1 INTRODUCTORY PROVISIONS: There must exist a relationship of employer-employee between the payer & the payee. It does not matter whether employee is a full-time employee or a part-time one. Employer-Employee Relationship Remuneration earned by employee directors is taxable u/h salary whereas remuneration earned by non-employee directors is taxable u/h other sources. Salary paid by a partnership firm to its partners is taxable in the hands of the partners u/h PGBP to the extent allowed u/s 40(b). MPs/MLAs are not employees of CG/SG and thus remuneration received by them is not chargeable to tax u/h salary ; rather such income is chargeable to tax u/h other sources. Place of Accrual of Salary Income (Section 9) Salary income is deemed to accrue/arise at the place where services have been rendered by the employee. Therefore, salary income shall be deemed to accrue/arise in India if the services are rendered in India. Exception: Salary payable by CG/SG to an Indian Citizen for services rendered outside India shall be deemed to accrue/arise in India even if the services are rendered outside India. Salary income is chargeable to income tax on due basis or receipt basis, whichever is earlier. Chargeability of Salary Income (Section 15) Contract of Service v/s Contract for Service Advance Salary v/s Advance Against Salary Foregoing of Salary v/s Surrender of Salary Tax-Free Salary Profits in Lieu of Salary If salary is due on the last day of the month, salary from April 2018 to March 2019 shall become due during PY 2018-19. If salary is due on the 1 st day of the next month, salary from March 2018 to February 2019 shall become due during PY 2018-19. Contract of Service: Contract of employment (Income taxable u/h salary) Contract for Service: Contract on freelancer basis (Income taxable u/h PGPB) Advance Salary: Salary received in advance (Taxable as and when such advance is received) Advance Against Salary: Loan taken which is adjusted against salary income (Not Taxable) Foregoing of Salary: Waiver of salary amounts to application of salary income (Taxable) Surrender of Salary: Salary surrendered to CG (Not Taxable) Tax paid by employer on behalf of employee taxable as a monetary perquisite u/s 17(2)(iv). Taxable portion of retrenchment compensation or voluntary retirement Taxable portion of gratuity, commuted pension and provident fund Amount received by the employee under Keyman Insurance Policy Amount received before taking up the employment or after termination of the employment Any other payment notified for this purpose COMPUTATION OF RELIEF UNDER SECTION 89: Relevant P/Y Year of Receipt of Arrears of Salary: Tax on total income (including arrears of salary) Tax on total income (excluding arrears of salary) Tax on arrears (difference b/w above figures) (A) Relevant P/Y Year to Which Arrears of Salary Pertain: Tax on total income (including arrears of salary) Tax on total income (excluding arrears of salary) Tax on arrears (difference b/w above figures) (B) Relief Under Section 89 [(A) (B)] () ()
2 TAXABILITY OF ALLOWANCES: 1) HOUSE RENT ALLOWANCE ( HRA ) Section 10(13A) & Rule 2A: Actual HRA received Rent (-) 10% of RBS for the relevant period 50% of RBS for the relevant period in case of Delhi, Mumbai, Chennai & Kolkata and 40% of RBS in other cases HRA fully taxable in the hands of the employee where no rent expenditure has been incurred by the employee. If there is any change in RBS, rent paid, place of residence or HRA received, exemption shall be calculated separately for pre-change period and post-change period. 2) PERSONAL ALLOWANCES Section 10(14) & Rule 2BB: Exemption available shall be lower of the amount received from the employer and the following limits: Children Education Allowance: Rs 100 p.m. per child (maximum 2 children) Hostel Expenditure Allowance: Rs 300 p.m. per child (maximum 2 children) Outstation Allowance: Exemption is available to employees of transport system provided they are not in receipt of daily allowance. Exemption available is 70% of such allowance or Rs 10,000 p.m., whichever is less. Transport Allowance: Rs 3,200 p.m. for blind/handicapped employees only (no benefit for normal employees) Tribal Area Allowance: Rs 200 p.m. Underground Allowances: Rs 800 p.m 3) OFFICIAL ALLOWANCES Section 10(14) & Rule 2BB: Exemption available shall be lower of the amount received from the employer and the amount spent by the employee. If any amount is saved by the employee, such saving would be taxable. Daily Allowance (for meeting the cost of boarding and lodging when the employee is on official tour) Uniform Allowance (for meeting the expenditure incurred on purchase/maintenance of office uniform) Conveyance Allowance (for meeting the expenditure incurred on conveyance in connection with official duties) Helper Allowance (for meeting the expenditure incurred on a helper hired in connection with official duties) Academic Allowance (for encouraging academic, research and training pursuits) Travelling Allowance (for meeting the cost of travel on tour or on transfer of duty) 4) FOREIGN ALLOWANCE Section 10(7): Allowances/perquisites paid by CG/SG to an Indian Citizen for services rendered outside India are fully exempt. 