A

Project

on

Tax planning in respect of Employee’s Remuneration

In partial fulfillment of the requirement for the subject Tax Planning &
Management

Submitted to

Dr. Darshna Khakhar

Submitted By

Prey Thakkar 201800510010114

Shrey Mandaliya 201800510010154

Date of Submission
25th January 2023

Batch 2018-23
 ➢ Types Of Employee

(i) Specified Employee: An employee satisfying any one of the following condition is treated as a
specified employee

• An employee who is appointed as a director of a company in the relevant previous year.

• An employee who is a shareholder having substantial interest in a company during the relevant
previous year.

• An employee drawing income from salary excluding non monetary benefits exceeding Rs. 50000.

(ii) Non Specified Employee: They are those who are not specified employee.

Computation of income from salary:

The total taxable income from salary is deducted after all applicable deductions, such as House
rent allowance, Leave travel allowance exemption, Interest on home loan are adjusted from the
total income, which is the gross salary + income from other sources + 3 percent cess.

Section 15 : Charge on salary income

Section 15 is the charging section in respect of income from 'Salaries'. This section brings to charge
the following categories of salary

1. Any salary due in the previous year, whether paid or not

2. Advance salary, and
3. Arrears of salary

A combined reading of sections 15 and 16 will reveal the following basis for charging salary to
tax.

1. Due basis
2. Payment basis
3. Allowance basis
 ➢ Section 16 (i) : Deduction allowed from gross salary

The Central Board of Direct Taxes (CBDT) announced that the Finance Act, 2018 has amended
Section 16 of the Income Tax Act, 1961.

The new provision states that a taxpayer having income chargeable under the head 'Salaries' shall
be allowed a deduction of Rs. 40,000 or the amount of salary, whichever is less, for computing his
taxable income.

The pension received by a taxpayer from his former employer is taxable under the head 'Salaries'

Accordingly, any taxpayer who is in receipt of pension from his former employer shall be entitled
to claim a deduction of Rs. 40,000 or the amount of pension, whichever is less, under Section 16
of the Act.
 ➢ Section 17(2) : Perquisites

This clause comprises six sub-clauses followed by two provisos, and they deal with the following
perquisites.

i. Value of rent-free accommodation provided to the assessee by his employer.

i. Value of any concession in respect of rent respecting any accommodation provided to the
assessee by his employer.

ili. Sums paid by the employer in respect of any obligation which, but for

such payment, would have been payable by the assessee.

iv. any sum payable by the employer, whether directly or through a fund, other than a recognized
provident fund or an approved superannuation fund or a 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 specified security or sweat equity shares allotted or transferred, directly or
indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee.
vi. the amount of any contribution to an approved superannuation fund by the employer in respect
of the assessee, to the extent it exceeds.

vii. Under the first proviso to clause (2) of section 17, medical benefits are not treated as perquisite
in certain specific situations.
 ➢ Section 17(2)(iii): Specified Employees

'Perquisite' includes the value of any benefit or amenity granted or provided free of cost or at
concessional rate in respect of certain employees. The specified employees in this context are as
follows: -

1. An employee having 20 per cent or more of voting power in employer Company, and
2. An employee who is drawing salary in excess of Rs.50,000 and does not fall in the aforesaid
two categories.

For computing the limit of Rs.50,000, the following items are excluded / deducted: -

a) Non-monetary benefits

b) Deduction on account of Profession tax

c) Exempt entertainment allowance, and

d) Non-taxable allowance.

Section 17(2)(iii): Special allowance or benefit

For the sake of ready reference section 10(14) is reproduced as follows: -

Incomes not included in total income.

• 10. In computing the total income of a previous year of any person, any income falling within
any of the following clauses shall not be included-

• (14) (i) any such special allowance or benefit, not being in the nature of a perquisite within the
meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and
exclusively incurred in the performance of the duties of an office or employment of profit, as may
be prescribed, to the extent to which such expenses are actually incurred for that purpose;

• (il) any such allowance granted to the assessee either to meet his personal expenses at the place
where the duties of his office or employment of profit are ordinarily performed by him or at the
place where he ordinarily resides, or to compensate him for the increased cost of living
 ➢ Section 10: Exemptions in respect of the salaried employees

• Any death-cum-retirement gratuity received by Central and State Government Servants in civil
posts or in the defense services and employees of the local authority, which is exempt under section
10(10)(i).

• Any gratuity received under the Payment of Gratuity Act, 1972 to the extent it does not exceed
an amount calculated in accordance with the provisions of sub-sections (2) and (3) of section 4 of
that Act, which is exempt under section 10(10)(ji).

• Any other gratuity received by an employee from one or more employers on retirement or
incapacitation or by his dependents on his death, not exceeding one half month's salary for each
year of completed service etc., is exempt under section 10(10) (ill).

• Any payment from a Provident Fund which the Provident Fund's Act, 1925, applies or any other
Provident Fund set-up and notified by the Government is exempt under section 10(11).

• The accumulated balance due and becoming payable to an employee participating in a

Recognized Provident Fund, to the extent provided on Rule 8 of Part A of the Fourth Schedule, is
exempt under section 10(12).

