Professional Documents
Culture Documents
What Constitutes Salary Income
What Constitutes Salary Income
a) When due from the former employer or present employer in the previous year, whether
paid or not.
c) When arrears of salary are paid in the previous year by or on behalf of a former employer
or present employer, if not charged to tax in the period to which it relates.
It is, therefore, clear that apart from current years salary, even advance salary and/or
arrears of salary may be taxed in the year of receipt. More specifically and elaborately, the
Income-tax Act has stipulated that salary includes :-
b) Wages;
c) Fees;
d) Commission;
e) Pension;
f) Annuity;
g) Perquisite;
Receipts from Provident Fund chargeable to tax; Profit in lieu of or in addition to salary or
wages; Gratuity;
i) Encashment of leave.
No, payment can be taxed under this section unless the relationship of employer and
employee exists between the payer and payee. The employer and employee relationship is
the relationship of a master and servant, and it distinctly differs from that existing between
a principal and agent. Primarily, the degree of control of the employer over the employee
would be a deciding factor, as the agent is generally not under the complete Control and
supervision of his principal.
That is why even the emoluments received by an Member if Parliament/ M.L.A. are not
taxable under the head "Salary" because of the absence of employer and employee
relationship.
The golden rule is that it accrues where the service is rendered. Leave salary paid to a
person employed in India on leave to a foreign country is treated to be the arisen in India.
However, if a citizen of India service outside India and receives salary from the of India, it
would be taxable as salary to have accrued in India.
Pensions are taxed under the head 'Salaries'. The of standard deduction is also available on
them.
The I.T. Act contemplates tax on salary which is due, whether paid or not, tax is attracted
at the latest possible point of time which is the date when the salary accrues or becomes
due. However, where any salary paid in advance is assessed in the year of payment, it
cannot be taxed again when it becomes due. Similarly, if arrears of salary have been
assessed on the 'due' basis in the past, they are not liable to be taxed again when they are
paid.
When the salary is paid 'tax-free' the employee has to return in his total income the gross
salary, i.e. aggregate of the net-salary received plus the amount of tax paid on his behalf by
the employer. It does not make any difference whether the tax is borne by the employer
voluntarily or under a contractual obligation.
Yes. The salary paid for services rendered in India is regarded as income earned in India,
so as to specifically provide that any salary payable for rest period or leave period which is
both proceeded or succeeded by service in India forms part of the service contract of
employment will also be regarded as income earned in India and so is to be taxed.
EXEMPTIONS OF INCOME
It is not true that every income received by an employee from his employer is taxable. Any
income falling within any of the following paragraphs shall not be included in computing the
income from salaries: -
(1) The value of any travel concession or assistance received by or due to an employee
from his employer or former employer for himself and his family, in connection with his
proceeding
(b) on retirement from service, or, after termination of service to any place in India is
exempt under clause (5) of Section 10 subject, however, to the conditions prescribed in rule
2B of the I.T. Rules, 1962.
(2) Death-cum-retirement gratuity or any other gratuity which is exempt to the extent
specified from inclusion in computing the total income.
(3) Any payment in commutation of pension received under the Civil Pension
(Commutation) Rules of the Central Government or under any similar scheme
applicable to the members of the Civil/Defense services under the Union/State/Local
Authority or a Corporation established by a Central, State or Provincial Act.
Payments in commutation of pension received under any scheme of any other
employer, exemption will be governed by the provisions of Section 10(10A) (ii).
(4) Any payment received by an employee of the Central /State Government, as cash-
equivalent of the leave salary in respect of the period of earned leave at his credit at the
time of his retirement on superannuation or otherwise, is exempt. In the case of other
employees it is subject to a maximum of ten month's leave. This exemption has an overall
max. limit of Rs. 2,40,000 [S.0.1015 (E) dated 27.11.97).
(6) Under Section 10(10C), any payment received by an employee of the notified bodies at
the time of his voluntary retirement or termination of his service, in accordance with any
scheme or schemes of voluntary retirement or in the case of public sector company, a
scheme of voluntary separation, is exempted to the extent that such amount does not
exceed five lakh rupees
(7) Any sum received under a Life Insurance Policy, including the sum allotted by way of
bonus on such policy other than any sum received under sub-section (3) of Section 80DDA.
(8) Any payment from a Provident Fund to which the Provident Funds Act, 1925 (19 of
1925), applies.
(9) Under Section 10(13AJ of the Income-tax Act, 1961, any special allowance specifically
granted to an assessee by his employer to meet expenditure incurred on payment of rent
(by whatever name called) in respect of residential accommodation occupied by the
assessee is exempt from Income-tax to the extent as may be prescribed.
(10) Under section 10(14) exemption of notified allowances is provided. The CBDT has
prescribed guidelines for the purpose of classes (i) and (ii) of Section 10(14) vide
Notification No.SO617(E) dated 7th July/ 1995 (F.No.l42/9/95TPL)which has been amended
vide Notification SO No.403(E) dated 24.4.2000 (F,No.l42/34/99-TPL).
11) Under Section 10(15)(iv)(i) of the Income-tax Act, interest payable by the Government
on deposits made by an employee of the Central Government or a State Government or a
public sector company from out of his retirement benefits, in a notified scheme, is exempt.
(12) Income by way of pension received by an individual or family pension
received by any member of the family of an individual who has been in the service of the
Central Government or State Government and has been awarded 'Param Vir Chakra" or
"Maha Vir Chakra" or "Vir Chakra" or such notified gallantry award, is exempt.
(13) Under Section 17 of the Act, exemption from tax will also be available, under
prescribed conditions, in respect of any medical treatment provided to an employee or any
member of his family or premium paid by the employer in respect of approved medical
insurance taken for his employees or reimbursement of insurance premium to the
employees for such medical insurance for the employee or his family members.
b) Employee who is beneficial owner of equity in the employer's company carrying 20% or
more voting power.
c) The employees other than those mentioned above, drawing salary in excess of Rs.
24,000 (w.e.f. 13th April 2002 this limit is Rs. 50,000) in monetary terms.
The value of any benefit or amenity granted or provided free of cost or at concessional rates
to these specified persons would be a 'perquisite' taxable in their hands.
