A PROJECT ON

INCOME from SALARY

IN THE SUBJECT DIRECT
AND INDIRECT TAX
SUBMITTED BY
SOUMEET SARKAR
A030
M.Com Part-II in Advance Accountancy
UNDER THE GUIDANCE OF
PROF. BHARAT PATEL
TO

UNIVERSITY OF MUMBAI
FOR

MASTER OF COMMERCE PROGRAMME

(SEMESTER - III)
In
ADVANCE ACCOUNTANCY

YEAR: 2014-15
SVKMS
NARSEE MONJEE COLLEGE OF COMMERCE &ECONOMICS
VILE PARLE (W), MUMBAI 400056.

EVALUATION CERTIFICATE
This is to certify that the undersigned have assessed and evaluated the project on
INCOME from

SALARY submitted by SOUMEET SARKAR student

of M.Com. Part - II (Semester III) In ADVANCE ACCOUNTANCY for

the academic year 2014-15. This project is original to the best of our knowledge
and has been accepted for Internal Assessment.
Name & Signature of Internal Examiner
Name & Signature of External Examiner

PRINCIPAL
Shri Sunil B. Mantri

DECLARATION BY THE STUDENT

I, SOUMEET

SARKAR student of M.Com (Part II) In ADVANCE

ACCOUNTANCY Roll No.: A030 hereby declare that the project titled
INCOME from SALARY for the subject DIRECT & INDIRECT TAX
submitted by me for Semester III of the academic year 2014-15, is based
on actual work carried out by me under the guidance and supervision of
PROF. BHARAT PATEL. I further state that this work is original and not

submitted anywhere else for any examination.

Place: MUMBAI
Date:

,SEPTEMBER 2014

Name & Signature of Student:

Name: SOUMEET SARKAR

Signature:

ACKNOWLEDGEMENT
It is indeed a great pleasure and proud privilege to present this project work.
I thank my project guide Prof. BHARAT PATEL of SVKMs Narsee Monjee
College of Commerce and Economics. Their co-operation and guidance have
helped me to complete this project.
I would sincerely like to thank the principal of our college Shri Sunil B.
Mantri for his support and guidance.
I would also like to thank the college library and staff for helping and guiding
me, the class representatives and my family and friends who supported me in
this project.

THANK YOU

INDEX
Sr. No.

PARTICULARS

Page No.

INTRODUCTION

CONTENT

CASE STUDY

27

COMPUTATION of INCOME

29

SUGGESTIONS, FINDINGS & CONCLUSION

32

BIBLOGRAPHY

35

ANNEXURES

INTRODUCTION
Income tax is an annual tax on income. The Indian Income Tax Act (Section 4)
provides that in respect of the total income of the previous year of every person, income
tax shall be charged for the corresponding assessment year at the rates laid down by the
Finance Act for that assessment year. Section 14 of the Income tax Act further provides
that for the purpose of charge of income tax and computation of total income all income
shall be classified under the following heads of income:I.
II.

Income from Salaries

Income from House Property

III.

Income from Business or Profession

IV.

Income from Capital Gains

V.

Income from Other Sources.

The total income from all the above heads of income is calculated in accordance with
the provisions of the Act as they stand on the first day of April of any assessment year.

INCOME from SALARY

Salary is the remuneration received by or accruing to an individual, periodically, for
service rendered as a result of an express or implied contract. The actual receipt of
salary in the previous year is not material as far as its taxability is concerned. There
must exist the relationship of an employer and employee between the payer and the
payee and it must not be the relationship between a principal and agent. Conceptually,
there is no difference between salary and wages except that generally, the term salary is
used for the services rendered for non-manual type of work while wages are paid in
connection with manual services. If an individual receives salary from more than one
employer during the same previous year either due to change in employment or due to
employment with more than one employer simultaneously, salary from each source is
taxable under the head salaries. Remuneration received or due from former, present or
prospective employer is chargeable to tax under the head salaries. Salary income must
be real and not fictitious. Tax is not payable in respect of salary surrendered, in other
words, benefit of tax exemption in respect of salary surrendered is available to all
employees whether they are employed in private sector or public sector.
If the employer pays salary tax-free, the employee has to include in his taxable income
not only the salary received but also the amount of tax paid by the employer. The act
does not make distinction between gratuity payments and contractual payments i.e. salary,
perquisite or allowance may come as a gift to an employee and yet it would be taxable.
Under section 17(1), salary includes:1) Wages:- Conceptually there is not much difference between salary and wages as
far as taxability is concerned. They are treated same as any income under the
head salary only.
2) Any Annuity or Pension:- Annuity is an annual grant made by the employer. It
may be paid voluntarily or on account of an contractual agreement by the
employer. Annuity if payable by the current employer is taxable as salary but if
is paid by the previous employer; it is taxed as profits in the lieu of salary.
3) Any Fees, Commission, Perquisite or Profits in Lieu of or in addition to any
Salary or Wages:- Any fees, commission, perquisite or profits in lieu of or in

