Taxation of Salaried Employees Pensioners and Senior Citizens

Tuesday, November 16, 2010

Taxation of Salaried Employees Pensioners and Senior Citizens


SALARY INCOME, PERQUISITES & ALLOWANCES

2.1 WHAT IS “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. The existence of employer-employee relationship is the sine-qua-non for taxing a particular receipt under the head “salaries.” For instance, the salary received by a partner from his partnership firm carrying on a business is not chargeable as “Salaries” but as “Profits & Gains from Business or Profession”. Similarly, salary received by a person as MP or MLA is taxable as “ Income from other sources”, but if a person received salary as Minister of State/ Central Government, the same shall be charged to tax under the head “Salaries”. Pension received by an assessee from his former employer is taxable as “Salaries” whereas pension received on his death by members of his family (Family Pension) is taxed as “Income from other sources”.

2.2 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.

2.3 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.

2.4 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.

2.5 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.

2.5.1 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 (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.

2.5.2 Value of Furnished Accommodation- The valuewould 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 theemployee towards the above would be reduced from this amount.

2.5.3 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.

2.5.4 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. 1200- (plus Rs. 600-, 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. 1600- (plus Rs. 600-, if chauffeur is also provided) per month if the cubic capacity if engine of the motor car exceeds 1.6 litres.
d) Rs. 400- (plus Rs. 600-, 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. 600- (plus Rs. 600-, 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 tne 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)).

2.5.5 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)]

2.5.6 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)].

2.5.7 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.

2.5.8 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)].

2.5.9 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.

2.5.10. 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.

2.6PERQUISITES 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.

2.7 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 allowanes 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 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 Income- tax 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 Amount exempt
(i) Special Compensatory Allowance for hilly areas or high altitude allowance or climate allowance. 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.
(ii) Border area allowance
or remote area
allowance or a difficult
area allowance or
disturbed area
allowance.
Various amounts ranging from
Rs.200 per month to Rs.1300
per month are exempt for
various areas specified in
Rule 2BB.
(iii) Tribal area/Schedule
area/Agency area
allowance available in
M.P., Assam, U.P.,
Karnataka, West
Bengal, Bihar, Orissa,
Tamilnadu, Tripura
Rs.200 per month.
(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.
70% of such allowance upto a
maximum of Rs.6000 per
month.
(v) Children education
allowance.
Rs.100 per month per child
upto a maximum 2 children.
(vi) Allowance granted to
meet hostel expenditure
on employee’s child.
Rs.300 per month per child
upto a maximum two children.
(vii) Compensatory field
area allowance
available in various
areas of Arunachal
Pradesh, Manipur
Sikkim, Nagaland,
H.P., U.P. & J&K.
Rs.2600 per month.
(viii) Compensatory modified
field area allowance
available in specified
areas of Punjab,
Rajsthan, Haryana,
U.P., J&K, H.P., West
Bengal & North East.
Rs.1000 per month
(ix) Counter insurgency
allowance to members
of Armed Forces.
Rs.3900 Per month
(x) Transport Allowance
granted to an employee
to meet his expenditure
for the purpose of
commuting between the
place of residence &
duty.
Rs.800 per month.
(xi) Transport allowance
granted to physically
disabled employee for
the purpose of
commuting between
place of duty and
residence.
Rs.1600 per month.
(xii) Underground allowance
granted to an employee
working in under
ground mines.
Rs.800 per month
(xiii) Special allowance in
the nature of high
altitude allowance
granted to members of
the armed forces.
Rs. 1060 p.m. (for altitude of
9000-15000 ft.) Rs.1600 p.m.
(for altitude above 15000 ft.)
(xiv) Any special allowance
granted to the members
of the armed forces in
the nature of special
compensatory highly
active field area
allowance
Rs. 4,200/- p.m.
(xv) Special allowance
granted to members of
armed forces in the
nature of island duty
allowance.
(in Andaman & Nicobar
& Lakshadweep Group
of Islands)
Rs. 3,250/- p.m.




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 receivessalary 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.





New Income Slab for the Financial Year 2010-11




(New Income Slab for Individual)
Income Slab Tax Income Slab Tax
Income upto Rs 1,60,000 Nil Income upto Rs 1,60,000 Nil
Income from Rs 1,60,001 to 5,00,000 10 % Income from Rs 1,60,001 to 3,00,000 10 %
Income from Rs 5,00,001 to 8,00,000 20 % Income from Rs 3,00,001 to 5,00,000 20 %
Income above 8,00,000 30 % Income above Rs 5,00,000 30 %
(Tax exemption under Infra Bonds Rs.20,000 from FY 2010-11)




(New Income Slab for Women)
Income Slab Tax Income Slab Tax
Income upto Rs 1,90,000 Nil Income upto Rs 1,90,000 Nil
Income from Rs 1,90,001 to 5,00,000 10 % Income from Rs 1,90,001 to 3,00,000 10 %
Income from Rs 5,00,001 to 8,00,000 20 % Income from Rs 3,00,001 to 5,00,000 20 %
Income above 8,00,000 30 % Income above Rs 5,00,000 30 %
(Tax exemption under Infra Bonds Rs.20,000 from FY 2010-11)





(New Income Slab for Senior Citizen)
Income Slab Tax Income Slab Tax
Income upto Rs 2,40,000 Nil Income upto Rs 2,40,000 Nil
Income from Rs 2,40,001 to 5,00,000 10 % Income from Rs 2,40,001 to 3,00,000 10 %
Income from Rs 5,00,001 to 8,00,000 20 % Income from Rs 3,00,001 to 5,00,000 20 %
Income above 8,00,000 30 % Income above Rs 5,00,000 30 %
(Tax exemption under Infra Bonds Rs.20,000 from FY 2010-11)


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