WHAT ARE THE OTHER TAXABLE PERQUISITES?
The other taxable perquisites which are taxable in a prescribed manner include the folio
wing: -
d) Amount paid by an employer in respect of any obligation which otherwise would have
been payable by the employee, for example - payment of income-tax.
The definition of "perquisite" has been amended to include the value of any prescribed
fringe benefit or amenity. The fringe benefits are to be calculated in the manner prescribed
in the Income-tax Rules.
It has further been laid down that 'profits in lieu of salary shall include amounts received in
lump sum, in installments or in any manner, even prior to employment or after cessation of
employment, for the purposes of taxation.
For the purposes of calculating perquisite value of rent free residential accommodation, the
employees have been classified into three categories as follows: -
Government employees.
Public Sector or Semi Government employees.
Employees in the private sector.
For the first category of employees, the of the rent free unfurnished Accommodation is
taken as the rent payable by such employee in accordance with the Government Rules for
allotment of residences to its officers.
In the case of second category of employees, the value of rent free unfurnished
accommodation is taken at 10% of the salary of the employee for the period during which it
is occupied by him. However, where the Fair Rental Value of the accommodation is less than
10% calculated above, the Assessing Officer is empowered to restrict the value of the
perquisite to such Fair Rental Value.
In the case of third category of employees, the value of rent free unfurnished
accommodation is taken 10% of salary plus excess of Fair Rental Value over 60% of salary,
if the property is located in the four metros. In any other place, the value will be taken as
10% of salary plus excess of Fair Rental Value over 50% of salary.
Under the new Rule 3, for purposes of valuation of perquisite of accommodation, employees
are of two categories only- Union. & State Govt. employees and Others.
The definition of "salary' for calculating perquisite value is the same as per earlier Rules.
The only change is that, medical allowances and reimbursement for treatment of serious
illnesses as prescribed in provision below Section 17 (2) (vi) have now been excluded.
For the purpose of calculating the perquisite, 'salary' includes basic salary or wages, D.A.,
Bonus, Commission, Fees, taxable allowances as well as payments made by the employer
(like Income-tax, electricity, gas etc.).
'Fair rent' is the rent which a similar accommodation is able to get in the same locality or
the Municipal value of the accommodation, whichever is higher.
Where the accommodation is hired by the employer, it is the actual rent paid for the
accommodation.
Where it is owned by the employer, maintenance expenses of garden and salary of the
gardener, if borne by the employer, are also to be taken into account.
First, the perquisite value of the accommodation is determined in the above manner as if it
was provided free of rent. From the amount so, determined, a deduction is made of the rent
actually paid by employee. The balance amount is the perquisite value to "be added to the
taxable salary.
Now, under the newly notified Rules, the value of residential accommodation provided by
the employer to the employee during the previous year relevant to the A.Y. 2002-03 shall
be determined on the basis provided
Where the
Where the accommodation is
Circumstances accommodation is
furnished
unfurnished
1. Where the accommodation License fee determined The value of perquisite as per
is provided by Union or by Union or State col. (3) [plus] 10% per
State Government to their government in respect annum of the cost of furniture
employees either holding of accommodation in (including TV sets, radio sets,
office or post in connection accordance with the refrigerators, other household
with the affairs of Union or rules framed by that appliances, air plants or other
State any body or government [minus] equipment) or if such
Undertaking under the the rent actually paid furniture is hired, the actual
control of such by the employee. hire charges payable for the
Government on same [minus] charges paid or
deputation. payable for it by the
employee.
2. Where the accommodation [i]] 10% of salary in The value of perquisite as per
is provided by any other cities having population col. (3) and
employer and exceeding four lacs as
per 1991 census; [plus]
Also, where on account of his transfer from one place to another, the employee is provided
with accommodation at the new place of posting while retaining the accommodation at the
other place, the value of perquisite shall be determined with reference to only one such
accommodation which has the lower value with reference to the Table above for a period
not exceeding 90 days and thereafter the value of perquisite shall be charged for both such
accommodations as per the above Table.
Yes. The scope of the word "accommodation" has been widened by clarifying that it
includes a house, flat, farm house, hotel accommodation, guest house, a caravan, mobile
home, ship etc. However, the value of any accommodation located ' in a remote area'
provided to an employee working at a mining site or an on-shore oil exploration site or a
project execution site or an accommodation provided in an offshore site will not be treated
as a perquisite. A project site for the purposes of this sub-rule means a site of project upto
the stage of its commissioning.
A remote area means an area located at least 40 kilometers away from a town having a
population not exceeding 20,000 as per the latest published all India census. Off-shore sites
of similar nature do not have to meet any requirement of distance.
The basic rule is that any expenditure incurred by the employer in providing educational
facilities to any family member of the employee normally is a perquisite.
Where the educational institution is run by the employer, the value of this perquisite is the
cost of education in a similar institution in or around the same locality.
THE LAW APPLICABLE FOR TAXATION OF PERQUISITES W.E.F. 1.4. 2001.
Under the new rules, free or concessional education shall be valued in a manner assuming
that such expenses are borne by the employee, and would cover cases where an employer
may be running, maintaining or directly or directly financing the educational institution. Any
amount paid by the employee for such facilities or services shall be deducted from the
above amount. However where such educational institution itself is maintained and owned
by the employer or where such free educational facilities are provided in any institution by
reason of his being in employment of that employer, the sub-rule shall not apply if the cost
of such education or such benefit per child does not exceed Rs. 1000 p.m.
Usually, where the car is owned or hired by the employer, the perquisite value is
determined as the expenditure inferred by the employer on the maintenance and running of
the motor car, including emoluments, if any, of the driver and for the normal depreciation
attributable to the use of the car for the private purposes of the employee.
1 . Where the car is owned or hired by the Rs.600 upto 30.9.01 Rs. 800 upto
employer and all expenses on its (Rs.300 upto 2.6.95) 30.9.01
maintenance and running are met or (Rs.400 upto
reimbursed to assessee by employer. 2.6.95)
employee's private or personal expenses are
borne by the employee.
