Chapter 6, Lesson B - Income from Salaries
Introduction of the Host
Mrs.Geetha Dasaraty is a commerce graduate with a Masters in Business
Administration specialising in finance. Her stint with a Coimbatore based company and later with a consulting firm in Chennai has provided her with a decade of experience in project finance and appraisals, accounting and tax laws.
She is a freelance writer and money matters are her forte. She is currently pursuing her final course in Company Secretaryship and is doing a course on Vaishnavism.
She has a passion for literature and Carnatic music. She is also a violinist.
About the Class
We bring you an online class titled 'Elementary Finance'. This will have
12 lessons - one a month. Each lesson is further subdivided into 4 chapters.
And we will give you one new chapter every week.
Chapter 6 Lesson B - Income from Salaries
In this lesson we will get to know what income from salaries are and how tax is computed on this.
What is income from salaries?
Salary includes the following:
- Wages
- Annuity or pension
- Gratuity
- Fees, commission perquisites, or profits in lieu of or in addition to salaries.
- Advance of salary
- Leave encashment
- Contribution of the employer to a provident fund in excess of the prescribed limit.
- Compensation due to variation in service contract.
On what basis is tax charged?
Salary for the purpose of charge includes:
- Salary due from an employer or former employer in the previous year whether actually paid or not.
- Salary paid or allowed to him by or on behalf of his employer in the previous year though not due or before it became due.
- Arrears of salary paid or allowed to him by or on his behalf, if not charged to tax in the previous year.
Salary is therefore charged to tax on due basis or on receipts basis. Income will be charged to tax under the head salaries only if there exists an employer-employee relationship. Income under this head is deemed to accrue and arise in India, if it is earned in India. Salary received abroad by Indian Nationals from the Government of India, for service rendered outside India, is also deemed to accrue or arise in India.
We will see the tax treatments for a few receipts.
Leave salary
Leave salary is taxed as follows:
- For a Central or State Government employee, any amount received as leave encashment for the earned leave at his credit during retirement will be exempt from tax.
- For non-Government employees, leave salary is exempt to the extent of the least of the following:
a. Leave encashment for the period of earned leave to the credit of an
employee only at
the time of retirement. Such earned leave cannot exceed 30 days for every
year of
service rendered, or
b. 10 years 'average salary' or
c. The amount not chargeable to tax as stated by the Government
d. Leave encashment actually received at the time of retirement.
Average salary will be the average salary drawn during the period of 10
months immediately preceding the retirement or superannuation.
Gratuity
Gratuity is taxed as follows:
- For Government employees the gratuity received is wholly exempt from tax.
- For employees covered under the Gratuity Act , gratuity received
is exempt to the extent of
a. 15 days salary based on the last drawn salary for every year of completed
service or part thereof in excess of 6 months - For other employees, the least of the following:
b. Rs.3,50,000 or
c. Gratuity actually received, whichever is less.
b. Half month's salary for each year of completed service.
c. Gratuity actually received.
Pension
Pension is the periodical payment received by an employee after his retirement
and it is taxed to salary.
- Uncommuted pension is taxable for both Government and non-Government employees.
- Commuted pension received by a Central or State Government, local authorities or statutory corporations is wholly exempt from tax.
- Commuted pension received by any other employee:
b. in any other case, the commuted value of half of such pension.
Allowances
An allowance is a fixed amount of money or other compensation received regularly in addition to salary for meeting specific requirement of the employees.
House rent allowance:
The least of the following is exempt from tax:
- An amount equal to 50 % of salary, where the residential house is situated in Mumbai, Kolkata, Delhi or Chennai and an amount equal to 40 % of salary where the residential house is situated at any other place.
- HRA received by the employee for the period during which the employee occupies the rental accommodation during the previous year.
- The excess of rent paid over 10 % of salary.
The above exemption is not available where an employee lives in his own house or in a house for which he does not pay rent.
Entertainment Allowance:
Entertainment allowance is first included in the salary and then a deduction
is allowed
- In the case of a Government employee the least of the following is eligible for deduction:
- For non-Government employees, it is eligible for deduction only if the employee is in continuous service with the present employer before April1, 1955 and has been receiving entertainment allowance from 1st April 1955 till the year in which income is to be taxed.
a. Rs.5000
b. 20 % of salary
c. the actual amount of entertainment allowance.
a. Rs.7500
b. 20% of salary
c. actual amount of entertainment allowance received during the previous year or
d. the amount of allowance received during the financial year 1954-55,
whichever is less.
Other allowances:
The following allowances are exempt subject to actuals.
- Allowance given to meet cost of travel on tour or transfer.
- Allowance granted on tour or journey in connection with transfer to meet the daily charges incurred by the employee.
- Allowance granted to meet conveyance expenses incurred in performance of duty, where no free conveyance is provided.
- Allowances to meet expenses incurred on engaging a helper for performance of official duty.
- Academic, training or research allowance granted in educational or research institutions.
- Uniform purchase or maintenance allowance.
- Certain allowances are exempt like border area allowance, tribal area allowance, children education allowances and transport allowance up to Rs.800 per month.
- Allowances paid to High Court Judges are not chargeable to tax.
- Children education allowance is exempt up to Rs.100 per month per child up to a maximum of two children.
- Allowance to meet the hostel expenditure on a child is exempted up to Rs.300 per month per child, up to a maximum of two children.
Perquisites
Perquisites are casual emoluments or benefits attached to an office or
position in addition to salary or wages.
- Value of rent-free accommodation provided by the employer.
- Any sum paid by the employer in respect of an obligation, which was actually paid by the assessee.
- Value of any benefit or amenity granted free or at a concessional rate to specified employees.
- Provision of medical facilities in government hospitals approved by the employer or the Chief Commissioner of Income Tax.
- Refreshments provided to employees during working hours in office premises.
- Transport provided by the employer free of cost or at concessional rates provided the employer is in the business of carriage of goods or passengers.
- Perquisites allowed outside India by the government to a citizen of India for rendering services outside India.
- Rent free official residence provided to a Judge of a High Court or Supreme Court or an Officer of Parliament.
- Residential telephone except for long distance personal calls.
Questions on Chapter 6 Lesson A
1. What are the conditions for an assessee to be a resident and ordinarily
resident?
2. Explain 'assessment year' and 'previous year'.