Dibrugarh University B. Com 6th Semester Income Tax Notes Unit-3 - myedu365

Unit - III


Syllabus
Computation of income from Salary – Definition of salary. Basis of charges, Place of accrual of salary, Profit in lieu of salary, Advance salary, Arrear salary, Loan or advance against salary, Annuity, Gratuity, Pension, Leave Salary, Retrenchment compensation, Compensation received on Voluntary Retirement, Provident fund, Approved superannuation fund, Allowances, Perquisites and its valuation. Deductions from salary, Deduction u/s 80C.

Meaning of Salary

Section 17(1) gives an inclusive definition of ‘Salary’

Salary includes –

(i) wages;

(ii) any annuity or pension;

(iii) any gratuity;

(iv) any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages;

(v) any advance of salary;

(vi) any payment received by an employee in respect of any period of leave not availed by him;

(vii) Employer’s contribution to Recognized Provident Fund (RPF) in excess of 12% of employee’s salary and interest credited to recognized provident fund in excess of 9.5% p.a;

(viii) the aggregate of all sums that are comprised in the transferred balance of an employee participating in a recognized provident fund to the extent to which it is chargeable to tax;

(ix) the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a notified pension scheme referred to in section 80CCD.

Basis of charge (Section 15)

(i) Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier.

(ii) However, where any salary, paid in advance, is assessed in the year of payment, it cannot be subsequently brought to tax in the year in which it becomes due.

(iii) If the salary paid in arrears has already been assessed on due basis, the same cannot be taxed again when it is paid.

Arrears of Salary

Salary is taxable on ‘due’ or ‘receipt’ basis whichever is earlier, but if there are any arrears of salary which have not been taxed in the past, such arrears will be taxed in the year in which these arrears are paid or allowed to the employees. For example, if the government announces increases in dearness allowances in the previous year 2019-2020 which is effective from 1.1.2017 then arrears from 1.1.2017 to 31.3.2019 were never due earlier. These arrears will be taxed in the previous year in which these are paid or allowed although the arrears of salary relate to the past years. In such cases the assessee can claim relief of income-tax under section 89, if he so desires.

Advance Salary

Advance salary is taxable when it is received by the employee irrespective of the fact whether it is due or not. It may so happen that when advance salary is included and charged in a particular previous year, the rate of tax at which the employee is assessed may be higher than the normal rate of tax to which he would have been assessed. Section 89(1) provides for relief in these types of cases.

House Rent Allowances [Section 10(13A)]

House Rent Allowances is given by the employer to the employee to meet the expenses in connection with rent of the accommodation which the employee might have to take. House Rent Allowances is taxable under the head ‘salaries’ to the extent it is not exempt under section 10(13A). House Rent Allowances is exempt under section 10(13A) to the extent of the minimum of the following three amounts:

a. Actual House Rent Allowances received by the employee in respect of the relevant period.

b. Rent paid – 10% of salary for the relevant period.

c. 50% of the salary where the residential house is situated at Mumbai, Kolkata, Delhi or Chennai and 40% of the salary where the house is situated at any other place, for the relevant period.

The minimum of the above three amounts shall be exempt from tax and the balance shall be taxable and thus included in gross salary of the employee.

Entertainment Allowances:

Entertainment Allowance received is fully taxable and is first to be included in the salary and thereafter the following deductions is to be made. This deduction is allowed only to a Government employee. In case of entertainment allowances, the assessee is not entitled to any exemption but he is entitled to a deduction under section 16(ii) from gross salary. The amount of deduction will be minimum of the following three limits:

a. Actual Entertainment Allowances received.

b. One-fifth of his basic salary; or

c. Rs. 5000

Amount actually spent by the employee towards entertainment out of entertainment allowance received by him is not a relevant consideration at all.

Professional tax on employment

Professional tax or taxes on employment levied by a State under Article 276 of the constitution is allowed as deduction only when it is actually paid by the employee during the previous year.

If professional tax is reimbursed or directly paid by the employer on behalf of the employee, the amount so paid first included as salary income and then allowed as a deduction u/s 16.

Gratuity

Gratuity is a payment made by the employer to an employee in appreciation of the past service rendered by the employee. Gratuity can either be received by the employee himself at the time of his retirement or the legal heir on the event of the death of the employee. Now-a-days gratuity becomes a normal payment applicable to all employees. In fact, Payment of Gratuity Act, 1972 is a statutory recognition of the concept of gratuity. Almost all employees enter into an agreement with employees to pay gratuity.

Exemption in respect of Gratuity [Section 10(10)]

1. Retirement gratuity received under the Pension Code Regulations applicable to members of the Defence Service is fully exempt from tax.

2. Central / State Government Employees: Any death cum retirement gratuity is fully exempt from tax.

3. No-government employees:

(i) Non-government employees covered by the Payment of Gratuity Act, 1972

Any death cum retirement gratuity is exempt from tax to the extent of least of the following:

 a. Rs. 10,00,000

 b. Gratuity actually received

 c. 15 days’ salary based on last drawn salary for each completed year of service or part thereof in excess of 6 months.