2.Where the car is owned or hired by the Rs.200 upto 30.9.01 Rs 300 upto
employer but the running & maintenance (Rs.100 upto 2.6.95) 30.9.01
expenses for the employee's private or (Rs.150 upto
personal are borne by the employee 2.6.95)
Under the new Rules, w.e.f. 1.4.2001, the calculation of Value of Perquisite per calendar
month of car, if used partly in the performance of duties & partly for private or personal
purposes of his own or any member of his household is determined as given here-in-below:-
Engine Cubic capacity does not Engine Cubic capacity
Circumstances
exceed 1.6 litres. exceeds 1.61t.
(ii) maintenance Rs.400 (plus Rs. 600, if chauffeur Rs.600 (plus Rs.600, if
and running for is provided by the employer to run chauffeur is also provided to
such private or the car). run the car).
personal use are
fully met by the
assessee
(ii) such reimbursement is for the Subject to the provisions Subject to the provisions
use of the vehicle partly for contained in clause (B) contained in clause (B) of
official purposes & partly for of this sub-rule, the this sub-rule, the actual
personal or private purposes of actual amount of amount of expenditure
the employee or any member of expenditure incurred by incurred by the employer
his household. the employer
(-)
(-)
Rs. 1600 (plus Rs.600, if
Rs.1200 (plus Rs.600, if chauffeur is also provided
chauffeur is also by the employer to run
provided by the the car).
employer to run the car).
HOW WILL THE PERQUISITE BE COMPUTED WHERE THE EMPLOYEE OWNS ANY
OTHER AUTOMOTIVE CONVEYANCE BUT THE ACTUAL RUNNING MAINTENANCE
CHARGES ARE MET OR REIMBURSED TO HIM BY THE EMPLOYER?
As per the old and the new rules, firstly, the value of the perquisite has to be arrived at as
given above and then from the amount so determined, deduction is made from the actual
amount paid by the employee for private use of the car. The balance is the perquisite value
in this case.
Such other cars shall be deemed to be for personal use and the value of perquisite shall be
computed accordingly. Where fuel and upkeep cost of the employees, car is borne or
reimbursed by the employer, the amount reasonably attributable to business use is not to
be charged as perquisite. For this, user details in the form of log books; odometer readings
etc. should be maintained.
For claiming higher amount of official use in respect of reimbursement of car expenses or
wholly official use of car provided by an employer, the following details and documents need
to be maintained:-
i) the employer has maintained complete details of journeys undertaken for official purpose
which may include date of journey, destination, mileage and the amount of expenditure
incurred thereon;
ii) the employee gives a certificate that the expenditure on claimed trips was incurred wholly
and exclusively for the performance of his official duty;
iii) the supervising authority of the employee, wherever applicable, gives a certificate to the
effect that the expenditure was incurred wholly and exclusively for the performance of
official duties.
ARE THE RULES OF VALUATION FOR EMPLOYEE OWNED CARS BE TAKEN TO APPLY
TO CONVEYANCE ALLOWANCE REGULARLY PAID OR PAYABLE TO THE EMPLOYEE?
No, these rules of valuation for employee owned cars should not be taken to apply to
conveyance allowance regularly paid or payable to the employee under terms of
employment or otherwise. The conveyance allowance is a cash disbursement and is to be
taxed separately as an allowance subject to the provisions contained in Section 10(14). The
present rules provide for the computation of value of perquisite where the expenses on the
running or maintenance of employee owned car is met or reimbursed by. the employer.
One of the most important changes incorporated is in the cubic capacities of motorcars.
Previously, the cubic capacities of small motorcars was specified as not exceeding 1.88 litres
whereas now the limit is 1.6 litres.
In case the supply is made from resources owned by the employer, the perquisite value is
'Nil'. Where the supply is taken from third party, the perquisite value would be the expenses
incurred by the employer.
In case the supply is partly for official and partly for private purposes, the perquisite value is
its actual cost to the employer or 6.25% of salary, whichever is Less,
For free supply of gas, electricity and water for household consumption the old rules already
provide that the amount paid by the employer to the agency supplying the amenity shall be
the value of perquisite. However, when the supply is made from employer's own resources,
the value of perquisite was taken as Nil. The separate provision in the old rules of valuation
at 6.25% of salary of the taxpayer for part official use is discontinued. Under the new rules
even where the supply is made from the employer's own resources, the manufacturing cost
per unit incurred by the employer would be the value of perquisite. Any amount paid by the
employee for such facilities or services is reduced from this amount.
1. Gardener, sweeper and 100% salary taxable. Rs. 120 p.m. Per person.
watchman.
Value of free service of all personal attendants including a sweeper, gardener, or watchman
is to be at actual cost to the employer. Where attendant(s) is provided at the residence of
employee, full cost will be taxed as perquisite in the hands of employee irrespective of
degree of personal service rendered to him. Any amount paid by the employee for such
facilities shall be reduced from the above amount.
IF THE EMPLOYER GIVES OPTION TO ITS EMPLOYEE 'TO BUY ITS SHARES, IS IT A
TAXABLE PERQUISITE?
Prior to 1.4.2001, stock options were taxed at two stages i.e., as perquisite (on the amount
representing the difference between the exercise price and the fair market value on the date
of exercise), and as capital gains.
With effect from 1.4.2001 (relevant to assessment year 2001-2002) onward, stock options
issued as per guidelines of the Central Government are to be taxed only once, at the time of
sale, as capital gains. In cases, where perquisite has been assessed with reference to
exercise of the option by the employee under Section 17(2), the fair market value at the
time of exercise of the option shall be the cost of acquisition of share for working out the
capital gains. The relevant guidelines of the Central Government have been issued vide
Notification No.l021(E) dt. 1.10.2001. Stock options not in conformity with the above
guidelines-(non-qualified stock options) shall continue to be taxed at both the stages.
This perquisite is to be charged at the rate of 10% of the original cost of the asset as
reduced by any charges paid for such use. However, Computers and laptops are exempt
Further, the value of perquisite for an asset used for income for more than ten years would
be taken as Nil.