addition to any salary or wages would be included in gross salary for the purpose
of tax. These may be a fixed amount or may be a percentage of their
performance in terms of net profit, turnover or revenue to the employer.
4) Any Gratuity:- Gratuity received by an employer on his retirement is taxable
under the head salary whereas gratuity received by the legal heir of the deceased
employee shall be taxed under the head Income from Other Sources. However
in both the above cases, gratuity is exempt up to a certain limit under section
10(10). In case gratuity is received by the employee, salary would include only
that part of the gratuity which is not exempt under section 10(10).
5) Any Payment Received in respect of any period of Leave not availed by
him:- Leave salary, after a minimum of specified criterion will be taxable under
the head salary of the employee.
6) The Portion of the Annual Accretion in any previous year to the balance at
the credit of an employee participating in Recognized Provident Fund to the
extent it is Taxable:- Any contribution made by the employer towards the
recognized provident fund in excess of the specified limit of 12% of the salary is
taxable in the hands of the employee and hence included under the head gross
salary.
7) The contribution made by the central government in the previous year to the
account of an employee under a pension scheme referred to in section 80CCD
(applicable from assessment year 2004-05).

BASIS of CHARGE
Any salary due from employer to an assessee in the previous year whether actually paid
or not. Any salary paid or allowed to him in the previous year by or on behalf of the
employer though not due or before it became due. Any arrears of salary paid or allowed
to him in the previous year by or on behalf of employer if not charged to income tax
for any earlier previous year. Salary is taxable on due or receipt basis whichever is
earlier. Method of accounting adopted by the employee is not relevant.
Income, under the head salaries, is deemed to accrue or arise at the place where the
services are rendered. Salaries, in respect of services rendered in India, are deemed to
accrue or arise in India even if it is paid outside India or it is paid or payable after the
contract of employment in India comes to an end.

TAX TREATMENT of DIFFERENT forms of SALARY INCOME

Advance Salary is taxable on receipt basis, irrespective of the tax incidence in
the hands of the employee.
Arrear Salary is taxable on receipt basis if the same is not subjected to tax
earlier on due basis.
Leave Salary:

leave encashment during continuity of employment (in case of government/

non- government employee is chargeable to tax however, relief can be
taken under section 89.

eave encashment at the time of retirement/leaving job (in case of

government employee) is fully exempt from tax u/s 10(10AA).

leave encashment at the time of retirement/leaving job (in case of nongovernment employee) is fully or partly exempt from tax in some cases u/s
10(10AA)(ii)

Salary to Partner, paid by a firm, is an appropriation of profits and is not

charged under the head salaries but is taxable under the head of profits and

gains of business and profession. Similar treatment is given to interest, bonus,

commission or remuneration, received by a partner of a firm from such firm.
Fees and Commission are taxable as salary, irrespective of the fact that they are
paid in addition to or in lieu of salary.
Bonus is taxable in the year of receipt if it has not been taxed earlier on due
basis.
Gratuity [Sec. 10(10)]
Annuity [Sec. 17(1)(ii)]
Annual Accretion to the Credit Balance in Provident Fund
Amount Transferred from Un-Recognized Provident Fund to Recognized
Provident Fund
Retrenchment Compensation [Sec. 10(10B)]
Profits in Lieu of Salary [Sec. 17(3)]
Remuneration for Extra Duties
Voluntary Payment to his Employees
Salary received from United Nations Organization (exemption granted)
Salary to Foreign Technicians, Salary to other Foreign Citizens
Compensations received at the time of Voluntary Retirement OR Separation
[SEC 10(10C)]

