TAXABILITY OF RETIREMENT BENEFITS

GRATUITY (Sec. 10(10)): (i) Any death cum retirement gratuity received by Central and State Govt. employees, Defence employees and employees in Local authority shall be exempt. (ii) Any gratuity received by persons covered under the Payment of Gratuity Act, 1972 shall be exempt subject to following limits:- (a) For every completed year of service or part thereof, gratuity shall be exempt to the extent of fifteen days Salary based on the rate of Salary last drawn by the concerned employee. (b) The amount of gratuity as calculated above shall not exceed Rs.3,50,000(w.e.f.24.9.97). (iii) In case of any other employee, gratuity received shall be exempt subject to the following limits:- (a) Exemption shall be limited to half month salary (based on last 10 months average) for each completed year of service b) Rs.3.5 Lakhs whichever is less. Where the gratuity was received in any one or more earlier previous years also and any exemption was allowed for the same, then the exemption to be allowed during the year gets reduced to the extent of exemption already allowed, the overall limit being Rs. 3.5 Lakhs. As per Board’s letter F.No. 194/6/73-IT(A-1) dated 19.6.73, exemption in respect of gratuity is permissible even in cases of termination of employment due to resignation. The taxable portion of gratuity will quality for relief u/s 89(1). Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax(Circular No. 573 dated 21.8.90). Payment of Gratuity (Amendment) Bill, 2010 has proposed to increase the limit to Rs. 10,00,000. COMMUTATION OF PENSION (SECTION 10(10A)): (i) In case of employees of Central & State Govt. Local Authority, Defence Services and Corporation established under Central or State Acts, the entire commuted value of pension is exempt. (ii) In case of any other employee, if the employee receives gratuity, the commuted value of 1/3 of the pension is exempt, otherwise, the commuted value of ½ of the pension is exempt. Judges of S.C. & H.C. shall be entitled to exemption of commuted value upto ½ of the pension (Circular No. 623 dated 6.1.1992). 8.4 LEAVE ENCASHMENT (Section 10(10AA)): (i) Leave Encashment during service is fully taxable in all cases, relief u/s 89(1) if applicable may be claimed for the same. (ii) Any payment by way of leave encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt. (iii) In case of other employees, the exemption is to be limited to the least of following: (a) Cash equivalent of unutilized earned leave (earned leave entitlement can not exceed 30 days for every year of actual service) (b) 10 months average salary (c) Leave encashment actually received. This is further subject to a limit of Rs.3,00,000 for retirements after 02.04.1998. (iv) Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit of such employee at the time of death is not taxable. For the purpose of Section 10(10AA), the term ‘Superannuation or otherwise’ covers resignation (CIT Vs. R.V. Shahney 159 ITR 160(Madras). RETRENCHMENT COMPENSATION (Sec. 10(10B)): Retrenchment compensation received by a workman under the Industrial Disputes Act, 1947 or any other Act or Rules is exempt subject to following limits:- (i) Compensation calculated @ fifteen days average pay for every completed year of continuous service or part thereof in excess of 6 months. (ii) The above is further subject to an overall limit of Rs.5,00,000 for retrenchment on or after 1.1.1997 (Notification No. 10969 dated 25.6.99). COMPENSATION ON VOLUNTARY RETIREMENT OR ‘GOLDEN HANDSHAKE’(Sec. 10(10C)): (i) Payment received by an employee of the following at the time of voluntary retirement, or termination of service is exempt to the extent of Rs. 5 Lakh: a) Public Sector Company. (b) Any other company. (c) Authority established under State, Central or Provincial Act. (d) Local Authority. (e) Co-operative Societies, Universities, IITs and Notified Institutes of Management. (f) Any State Government or the Central Government. (ii) The voluntary retirement Scheme under which the payment is being made must be framed in accordance with the guidelines prescribed in Rule 2BA of Income Tax Rules. In case of a company other than a public sector company and a co-operative society, such scheme must be approved by the Chief Commissioner/Director General of Income-tax. However, such approval is not necessary from A.Y. 2001- 2002 onwards. (iii) Where exemption has been allowed under above section for any assessment year, no exemption shall be allowed in relation to any other assessment year. Further, where any relief u/s 89 for any assessment year in respect of any amount received or receivable or voluntary retirement or termination of service has been allowed, no