IS AN AMOUNT SPENT ON MEMBERSHIP FEE BY THE EMPLOYER ON THE
MEMBERSHIP OF THE EMPLOYEE IN A PROFESSIONAL INSTITUTION A TAXABLE
PERQUISITE?
AS PER NEW RULES WHAT IS THE POSITION OF CLUB EXPENSES BORNE BY THE
EMPLOYER?
Club expenses of employees borne by employers are already charged as perquisite by virtue
of Section 17(2)(iv). To formalize the issue, now it has been specified that annual and
periodical club fees paid by the employer is chargeable as a perquisite. However to ensure
that basic facilities for the health and recreation of employees are not hit, health clubs,
sports facilities etc provided uniformly to all classes of employees by the employer at the
employer's premises are exempt. Where such expenses on entertainment including meals
are for purposes of business and proper records for the same are maintained, no perquisite
would arise.
AS PER NEW RULES WHAT IS THE POSITION OF INITIAL ONE TIME DEPOSITS OR
FEES FOR CLUB MEMBERSHIPS?
The initial one time deposits or fees for corporate or institutional membership, where the
benefit does not remain with a particular employee after cessation of employment, are
exempt.
AS PER NEW RULES WHAT IS THE POSITION OF CREDIT CARD EXPENSES BORNE
BY EMPLOYERS?
Credit card expenses of employees both business and personal, are often borne by
employers. Such credit card payments would ordinarily be chargeable to tax as a perquisite.
However, these expenses are often incurred to entertain customers and clients for the
purposes of business. Therefore where such expenses on entertainment including meals are
for purposes of business and proper records for the same are maintained no perquisite
would arise.
For credit card and club expenses to be exempt for business purposes, the following
documentation needs to be maintained:
(a) Complete details in respect of such expenditure maintained by the employer
including the date of expenditure and the nature of expenditure;
(b) It is certified by the employee that such expenditure was incurred wholly
and exclusively for the performance of official duty;
(c) Supervising authority of the employee, wherever applicable, gives a certificate for such
expenditure to the effect that the same was incurred wholly and exclusively for the
performance of official duties;
(d) Where an employee incurs expenditure on entertainment and claims the
same to have been incurred wholly and exclusively in the performance of his duties,
details of such entertainment expenses including the nature and purpose of
entertainment and
persons entertained.
Often an employee or member of his household benefits from the transfer of movable asset
(not being shares or Securities) at no cost or at a cost less than its market .Value from the
employer. The difference between the cost of the movable asset (not being shares or
securities) and the sum, if any, paid by the employee, Shall be taken as the value of
perquisite. In case of a movable asset, which has already been put to use, the original cost
shall be reduced by a sum of 10% of such original cost for every completed year of use of
the asset.
AS PER NEW RULES WHAT IS THE PERQUISITE IF THE EMPLOYEE AVAILS OF FREE
OR CONCESSIONAL JOURNEYS IN THE CONVEYANCE(S) OWNED BY THE
EMPLOYER'S BUSINESS FOR TRANSPORTATION?
Under the old rules where an employee avails of free or concessional journeys in
conveyance owned by the employer's undertaking for the purpose of transport of
passengers or goods, the value of perquisite was taken as Nil. However, under the new
rules the value at which such benefit or amenity is offered by such undertaking to the
public, the value of perquisite shall now be taken as such value as reduced by any amount
actually paid by the employee. The conveyance may be owned, leased or made available by
any other arrangement by the undertaking.
However Journey tickets for leave travel, tours and transfers which are already exempt
under Sections 10(5) and 10(14) would continue to be exempt
It is common practice to provide interest free or concessional loans to employees. The value
of such perquisite would be the excess of interest payable at prescribed interest rate over
interest, if any, actually paid by the employee.
The prescribed interest rate now is 10% p.a. for loans for housing/conveyance and 13%
p.a. for other loans.
Perquisite value would be calculated on the basis of the maximum outstanding monthly
balance by the simple interest method. Such housing or conveyance loans must be for
'acquiring capital assets' i.e., house or conveyance, as the case may be, and not for repairs
thereof, however extensive they may be.
For valuing perquisites under this rule, any other method of calculation and adjustment
otherwise adopted by the employer shall not be recognised for purposes of this rule.
It has been specifically clarified that the above sub-rule shall also apply to loans outstanding
as on 1 st April, 2001, (if the new rule is applied from that date) or 1 st October, 2001 (if
the new rule is applied from that date).
The value of such perquisite shall be the expenditure incurred by the employer. This would
also apply to official tours extended as a vacation and family members accompanying
taxpayers on official tours. However leave travel as per Section 10(5) and enjoyment of
holiday home facilities available uniformly to all classes of employees would remain exempt.
The scheme of free meals as a staff welfare measure had been recognized and was
admissible upto Rs.35 for each meal. The new rule does not treat as perquisite free meals if
the cost per meal does not exceed Rs.50
Where any amount is recovered from the employee, such amount shall be reduced from the
value of perquisite. Such free or subsidised meal should, however, be provided at office
premises or through non-transferable vouchers meant for only meals during working hours.
Tea or similar non-alcoholic beverages and snacks - in the form of light refreshments during
working hours are not charged as perquisite.
Also, meals in, remote areas as prescribed and similar off-shore sites as specified, shall be
exempt.
However, provision of free meals by the employer in excess of Rs.50 would be treated as
perquisite, as reduced by recoveries made from the employee.
A benefit or amenity not included in the rules shall be valued at the cost to the employer
where the employer pays for the benefit or amenity. Otherwise, it would be valued at the
amount the employee would pay to acquire such benefit or amenity from the market. But,
the benefit of conveyance to and from residence to place of work, periodicals and journals
required for discharge of work and expenses on telephones, including a mobile phone, shall
not be perquisite.
THE NEW RULES HAVE BEEN MADE EFFECTIVE FROM 1.4.2001 ALTHOUGH THE
WERE ONLY NOTIFIED THROUGH NOTIFICATION NO. 313 DATED 25.9.2001. IS
THIS IS NOT INEQUITABLE?