5) OTHER ALLOWANCES: Fully taxable in the hands of employees (such as Overtime Allowance, Medical Allowance, Telephone Allowance, City Compensatory Allowance, Dearness Allowance, etc) Standard Deduction Section 16(ia) Least of the following available as deduction to all employees: Salary income Rs 40,000 DEDUCTIONS UNDER SECTION 16 Entertainment Allowance Section 16(ii) Least of the following available as deduction to only government employees: Actual entertainment allowance received 20% of basic pay Rs 5,000 Professional Tax Section 16(iii) Paid by person carrying on business/profession: Professional tax to be debited to P&L A/c on actual payment basis. Paid by the employee himself: Professional tax allowed as deduction from gross salary u/s 16(iii) on actual payment basis. Paid by the employer on behalf of the employee: First taxable as a monetary perquisite in the hands of the employee u/s 17(2)(iv) and subsequently allowed as deduction from gross salary u/s 16(iii) on actual payment basis.
3 TAXABILITY OF PERQUISITES: 1) RENT FREE ACCOMMODATION {Section 17(2)(i); Rule 3(1)}: Government Non-Government Perquisite value = License fee determined as per the rules framed by the Government Accommodation NOT OWNED by the Employer (Rented Accommodation): Perquisite value = Lower of rent charges paid/payable by the employer or 15% of RFA Salary Accommodation OWNED by the Employer (Rented Accommodation): Population of the Area Where Accommodation is Situated Upto 10 lakhs More than 10 lakhs; but upto 25 lakhs More than 25 lakhs Perquisite Value 7.5% of RFA Salary 10% of RFA Salary 15% of RFA Salary In case of furnished accommodation, the perquisite vale of furniture shall be added to the value of accommodation. Such perquisite value shall be taxable in the hands of all kinds of employees, whether government or non-government. Perquisite value of furniture shall be the rent charges paid/payable by the employer (if the furniture is not owned by the employer) or 10% p.a. of actual cost of such furniture (if the furniture is owned by the employer). 2) ACCOMMODATION AT CONCESSIONAL RATES {Section 17(2)(ii); Rule 3(1)}: Perquisite value u/s 17(2)(ii) = Perquisite value u/s 17(2)(i) Amount recovered from employee 3) PERQUISITES TAXABLE IN CASE OF SPECIFIED EMPLOYEES ONLY Section 17(2)(iii): Following perquisites taxable u/s 17(2)(iii) if the nature of perquisites is non-monetary perquisites and the employee is a specified employee (ie director/ substantial interest/ monetary income u/h salary exceeding Rs 50,000): Facility Perquisite Value Motor Car Facility Facilities of Gardener, Watchman, etc Facilities of Gas, Electricity & Water Free Education Facility Refer to the flowchart provided later in this document Expenditure incurred by the employer (-) Amount recovered from employee Manufacturing cost/actual expenditure incurred by the employer (-) Amount recovered from employee Educational institution owned by the employer: Perquisite value = Cost of education in a similar institution in or near the locality (-) Amount recovered from employee Exemption upto Rs 1,000 p.m. in case of children without any limit on the number of children Educational institution NOT owned by the employer: Expenditure incurred by the employer (-) Amount recovered from employee (Exemption upto Rs 1,000 p.m. in case of children) Free Transport Facility Perquisite value shall be nil where transportation facilities are provided by airlines or railways to their employees or employees household members. Other cases: Perquisite value = FMV (-) Amount recovered from employee 4) OBLIGATION OF THE EMPLOYEE MET BY THE EMPLOYER Section 17(2)(iv) {Monetary Perquisites): Perquisite value u/s 17(2)(iv) = Amount paid/reimbursed by the employer ( ) Amount recovered from employee 5) PAYMENT OF LIFE INSURANCE PREMIUM BY THE EMPLOYER ON BEHALF OF THE EMPLOYEE Section 17(2)(v): Perquisite value u/s 17(2)(v) = Life insurance premium paid by the employer to LIC or any other insurance company for a life insurance policy taken in the name of the employee or any member of his family. Deduction available u/s 80C if conditions given u/s 80C are fulfilled. Accident insurance premium, group insurance premium, etc paid by employer not to be regarded as a perquisite.
