Meaning

of salary. What is basis of charges of salary income. Different forms of allowance. Permissible deduction u/s 16. Tax treatment of Provident funds. Gratuity. Pensions.

 Meaning

of salary:

Salary is a fixed amount of money or compensation paid to an employee by an employer in return for work performed.
Salary

comprises of remuneration in any form (including perquisites) received by an employee from employer. There should be contractual employer-employee relationship. The contract may be express, oral or implied.

As per section 17(1) of income tax act:

SALARY

includes wages, dearness allowance, Bonus, gratuity , annuity or pension, advance of salary, Fees / Commissions perquisites/ profits received from employer in addition to salary, Leave encashment while in service, Employers contribution to provident fund in excess of 12% of salary of employee, profit in lieu of salary.

 As

per section 15 salary consists of Any salary due from employer to an assessee in the previous year, Any salary paid or allowed to him in the previous year Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer, if not charged to income tax for any earlier previous year.

Salary is taxable on due or receipt basis whichever is earlier

 House

rent allowance. Leave encashment. Entertainment allowance. Leave travel assistance or leave travel. concession. Medical treatment. Voluntary retirement scheme.

 Meaning:

House Rent Allowance (HRA) is given by the employer to the employee to meet the expenses in connection with rent of the accommodation. House rent allowance is exempt under sec 10(13A) to the extent of minimum of following 1) Actual House Rent Allowance received by the employee 2) Excess of rent paid for the accommodation occupied by him over 10 % of the salary*.

3) 50% of salary* where the residential house is situated at Mumbai, Calcutta, Delhi or Chennai and 40% of the salary where the house is situated at any other place. *( for HRA salary includes Basic + D.A + Commission based on fixed percentage on turnover) There will be no exemption if the residential accommodation is owned by employee or employee has not paid any rent for residential accommodation used by him.

 Meaning:

As per Service rules every employee is entitled to certain no. of leaves per annum. If an employee does not utilize all his leaves available to him per annum such unutilized either get lapsed or get carry forward which can be enchased later. If such carry forward leaves are liquidated in cash form during the continuity of employment or on retirement, it is known as leave salary.

Status of Employee

Nature of Leave Encashment

Taxability

Government/ NonGovernment employee

It is chargeable to tax. Leave encashment However relief can be during Continuity of taken under section employment 89 Leave encashment at It is fully exempt from the time of retirement tax under section / leaving job 10(10AA)(I) It is fully or partially Leave encashment at exempt from tax in the time of retirement some cases under / leaving job section 10(10AA)(ii)

Government employee

Non-Government employee

 Least

of the following will be exempt: 1) Period of earned leave (in no. of months) to the credit of the employee at the time of his retirement leaving the job Average monthly salary*. 2) 10 Average monthly salary*. 3) The amount specified by the Government i.e., Rs. 3,00,000 /- and 4) Leave encashment actually received at the time of retirement *[Salary = Basic + dearness allowance + commission (fixed percentage on turnover)]

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: [under sec 16(ii)] 1) Rs. 5000/2) Entertainment allowance actually received 3) 20% of salary* (Salary = basic + DA + commission based on fixed % of turnover.)

 Professional

tax: Professional tax or tax on employment levied by a state is allowed as deduction. The following points should be kept in mind, 1) Deduction is available only in the year in which professional tax is paid. 2) The professional tax paid by employer on behalf of employee, it is first included in the salary of the employee as perquisite and then same should be same amount should be allowed as deduction on account of professional tax from gross salary.

 Entertainment

allowance: As explain earlier, entertainment allowance is first included in salary and thereafter a deduction is allowed. In case of non government employees entertainment allowance is not deductable. It is chargeable to tax under income from salary for all non government employees. Standard deduction: know standard deduction is not available.

 Meaning:

Provident fund scheme is a retirement benefit scheme. Under this scheme a stipulated sum of is deducted from the salary of employee as his contribution towards the fund. The employer also contributes simultaneously the same amount out of his pocket to the fund. The employees and employers contribution are invested in Gilt Edged securities, interest earned thereon is also credited to provident fund account.

 Statutory

provident fund: Fund set up under the provisions of the provident fund Act 1925. this fund is maintained by government, semi government organization, local authority, railways universities. provident fund: A provident scheme to which the employees provident Fund and miscellaneous Provisions Act 1952 applies is recognized provident fund. As per PF act 1952 any establishment employing 20 or more person is covered by PF Act 1952.