No. While this Rule comes into force with effect from the 1 st day of April, 2001 it has been
provided that the employee may, at his option, compute the value of perquisites made
available to him or any member of his household for the period beginning on 1 st day of
April, 2001 and ending on 30th day of September, 2001 in accordance with the Rules, as
they stood prior to this amendment. Therefore, the employer has to obtain a declaration
from each employee as to the option he wants to follow for purposes of tax deduction at
source.
However, administrative circulars and instructions relating to perquisites failing under the
purview of Rule 3 issued before the adoption of the new rules, shall stand superseded or
modified, as the case may be.
CAN AN EMPLOYEE EXERCISE OPTION FOR USING THE OLD OR NEW RULES FOR
THE PERIOD DIFFERENTLY IN RESPECT OF DIFFERENT PERQUISITES?
No. It should be noted that the option to the taxpayer of using the old or new rules for the
period specified above shall be applied uniformly in respect of all perquisites, in case of a
particular taxpayer. In other words, one cannot selectively value a particular perquisite by
the old rule and another one by the new rule.
WHAT ARE THE CONDITIONS FOR MEDICAL FACILITIES TO QUALIFY AS TAX FREE
PERQUISITES?
(a) The value of any medical treatment provided to an employee or any member of his
family, in any hospital maintained by the employer;
(b) Any sum paid by the employer in respect of any expenditure actually incurred by
employee on his medical treatment or of any member of his family:
(i) In ally hospital the Government or of any local Authority or any other hospital approved
for the purposes of medical treatment of its employees;
(ii) In respect of the prescribed diseases or ailments, in any hospital approved by the Chief
Commissioner :
Provided that, in a case failing in sub-clause (ii), the employee shall attach with his return of
income a hospital certificate specifying the disease 85 hospital Receipt for amount paid.
(c) Premium paid by the employer in respect of approved medical insurance taken for his
employees or reimbursement of insurance premium to employees for medical insurance for
themselves/family members.
(d) Reimbursement by the employer, of the amount spent by an employee in obtaining
medical treatment for himself or any member of his family from any doctor, max.
aggregate Rs. 15,000 in an year.
(e) As regards medical treatment abroad, the actual expenditure on stay and treatment
abroad of the employee or any member of his family, or, on stay abroad of one attendant
who accompanies the patient, in connection with such treatment, will be excluded from
perquisites to the extent permitted by the Reserve Bank of India. As regards the
expenditure incurred on travel abroad by the patient/attendant, it shall be excluded from
perquisites only if the employee's gross total income, as computed before including the said
expenditure, does not exceed Rs.2 lakhs.
The basic golden rule is that all such allowances are taxable as these are paid because of
direct relationship between an employer and employee. However, there are exceptions to
this rule. Some of them are given below :-
(a) Any special allowances or benefit granted to an employee to meet the expenses incurred
in the performance of his duties.
(b) Any allowance granted to an assessee either to meet his personal expenses at the place
of his posting or at the place he ordinarily resides or to compensate him for the increased
cost of living.
However, the allowance referred to in (b) above should not be in the nature of a personal
allowance granted to the assessee to remunerate or relating to his office or employment
unless such allowance is related to his place of posting or residence.
Earlier the exempt allowances were being specified through notifications issued by the
Central Government. With effect from 1.7.95, the details of allowances exempt is given in
the Income Tax Rules.
The following allowances are exempt to the extent and subject to the conditions indicated in
the Rules :-
d) Any allowance granted to meet the expenditure incurred on a helper where he is
engaged for the performance of duties of any Office/employment of profit.
Any allowance granted for encouraging academic research in educational and research
institutions.
Any allowance for Purchase or maintenance of uniform for wear during the performance of
duties of an office/employment of profit.
Yes, certainly. Any allowance (mentioned above) received but not actually spent will be
taxable.
If ARE THERE ANY ALLOWANCES, WHICH ARE ONLY : exempt when received at a
particular place(s) ;pr area(s)? and do they have any upper ceilings : for exemption?
For the new amended Rules contain other allowances also .which are exempt (subject to
ceilings) in particular area(s) only. These special allowances are :-
ii) Any special Compensatory Allowance given which is in the nature of border area
allowance or remote area allowance or difficult area allowance or disturbed area allowance;
iii) Allowance granted to an employee working in any transport system to meet his personal
expenditure during his duty performed in the course of running of such transport from one
place to another place, provided that such employee is not in receipt of daily allowance;
v) Any allowance granted to an employee to meet the hostel expenditure of his child;
viii) Any Special allowance, in the nature of counter insurgency allowance granted to the
members of armed forces operating in areas from their permanent locations for a period of
more than 30 days.
It may be noted that the Dearness Allowance and City Compensatory Allowance granted to
an employee are not covered by the Amended Rules. So, these allowances will clearly be
part of income and will have to be taken into account in the computation of income for the
purposes of deduction of tax at source.
The reimbursement of tuition fee is also not exempt.The transport allowance granted to an
employee to meet his expenditure for the purpose of commuting between the place of his
residence and the place of duty is exempt to the extent of Rs. 800 per month vide
Notification S.O.No. 395(E) dated 13.5.98.
The exemption from tax with regard to HRA is restricted to the least of the following
amounts:-
The amount by which actual rent paid by the employee exceeds 10% of his salary; and
ii) 50% of salary if the rented house is situated at Delhi, Bombay, Kolkata or Chennai, or
40% of the salary in the case of other cities.
In simpler terms, the whole of H.R.A. is exempt from tax only if it is not in excess of 50% in
the 4 metropolitan cities, and 40% in the case of other cities, and further if the rent paid is
more than the total of H.R.A and 10% of the "salary. Otherwise, the excess has to be added
to the taxable income.
IN THE CASE OF EMPLOYEE RESIDING IN HIS OWN HOUSE, IS THE H.R.A EXEMPT FROM
TAX ?
No. As he is not paying any rent, so exemption from tax with regard to H.R.A. is restricted
to 'Nil'. IF AN EMPLOYEE IS RESIDING ALONG WITH HIS PARENTS IN A HOUSE
FOR WHICH NO RENT IS PAID BY HIM, WILL H.R.A. RECEIVED BY HIM BE TAXABLE?