Leave Salary:- An employee is entitled to different kinds of leave. Encashment of

leave by surrendering leave standing to ones credit is known as leave salary. If leave,
standing to his credit, is not taken within a year as per the service rules, it may lapse
or it may be en-cashed or it may be accumulated. This accumulated leave may be
availed by the employee during his service time or can be en-cashed at the time of
retirement or leaving the job. In case of such employee (including an employee of a
local authority or a public sector undertaking), leave salary is exempt on the basis of the
least of the following:

Period of earned leave (in number of months) to the credit of the

employee at the time of his retirement or leaving the job average
monthly salary

10 average monthly salary

The amount specified by the government (i.e. Rs. 3,00,000 applicable from
st

1 April, 1998)

Leave encashment actually received at the time of retirement.

Gratuity:- According to the Oxford English Dictionary, gratuity means a gift or a

present or a gratuitous payment, made by an employer to his employee, often in return
for favors and services rendered. It is paid for meritorious services rendered by an
employee. Tax treatment is as follows:

in case of a government employee, it is fully exempt from tax u/s

10(10)(i)

in case of non-government employee, covered by the Payment of Gratuity

Act(POGA), 1970, it is fully or partly exempt from tax u/s 10(10)(ii)

in case of non-government employee, not covered by the Payment of

Gratuity Act,1970, it is fully or partly exempt from tax u/s 10(10)(iii)

in case of government employees - a death-cum retirement gratuity

received under any of the following categories is exempt from tax:a) the Revised Pension Rules of the Central Government, or

b) the Central Civil Services(Pension) Rules, 1972, or

c) any similar scheme applicable to members of the civil service of
the union, holders of any post connected with defense or of civil
post under the union, the members of all India services, members
of civil services of the state, holders of civil post under the state,
employees of local authority.

in case of employees covered by Payment of Gratuity Act, 1972, the least

of the following is exempt from tax:a) 15 days salary (7 days salary in case of seasonal employment)based
on salary last drawn for each year of service (i.e. 15 days salary
length of service).
b) Rs. 3,50,000.
c) Gratuity actually received.

in case of any other employee, the least of the following is exempt from
tax:a) Rs.3,50,000.
b) Half months average salary for every completed year of service.
c) Gratuity actually received.

GRATUITY u/s
10(10)

GOVERNMENT

FULLY EXEMPT

POGA

OTHERS

15/26* SERVICE
P.M.* NO. OF
YEARS OF
SERVICE

15/30* SERVICE
P.M.* NO. OF
YEARS OF
SERVICE

ACTUAL AMOUNT
RECEIVED

ACTUAL AMOUNT
RECEIVED

MAX. 10 LACS

NOTE
For POGA:1. Salary means = Basic + D.A. in term + D.A. not in term.
2. Number of years of service = round off only when more than 6 months.
For Others:1. Salary means = Basic + D.A. in term + commission on turnover.
2. Average salary for last 10 month number.
3. Number of years of service = Ignore the number of months.

Retrenchment Compensation u/s 10(10B):- The lowest of the following is

exempt:a) an amount calculated in accordance with the provisions of Sec. 25(b) of the
Industrial Disputes Act, 1947, or
b) the amount specified by the government, i.e., Rs.5 lacs, or
c) the amount received.

Various Allowances:1. City Compensatory Allowance is taxable.

2. House Rent Allowance [Sec. 10(13A) & Rule 2]
The least of them is taxable:

An amount equal to 50% of the salary where residential house is situated

at Bombay, Calcutta, Delhi or Madras and an amount equal to 40% of the
salary where the residential house is situated at any other place.

House rent allowance, received by the employee in respect of the period

during which rental accommodation is occupied by the employee during the
previous year.

The excess of rent paid over 10 per cent of salary.

3. Entertainment Allowance [Sec. 16(ii)]:- Entertainment allowance is first included in

the income from salaries and thereafter a deduction is given on the least of the
following in case of a government employee:

Rs.5000, or,

20% of salary, or,

Amount of entertainment allowance granted during the previous year in

case of non-government employees, deduction will not be available.

4. Special Allowance [Sec. 10(14)]:- Given in Rule 2BB, allowance or benefit, which
is not in the nature of perquisite within the meaning of sec 17(2)and which is
granted to meet expenses in performance of duties of an office or employment of
profit.

