each instalment. the cash price can be calculated under following two situations.
(a)By Annuity Method, if the annity value of Re. 1 is given:
Cash Price = (Annuity, Value of Re.1 x Amt. of one instalment) + down payment if, any.
Calculation of Cash Price by Annuity Method
Worked out Example-4
On 1st April,2005 a manufacturing company buys on Hire-purchase system a machinery for Rs. 60,000, payable by three equal annual instalments combining principal and interest, the rate of interest was 5% per annum. Calculate the amount of cash price and interest. The present value of an annuity of one rupee for three years at 5% interest is Rs. 2,72325.
Solution:
Calculation of Cash Price – The present value of an annuity of Re. 1 paid for 3 year @ 5% = Rs. 2,72325 Then the present value of Rs. 20,000 for 3 years = 2,72325 x 20,000 = Rs. 54,465 Cash Price Rs. 54,465
(b) By Arithmetic Method, if the annuity value of Re. 1 is not given:
? First take the last instalment and calculate interest included in that instalment. Interest: = (Amount of instalment x Rate of Int) / 100+Rate of Int.
Thereafter interest included in last but one instalment should be calculated. Interest = [(Amt. of last but one instalment + principal price included in the last instalment) x Rate of Interest] / 100+ Rate of Int.
? Interest included in all proceeding instalment should be calculated in the same manner.
? In the end, interest included in each instalment should be added. It should be remembered that down payment does not include any interest.
? Finally cash price = Hire purchse price – Total interest included in various instalments.
Calculation of Cash Price by Arithmetic Method
Worked out Example-5
Mr. X purchased a machine on Hire-Purchase system on 1st April,2005. He paid Rs. 5,000 at spot and then three annual instalments of Rs. 5,000 each. The rate of interest was 5% per annum. Find out the amount of interest included in instalments and cash price of the machine.
Solution:
(1)First of all Interest included in the 3rd instalment is to be calculated.
Interest=(5000x5)/105=Rs. 238,Principal= 5000-238=4762
(2)Interest included in second instalment = [(5000+4762)x5]/105 = 465, Principal=4535
(3)Interest included in 1st instalment = [(5000+4762+4535)x5]/105 = 681,Principal=4319
Cash Price = 4762+4535+4319+down payment Rs.5000 = Rs.=18616
Total Interest=Rs20000-18616=1384. I Yr. rs.681, IIYr. Rs465, III Yr.Rs238
Note: Now you can make the interest table in the usual manner as explained in worked out example-1 and check your calculation of amount of interest.
1.9 Calculation of Amount of Interest, if Rate of Interest is not given
Wherever, rate of interest is not given in the problem, again there can be two situations.
(a) When cash price and the amounts of instalments are given and the amount of each instalment is same. the following worked out example will make the calculation clear.
Worked out Example-6
(Calculation of Interest When Rate of Interest is not given) A machine was sold on hire-purchase system on 1st April,2005 Rs. 10,000 was paid at spot and rest was paid by four equal quarterly instalments of 22,000 each. The cash price of machine was Rs. 90,000. Find out the amount of interest included in each instalment.
Soluton:
Hire-purchase Price = 10,000 + (22,000 x 4) = Rs.98,000 Less: Cash Price Rs.90,000 Total Interest= Rs.8,000
The total Interest of Rs 8,000 is to be apportioned among the various instalments i.e. 4th, 3rd, 2nd and 1st instalment in the ratio of 1:2:3:4 (i.e. among 1st, 2nd, 3rd and 4th instalment in the ratio of 4:3:2:1)
(1)Share of 1st instalment in the Interest= 8,000x4/10 = Rs.3,200
(2)Share of 2nd instalment in the Interest= 8,000x3/10 = Rs.2,400
(3)Share of 3rd instalment in the interest= 8,000x2/10 = Rs.1,600
(4)Share of 2nd instalment in the interest= 8,000x1/10 = Rs. 800
(b) When cash price and amounts of instalments are given but the amount of each instalment is not equal: The following worked out example will clear the doubts.
Rate of Interest not known and Instalments of different amounts
Worked out Example-7
Cash price of a machine is Rs. 37,400 on 1st January,2003. Its hire-purchase price is Rs. 50,000. This hire-purchase price is paid in five annual instalments in the following manner: Rs. 15,000 at the end of the first year Rs. 12,000 at the end of second year; Rs. 10,000 at the end of third year, Rs. 8,000 at the end of fourth year, Rs. 5,000 at the end of fifth year. Calculate interest and cash price included in each instalment.
Solution:
Calculation of Interest Included in each Instalment
Total Interest= Hire-purchase price-Cash Price
Total Interest=Rs.50,000-37,400=12600
Total Interest of Rs12,600 is to be apportioned among the five instalments in the following manner:
Instalment No Unpaid Amount(Rs.) Calculation of Int.(Rs.)
First 50000 (12600x50000)/126000=5000
Second 50000-15000=35000 (12600x35000)/126000=3500
Third 35000-12000=23000 (12600x23000)/126000=2300
Fourth 23000-10000=13000 (12600x13000)/126000=1300
Fifth 13000-8000=5000 (12600x5000)/126000=500
Total 126000
Calculation of Cash Price included in each instalment
Instalment No. Instalment(Rs.) Interest(Rs.) Cash Price(Rs.)
First 15000 5000 10000
Second 12000 3500 8500
Third 10000 2300 7700
Fourth 8000 1300 6700
Fifth 5000 500 4500
Total 50000 12600 37400
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