SALARIES

Salary"

is the remuneration received by or accruing

periodically to an individual for service rendered as a result of expressed or implied contract.

The meaning of the term salary for purposes of income tax is much wider than what is normally understood. Every payment made by an employer to his employee for service rendered would be chargeable to tax as income from salaries. The term salary for the purposes of Income-Tax Act will include both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans etc).

Under section 15, the following incomes are chargeable to Income-tax under the head Salaries:
(a) Any salary due from the former employer or present employer in the previous year, whether paid or not . [ Due Salary] (b) Any salary 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. [Salary received in advance] (c) Any arrears of salary is paid in the previous year by or on behalf of a former employer or present employer, if not charged to tax in the period to which it relates. [Arrears of salary]

Year of Chargeability of Salary DUE OR RECEIPT WHICHEVER FALLS EARLIER: Salary is taxable on due basis or on receipt basis, whichever is earlier. Hence, (a) salary due in a previous year is taxable, even if it not received. (b) Salary received in a previous year is taxable, even if it is not due. (c) Arrears of salary received during the current previous year shall be taxable in the current year if not charged to tax in an earlier previous year. For Government employees, the period of chargeability of salary is from March to February. For example, salary from 1March 2008 to 29February 2009 is chargeable as Income of the Assessment Year 2009-10

CHARACTERSTICS OF SALARY
1. 2. 3. 4. 5. 6. 7. 8. Relationship of employer and employee Salary from more than one employer Salary from present, past or prospective employer Tax free Salary Salary received as member of Parliament Taxable as Income from Other Sources. Recepts from person other than employer - Taxable as Income from Other Sources. Place of Accrual of salary income: salary accrues at the place where services are renderred Deductions made by employer: amount deducted is deemed to be received by employee.

CHARACTERSTICS OF SALARY
9. Salary as partner of partnership firm Taxable under the head Profits and Gains 10. Payment received by legal representatives of deceased Employee Family pension taxable as Income from Other Sources. 11. Payment made after cessation of employment: taxable under the head salaries 12. Voluntary foregoing: Application of salary 13. Taxability of Salary on due or receipt whichever is earlier 14. Advance salary received: taxable in the year of receipt 15. Arrears of salary: taxable in the year of receipt 16. Salary in lieu of notice: Taxable under the head salaries on receipt basis

Definition of Word Salary Under section 17(1) of the Income Tax Act, 1961 there are following incomes which are included under head of salary: Wages Any annuity or pension Any gratuity Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages Any advance salary Encashment of leave-not-availed Interest earned in excess of 9.5% on Recognized Provident Fund (RPF) Amount transferred in excess of 12% of Salary to RPF

Allowances [Section 17(3)]

Payment in cash made by he employer to his employees monthly, other than salary, is called an allowance.

A. Fully Exempted Allowances

i. Foreign allowance given by Government to its employees posted abroad ii. House rent allowance given to Judges of High Court and Supreme Court iii. Sumptuary Allowance given to Judges of High Court and Supreme Court

B. Fully Taxable Allowances

i. Dearness Allowance/Dearness Pay ii. Fixed Medical Allowance iii. Tiffin Allowance iv. Servant Allowance v. Non-practising Allowance vi. Hill Allowance vii. Warden allowance viii. Deputation Allowance ix. Overtime Allowance x. Other Allowances

C. Partially Taxable Allowances

1. House Rent Allowance [Section 10(13A)
Under sections 10(13A) of Income Tax Act, 1961 allowance is defined as an amount received by an employee paid by his/ her employer as a rent of his/her house. It is a taxable income. There is no exemption in tax if he is living in his own house or house for which he is not paying rent. Least of the following amounts shall be exempt i. H.R.A. actually received by the employee ii. Rent paid by employee 10% of the salary due iii. 50% of the salary if house is placed at Delhi, Mumbai, Kolkata, Chennai or 40% of the salary in it is placed in any other city

Taxable HRA = Actual HRA Received Exempted Amount Salary = Basic + DA (Enters)/DP + Commission on turnover If an employee is living i. living in his own house and receiving HRA or ii living in a house for which no rent is being paid or iii. Receiving HRA less than 10% of salary it will be fully taxable.