5. Servant Allowance is taxable.

6. Allowance to High Court Judges is not taxable.
7. Allowance received from United Nations Organization is not taxable.
8. Allowance to Foreign Technician is not taxable.
9. Allowance to Foreign Citizen is not taxable.
10. Compensatory Allowance, received by a judge under article 222(2) of the
constitution, is not taxable.
11. Sumptuary Allowance is not chargeable to tax.

Perquisites:- Perquisite denotes some benefit in addition to the amount that may be
legally due by way of contract for services rendered. The following points must be
borne in mind while deciding whether the expenses can be called perquisites:

personal benefit does not cover a mere reimbursement of necessary expenses

incurred by an employee, it may be provided in cash or in kind.

they are included in salary income only if they are received by an employee from
his employer.

a benefit or advantage would be taxable as perquisite only if it has a legal origin

and is an enforceable right.

premium, paid by an employer towards personal accident policy of employee, is

not taxable as perquisite.

payments made by an employer to provide pensions / deferred annuity benefits to

his employees are taxable as perquisites only when a vested interest accrues to
the employee.

perquisites are taxable only if they are allowed by an employer to his employee,
allowed during the continuance of the employment, directly dependent upon
service, resulting in the nature of personal advantage to the employee and derived
by the virtue of employers authority.

Inclusions in Perquisites:

The value of rent free accommodation.

The value of any concession in matter of rent in respect of any accommodation.

The value of any benefit or amenity granted or provided at free of cost or at a

concessional rate.

By a company to an employee who is a director thereof,

By a company to an employee who has a substantial interest in the company

By an employer (including a company) to an employee to whom provisions of

the above do not apply.

Any sum paid by the employer in respect of any obligation, which but for such
payment would have been payable by the assessee.

Any sum, payable by the employer, whether directly or through a fund other than
the recognized provident fund or approved superannuation fund or a deposit linked
insurance fund, to effect an assurance on the life of the assessee or to effect a
contract for an annuity.

The value of any other fringe benefit or amenity as may be prescribed.

Perquisites which are taxable: rent free accommodation,

accommodation at concessional rate,
employees obligation met by employer,
amount payable by employer to effect an assurance on the life of employer,
notified fringe benefits.
Perquisites which are not taxable: Rent Free House:

rent free accommodation, provided to a judge of a high court or of a

supreme court or to an official of parliament or a union minister or to a
leader of an opposition party in parliament.

accommodation, provided in a remote area to an employee working at a

mining site or on on-shore oil exploration site, or a project execution site
or dam site or power generation site or an accommodation, provided in an
offshore site.

accommodation, provided on transfer of an employee in a hotel not

exceeding 15 days in aggregate.

Car facility up to Rs.1,200 per month and conveyance facility, provided to high
court as well as Supreme Court judges and conveyance expenses, provided to an
employee to cover journey between office and residence.
Education Facility in an institution, run by the employer, where the value of
education per child does not exceed Rs.1,000 per month with no limits on the
number of children.
Amount, spent on training of employees or fees, paid for refresher management
courses.
Transport Facility, given to railway employees or airline employees.
Free Meals (subject to certain conditions)
Clubs:- Initial fees, paid by employer for acquiring corporate membership of a
club, use of health club, sports or similar facility, provided uniformly to all
employees by the employer.
Use of Moveable Assets, such as computer/laptop etc.
Medical Facilities.
Others:- Gift-in-kind up to Rs.5,000 in a year, goods manufactured and sold by
the employer to his employees at concessional rates, perquisites allowed outside
India by government to its citizen for services, rendered outside India, leave travel
concession, employers contribution to staff group insurance scheme, free telephone
including mobile phone, periodicals and journals required for discharge of work
etc.

Perquisites Taxable only in the hands of Specified Person: Specified persons for the above purpose are a director employee, an employee,
who has substantial interest in the employer company or an employee, drawing in
excess of Rs.50,000.