Yes. The entire H.R.A. would be taxable f6r the same reason as given above. FOR THIS
PURPOSE WHAT DOES "SALARY" MEAN?
"Salary" includes dearness allowance, if the terms of employment so provide, but excludes
all other allowances and perquisites.
No. It has been decided as an administrative measure that salaried employees drawing
house rent allowance upto Rs.3,000 pm will be exempted from giving rent receipt to DDO.
But in the regular assessment of the employee, the Assessing Officer is free to make
enquiry or request proof of payment of rent by assessee.
ARE THERE ANY OTHER ALLOWANCES WHICH GET SPECIAL TREATMENT UNDER THE
I.T. ACT ? Yes. There are other payments e.g. leave travel concession etc., made by the
employer which get special tax treatment.
LEAVE TRAVEL CONCESSION
(a) Where journey is performed by rail; railway-fare in Second AC class by shortest route to
destination.
(b) Where places of origin and destination are connected by rail but the journey is
performed by any other mode then Second AC class fare by shortest route to the place of
destination.
(c) Where place of origin of journey and destination, or part thereof, are not connected by
rail and journey is performed by any other transport; then
(i) If a recognised public transport system exists between such places the first class or
deluxe class fare of such transport by shortest route, or,
(ii) If in other case, Second AC class fare for the distance of the journey by the shortest
route, as if the journey has been performed by rail.
Leave Travel Concession Rules have been amended on the recommendation of the Fifth Pay
Commission to extend the facility of travel by air economy Y- Class to certain categories of
employees of the Central Government with effect from 1st October, 1997.
Consequently, where the journey is performed on or after 1st October, 1997 by air, an
amount not exceeding the air economy fare of the National Carrier by the shortest route to
the place of destination.
Also, where the entitlement was previously for air-conditioned Second Class Rail fare, it has
been upgraded to air-conditioned First Class Rail fare. [l.T. (First Amendment) Rules 1998,
O.O.I. Gazette Notification No. S.O. 34(E) dt.
Yes, certainty. In case the L.T.C. is encashed without actually performing the journey the
entire amount received by the employee would be taxed in his hands.
(ii) The parents, brothers and sisters of the individual or any of them, wholly or mainly
dependent on the individual.
HAS ANY CHANGE BEEN MADE IN RULES FOR EXEMPTION OF L.T.C. TO DENY THIS
BENEFIT TO LARGE FAMILIES?
Yes. Exemption of L.T.C. shall not be available to more than two surviving children of an
individual after 1 st October 1998. However, this shall not apply in respect of children born
before 1.10.98 and also in case of multiple births after one child. If an employee has before
1.10.98 even five children or more, exemption would still be available to all children.
However, if an employee begets a third child after 1.10.1998, the L.T.C. for the third child
will not be exempt.
The definition of PROFIT-IN-LIEU OF SALARY is an inclusive one and includes the
following:-
(a) The amount of compensation due to or received by an assessee from his employ Or
former employee at or Inconnection with the termination/or the modifications of the terms
and conditions if employment.
(c) Interest credited on the Provident Fund balance of the employee in so far as it exceeds
the rate fixed by the Central Government.
TAXATION OF AMOUNTS RECEIVED UNDER V.R.S.
Retrenchment compensation received by the Director under the Industrial Dispute Act or
under such similar Acts, Laws, Rules etc. to the extent the compensation does not exceed,
the amount payable u/s 25F(b) of the Industrial Disputes Act, 1947. It, therefore, means
that the compensation should not exceed the amount calculated @15 days wages for every
completed year of continuous service, subject to a max of Rs. 50,000 . The Central
Government has the powers to enhance the ceiling/limit of such compensation or to relax
the limit in deserving cases.
This exemption also is extended to the compensation paid at the time of transfer of the
Undertaking by the new owner or management resulting in interruption of service or
modification in the terms of service. The exemption also extends to the compensation paid
at time of closing down of an industrial undertaking.
HAS THE EXEMPTION OF AMOUNT RECEIVED UNDER V.R.S NOW BEEN EXTENDED
TO CENTRAL AND STATE GOVERNMENT EMPLOYEES?
Yes. The exemption of amount received under V.R.S. is extended to employees of the
Central Government w.e.f. Assessment Year 2002-2003 and State Government employees
w.e.f. Assessment Year 2001-2002.
'GOLDEN HANDSHAKE'
The guidelines for bestowing the exemption from tax on the Golden Handshake are given
herein below:-
1. VRS applies to an employee of the company who has completed 10 years of service
or 40 years
2. It applies to all employees and executives (excluding directors).
3. It has been drawn to result in overall reduction in the existing strength of the
employees of the company.
4. Vacancy caused by the VRS is not to be filled up.
5. The retiring employee is not to be employed in other business belonging to the same
management.
6. The amount should not exceed Rs. 5 lacs.
7. The employee has not Availed in the past the benefit of any other voluntary scheme.
The above guidelines are to be strictly followed, and in case, the payment on account of
voluntary retirements are not strictly made as per the prescribed guidelines, the payment
will not be exempt.
Only the amount representing the excess and above the limit of Rs. 5 lacs is to be subjected
to Income-tax.
No. The scheme is applicable to the employees who have completed 10 years of service with
a company, so it will not be exempt.
The guidelines require that the scheme should result in overall reduction in the existing
strength of the employees of the company. Therefore, the Scheme can be drawn even by
the profit making companies.
WHETHER INCOME TAX EXEMPTION OF GOLDEN HANDSHAKE IS AVAILABLE WHEN
THE AMOUNT PAYABLE IS IN ADDITION TO NORMAL RETIREMENT BENEFITS LIKE
P.F., GRATUITY, PENSION ETC. UNDER THE TERMS GOVERNING EMPLOYMENT?
Yes. The provisions governing exemption of Golden Handshake are separate from the
provisions which govern taxation of provident Fund, Gratuity, Pension etc.
No. If all specified conditions are satisfied the employer need not deduct the TDS from the
Golden Handshake.
HAS THERE BEEN ANY REGENT CHANGE IN THE GOLDEN HANDSHAKE SCHEME?