2. Children Education Allowance This allowance is exempt to the extent of Rs.100 per month per child for maximum of 2 children (grand children are not considered). 3. Children Hostel Allowance Any allowance granted to an employee to meet the hostel expenditure on his child is exempt to the extent of Rs.300 per month per child for maximum of 2 children.

4. Transport Allowance This allowance is generally given to government employees to compensate the cost incurred in commuting between place of residence and place of work. An amount uptoRs.800 per month paid is exempt. However, in case of blind handicapped persons, it is exempt up to Rs. 1600 p.m. 5. Out of station allowance An allowance granted to an employee working in a transport system to meet his personal expenses in performance of his duty in the course of running of such transport from one place to another is exempt up to 70% of such allowance or Rs.6000 per month, whichever is less.

6. Helper Allowance: Actual Amount Spent on engaging helper to perform official duties 7. Uniform Allowance: Actual Amount Spent on acquiring or maintaining official Uniform 8. Academic Research Allowance: Actual Amount Spent 9. Conveyance Allowance: Actual Amount Spent to perform official duties

PERQUISITES

As per Section 17 (2) of the Act, perquisites include: 1. Value of rent free accommodation provided to the employee by the employer. 2. Value of concession in the matter of rent in respect of accommodation provided to the employee by his employer. 3. Value of any benefit granted free of cost or at a concessional rate in any of the following cases: a) by a company to an employee who is a director thereof b) by a company to an employee who has substantial interest in the company c) by any employer to an employee who is neither a director, nor has substantial interest in the company, but his monetary emoluments under the head Salaries exceeds Rs.50, 000. 4. Any sum paid by the employer towards any obligation of the employee. 5. Any sum payable by employer to effect an assurance on the life of assessee. 6. The value of any other fringe benefit given to the employee as may be prescribed.

CLASSIFICATION OF PERQUISITES
For tax purposes, perquisites specified under Section 17 (2) of the Act may be classified as follows: (1) Perquisites that are taxable in case of every employee, whether specified or not (2) Perquisites that are taxable in case of specified employees only. (3) Perquisites that are exempt from tax for all employees

(1) Perquisites Taxable in case of All Employees

The following perquisites are taxable in case of every

employee, whether specified or not: 1. Rent free house provided by employer 2. House provided at concessional rate 3. Any obligation of employee discharged by employer e.g. payment of club or hotel bills of employee, salary to domestic servants engaged by employee, payment of school fees of employees children etc. 4. Any sum paid by employer in respect of insurance premia on the life of employee 5. Notified fringe benefits (on which fringe benefit tax is not applicable) it includes interest free or concessional loans to employees, use of movable assets, transfer of
moveable assets, credit card facility, club facility, gift voucher etc.

2. Perquisites taxable in case of Specified Employees only

The following perquisites are taxable in case of such employees: 1. Free supply of gas, electricity or water supply for household consumption 2. Free or concessional educational facilities to the members of employees household 3. Free or concessional transport facilities 4. Sweeper, watchman, gardener and personal attendant 5. Medical facility 6. Education facility for children Specified employee is an employee who is either a director or has substantial interest in the company where he is employed or is drawing monetary salary of more than Rs.50, 000 during the previous year.

3. Perquisites which are tax free for all the employees

This category includes perquisites which are tax free for the employees and also other perquisites on which employer has to pay a tax (called Fringe Benefit Tax) if they are given to the employees and so are not taxable for them. 1. Medical benefits (provided within or out of India) subject to limits. 2. Value of Leave Travel Concession in India if given twice in a block of 4 years. 3. Free meals provided to the employees during working hours. 4. Amount spent by the employer as its contribution to staff welfare schemes. 5. Laptops and computers provided for personal use. 6. Rent free official accommodation provided to a Judge of High Court or Supreme Court or an official of Parliament including Minister and Leader of Opposition in Parliament. 7. Health Insurance Premium of employee or member of household paid by the employer.