Perquisites

Taxable for all

Taxable for Specified

Employee

Fully Exempt

Telephone/Mobile

LIC premium paid by

Employer

Computer/Laptop
Rent Free
Accomodation
Gas/Water/Electricity
Employee Liability paid
by Employer

Free Car Facility(Personal &

Office)

Medi-claim
Insurance
Premium paid by
Employer
Tea/Snacks/Refres
hment/Training
Free
Lunch,Dinner

Free Gardener/Servant

Interest Free Loan

less than
Rs.20000

Perquistes Fully Exempt

Reimbursement of Medical
Expenses

Treatment taken at
Government/Recognised/Empl
oyer Hospital

Fully Exempt

Other Hospital

Exempt upto Rs.15000

Employees Provident Fund:- The Provident fund scheme is a retirement benefit

scheme, where a stipulated sum is deducted from the salary of the employee as his
contribution towards the fund. The employer also generally contributes simultaneously an
equal amount out of his pocket to the fund. The contributions are then invested in giltedged securities. Interest thereon is also credited to the provident fund account of
employees. Thus, the credit balance in the provident fund account of an employee
consists of employees contribution, interest on employees contribution, employers
contribution and interest on employers contribution. The accumulated sum is paid to the
employee at the time of his retirement or resignation. In case of death of an employee,
the accumulated balance is paid to his legal heirs.

Pension:- Pension is a retirement benefit. Pension received from a former employer is

taxable as Salary. Hence, the various deductions available on salary income, including
relief u/s 89(1) for the arrears of pension received would be granted to pensioners who
received their pension from, a nationalized bank and in other cases their present Drawing
& Disbursing Officers. Similarly, deductions from the amount of pension of standard
deduction and adjustment of tax rebate u/s 88 and 88B shall be done by the concerned
bank, at the time of deduction of tax at source from the pension, on furnishing of
relevant details by the pensioner. Instructions in above regard were issued by R.B.I.s
Pension Circular. Family pension is defined in Section 57 as a regular monthly amount
payable by the employer to a person belonging to the family of an employee in the
event of death. Pension and family pension are qualitatively different. The former is paid
during the lifetime of the employee while the latter is paid on his death to surviving
family members. TDS is not deductible on family pension as it is not covered u/s 192
of the Income Tax Act.
PARTICULARS

TAX TREATMENT

Pension is received from UNO by the It is not chargeable to tax

employee or his family members

Family pension received by the family It is exempt u/s 10(19)

members of armed forces (after death of
the employee)
Family pension received by the family It is taxable in the hands of recipients under
members of other cases (after death of the section 56 under the head income from other
employee)

sources. Standard deduction is available under

section 57 which is 1/3 of such pension or
Rs.15000, whichever is lower.

Pension received by an employee (during his Tax treatment depends on whether Pension is
lifetime) in any other cases.

Commuted or Un-commuted.
1. Un-commuted

pension

whether

received by a Govt. or a Non

Govt. employee

is

chargeable to

tax in both cases.

2. Commuted pension is a lump-sum
periodical

payment.

For

Govt.

Employees it is fully exempt and

for Non-Govt. Employees
a) If Gratuity received - Onethird of the pension, which he
is normally entitled to receive,
is exempt
b) If Gratuity is not received One-half of the pension which
he is normally entitled to
receive is exempt

21

TAX REBATE u/s 88

Tax rebate u/s 88 is available @ 30% of the net qualifying amount.

If gross total income does not exceed Rs 1,50,000, rebate is available @ 20% of
the net qualifying amount.

If gross total income exceeds Rs.1,50,000 but does not exceed Rs.5,00,000,tax
rebate is available @15% of the net qualifying amount.

TAX REBATE u/s 89

If an individual receives any portion of his salary in arrears or in advance or receives
profit in lieu of salary, he can claim relief u/s 89 read with rule 21A:

Computation of relief when salary has been received in arrears or in advancerule21A(2).

Computation of relief in respect of gratuity-rule21A(3).

Computation of relief in respect of compensation on termination of employmentrule 21A(4).

Computation of relief in respect of payment in commutation of pension-rule

21A(5).

Computation of relief in respect of other payments-rule 21A(6).

GUIDELINES for TAX EXEMPTION for COMPENSATION received

under VOLUNTARY RETIREMENT SCHEME
The guidelines for bestowing the exemption from tax on the voluntary retirement scheme
are to be strictly followed:1. VRS applies to an employee of the company who has completed 10 years of
service or 40 years.
2. It applies to all employees and executives (excluding directors).
22

3. It has been drawn to result in overall reduction in the existing strength of the
employees of the company.
4. Vacancy caused by the VRS is not to be filled up.
5. The retiring employee is not to be employed in any other business, belonging to
the same management.
6. The amount should not exceed Rs.5 lacs.
7. The employee has not availed in the past the benefit of any other voluntary
scheme.