exemption under this clause shall be allowed for any assessment year. PAYMENT FROM PROVIDENT FUND (Sec. 10(11), Sec. 10(12)): Any payment received from a Provident Fund, (i.e. to which the Provident Fund Act, 1925 applies) is exempt. Any payment from any other provident fund notified by the Central Govt. is also exempt. The Public Provident Fund(PPF) established under the PPF Scheme, 1968 has been notified for this purpose. Besides the above, the accumulated balance due and becoming payable to an employee participating in a Recognised Provident Fund is also exempt to the extent provided in Rule 8 of Part A of the Fourth Schedule of the Income Tax Act. PAYMENT FROM APPROVED SUPERANNUATION FUND (Sec.10(13)): Payment from an Approved Superannuation Fund will be exempt provided the payment is made in the circumstances specified in the section viz. death, retirement and incapacitation. DEPOSIT SCHEME FOR RETIRED GOVT/PUBLIC SECTOR COMPANY EMPLOYEES: Section 10(15) of the Income Tax Act incorporates a number of investments, the interest from which is totally exempt from taxation. These investments may be considered as one of the options for investing various benefits received on retirement. One among them, notified u/s 10(15)(iv)(i), is the DEPOSIT SCHEME FOR RETIRED GOVT/PUBLIC SECTOR COMPANY EMPLOYEES which is a particularly attractive option for retiring employees of Govt. and Public Sector Companies. W.e.f. assessment year 1990-91, the interest on deposits made under this scheme by an employee of Central/State Govt. out of the various retirement benefits received is exempt from Income-tax. This exemption was subsequently extended to employees of Public Sector companies from assessment year 1991-92 vide notification No. 2/19/89-NS-II dated 12.12.1990. Salient features of the scheme are discussed below: Rate of Return Tax free interest @ 9% P.A. payable half yearly on 30th June and 31st December Limit of Investment Minimum Rs.1000. Maximum not exceeding the total retirement benefits. Liquidity Entire balance can be withdrawn after expiry of 3 years from the date of deposit. Premature encashment can be, made after one year from the date of deposit in which case interest on amount withdrawn will be payable @ 4% from the date of deposit to the date of withdrawal. Other considerations: Only 1 account can be opened in own name or jointly with spouse. Account is to be opened within 3 months of receiving retirement benefits. Scheme is operated through branches of SBI and its subsidiaries and selected branches of nationalised banks. [This scheme has been discontinued w.e.f. 10.07.2004 vide notification F. No.15-01/2004-NS-2, dated 09.07.2004.

PAN CARD OR PAN NUMBER

WHO SHALL APPLY FOR P.A.N. Section 139A of the Income Tax Act provides that every person whose total income exceeds the maximum amount not chargeable to tax or every person who carries on any business or profession whose total turnover or gross receipts exceed Rs.5 lakhs in any previous year or any person required to file a return of income u/s 139(4A) shall apply for PAN. Besides, any person not fulfilling the above conditions may also apply for allotment of PAN. With effect from 01.06.2000, the Central Government may by notification specify any class/classes of person including importers and exporters, whether or not any tax is payable by them, and such persons shall also then apply to the Assessing Officer for allotment of PAN. W.e.f. 01.04.2006 a person liable to furnish a return of fringe benefits under the newly introduced section 115WD of the I.T. Act is also required to apply for allotment of PAN. Of course, if such a person already has been allotted a PAN he shall not be required to obtain another PAN. The Finance Act, 2006 has provided that for the purpose of collecting any information, the Central Govt. may by way of notification specify any class or classes of persons for allotment of PAN and such persons shall apply to the Assessing Officer within the prescribed time. Provision for Suo moto allotment of 50 51 PAN has also been introduced w.e.f.1.6.2006 as per which the assessing officer may allot a Permanent Account No. to any person whether or not any tax is payable by him having regard to the nature of transactions. TRANSACTIONS IN WHICH QUOTING OF PAN IS MANDATORY 􀁹 Purchase and sale of immovable property. 􀁹 Purchase and sale of motor vehicles. 􀁹 Transaction in shares exceeding Rs.50,000. 􀁹 Opening of new bank accounts. 􀁹 Fixed deposits of more than Rs.50,000. 􀁹 Application for allotment of telephone connections. 􀁹 Payment to hotels exceeding Rs.25,000. 􀁹 Provided that till such time PAN is allotted to a person, he may quote his General Index register Number or GIR No.