Pension
Pension is a payment made by the employer after the retirement or death of employee as a reward for past service. It is normally paid as a periodical payment on monthly basis but certain employers may allow an employee to forgo a portion of pension in lieu of lumpsum amount. This is known as commutation of pension. The treatment of these two kinds of pension is as under:

(i) Periodical pension or uncommuted pension

It is fully taxable in the hands of all employee, whether government or non government.

(ii) Commuted pension

1. For employees of government organisations, local authorities and statutory corporations, it is fully exempted from tax, hence not included in gross salary.

2. For other employees, commuted value of half of the total value of pension is exempted from tax. Any amount received over and above this amount is taxable, so included in gross salary. 3. If, however, the employee is also receiving gratuity (another retirement benefit) along with pension, then one third of the total value of pension is exempted from tax. Amount received in excess of this is taxable, so included in gross salary.

4. Pension received by employee is taxable under the head Salaries. However, family pension received by legal heirs after death of employee is taxable under Income from other sources

GRATUITY [SECTION 10(10)]

Gratuity is the payment made by the employer to an employee in appreciation of past services rendered by the employee. It is received by the employee on his retirement. Gratuity is exempted upto certain limit depending upon the category of employee. For the purpose of exemption, employees are divided into 3 categories:

(i) Government employees and employees of local authority: In case of such employees, the entire amount of gratuity received by them is exempted from tax. Nothing will be added to gross salary.

(ii) Employees covered under Payment of Gratuity Act, 1972

In case of employees who are covered under Payment of Gratuity Act, the minimum of the following amounts are exempted from tax: Amount of gratuity actually received 15 days of salary for every completed years of service or part thereof in excess of six months. 15 / 26 x [basic salary + Dearness Allowance] x No. of years of service+1 [if fraction > 6 months]). Rs.3, 50,000 (amount specified by government).

(iii) Other employees. In case of employees not falling in the above two categories, gratuity received from the employers is exempt to the extent of minimum of following amounts: Actual amount of gratuity received. Half month average salary for every completed year of service (1/2 x average salary of last 10 months x completed years of service). Rs.3, 50,000 (amount specified by government).

LEAVE ENCASHMENT [ SECTION 10(10AA)]

Employees are entitled to various types of leave. The leave generally can be taken (casual leave/medical leave) or it lapses. Earned leave is a kind of leave which an employee is said to have earned every year after working for some time. This leave can either be availed every year, or get encashment for it. If leave is not availed or encashed, it is allowed to be carried forward. This leave keeps getting accumulated and is encashed by employee on his retirement. The tax treatment of leave encashment is as under:

(i) Encashment of leave while in service. This is fully taxable and so is added to gross salary.

(ii) Encashment of leave on retirement. For the purpose of exemption of accumulated leave encashment, the employees are divided into two categories:

a. State or Central Government employees. Leave encashment received by government employees is fully exempted from tax. Nothing is to be included in gross salary.

b. Other employees Leave encashment of accumulated leave at the time of retirement received by other employees is exempted to the extent of minimum of four amounts. - Amount specified by Central Government (3, 00,000). - Leave encashment actually received. - 10 months average salary (10 x average salary of 10 months preceeding retirement). - Cash equivalent of unavailed leave. (Leave entitlement is calculated on the basis of maximum 30 days leave every year, cash equivalent is based on average salary of last 10 months).

Profits in Lieu of Salary u/s 17(3)

1. Compensation due or received from present/former employer in connection with (a) termination of employment, or (b) modification of terms and conditions of employment. 2. Any amount received from an Unrecognized Provident Fund, to the extent of Employers contributions, along with interest on such contribution. 3. Sum received under Keyman Insurance Policy, including Bonus on it. 4. Any sum received (either in lump sum or otherwise), either prior to employment or after cessation of employment.

DEDUCTIONS AGAINST SALARY 1. Entertainment Allowance: Applicable only for Government Employees [Sec.16(ii)] Least of the following will be allowed as a deduction to government employees: (i) Actual amount of entertainment allowance received (ii) 20% of Basic salary of the Individual (iii) Rs. 5,000 If entertainment allowance is given to employees working in private sector, it is fully taxable.

2. Professional Tax [Sec.16(iii)] Professional tax or tax on employment paid by an employee, levied under a State Act shall be allowed as deduction.