Yes, w.e.f. 1.4.2001, the words "termination of his service" have been added to the word
Voluntary retirement' and in the case of a public sector company 'a scheme of voluntary
separation' have been added.
As the name suggests, it is the amount received by the employee for the leave period not
availed by him.
Yes, subject to certain limits, if it relates to a Government employee his retirement from
service on superannuation or otherwise, it is fully exempt.
In the case of other employees, the exemption from Income-tax is in respect of encashment
of upto the maximum of 8 months earned leave calculated at the average of Jast 10
month's salary. There is also maximum monetary limit which is Rs. 1,35,360 for a person
retiring on or after 1.7.95.
This limit is applied on the aggregate amount of such payments received from, two or more
employers, whether received in the same year or in different years.
No. Encashment of leave at any time during the employment is taxable in full.
In the case of Industrial Workers, any gratuity received by an employee drawing monthly
salary (not exceeding Rs.2,500) only the feast is exempt:-
(a) 5 days salary (7 days in the case of seasonal employment) for each completed year of
service or in excess of 6 months.
In other cases, the exemption is available in respect of amount of gratuity actually received.
IF GRATUITY IS RECEIVED FROM MORE THAN ONE EMPLOYER IN THE SAME YEAR,
WHAT WILL BE THE CEILING?
The Ceiling of Rs.3,50,000 would apply to aggregate of gratuity from one or more
employers in the same year in case of retirement or death etc. occurring after 24.9.97 Prior
to that date, ceiling was Rs.2,50,000.
No. The ceiling will still be Rs,3.5 lakhs or Rs.2.5 lakhs as specified in the preceding
paragraph.
(ii) Interest on the accumulated balances should not be paid at a rate higher than 12% per
annum. Such interest in excess of this exempted limit forms part of the employee's salary,
and the deduction under section 80-L is also not allowable in respect of such interest.
Yes. After 22nd September 1997 it has been raised upto 12% (previously 10%) by the
Employee's Provident Fund 85 Misc. Provisions [Amendment Ordinance, 1997 (17 of 1997)].
Yes. Upto 21st Sept. 1997 the tax deductible contribution by an employer was
upto 25% of the annual salary of the employees. Now this limit has been increased to 27%
of the employee's salary for each year. [I.T. (Second Amendment) Rules 1998, G.O.I.
Gazette Notification No. S.O. 50(E) dt. 16th Jan. 1998; CBDT F.No. 142/79/97-IPL No.
105071.
Yes. After 22 nd September 1997, the annual contribution by an employer and employee
(taken together) to a superannuation fund in respect of any particular employee shall not
exceed 27% (previously 25%) of his salary, for each year.
ESOPs or SWEAT EQUITY is the stuff that has made crorepatis of even car-drivers in
Company(s) like Infosys. These are relatively new in India but gradually becoming the most
favoured portion of remuneration in private Company (s).
ESOPs or "Employees Stock Options Plans" is the generic term for a basket of instruments
and incentive schemes that find favour with the new upward mobile salary class and which
are used to motivate, reward, remunerate and hold on to achievers.
ESOPs are generally granted in the from of directly allotted shares, debentures or warrants,
stock options etc. These ESOPs can have numerous variations/ alternative options.The
characteristic facet of these ESOPs is that the compensation gets linked with the increase in
the price of the shares of the Employer Company or rather the net worth of Company.
VARIETY OF ESOPs
First variety of ESOPs is the scheme under which the employee is directly allotted shares by
the Company either at market price or at a concessional price. Source of purchase may be
own funds of the employee or loan(s) from the Company / Banks / Financial Institutions.
Second Variety is when the employee has the 'option' to acquire the shares, debentures or
warrants of the Company at a price that may be the market price or lower than that. After
that there is a waiting period or Vesting Period when the employee has to wait to exercise
his option. After this is the 'Exercise-Period' during which the employee can exercise the
option to seek allotment of shares.
There may also be a 'Lock-in Period' during which the employee can not sell these shares.
Third Variety may be 'Stock Appreciation Rights'. A specified number of shares are
notionally allotted to him at a certain price. At the end of a specified period, the price of the
shares is noted and if the price has increased then the difference is paid to him by the
Company.
Another Variety may be 'staggered options' available to the employee over a period of time.
It is a right, but not compulsion. The option-holder may or may not acquire the shares of
the Company during a Specified period at pre-determined price, irrespective of the market-
price at the time of giving the Stock option by the Company or at the time of exercise of the
option by the employee.
There are so many factors to determine the employee's decision. The employee ultimately
may not exercise his option.
'Sweat Equity' means equity shares issued by the company to employees or directors at a
discount or for consideration other than cash for making available know how in the nature of
intellectual property rights or value additions, by whatever name called.
All Company(s), whether private, public, listed or not-listed can issue Sweat Equity Shares,
The Law has not set any limit on the rate of discontent for issue of shares to employees.
Yes and no, both! For A.Y. 2000-01, the difference between the market value and the cost
of acquisition of such shares, debentures or warrants was taxable as perquisites. However,
for A.Y.2001-02 and subsequent year(s), the Law stands modified and such benefit(s) are
not to be taxed as perquisites. Mere grant of stock options or even exercise of such stock
options whereby shares are in fact allotted does not attract tax as perquisite(s). They are to
be taxed only once when sold, as capital gains.
BUT WHAT SHALL BE THE COST OF THE SHARES IF THE TAX HAD BEEN LEVIED AS
PERQUISITE AT THE TIME OF EXERCISE OF OPTION?
In case where tax has been levied as perquisite at the time of the exercise of the option by
the employees, its fair market value at the time of exercise of option shall be the cost of the
share for working out the capital gain. This amendment is w.e.f. 1.4.01 and, applies in
relation to the A.Y. 2001-2002 and subsequent years.
No. Now w.e.f. 1.4.2001 i.e. for A.Y. 2001-02 and subsequent year(s), even when such
share(s), debenture(s) or warrant(s) (received as ESOPs/Sweat Equity) are transferred
under a gift or an irrevocable trust, the transaction will be a taxable transfer. The transfer
consideration will be the market value of such assets minus the cost paid by the employee,
if any.