• Any payment received from an Approved Superannuation Fund to the extent it is exempt under
section 10(13); and

• Any special allowance granted to an assessee by his employer to meet his house rent expense to
the extent exempt under section 10(13A).

Pay more special allowances to the employees, which are exempt in their hands

• It would be advisable to pay more special allowances to the employees, which are exempt in their
hands under section 10 or 17(2). In this context, Rule 2BB (1) is very relevant. As per Rule
2BB(1)(c), any allowance granted to meet the expenditure incurred on conveyance in performance
of duties of an office or employment of profit, is exempt from tax.

• Therefore, a special allowance should be preferred to payment by way of reimbursement on the

expenditure incurred by the employees.
 ➢ Deductions under Section 80C

• Section 80C provides that an assessee, being an individual or a Hindu Undivided Family, will be
allowed a deduction from gross total income of an amount not exceeding Rs. 1.50 lakh in respect
of amount paid or deposited in the previous year in the specified savings listed in section 80C(2).

• The deductions include payment of life insurance premium and contributions to provident fund,
etc. Such payments also include contribution to certain pension funds, payment of tuition fees for
children, payment for repayment of loan in respect of purchase / construction of a residential house.

• Total deduction under sections 80C as well as 80CCC and 80CCD, should not exceed Rs. 1.50
lakh.

Allowance
It is always given in cash.
Allowance maybe given for official purpose
or personal purpose.
Allowances increases the take home salary.
Allowances if taxable shall increase the tax
liability.
Perquisite
Perquisite is generally given in kind
Perquisites in most of the cases is given in
kind of personal purpose.
Perquisite given in kind does not affect the
take home salary.
Valuation of perquisite is generally less than
allowances, therefore perquisites decrease the
tax liability.

Allowances: Fully Taxable

(i) Entertainment
(ii) Overtime
(iii) Dearness
(iv) Meal
(v) City Compensatory
(vi) Interim
(vii) Cash
(viii) Servant
(ix) Project
 (x) Warden Allowance
(xi) Non-Practicing
(xii) Telephone
(xiii) Rural
(xiv) Refreshment
(xv) Tiffin

➢ Allowances: Non Taxable

The allowances given to an employee which form a part of their salary but are fully exempted from
tax are called non-taxable allowance. Below is the list of allowances which form part of non-
taxable allowances.

• Allowances Paid to Government Employees Abroad: When servants of Indian Government travel
abroad for assignments they receive an allowance to carry out their expenditure in another country.
These allowances are exempted from tax liability.

• Allowances Paid to UNO Employees: The allowances received by UNO employees are free from
tax liability.

• Allowances Paid to Judges of HC & SC: Judges of High court and Supreme Court get allowances
which are free from exempt from tax.

These allowances are known as sumptuary allowances.

• Compensatory Allowances: The compensatory allowances received by Judges of High Court and
Supreme court are also exempted from tax as per Income Tax Act.
 ➢ Allowances: Partially Taxable

The allowances which are partially exempted from tax to a certain limit are called partially taxable
allowances, as per the sections specified in the Income Tax Act. Some examples of partially
taxable allowances are mentioned below.

• Conveyance Allowance Exemption Limit: The allowance which is paid to the employee by the
employer for commuting to work from his/her residence is called conveyance allowance. The
allowance is exempt from tax to the limit of IN 1600 per month. Any amount paid greater than IN
1600 will be taxable as per the Income Tax Act.

• House Rent Allowance (HRA) Exemption Limit: House rent allowance is paid to the employee
by the employer to compensate the accommodation expenses. If the employee does not live in a
rented place and owns his own house or lives with parents then this allowance is fully taxable. The
deduction can be claimed by employees on house rent allowance as per section 10 (13a) provided:

The actual HRA is received by the employee from the employer In metro cities like Mumbai,
Bangalore, Chennai or Delhi actual rent paid should be 50% of the basic salary. In the case of
employee living in non-metros, it should be 40% of basic salary.

Any excess amount received as HRA after claiming the deduction is fully taxable.

Calculation of House Rent Allowance

50% of salary (SAS) if place
of residence is metro cities
Formula (Delhi, Mumbai, Chennai,
Kolkata) otherwise 40% of
Least is exempt from
Salary (SAS)
Tax
Actual Actual HRA received
Rent paid in excess of 10% of
Formula salary (SAS) which is rent
paid - 10% of salary (SAS)
 Special Allowance
Name of Allowance Exemption Allowed
Transfer Allowance
Helper Allowance
Academic Allowance Exemption allowed is the amount of
R&D Allowance expenditure incurred for official purpose or
Daily Allowance for specified purpose.
Uniform Allowance
Conveyance Allowance

• Transport Allowance : It is given to commute between residence to office and back. Exemption
allowed is Rs.800pm. However in case of individual who is blind or orthopedic handicapped, then
exemption allowed is upto Rs.1600. (Exemption does not depend on expenditure incurred)

• Children education & Hostel allowance: Allowance allowed to employee's children with hostel.