(ii) Non-government employees not covered by the Payment of Gratuity Act, 1972

Any death cum retirement gratuity is exempt from tax to the extent of least of the following:

 a. Rs. 10,00,000 

 b. Gratuity actually received

 c. Half months’ salary (based on last 10 moths’ average salary immediately preceding the month of retirement or death) for each completed year of service.

Leave Salary or Leave Encashment

Generally, employees are allowed leaves during the period of service. Employee may avail such leaves or in case the leaves are not availed, then the leaves may either be lapsed or accumulated for future or allowed to be encashed every year or at the time of termination / retirement. The payment received on account of encashment of unavailed leave would be form part of salary. However, section 10(10AA) provides exemptions in respect of amount received by way of encashment of unutilized earned leave by an employee at the time of his retirement whether on superannuation or otherwise. Leave encashment to an employee, while he continues to be in service with the same employer, is fully taxable.

Exemption of amount received by way of encashment of unutilized earned leave on retirement [Section 10(10AA)]

The provisions of this clause are mentioned below:

(a) Government employee: Leave salary received at the time of retirement is fully exempt from tax.

(b) Non- government employee: Leave salary received at the time of retirement is exempt from tax to the extent of least of the following:

(i) Rs. 3,00,000

(ii) Leave salary actually received

(iii) 10 months’ salary (on the basis of average salary of last 10 moths)

(iv) Cash equivalent of leave (based on last 10 moths’ average salary immediately preceding the date of retirement) to the credit of the employee at the time of retirement or death. Earned    leave entitlement cannot exceed 30 days for every year of actual service rendered for the    employer from whose service he has retired.

Profits in lieu of Salary [Section 17(3)]

It includes the following:

(i) Compensation on account of termination of his employment

The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment.

(ii) Compensation on account of modification of the terms and conditions of employment

The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the modification of the terms and conditions of employment.

Usually, such compensation is treated as a capital receipt. However, by virtue of this provision, the same is treated as a revenue receipt and is chargeable as salary.

(iii) Payment from provident fund or other fund

Any payment due to or received by an assessee from his employer or former employer from a provident or other fund other than

-Gratuity [section 10(10)]

-Pension [section 10(10A)]

-Compensation received by a workman under Industrial Disputes Act, 1947 [section 10(10B)]

-From provident fund or public provident fund [section 10(11)]

-From recognized provident fund [section 10(12)]

-From approved superannuation fund [section 10(13)]

-Any House Rent Allowance [section 10(13A)]

To the extent to which it does mot consist of employee’s contributions or interest on such contributions.

(iv) Keyman Insurance policy

Any sum received by an assessee under a Key man Insurance policy including the sum allocated by way of bonus on such policy.

(v) Lump sum payment or otherwise

Any amount, whether in lump sum or otherwise, due to the assessee or received by him, from any person-

(a) Before joining employment with that person, or

(b) After cessation of his employment with that person. 

Retrenchment compensation [section 10(10B)]

The retrenchment compensation means the compensation paid under Industrial Disputes Act, 1947 or under any Act, Rule, Order or Notification issued under any law. It also includes compensation paid on transfer of employment under section 25F or closing down of an undertaking under section 25FF of the Industrial Disputes Act, 1947.

It may be noted that compensation on account of termination and due to modification in terms and conditions of employment would be taxable as ‘profits in lieu of salary’. However, the retrenchment compensation would be exempt under section 10(10B), subject to following limits.

(a) Amount calculated in accordance with the provisions of section 25F of the Industrial Disputes Act, 1947

15/26 X Avg. salary of last 3 month X completed years of services and part thereof in excess of 6 month

Or

(b) An amount, not less than Rs. 5,00,000 as may be notified by the Central Government in this behalf; whichever is lower.

Provident Fund

Provident fund scheme is a scheme intended to give substantial benefits to an employee at the time of his retirement. Under this scheme, a specified sum is deducted from the salary of the employee as his contribution towards the fund. The employer also generally contributes the same amount out of his pocket, to the fund. The contribution of the employer and the employee are invested in approved securities. Interest earned thereon is also credited to the account of the employee. Thus, the credit balance in a provident fund account of an employee consists of the following:

(i) Employee’s contribution

(ii) Interest on employee’s contribution

(iii) Employer’s contribution

(iv) Interest on employer’s contribution

The accumulated balance is paid to the employee at the time of his retirement or resignation. In the case of death of the employee, the same is paid to his legal heirs.

Types of Provident Fund

1. Statutory Provident Fund (SPF)

The Statutory Provident Fund is governed by Provident Funds Act, 1925. It applies to employees of government, railways, semi-government institutions, local bodies, universities and all recognized educational institutions.

2.  Recognized Provident Fund (RPF)

Recognized Provident Fund means a provident fund recognized by the Commissioner of Income-tax for the purposes of income-tax. It is governed by Part A of Schedule IV to the Income-tax Act, 1961. This schedule contains various rules regarding the following:

(a) Recognition of the fund

(b) Employee’s and Employer’s contribution to the fund

(c) Treatment of accumulated balance etc.