TAX REBATE & RELIEF INTRODUCTION The total income of an assessee is determined after deductions from the gross total income are made as discussed in the previous chapter. It is on this total income that the tax payable is computed at the rates in force. The Income Tax Act further provides for rebate from the tax payable as computed above, if certain investments or payments are made. Rebate provided u/s 88 of the Act must be distinguished from deductions provided in Chapter VIA of the Act. While the latter reduces the gross total income, rebate is a reduction from the tax payable. The Finance Act 2002 introduced some changes in the above which came into effect from A.Y. 2003-2004. The rate of rebate has been kept at 20% in case the gross total income, before giving effect to the deductions under chapter VIA, is below Rs. 1.5 lacs while the rate would be 15% if gross total income is higher than Rs. 1.5 lacs but lower than Rs. 5 lacs. On the other hand, if the gross total income exceeds Rs. 5 lacs, no rebate under this chapter would be available. It has also been provided that an individual whose income under the head ‘Salaries’ is below Rs. 1 lakh during the previous year and constitutes at least 90% of his gross total income, shall be entitled to rebate @ 30% on the investments/ payments specified in Section 88. The maximum amount of investment qualifying for rebate u/s 88 has been enhanced to Rs.70,000, however, additional rebate on investment upto Rs. 30,000 is available in respect of subscription to specified infrastructure equity share/debentures. Investment qualifying for rebate u/s 88 must be out of income chargeable to tax in the relevant previous year. The above requirement has, however, been deleted by the Finance Act 2002 w.e.f. A.Y. 2003-2004. With effect from assessment year 2001-2002 onwards a new section 88C has been inserted. It provides that in case of assessee being a woman resident in India and below 65 years of age, tax rebate of an amount of Rs. 5,000 or 100% of tax, whichever is less, shall be available. The above rebate is to be allowed from the amount of Income Tax computed before allowing for tax rebate u/s 88 in respect of various investments expenditures, important among which are discussed below in paragraph 6.2. NATURE OF INVESTMENT Life Insurance Premium Sum paid under contract for deferred annuity Sum deducted from salary payable to Govt. Servant for securing deferred annuity for self, spouse or children Contribution made under Employee’s Provident Fund Scheme Contribution to PPF REMARKS For individual, policy must be in self or spouse’s or any child’s name. For HUF, it may be on life of any member of HUF. For individual, on life of self, spouse or any child Payment limited to 20% of salary. — For individual, can be in the name of self/spouse, any child & for HUF, it can be in the name of any member of the family. Contribution by employee to a Recognised Provident Fund. Sum deposited in 10 year/ 15year account of Post Office Savings Bank Subscription to any notified securities/notified deposits scheme. Subscription to any notified savings certificates Contribution to Unit Linked Insurance Plan of LIC Mutual Fund Contribution to notified deposit scheme/Pension fund set up by the National Housing Bank. Certain payment made by way of instalment or part payment of loan taken for purchase/ construction of residential house property. Contribution to notified annuity Plan of LIC(e.g. Jeevan Dhara) or Units of UTI/notified Mutual Fund. Subscription to units of a Mutual Fund notified u/s 10(23D) — — — e.g. NSC VIII issue. e.g. Dhanrakhsa 1989 — Qualifying amount limited to Rs.10,000. The limit has been raised to Rs.20,000 w.e.f. assessment year 2001-2002. If in respect of such contribution, deduction u/s 80CCC has been availed of, rebate u/s 88 would not be allowable. — Subscription to deposit scheme of a Public Sector Company/ Authorised Authority providing long term house financing. Subscription to equity shares/ debentures forming part of any approved eligible issue of capital made by a public company or public financial institutions. (w.e.f. 01.04.2004) Tuition fees paid at the time of admission or otherwise to any school, college, university or other educational institution situated within India for the purpose of full time education of any two children. — In respect of it, a higher limit of qualifying investment of Rs.70,000 (Rs.80,000 w.e.f. A.Y. 2001-2002) is available as against Rs.60,000 in case of other investments. The qualifying amount limited to Rs.12,000/- in respect of each child. It is important to note that no tax rebate u/s 88 shall be available from A.Y.2006-07 onwards. Similarly, sections 88B and 88C providing special rebates to senior citizens and ladies, stand omitted w.e.f. 01.04.2006. 48 49 6.3 RELIEF UNDER SECTION 89 (1):- It is available to an employee when he receives salary in advance or in arrear or when in one financial year, he receives salary of more than 12 months or receives ‘profits in lieu of salary’. W.e.f. 1.6.89, relief u/s 89(1) can be granted at the time of TDS from employees of all companies, co-operative societies, universities or institutions as well as govt./public sector undertakings, the relief should be claimed by the employee in Form No. 10E and should be worked out as explained in Rule 21A of the Income Tax Rules.