GENERAL QUERIES RELATED to SALARIES:1. What are the various deduction from salary income?

Entertainment Allowance - Exemption on receipt of this allowance is

allowable only to Central/ State Govt. Employees and not to Private Sector
employees. Exemption being calculated as least of the following:

Rs.5,000/-

Entertainment allowance actually received.

20% of Salary (Salary= Basic+ DA+ Commission based on fixed % of

turnover)
The Actual allowance is first added back in the salary & then exemption
is deducted for calculation of Taxable value of Entertainment Allowance.

Professional Tax - deduction is available on PAID basis up to a

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

2. Categories of foreign citizen employees who are paid salary:

Salary of diplomatic personnel

Salary of foreign employees

Salary received by a ships crew

Remuneration of a foreign trainee

Remuneration out of funds of an international organization

3. Is salary, payable for the leave period to non-residents, taxable even if the
leave is spent outside India?
Yes, 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 preceded 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 it will be taxed.

4. Who is a Specified employee?

Specified employees include the following:

director employee, whether full time or part time,

employee, who is the beneficial owner of equity in the employers

company, carrying 20% or more voting power.

The employees, other than those mentioned above, drawing salary in

excess of Rs 24,000(w.e.f.13

th

april,2002,his limit is 50,000) in monetary

terms.
5. Is ESOP a taxable perquisite?
Prior to 01.04.2001, stock options were taxed at 2 stages i.e., as
perquisite (on the amount representing the difference between the exercise
price and the fair market value, less the date of exercise),and as capital
gains.
With effect from 01.04.2001 (relevant to assessment year 2001-2002)
onward,

stock

options,

issued

as

per

guidelines

of

the

Central

Government, are to be taxed only once, at the time of sale, as capital

gains. In cases where the perquisite has been assessed with reference to
exercise of the option by the employee, under Section 17(2), the fair
market value at the time of exercise of the option shall be the cost of
acquisition of share for working out the capital gains. The relevant

guidelines of the Central Government have been issued vide Notification

No.l021 (E) dt. 1.10.2001. Stock options, not in conformity with the
above guidelines-(non-qualified stock options), shall continue to be taxed
at both the stages.
6. What is the perquisite with regard to the use of an asset, owned by the
employer, by an employee?
This perquisite is to be charged at the rate of 10% of the original cost of
the asset as reduced by any charges paid for such use. However,
computers and laptops are exempt. Further, the value of perquisite for an
asset, used for income for more than ten years would be taken as Nil.
7. To qualify for exemption of Leave Travel Allowance (LTA), is it necessary
to perform the actual journey?
Yes. In case the LTA is en-cashed, without actually performing the
journey, the entire amount received by the employee would be taxed in
his hands.
8. Can Central & State Government employees avail tax exemption for amount
received under Voluntary Retirement Scheme (VRS)?
Yes. The exemption of any amount, received under V.R.S., is extended to
employees of the Central Government w.e.f. Assessment Year 2002-2003
and State Government Employees w.e.f. Assessment Year 2001-2002.
9. Is there any relief against higher tax rates when salary is paid in arrears or
in advance?
Yes. If because of payment of salary in arrears or in advance, or
payment of compensation or provident Fund or gratuity etc., an assessee's
income becomes assessable at a higher rate in a particular year than at
which it would otherwise have been assessed, the Assessing Officer is

bound by Section 89(1) to grant relief as prescribed. This enables the

assessee to pay the tax at lower rates.
10. Is it necessary that deductions and rebates claimed should be made out of
income, chargeable to tax?
Yes, most definitely. It is to be strictly noted that deductions rebates,
under Chapter VI-A of the IT Act, 1961, are allowed only if the
investments/payments are made out of the income, chargeable to tax of
the financial year relevant to the assessment year under consideration.
11. If the salary is being paid in foreign currency, what would be its taxable
value for the purpose of TDS?
For the purpose of TDS on salary, payable in foreign currency, the value
in rupees shall be calculated at the prescribed rate of exchange, for each
of such payments.
12. Remedy for non-issue of TDS certificate.
As per Section 203, every person, responsible for TDS, must furnish a
certificate to the payee that tax has been deducted and to specify the
amount so deducted. This TDS certificate must be furnished within one
month from the end of the relevant financial year. Even the banks,
deducting tax at the time of payment of pension or bank-interest, are
required to issue such certificates. This certificate is to be issued on the
tax deductors own stationery.
If he fails to issue the TDS certificate to the taxpayer concerned, he will
be liable to pay, by way of penalty under section 272A, a sum @ Rs.100
for every day during which the failure continues. However, the penalty
shall not exceed the amount of tax deductible.