AT WHAT RATE IS THE LONG TERM CAPITAL GAINS IN RESPECT TO
GDRs ISSUED TO EMPLOYEES UNDER ESOPQ TAXABLE?
On Income by way of dividends or long term capital gains Global Depository Receipts
(GDRs) of an Indian company purchased by a resident employee of such company engaged
in information technology software and/or services, as per a notified ESOP, is taxable @
10% u/s 115 ACA.
WHAT IS THE POSITION OF TDS IN THE YEAR SUCH ESOPs OR SWEAT EQUITY ARE
GIVEN/ALLOTTED BY THE COMPANY?
When w.e.f 1.4.01 the Income Tax Act, 1961 does not consider concessional allotment of
share(s), debenture(s) or warrant(s) be treated as perquisites so the question of deducting
TDS is extraneous for A.Y, 2001-02 and subsequent year(s).
1. Standard deduction.
2. Deduction for professional or employment tax
3. Deduction of entertainment allowance.
STANDARD DEDUCTION
For A.Y. 1998-99, Standard deduction of a sum equal to 33-1/3% of the salary or Rs.20,000
whichever is less, was allowed to an individual having income from salary.
Then w.e.f. 1-4-99 this limit of Standard deduction for assessees having salary income upto
Rs. 1,00,000 was increased from Rs.20,000 to Rs.25,000, However, the benefit of standard
deduction to assessees having salary income of more than Rs. 5,00,000 was withdrawn.
This implies that an assessee earning salary income between Rs. 1 lac and Rs.5 lacs will
only be entitled to a Standard deduction of a sum equal to 33-1/3% of the salary or
Rs.20,000 whichever is less.
ENTERTAINMENT ALLOWANCE
Upto A.Y. 2001-02 Entertainment allowance is first , included in the employee's salary
and then exemption is allowed as given here-in-below:-
(i) Entertainment allowance regularly received from his present employer from a date prior
to 1.4.1955 or,
(ii) A sum equal to 1/5th of salary (exclusive of any other allowance, benefit or perquisite)
or,
Yes. With effect from 1 st April, 2002, i.e. in relation to the assessment year 2002-2003 and
subsequent years, this provision relating to deduction of entertainment allowance stands
omitted in the case of employees in continuous employment since the 1 st April, 1955 under
section 16.
WHO WOULD GRANT RELIEF TO PENSIONERS U/S. 16, 88, 88B AND 88C?
The deductions from the amount of pension of standard deduction under section 16 and the
tax rebate U/S 88B will be allowed by the DDO/Bank, before making payment to pensioner.
For rebate under section 88 on account of contribution to Life Insurance, Provident Fund,
NSC etc., if the pensioner furnishes the relevant details to the banks, the tax rebate will
also be allowed. Necessary instructions were issued by the Reserve Bank of India to the
Banks vide RBFs Pension Circular (Central Series) No. 7/C. D. R./ 1992 (Ref. Co. DGBA: GA
(NBS) No. 60/GA. 64 (11 CVL)-91/92) dated the 27th April, 1992, and, they must be
followed by all the Banks, which have been entrusted with the task of payment of pensions.
The relevant rule for determination of relief u/s 89(1) is Rule 21A of the I.T. Rules 1962.
5. Deduct: [D (-) B] E
Yes. Even in such a case, as per Rule 21A(6), the CBDT may, having regard to the
circumstances of the case, allow such relief as it deems fit. Aggregate salary of the
employee who is or has been in receipt of salary from more than one employer.
The employee furnishes to the chosen employer details of the income under the head
'Salary' due/received from the former/other employer and also tax deducted at source there
from in writing and duly verified by him and by the former/other employer. Then the
present employer will deduct tax at source on the both salary(s).
IS IT NECESSARY THAT DEDUCTIONS AND REBATES CLAIMED SHOULD HAVE BEEN
MADE OUT OF INCOME CHARGEABLE TO TAX?
Yes. Absolutely. It is to be strictly noted that deductions rebates under Chapter VI-A of the
IT Act, 1961 are allowed only if the investments/payments are made out of the income
chargeable to tax of the financial year relevant to the assessment year under consideration.
IF THE TAX PAYER ALSO ENJOYS INCOME UNDER OTHER HEADS OF INCOMES /
SOURCES, SHOULD THE EMPLOYER DEDUCT TDS ON SUCH OTHER INCOME(S)?
Not necessarily. An option to be is given U/S 192(2B) which enables a tax payer to furnish
details of income under any head other than Salaries and to get TDS thereon.
The employer shall take such other income and tax, if any, deducted at source from such
income, into account for the purpose of computing tax deductible under section 192 of the
Income-tax Act. From 1.8.98 the DDO's have been empowered to take into account the loss
if any under the head "Income from House Property" for making deduction of Income-Tax
U/S 192(1).
For the purpose of TDS on salary payable in foreign currency, the value in rupees shall be
calculated at the prescribed rate of exchange, for each such payment.
Yes. Section 197 enables the tax payer to make an application in Form No. 13 to his
Assessing officer. In the absence of such a certificate from employee, the employer should
deduct income tax on the salary payable at normal rates (Circular No. 147 dated 28-10-
1974).
Yes. .As per Section 203, every person responsible for TDS must furnish a certificate to the
payee that tax has been deducted and to specify the amount so deducted. This TDS
certificate, must be furnished within one month from the end of the relevant financial year.
Even the banks deducting tax at the time of payment of pension or bank-interest are
required to issue such certificates. This certificate is to be issued on the tax deductor's own
stationary.
If he fails to issue the TDS certificate to the tax payer concerned, he will be liable to pay, by
way of penalty, under section 272A, a sum @ Rs.100 for every day during which the failure
continues. However, the penalty shall not exceed the amount of tax deductible.
IS THE LIABILITY OF THE EMPLOYER TO DEDUCT AND PAY TAX U/S 192(1)
ABSOLUTE AND WHAT IF HE FAILS TO DO SO?
Yes. Such liability is absolute and any failure would attract interest liability as well as other
penal provisions. (CBDT F. No. 237/4/75-A/ PAC 11/23.11.76.]