INCOME FROM CAPITAL GAIN

CAPITAL GAINS Profits or gains arising from the transfer of a capital asset during the previous year are taxable as “Capital Gains” under section 45(1) of the Income Tax Act. The taxability of capital gains is in the year of transfer of the capital asset. 4.2 CAPITAL ASSET As defined in section 2(14) of the Income Tax Act, it means property of any kind held by the assessee except: (a) Stock in trade, consumable stores or raw materials held for the purpose of business or profession. (b) Personal effects, being moveable property (excluding Jewellery, archaeological collections, drawings, paintings, sculptures or any other work of art) held for personal use. (c) Agricultural land, except land situated within or in area upto 8 kms, from a municipality, municipal corporation, notified area committee, town committee or a cantonment board with population of at least 10,000. (d) Six and half percent Gold Bonds, National Defence Gold Bonds and Special Bearer Bonds. 4.3 TYPES OF CAPITAL GAINS When a capital asset is transferred by an assessee after having held it for at least 36 months, the Capital Gains arising from this transfer are known as Long Term Capital Gains. In case of shares of a company or units of UTI or units of a Mutual Fund, the minimum period of holding for long term capital gains to arise is 12 months. If the period of holding is less than above, the capital gains arising therefrom are known as Short Term Capital Gains. 30 31 4.4 COMPUTATION OF CAPITAL GAINS (Sec.48) Capital gain is computed by deducting from the full value of consideration, for the transfer of a capital asset, the following:- (a) Cost of acquisition of the asset(COA):- In case of Long Term Capital Gains, the cost of acquisition is indexed by a factor which is equal to the ratio of the cost inflation index of the year of transfer to the cost inflation index of the year of acquisition of the asset. Normally, the cost of acquisition is the cost that a person has incurred to acquire the capital asset. However, in certain cases, it is taken as following: (i) When the capital asset becomes a property of an assessee under a gift or will or by succession or inheritance or on partition of Hindu Undivided Family or on distribution of assets, or dissolution of a firm, or liquidation of a company, the COA shall be the cost for which the previous owner acquired it, as increased by the cost of improvement till the date of acquisition of the asset by the assessee? (ii) When shares in an amalgamated Indian company had become the property of the assessee in a scheme of amalgamation, the COA shall be the cost of acquisition of shares in the amalgamating company. (iii) Where the capital asset is goodwill of a business, tenancy right, stage carriage permits or loom hours the COA is the purchase price paid, if any or else nil. (iv) The COA of rights shares is the amount which is paid by the subscriber to get them. In case of bonus shares, the COA is nil. (v) If a capital asset has become the property of the assessee before 1.4.81, the assessee may choose either the fair market value as on 1.4.81 or the actual cost of acquisition of the asset as the COA. (b) Cost of improvement, if any such cost was incurred. In case of long term capital assets, the indexed cost of improvement will be taken. (c) Expenses connected exclusively with the transfer such as brokerage etc. 4.5 SOME IMPORTANT EXEMPTIONS FROM LONG TERM CAPITAL GAINS (a) Section 54: In case the asset transferred is a long term capital asset being a residential house, and if out of the capital gains, a new residential house is constructed within 3 years, or purchased 1 year before or 2 years after the date of transfer, then exemption on the LTCG is available on the amount of investment in the new asset to the extent of the capital gains. It may be noted that the amount of capital gains not appropriated towards purchase or construction may be deposited in the Capital Gains Account Scheme of a public sector bank before the due date of filing of Income Tax Return. This amount should subsequently be used for purchase or construction of a new house within 3 years. (b) Section 54F: When the asset transferred is a long term capital asset other than a residential house, and if out of the consideration, investment in purchase or construction of a residential house is made within the specified time as in sec. 54, then exemption from the capital gains will be available