13. Is it the liability of the employer to deduct and pay tax, u/s 192(1), absolute
and what if he fails to do so?
Yes. Such liability is absolute and any failure would attract interest
liability as well as other penal provisions.

CASE STUDY
Below are the details of Salary earned by Mr. Rohan Naik (Date of Birth 22/03/1975)
working in the capacity of Regional Business Development Head with SINEWAVE
COMPUTER SERVICES PRIVATE LIMITED at MUMBAI. Computation of Taxable
Income of Mr. Rohan Naik for A.Y. 2014-15 under the Head Income from Salaries.

Particulars

Amount (Rs.)

Basic Salary

6,00,000.00

Dearness Allowance

3,00,000.00

Conveyance Allowance

60,000.00

House Rent Allowance

1,80,000.00

Uniform Allowance

30,000.00

Research Allowance

85,000.00

Children Education Allowance

25,000.00

Advance Salary taken

1,50,000.00

Salary of Watchman and Maid Servant paid by the Co.

72,000.00

Value of Interest Free Concessional Loan

34,000.00

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

Co.

TOTAL

1,563,000.00

Also consider the following adjustments to be made in the above Income of Mr. Rohan
1. Rent paid by Mr. Rohan during the Previous year amounts to Rs.1,80,000.
2. Expenditure incurred on maintenance of Uniform amounts to Rs.35,000.
3. Expenditure

amounting

to

Rs.70,000

has

been

incurred

on

Research

&

Development of an Advanced Programming language.

4. Mr. Rohan has only one daughter.
5. The services of Watchman and Maid Servant have been engaged by the Company
itself.
6. The value determined above is as per provisions of the Income Tax Act 1961.
7. Mr. Rohan has the made the following payments during the previous year:a) LIC Premium paid amounting to Rs.30,000.
b) National Savings Certificate purchased amounting to Rs.20,000.
c) Units of Reliance Mutual Fund [as referred u/s 10(23D)] purchased
amounting to Rs.77,000.
d) Medical Insurance Premium paid through a bearer cheque amounting to
Rs.14,000, on his spouse's life.
st

8. Advance Tax paid amounting to Rs.50,000 on 1 January 2014.

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

SOLUTION:-

Particulars

Rs.

Rs.

Rs.

Rs.

I. INCOME FROM SALARIES

Basic Salary

6,00,000.00

Dearness Allowance

3,00,000.00

Children Education Allowance

Less: Exempt under Section 10
(14) [Note-1]
Conveyance Allowance
Less: Exempt under Section 10
(14) [Note-2]
House Rent Allowance
Less: Exempt under Section 10
(13 A) [Note-3]
Uniform Allowance
Less: Exempt under Section 10
(14) [Note-4]

25,000.00

1,200.00

23,800.00

60,000.00

9,600.00

50,400.00

1,80,000.00

90,000.00

90,000.00

30,000.00

30,000.00

29

Research Allowance

85,000.00

Less: Exempt under Section 10

(14) [Note-5]
Advance Salary taken
Salary of Watchman and Maid
Servant paid by the Company
Value

of

Interest

Free

Concessional Loan
Value of Medical Facilities at a
Hospital maintained by the Co.
Less: Exemption

15,000.00

1,50,000.00

72,000.00

34,000.00

27,000.00

27,000.00

available [Note-6]

GROSS TOTAL INCOME

DEDUCTIONS

70,000.00

1,335,200.00

UNDER

CHAPTER VIA

Life Insurance Premium

30,000.00

NSC Purchased

40,000.00

30

Units of Reliance Mutual Fund

77,000.00

Deduction u/s 80C [Note- 7]

1,00,000.00

Deduction u/s 80D [Note- 8]

14,000.00

Sub Total

1,14,000.00

TOTAL INCOME

12,21,200.00

INCOME-TAX ON TOTAL
INCOME (Note-9)