4 6) SWEAT EQUITY SHARES/SECURITIES ISSUED TO EMPLOYEES - Section 17(2)(vi): Perquisite value = If such shares/securities are subsequently sold by the employee, the cost of acquisition of such shares/securities shall be the FMV of the shares/securities as on the date of exercising the option. 7) EMPLOYER s CONTRIBUTION TO APPROVED SUPERANNUATION FUND Section 17(2)(vii): Employer s contribution to an approved superannuation fund is exempt in the hands of the employee to the extent of Rs 1,50,000 and contribution in excess of Rs 1,50,000 shall be taxable as a perquisite u/s 17(2)(vii). 8) FRINGE BENEFITS {Section 17(2)(viii); Rule 3(7)} Facility Interest Free/ Concessional Loans Perquisite Value Perquisite value shall be taken as nil in the following cases: Petty loans (aggregate amount of loans during the year does not exceed Rs 20,000); and Loans taken for medical treatment of disease specified under Rule 3A and no reimbursement is received from insurance company. In other cases, perquisite value shall be calculated on monthly basis starting from the month in which the loan has been taken. Further, part of the month shall also be taken as full month. Amount on which interest is to be calculated: O/s loan balance as at the end of each month Rate: {SBI rate as on 1 st April of PY (-) Interest rate charged from employee} Free Food/ Refreshment Gifts to Credit Card Facility Club Facilities Use of Employer s Moveable Assets by Employee Sale of Moveable Assets by Employer to Employee Perquisite value of meals & refreshments provided at remote area = Nil Perquisite value of refreshments = Nil Perquisite value of meal = Value of meal (-) Rs 50 (-) Amount recovered from employee Cash gifts/ gifts convertible into cash (cheques, etc): Fully taxable Gifts in kind: Exempt upto Rs 5,000. Amount in excess of Rs 5,000 is taxable. Perquisite value where credit card facility is used by the employee for personal purposes = Expenses borne by the employer (-) Amount recovered from employee Perquisite value shall be nil where facilities of health club, sports club, etc are provided uniformly to all employees. Perquisite value in other cases where club facility is used by the employee for personal purposes = Expenses borne by the employer (-) Amount recovered from employee Laptops, computers, etc: Perquisite value shall be nil. Other assets: Perquisite value = 10% p.a. of original cost/rent charges (-) Amt recovered from employee Computer & electronic items: Perquisite value = Original cost (-) Depreciation @ 50% for completed years (WDV) Motor car: Perquisite value = Original cost (-) Depreciation @ 20% for completed years (WDV) Other assets: Perquisite value = Original cost (-) Depreciation @ 10% for completed years (SLM) Note: Amount recovered from employee can be deducted in all cases. Any Other Fringe Benefit Perquisite value = Cost incurred by the employer on arm s length basis (-) Amount recovered from the employee Expense incurred/reimbursed by the employer in connection with providing telephone facility to the employee including mobile phone facility fully exempt in the hands of the employee.