as: (i) If cost of new asset is greater than the net consideration received, the entire capital gain is exempt. (ii) Otherwise, exemption = Capital Gains x Cost of new asset/Net consideration. It may be noted that this exemption is not available, if on the date of transfer, the assessee owns any house other than the new asset. It may be noted that the Finance Act 2000 has provided that with effect from assessment year 2001-2002, the above exemption shall not be available if assessee owns more than one residential house, other than new asset, on the date of transfer. Investment in the Capital Gains Account Scheme may be made as in Sec.54. (c) Section 54EA: If any long term capital asset is transferred before 1.4.2000 and out of the consideration, investment in specified bonds/debentures/shares is made within 6 months of the date of transfer, then exemption from capital gains is available as computed in Section 54F. (d) Section 54EB: If any long term capital asset is transferred before 1.4.2000 and investment in specified assets is made within a period of 6 months from the date of transfer, then exemption from capital gains will be available as :- (i) If cost of new assets is not less than the Capital Gain, the entire Capital Gain is exempt. (ii) Otherwise exemption = Capital Gains x Cost of New asset Capital Gains (e) Section 54EC: This section has been introduced from assessment year 2001-2002 onwards. It provides that if any long term capital asset is transferred and out of the consideration, investment in specified assets (any bond issued by National Highway Authority of India or by Rural Electrification Corporation redeemable after 3 years), is made within 6 months from the date of transfer, then exemption would be available as computed in Sec. 54EB. The Finance Act, 2007 has laid an annual ceiling of Rs. 50 lakh on the investment made under this section w.e.f. 1.4.2007. (f) Section 54ED: This section has been introduced from assessment year 2002-03 onwards. It provides that if a long term capital asset, being listed securities or units, is transferred and out of the consideration, investment in acquiring equity 32 33 shares forming part of an eligible issue of capital is made within six months from the date of transfer, then exemption would be available as computed in Sec. 54EB. As per the Finance Act 2006 it has been provided that with effect from assessment year 2007-08, no exemption under this Section shall be available. 4.6 LOSS UNDER CAPITAL GAINS Can not be set off against any income under any other head but can be carried forward for 8 assessment years and be set off against capital gains in those assessment years. 4.7 EXEMPT INCOME The Finance Act 2003 has introduced S.10(33) w.e.f. 01.04.2003 which provides that income arising from certain types of transfer of capital assets shall be treated as exempt income. S.10(33) provides for exemption of income arising from transfer of units of the US 64 (Unit Scheme 1964). S.10(36) inserted by the Finance Act, 2003 w.e.f. 1.4.2004 provides that income arising from transfer of eligible equity shares held for a period of 12 months or more shall be exempt. The Finance Act, 2004 has introduced section 10(38) of the I.T. Act which provides that no capital gains shall arise in case of transfer of equity shares held as a long term capital asset by an individual or HUF w.e.f. 01.04.2005 provided such transaction is chargeable to ‘securities transaction tax’. COST INFLATION INDEX: The Central Government has notified the Cost Inflation Index for the purpose of long term Capital Gain as follows: Financial Year Cost Inflation Index 1981-82 100 1982-83 109 1983-84 116 1984-85 125 1985-86 133 1986-87 140 1987-88 150 1988-89 161 1989-90 172 1990-91 182 1991-92 199 1992-93 223 1993-94 244 1994-95 259 1995-96 281 1996-97 305 1997-98 331 1998-99 351 1999-2000 389 2000-2001 406 2001-2002 426 2002-2003 447 2003-2004 463 2004-2005 480 2005-2006 497 2006-2007 519 2007-2008 551 2008-2009 582 2009-2010 632 34 35

INCOME FROM HOUSE PROPERTY