Recognized

 Public

provident fund: The central government has established the public provident fund for the benefit of general public to mobilized personal savings. Any member of public can participate in the fund by opening a provident fund account at the STATE BANK OF INDIA or its subsidiaries or other nationalized banks. Any amount subject to minimum Rs.500 and maximum Rs.70000 may be deposited. The accumulated sum is repayable after 15 years.

Unrecognized

Provident fund: If a fund is not recognized by commissioner of Income tax, it is known as unrecognised provident fund.

Particulars

Deduction under section Employers 80C on contribution employees to P.F. contribution

Lump sum payment at the time of retirement or Interest termination of credited to P.F. service

Not treated as Income of the year in which contribution is Statutory P.F made Not treated as income up to 12 per cent of salary excess of employers contribution over Recognized 12 per cent of P.F. salary is taxable

Available

Not treated as Income of the year in which interest is credited

Exempt from tax

Available

Not treated as Exempt from tax Income if rate in some cases. of interest (i.e. When not 9.5 per cent), exempt P.F. will excess of be treated as an interest over the unrecognized notified rate is, fund from the however, taxable beginning.

Employers contribution Particulars to P.F.

deduction under section 80C on Interest employees credited to contribution P.F.

Lump sum payment at the time of retirement or termination of service

Not treated as income of the year in which Unrecognized contribution is P.F. made

Available

Not treated as Income of the year in which interest is credited

Not treated as Income of the year in which contribution is made

Public provident Employer does not fund contribute

Available

Exempt from tax Exempt from tax

 Meaning:

Gratuity being a retirement benefit is generally payable at the time of cessation of employment and on basis of duration of service. Eligibility: 1) Any person employed on wages/salary. 2) At the time of retirement or resignation or on superannuation, an employee should have rendered continuous service of not less than five years. 3) In case of death or disablement, the gratuity is payable, even if he has not completed 5 years of service.

Status of Employee

Whether Gratuity is taxable

Government employee

It is fully exempt from tax under section 10(10)(I) It is fully or partly exempt from tax under section 10(10)(ii) It is fully or partly exempt from tax under section 10(10)(iii)

Non-Government employee covered by the payment of Gratuity Act, 1972 Non-Government employee not covered by the payment of Gratuity Act, 1972

1) 15 days salary*( 7 days salary in the case of employee of a seasonal establishment) based on salary last drawn for each of service (i.e., 15 days salary length of service). 2) Rs. Ten lakh. 3) Gratuity actually received. SALARY = Basic plus dearness allowance.

1) Rs. Ten lakh.

2) Half months average salary* for each completed year service. 3) Gratuity actually received. * SALARY = BASICS + DEARNESS ALLOWANCE

Meaning: Pension is a payment made by the employer after the retirement/ death of the employee as a reward for past services.
Post-retirement benefits that an employee might receive from some employers. A pension is essentially compensation received by the employee after he/she has retired.

CASE

PARTICULARS

TAX TREATMENT

CASE 1

Pension is received from UNO by the employee or his family members

It is not chargeable to tax

CASE 2

Family pension received by the family members of armed forces (after the death of the employee)

It is exempt under section 10 (19) in some cases.

CASE CASE 3

PARTICULARS Family pension received by the family members of other cases (after the death of the employee)

TAX TREATMENT It is taxable in the hands of recipients under section 56 under the head income from other sources. Standard deduction is available under section 57 which is 1/3 of such pension or Rs. 15000, whichever is lower. Tax treatment depends on whether Pension is Commuted or Un commuted

CASE 4

Pension received by an employee (during his lifetime) in any other cases.

 Un

commuted Pension: It is periodical payment of pension. Un commuted pension whether received by a Govt. or a Non Govt. employee is chargeable to tax in both case. Pension: It is lump sum payment in lieu of periodical payment. Commuted pension in case of government employees is fully exempt. But in case of non government employees it is fully of partly exempt from tax u/s 10(10A)(ii ).

Commuted

Situation

Tax Exemption available

If Gratuity is received

One-third of the pension, which he is normally entitled to receive, is exempt. One-half of the pension which he is normally entitled to receive is exempt.

If Gratuity is not received