Children Educational Hostel Allowance (Max 2

Allowance (Max 2 child) Child)
Monthly Exemption Up to Rs.100pm/child Up to Rs.300pm/child
Lump sum Exemption Rs. 1200/child (Max 2400) Rs. 3600/child (Max 7200)

Other Notified Allowance

Particular Exemption
Tribal Area Allowance Rs 200 Per Month
Underground Allowance Rs 800 Per Month
Compensatory Modified Allowance Rs 1000 Per Month
Island Duty Allowance Rs 3250 Per Month
Counter Insurgency Allowance Rs 3900 Per Month
Special Compensatory Active Field Area Rs 4200 Per Month
Allowance
 ➢ Tax Treatment of Perquisites

Perquisites include the value of rent free accommodation provided to the assessee by his employer.
The accommodation maybe given free of rent or at concessional rent and value of accommodation
is taxable for both specified or non-specified employee.

Value of any benefit or amenity granted or provided free of cost or at concessional rate. These
amenities include gas, electricity or water facility and value is taxable only in case of specified
employee.

Any monetary sum paid by the employer in respect of any obligation which, but for such payment,
would have payable by the employee.

Any life insurance premium payable by the employer or to effect a contract for an annuity and is
taxable for specified and non-specified employee.

Perquisites: Tax-free

• Use of computer, laptop and telephone

• Use of car facility

• Use of credit card facility

• Use of club facility

• The value of gifts in kind. Gifts in cash is fully taxable.

• The value of holiday home facility

• Transport facility

• The value of meals

• Where the shares, debentures or warrants are by employer to the employee for free or at
concessional rate.
 Deduction available based on Salary Structure
Section Particulars
Transport allowance for
business travel and if you
10(14)
don't have actual bills to
claim.
Entertainment allowance
Received by the government
16(ii)
employees (fully taxable in
case of other employees)
Food allowance
(Provided in any form other
17(2)(viii)
than cash - like Sodexo
vouchers, etc)
LTA (Leave Travel
10(5)
Allowance)
Benefit
Amount of exemption shall
be lower of following:
(a) 70% of such allowance; or
(b) Rs. 10,000 per month.
Least of the following is
deductible:
(a) Rs 5,000
(b) 1/5th of salary (excluding
any allowance, benefits or
other perquisite)
(c) Actual entertainment
allowance received
It is exempt to the extent of
50/- per day per meal.
Anything provided in excess
of 50/- per day per meal is
taxable
The exemption shall be
limited to fare for going
anywhere in India along with
family twice in a block of
four years:
Journey by air: Airfare of
economy class in the National
Carrier by the shortest route
or the amount spent, |
whichever is less
Journey by rail: Air-
conditioned first class rail
 fare by the shortest route or
the amount spent, whichever
is less Note: (1) Only travel
expenditure is exempt but not
stay and food expenditure
(2) Foreign travels are not
considered for this exemption
Expenses incurred by
Reimbursement of expenses
employees on behalf of the
(incurred by employee on
company - are not taxable in
behalf of company)
the hands of the employee
Monetary gifts are taxable -
Gifts received from the but non-monetary gifts are
employer exempt up to Rs.50,000 in a
year
 ➢ Tax Planning Measures

Some broad guidelines by way of tax-planning measures, may be provided as follows: -

1. The basic salary may be taken at 35-40% of the total pay-package

2. It should be ensured that dearness allowance forms part of salary as per the terms of
employment.

3. House rent allowance (HRA) paid by the employer, is exempt under section 10(13A), as per the
limits prescribed by Rule 2A of the Income-Tax Rules, 1962.

4. All these special allowances exempt under section 10(14) r.w.rule 2BB should be provided to
the extent possible.

Some instances of these allowances are, as follows: -

• Conveyance allowance
• Transport allowance for commuting between the office and residence up to Rs. 1600 per
month. However, wef A.Y 2019-20 this allowance has been withdrawn and standard
deduction of Rs 40000 has been allowed
• Uniform allowance, if the employer has uniform code in the organization.
• Helper allowance where such helper is engaged in the performance of official duties, and
• Education allowance, etc.

5. Leave travel allowance may be provided as a part of pay-package.

6. Expenditure on medical treatment should also be made a part of pay-package. Such expenditure
is exempt, vide proviso to section 17(2) after clause (vi) thereof.

7. If employee owns a house, which he has occupied for his own residence, such house may be
taken by the employer on lease and thereafter, the same may be allotted to the employee as rent-
free accommodation.

8. Maximum benefit must be availed of, in respect of the exemptions

provided to salaried employees under section 10 of the Income-Tax Act.

Some instances of such exemptions are as follows: -

(a) Gratuity

(b) Commutation of pension

(c) Encashment of leave salary

(d) Recognized Provident Fund

9. Maximum benefit must be availed of, in respect of deduction under section 80C, etc.

10. Motor-car for office and private use, along with driver, if necessary, may be provided to senior
employees of the organization.

11. Computer or lap-top for office and private use may also be provided to the employee.

12. Free tea, coffee, snacks, refreshment, lunch / dinner in office or factory, may be provided to
the employees. If feasible paid meal vouchers may also be provided to the employees in the
absence of canteen or other such arrangement.