Under the Income Tax Act what is taxed under the head ‘Income from House Property’ is the inherent capacity of the property to earn income called the Annual Value of the property. The above is taxed in the hands of the owner of the property. 3.2 COMPUTATION OF ANNUAL VALUE (i) GROSS ANNUAL VALUE(G.A.V.) is the highest of (a) Rent received or receivable (b) Fair Market Value. (c) Municipal valuation. (If however, the Rent Control Act is applicable, the G.A.V. is the standard rent or rent received, whichever is higher). It may be noted that if the let out property was vacant for whole or any part of the previous year and owing to such vacancy the actual rent received or receivable is less than the sum referred to in clause(a) above, then the amount actually received/receivable shall be taken into account while computing the G.A.V. If any portion of the rent is unrealisable, (condition of unrealisability of rent are laid down in Rule 4 of I.T. Rules) then the same shall not be included in the actual rent received/receivable while computing the G.A.V. (ii) NET VALUE (N.A.V.) is the GAV less the municipal taxes paid by the owner. Provided that the taxes were paid during the year. (iii) ANNUAL VALUE is the N.A.V. less the deductions available u/s 24. 3.3 DEDUCTIONS U/S 24:- Are exhaustive and no other deductions are available:- (i) A sum equal to 30% of the annual value as computed above. (ii) Interest on money borrowed for acquisition/construction/ repair/renovation of property is deductible on accrual basis. Interest paid during the pre construction/acquisition period will be allowed in five successive financial years starting with the financial year in which construction/acquisition is completed. This deduction is also available in respect of a self occupied property and can be claimed up to maximum of Rs.30,000/-. The Finance Act, 2001 had provided that w.e.f. A.Y. 2002-03 the amount of deduction available under this clause would be available up to Rs.1,50,000/- in case the property is acquired or constructed with capital borrowed on or after 1.4.99 and such acquisition or construction is completed before 1.4.2003. The Finance Act 2002 has further removed the requirement of acquisition/ construction being completed before 1.4.2003 and has simply provided that the acquisition/construction of the property must be completed within three years from the end of the financial year in which the capital was borrowed. 3.4 SOME NOTABLE POINTS In case of one self occupied property, the annual value is taken as nil. Deduction u/s 24 for interest paid may still be claimed therefrom. The resulting loss may be set off against income under other heads but can not be carried forward. If more than one property is owned and all are used for self occupation purposes only, then any one can be opted as self occupied, the others are deemed to be let out. 28 29 Annual value of one house away from workplace which is not let out can be taken as NIL provided that it is the only house owned and it is not let out. If a let out property is partly self occupied or is self occupied for a part of the year, then the value in proportion to the portion of self occupied property or period of self occupation, as the case may be is to be excluded from the annual value. From assessment year 1999-2000 onwards, an assessee who apart from his salary income has loss under the head “Income from house property”, may furnish the particulars of the same in the prescribed form to his Drawing and Disbursing Officer who shall then take the above loss also into account for the purpose of TDS from salary. A new section 25B has been inserted with effect from assessment year 2001-2002 which provides that where the assessee, being the owner of any property consisting of any buildings or lands appurtenant thereto which may have been let to a tenant, receives any arrears of rent not charged to income tax for any previous year, then such arrears shall be taxed as the income of the previous year in which the same is received after deducting therefrom a sum equal to 30% of the amount of arrears in respect of repairs/collection charges. It may be noted that the above provision shall apply whether or not the assessee remains the owner of the property in the year of receipt of such arrears. 3.5 PROPERTY INCOME EXEMPT FROM TAX Income from farm house (Sec.2(1A)(c) read with sec. 10(1)). Annual value of any one palace of an ex-ruler (Sec.10(19A)). Property income of a local authority (Sec.10(20)), university/ educational institution (Sec.10(23C)), approved scientific research association (Sec.10(21)), political party (sec.13A). Property used for own business or profession (Sec.22). One self occupied property (sec.23(2)). House property held for charitable purposes (sec.11).

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.

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