Monday, April 28, 2014

INCOME TAX NOTES: INCOME FROM SALARY




HEADS OF INCOME:

Income of a person is classified into 5 categories. Thus, income belonging to a particular category is taxed under a separate head of income pertaining to that category. Section 14 of the Act, has classified five different heads of income for the purpose of computation of total income.All income shall be classified under the following heads for the purpose of computation of taxable amount subject to certain Exemptions’ and deductions.


THE FIVE HEADS OF INCOME ARE:
  1. Income under the head salaries (Section 15 – 17)
  2. Income from house property (Section 22 – 27)
  3. Profits and gains from business or profession (Section 28 – 44)
  4. Capital gains (Section 45 – 55)
  5. Income from other sources (Section 56 – 59)

INCOME FROM “SALARY”

Meaning of Salary: Any remuneration paid by an employer to an employee in consideration of his services is called salaries. It includes monetary value of those benefits and facilities, which are provided by the employer and are taxable.

Income forming part of salary: They include basic salary, advance salary, fees, commission, bonus, taxable value of cash allowances, perquisites and retirement benefits. Section 17 of the Act gives an inclusive definition of salary. Broadly, it includes:
  • Basic salary
  • Fees, Commission and Bonus
  • Taxable value of cash allowances
  • Taxable value of perquisites
  • Retirement Benefits
Allowances:
These are of three types

1.Taxable Allowances : Dearness allowance, Medical allowance, Servant allowance, Warden Allowance, Family allowance, City Compensatory allowance etc.

2.Allowances exempt upto specified limit: House rent allowances, Entertainment allowance, Certain Special allowances, etc.

3.Fully exempted allowances: Foreign allowance, sumptuary allowance to High Court / Supreme Court Judges, Allowances from U.NO.

Fully taxable allowances
  • Dearness Allowance and Dearness Pay
  • City Compensatory Allowance
  • Tiffin / Lunch Allowance
  • Warden or Proctor Allowance
  • Overtime Allowance
  • Fixed Medical Allowance
  • Servant Allowance
  • Other allowances
Partially exempt allowances
This category includes allowances which are exempt up to certain limit.

House Rent Allowance (H.R.A.) Sec.10(13A)
An allowance granted to a person by his employer to meet expenditure incurred on payment of rent in respect of residential accommodation occupied by him is exempt from tax to the extent of least of the following three amounts:

Format for computation of H.R.A
1)Rent-10% of Salary- XXX
2)House Rent Allowance actually received by the assessee- XXX
3) 50% of salary (If accommodation is situated in Mumbai,
Kolkata, Delhi, Chennai) OR  40% of salary (if accommodation is situated in any other place).- XXX
Least of the Above    XXX

If an employee is living in his own house and receiving HRA, it will be fully taxable.

Entertainment Allowance Sec.16 (ii)
This allowance is first included in gross salary under allowances and then deduction is given to only government employees under Section 16 (ii).

Limit
Gross Salary    XXXXXX
1)    5000   
2)    1/5 of the Salary   
3)    Actual Amount   
Least of the Above    XXX



Special Allowances for meeting official expenditure
Certain allowances are given to the employees to meet expenses incurred exclusively in performance of official duties and hence are exempt to the extent actually incurred for the purpose for which it is given. These include travelling allowance, daily allowance, conveyance allowance, helper allowance, research allowance and uniform allowance.

Children Education Allowance
This allowance is exempt to the extent of Rs.100 per month per child for maximum of 2 children

Children Hostel Allowance
Exempt to the extent of Rs.300 per month per child for maximumof 2 children.

Transport Allowance
An amount uptoRs.800 per month paid is exempt. However, in case of blind and orthopedically handicapped persons, it is exempt up to Rs. 1600p.m.

Out of station allowance
Exempt up to 70% of such allowance or Rs.6000 per month, whichever is less Transport Allowance
An amount uptoRs.800 per month paid is exempt. However, in case of blind and orthopedically handicapped persons, it is exempt up to Rs. 1600p.m.

Out of station allowance
Exempt up to 70% of such allowance or Rs.6000 per month, whichever is less


FULLY EXEMPT ALLOWANCES
  • Foreign allowance is usually paid by the government to its employees being Indian citizen posted out of India for rendering services abroad. It is fully exempt from tax.
  • Allowance to High Court and Supreme Court Judges of whatever nature are exempt from tax.
  • Allowances from UNO organisation to its employees are fully exempt from tax.
Retirement Benefits

Gratuity Sce.10 (10)

1) Govt Employee death cum retirement is wholly exempt from tax
2) Employees covered by the payment of Gratuity Act 1972


Actual Gratuity    Xxxx
1) 10,00,000    Xxxx
2)15/26*last  drawn  salary  *completed  year  of    Xxx
service or Part of the year in excess of 6 months.    Xxxx
3) Actual Amount    ----------------
Least of the above    Xxxxx
Taxable Gratuity    Xxxxx


3) Employees not covered by the payment of Gratuity Act 1972
Actual Gratuity    Xxxx
1) 10,00,000    Xxxx
2)1/2 *  Average last 10 months salary * complted    Xxx
year of service    Xxxx
3) Actual Amount    ----------------
Least of the above    Xxxxx
Taxable Gratuity    Xxxxx


PENSION
Un commuted pension refers to pension periodically received by the employee. It is taxable in the hands of the both Govt. and Non Govt Employees.

Commuted pension Sec.10 (10A) means lumsum amount taken by commuting the pension or part of the pension. Any commuted pension received by a Govt employee is wholly exempt from tax.

LEAVE SALARY. Sec.10 (10AA)
Govt employee is wholly exempt from tax.

Others are following
Actual Amount    Xxxx
1) 300,000    Xxxx
2)10* salary (Average last 10 months salary )    Xxx
3)cash  equivalent  leave*  Average  last  10  months    Xxxx
salary    ----------------
3) Actual Amount    Xxxxx
Least of the above   
Taxable Amount    Xxxxx

RETRENCHEMENT COMPENSATION Sec.10(10B)     
Actual Amount    Xxxx
1) Amount calculated under the Industrial Disputes    Xxxx
Act 1947.    Xxx
2) 500,000    ---------------
        Xxxxx
TaxableAmount    Xxxxx

VOLUNTARY RETIREMENT SCHEME  Sec.10(10C)

Employee who has completed 10 years of service or completed 40 years of age Xxxx
Actual Amount   
1) last drawn salary *3* complted years service    Xxxx
OR    Xxx
last drawn salary  * remaining months of service    xxxx
whichever is lower    ----------------
2)500,000    Xxxxx
3)actual Amount Received   
Taxable Amount    xxxxx

RENT FREE ACCOMADATION Sec.17(2)
Govt  Employee : License fee determined by the  Govt

Other than Govt Employee

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