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6 1) MEDICAL FACILITIES - Proviso to Section 17(2): Part 1: Medical Treatment in India Part 2: Medical Treatment Outside India MISCELLANEOUS TOPICS Treatment fully exempt in certain cases (government hospital, hospital owned by local authority, hospital owned by employer and any private hospital approved by government). Treatment in any other hospital fully exempt if expenditure has been incurred on treatment of diseases specified under Rule 3A and hospital has been approved by the CIT. In other cases, the entire expenditure incurred by the employer shall be taxable. Expenditure on medical treatment and stay abroad are exempt to the extent permitted by RBI. Travel expenses incurred for patient and one attendant are fully exempt if GTI before including such travel expenses does not exceed Rs 2,00,000. Expenditure incurred/reimbursed by employer should be in connection with medical treatment of employee or any member of his family. Family would include spouse, children whether dependent or not, and parents, brothers and sisters of the employee provided they are dependent on him. Payment/reimbursement of mediclaim insurance premium by an employer for a policy taken in the name of the employee or his family member is exempt in the hands of the employee. 2) LEAVE TRAVEL CONCESSION/ASSISTANCE (LTC/LTA) Section 10(5) & Rule 2B: Any Other Mode Journey Performed by Air Rail service is available Rail service is not available Exemption Amount not exceeding air economy fare by the shortest route Amount not exceeding air conditioned first class rail fare by the shortest route Public transport exists: Amount not exceeding the first class or deluxe class fare by the shortest route Public transport does not exist: Amount equivalent to air conditioned first class rail fare by the shortest route The employee may go on leave to any place in India either alone or along with his family. Family includes spouse, children whether dependent or not, and parents, brothers and sisters of the employee provided they are dependent on him. No exemption is allowed for the third or subsequent child who is born on or after October 1 st, 1998. This rule shall not be applicable in case of multiple birth. Exemption is available for 2 trips in a block of 4 calendar years. However, no exemption is available where an employee encashes LTA/LTC without undertaking any trip. 3) DEDUCTION U/S 80CCD (New Pension Scheme): Individual s Own Contribution {80CCD(1) & 80CCD(1B)} Employer s Contribution {80CCD(2)} 80CCD(1): Individual s contribution to NPS eligible for deduction (Max 10% of Salary/20% of GTI) 80CCD(1B): Additional deduction of maximum Rs 50,000 available u/s 80CCD(1B) if deduction not fully available u/s 80CCD(1) due to the following reasons: Contribution to NPS exceeds 10% of Salary/20% of GTI; or Contribution to NPS exceeds Rs 1,50,000; or Total investments eligible for deduction u/s 80C, 80CCC & 80CCD(1) exceeds Rs 1,50,000. Employer s contribution to be first added to the gross salary of the employee. Thereafter, such contribution is allowed as deduction u/s 80CCD(2). Deduction u/s 80CCD(2) should not exceed 10% of Salary of the employee. Salary for the purposes of Section 80CCD would mean retirement benefit salary. Maximum deduction u/s 80C, 80CCC & 80CCD(1) limited to Rs 1,50,000 as per Section 80CCE. Amount withdrawn or pension received from NPS fully exempt if such amount has been used for purchasing an annuity plan during the year of receipt. Amount received by nominee/legal heir on death of the assessee is also fully exempt.