A fund constituted under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 will also be a Recognized Provident Fund.

3. Unrecognized Provident Fund (URPF)

A fund not recognized by the Commissioner of Income-tax is Unrecognized Provident Fund.

4. Public Provident Fund (PPF)

Public Provident Fund is operated under the Public Provident Fund Act, 1968. A membership of the fund is open to every individual though it is ideally suited to self-employed people. A salaried employee may also contribute to PPF in addition to the fund operated by his employer. An individual may contribute to the fund on his own behalf as also on behalf of a minor of whom he is the guardian. For getting a deduction under section 80C, a member is required to contribute to the PPF a minimum of Rs. 500 in a year. The maximum amount that may qualify for deduction on this account is Rs. 1, 50, 000 as per PPF rules. The rate of interest, at present, under the scheme is 8.0%.


Perquisites

The term ‘perquisites’ indicates some extra benefit in addition to the amount that may be legally due by way of contract for services rendered. In modern times, the salary package of an employee normally includes monetary salary and perquisite like housing, car etc.

-Perquisite may be provided in cash or in kind.

-Reimbursement of expenses incurred in the official discharge of duties is not a perquisite.

-Perquisite may arise in the course of employment or in the course of profession. If it arises from a relationship of employer-employee, then the value of the perquisite is taxable as salary. However, if it arises during the course of profession, the value of such perquisite is chargeable as profits and gains of business or profession.

-Perquisite will become taxable only if it has a legal origin. An unauthorized advantage taken by an employee without his employer’s sanction cannot be considered as a perquisite under the Act.

The term ‘perquisite’ is defined under section 17(2). The definition of perquisite is an inclusive one. Based on the definition, perquisites can be classified n following three ways:

1. Perquisites taxable in the case of all employees.

2. Perquisites exempt from tax in the case of all employees.

3. Perquisites taxable only in the hands of specified employees.

1. Perquisites taxable in the case of all employees.

The following perquisites are taxable in the hands of all employees:

(i) Rent free accommodation provided by the employer to the employee, Such accommodation may be furnished or unfurnished.

(ii) Any concession in the matter of rent in respect of the accommodation provided or granted by the employer to the employee.

(iii) Any sum paid by the employer in discharging the monetary obligation of the employee which otherwise would have been payable by the employee e.g. the school fees of the children of the employee paid by the employer or the Income-tax of the employee paid by the employer.

(iv) Any sum payable by the employer whether directly or through a fund (other than Recognized Provident Fund (RPF), Approved Superannuation Fund or Deposit Linked Insurance Fund) to effect an assurance on the life of the assessee or to effect a contract for an annuity.

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

2. Perquisites exempt from tax in the case of all employees.

Following perquisites are exempt from tax in the hands of all employees:

1. Telephone

Telephone provided by an employer to an employee at his residence.

2. Transport facility

Transport facility provided by an employer engaged in the business of carrying of passengers or goods to his employees either free of charge or at a concessional rate.

3. Perquisites allowed outside India by the Government

Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India.

4. Refreshment

Refreshment provided to all employees during working hours in office premises.

5. Annual premium by employer on personal accident policy

Payment of annual premium by employer on personal accident policy effected by him on the life of the employee.

6. Subsidized lunch

Subsidized lunch or dinner provided to an employee.

7. Recreational facilities

Recreational facilities, including club facilities, extended to employees in general i.e., not restricted to a few selected employees.

8. Amount spent on training of employees

Amount paid by the employer on training of employees or amount paid for refresher management course including expenses on boarding and lodging.

9. Sum payable by employer to a RPF or an superannuation fund

Sum payable by employer to a RPF or an superannuation fund or deposit-linked insurance fund established under the Coal Mines Provident Fund or the Employee’s Provident Fund Act.

10. Leave travel concession

Leave travel concession, subject to the conditions specified under section 10.

11. Medical facilities

Medical facilities subject to certain prescribed limits.

12. Rent free house / Conveyance facility

Rent free official residence and conveyance facilities provided to a Judge of the Supreme Court / High Court is not a taxable perquisite.

13. Residence to officials of Parliament

Rent free furnished residence (including maintenance thereof) provided to an officer of the Parliament, a Union Minister or Leader of Opposition in Parliament is not a taxable perquisite.

Residential accommodation provided by employer

1. Unfurnished accommodation

a. Accommodation provided by the Government to its employees

The license fee determined by Union or State Government as reduced by the rent actually paid by the employee.

b. Accommodation provided by any other employer.

2. Furnished accommodation

Value of perquisite shall be determined as if it is an unfurnished accommodation. Such value shall be increased by 10% p.a. of the cost of furniture (including television sets, refrigerators, other household appliances, air conditioning plant or equipment or other similar appliances or gadgets) or if such furniture is hired from a third party, the actual hire charges payable for the same. Such valuation of furniture shall be as reduced by any charges paid or payable for such furniture by the employee during the previous year.

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