Add: Education Cess @ 3%

TAX

PAYABLE

1,96,360.00

5,891.00

EDUCATION CESS (Gross

2,02,251.00

Tax Liability)

LESS : Advance TAX Paid

LESS : TAX DEDUCTED AT
SOURCE- u/s 192 (Note -10)
BALANCE TAX PAYABLE

50,000.00

1,33,000.00

19,251.00

31

NOTES:1. Children Education Allowance is exempt up to Rs.100 per month per child up to
a maximum of two children, so here it is exempted for one child since Mr.
Rohan has only one daughter.
2. Conveyance Allowance is exempt up to Rs.800 per month only, so for 12 months
it amounts to Rs.9,600.
3. House Rent Allowance is Exempt to the least of the following three:a) HRA Actually received = 1,80,000.
b) 40% of Salary* = 3,60,000.
c) Rent paid less 10% of Salary* = 90,000.
{Rs.1,80,000 - (10% 6,00,000 + 3,00,000)}. Hence Rs.90,000 being the least
of the following three is exempt from tax u/s 10(13A).
*Salary for the purpose of HRA exemption calculation will include only
Basic + Dearness Allowance.
4. Uniform Allowance is exempted to the extent of expenditure incurred on Uniform
maintenance but restricted to the maximum of Uniform Allowance received.
5. Research Allowance is exempted to the extent of expenditure incurred on
Research & Development relating to the employer's business.
6. Medical Facilities at a Hospital maintained by the Employer is fully exempted
from tax.
7. Deduction under Section 80C is restricted to a maximum limit of Rs.1,00,000,
since here it amounts to Rs.1,47,000.
8. Deduction u/s 80D for Payment of Medical Insurance Premium can be availed
only if premium is paid through a Cheque whether Bearer or Crossed. The
Deduction is allowable to a maximum limit of Rs.15,000 in case of a person of
less than 65 years of age.
9. Calculated as per normal Slab rates applicable for an Individual male below 65
years of age.
10. Tax Deducted at Source under Section 192 for Salaried Individuals is equivalent
to Advance Tax paid and deductible from Gross tax liability.

32

HINTS

for

TAX

PLANNING

under

the

head

INCOME

from

SALARIES:1) Dearness allowance and dearness pay must form part of basic salary. This will
minimize tax incidence on house rent allowance, gratuity and commuted pension.
Likewise, incidence of tax on employers contribution to recognized provident
fund will be less.
2) If commission is paid at a fixed percentage of turnover achieved by the
employee, then tax incidence on house rent allowance, entertainment allowance,
gratuity and commuted pension will be less.
3) An un-commuted pension is always taxable. On the other hand, commuted pension
is fully exempt from tax in case of government employees and partly exempt
from tax in case of non-government employees, therefore employees should get
their pension converted.
4) The accumulated balance of the provident fund with the former employer will be
exempt from tax, provided the same is transferred to the new employer who also
maintains a recognized provident fund.
5) Employees should go in for free medical facilities instead of fixed medical
allowance.
6) An employee should take the benefit of relief available u/s 89.

CHANGES in CURRENT BUDGET:1) Personal Income-tax exemption limit raised by Rs.50,000/- that is, from Rs.2
lakh to Rs.2.5 lakh in the case of individual taxpayers, below the age of 60
years. Exemption limit raised from Rs.2.5 lakh to Rs.3 lakh in the case of
senior citizens.
2) No change in the rate of surcharge either for the corporates or the individuals,
HUFs, firms, etc.
3) The education cess to continue at 3 percent.

4) Deduction limit on account of interest on loan in respect of self-occupied house

property raised from Rs.1.5 lakh to Rs.2 lakh.
5) Concessional rate of 15 percent on foreign dividends without any sunset date to
be continued.
6) To remove tax arbitrage, rate of tax on long term capital gains increased from
10 percent to 20 percent on transfer of units of Mutual Funds, other than equity
oriented funds.
7) Income and dividend distribution tax to be levied on gross amount instead of
amount paid net of taxes.
8) 60 more Ayakar Seva Kendras to be opened during the current financial year to
promote excellence in service delivery.

BIBLOGRAPHY:1) www.incometaxindia.gov.in
2) www.icai.in
3) www.indiataxes.com
4) www.finotax.com
5) www.law.incometaxindia.gov.in
6) www.indiabudget.nic.in