7 TREATMENT OF RETIREMENT BENEFITS 1) Provident Funds Provisions Related to Taxability & Exemptions: Particulars Recognized PF Unrecognized PF Statutory PF PPF Employer s Contribution Amount in excess of 12% of RBS is taxable Not taxable yearly Fully exempt N.A. Employee s Contribution Eligible for deduction u/s 80C Not eligible for deduction Eligible for deduction u/s 80C Eligible for deduction u/s 80C Interest Credited Amount Received on Retirement, etc Amount in excess of 9.5% p.a. is taxable Exempt from tax if employee served a continuous period of 5 years or more or retires before rendering 5 years of service because of reason beyond the control of the employee. In other cases, it will be taxable. Not taxable yearly Fully exempt Fully exempt Employer s contribution and interest thereon is taxable as salary. Employee s contribution is not taxable. Interest on employee s contribution is taxable u/h income from other sources. Fully exempt Fully exempt 2) TAXABILITY OF GRATUITY- Section 10(10): Type of Employee Taxability of Gratuity Received on Retirement Government Fully exempt u/s 10(10) Non-Government Covered by the Payment of Gratuity Act, 1972: Rs 20 lacs Gratuity actually received 15/26 (x) last drawn salary (x) number of completed years or part in excess of six months Not Covered by the Payment of Gratuity Act, 1972: Rs 10 lacs Gratuity actually received 1/2 (x) average salary of last 10 months immediately preceding the month of retirement (x) number of completed years of service (fraction to be ignored) Gratuity received during the continuity of service fully taxable in case of govt as well as non-govt employees. Non-government employee can claim a total exemption of Rs 20L/Rs 10L u/s 10(10) during his entire lifetime. 3) TAXABILITY OF PENSION: Type of Pension Taxability Uncommuted Pension Fully taxable in case of both government as well as non-government employees Commuted Pension {Section 10(10A)} Government Fully exempt u/s 10(10A) Non-Government Employee in receipt of gratuity: 1/3rd of commuted pension is exempt Employee not in receipt of gratuity: 50% of commuted pension is exempt Pension received by family members of deceased employee taxable as family pension u/s 56 in the hands of family members. However, family pension received by widow/children/nominee after the death of members of armed forces of India including para-military forces during the performance of their operational duties is fully exempt u/s 10(19). Pension received by winners of gallantry awards such as Param Vir Chakra, Maha Vir Chakra or Vir Chakra is fully exempt u/s 10(18).
8 4) TAXABILITY OF LEAVE SALARY Section 10(10AA): Type of Employee Government Fully exempt u/s 10(10AA) Non-Government Taxability of Leave Salary Received on Retirement Leave salary actually received Rs 3,00,000 10 times (x) average salary p.m. Leave at the credit of the employee (x) average salary p.m. Meaning of average salary : Average of salary of last 10 months immediately preceding the date of retirement Meaning of leave at the credit : Leave entitlement (max 30 days leave per completed year) (-) Leave availed/encashed Leave salary received during the continuity of service fully taxable in case of govt as well as non-govt employees. Non-government employee can claim a total exemption of Rs 3,00,000 u/s 10(10AA) during his entire lifetime. 5) TAXABILITY OF RETRENCHMENT COMPENSATION Section 10(10B): Actual retrenchment compensation received; Rs 5,00,000; 15/26 (x) average salary of last 3 months (x) No of completed years or part thereof in excess of 6 months Note: Salary = Basic Pay (+) DA 6) TAXABILITY OF VRS COMPENSATION Section 10(10C) & Rule 2BA: Actual voluntary retirement compensation received; Rs 5,00,000; 3 (x) RBS p.m. at the time of retirement (x) No of completed years of service (fraction to be ignored) RBS p.m. at time of retirement (x) No of months of service yet to be completed before retirement MEANING OF SALARY AT DIFFERENT PLACES: S.No. Particulars Meaning of Salary Items to be Included 1. Gratuity (Non-government employees covered by Payment of Gratuity Act, 1972) Retrenchment Compensation as per the Industrial Disputes Act, 1947 2. Gratuity (Non-government employees NOT covered by Payment of Gratuity Act, 1972) Leave Salary House Rent Allowance Recognized Provident Fund Voluntary Retirement Compensation Basic Pay (+) Full Dearness Allowance Retirement Benefit Salary (ie Basic Pay (+) Dearness Allowance forming part of retirement benefits (+) Commission as a fixed percentage of turnover) 3. RFA & Concessional Accommodation Basic Pay (+) Dearness Allowance forming part of retirement benefits (+) Bonus, Commission, Fees (+) Taxable portion of Allowances 4 Entertainment Allowance Basic Pay (Perquisites, arrears of salary, advance salary, lump-sum payments received at the time of termination of service or superannuation or voluntary retirement)