INCOME TAX NOTES: INCOME FROM SALARY

HEADS OF INCOME:

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:

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

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

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