SALARY INCOME

(Sec15,16 & 17)

What is salary?
□ Payer & Payee
□ More than one source
□ Foregoing salary is salary income
□ Tax free salary should include the tax paid
by the employee
Basis of Charge
□ Salary is chargeable to tax when it is due to
be paid whether it is paid or not (salary paid
on 1.4.2009)
□ Salary is chargeable to tax when any amount
is paid whether it is due or not
□ Arrears of salary paid to employee is
chargeable to tax.
Salary means-
□ Basic salary and allowances
□ Annuity
□ Gratuity
□ Commission
□ Perquisite in lieu of salary
□ Advance salary
□ Employers contribution to PF
□ Leave salary
House Rent Allowance
The least of the following is exempt from tax:
1.50% of Salary where the assessee lives in Mumbai,
Delhi ,Chennai & Calcutta and 40% in other cases
2.Actual HRA received
3.Excess of rent paid over 10% of Salary.
(Salary for HRA means basic salary , commission if
based on fixed percentage of sale & DA ,if it is part
of retirement benefits)
Allowances:
□ Conveyance: Exempted upto Rs.800 per month if
used for travel between home and place of work
□ Medical expenses: Exempted when it is a
reimbursement of actual expenses upto Rs.15000
.Beyond this limit, it is taxable.
□ Fixed Medical allowance is taxable
□ City compensatory allowance is taxable in all cases
Allowances(cont.)
□ Tiffin allowance: It is taxable
□ Tea & snacks during office hours are not
charged to tax as perquisite while free meals
in excess of Rs50 per meal is a perquisite
□ Servant allowances: It is taxable
□ Gifts: Perquisite in respect of gift where it is
below Rs.5000, the value is taken as nil
PENSION
1.Pension from UNO It is not chargeable to tax
2.Pension received
by the family of Exempted
armed forces
3.Family pension
received by Taxable as in the hands
family members of recipient as income from
after the death of other sources
employee
PENSION (cont.)

□ Pension received in any other case

Tax treatment: Rules apply
PENSION (cont.)
□ Uncommuted Govt. /Non Govt Taxable
Pension Employee
□ Commuted
Govt. Employee Exempted
Pension from Tax
Commuted Non-Govt. It is fully or partly
Pension Employee exempted
COMMUTED PENSION (cont.)
Central /state Govt, With or without Exempted
Local authority Gratuity Fully
employee
Non Govt. Gratuity is received 1/3 of normal
Employee Exempted

Gratuity is not ½ of normal

Non Govt.
received is exempted
Employee
Pension scheme for employees joining
Central Govt. or Other Employees after
January 1, 2004
□ Contribution by Employer is added to salary
□ Employers contribution along with the
Employees contribution to Pension fund is
deductible U/S 80CCD
 Leave Encashment

GOVERNMENT EMPLOYEES GETTING LEAVE ENCASHMENT

AT TIME OF RETIREMENT:

❑ Govt employee at that time is exempted from tax.

❑ While leave encashment while in service is taxable

 Leave Encashment( cont.)

NON GOVERNMENT EMPLOYEES are chargeable to tax on

leave encashment while in service
LEAVE ENCASHMENT AT TIME OF RETIREMENT:
He is exempted on basis of least of the following:
1.period of earned leave (in no.of months) to the credit of
employee at the time of his retirement or leaving the job)* average
monthly salary
2.10 months *average monthly salary
3. the amt. specified by the government Rs.3,00,000
4. leave encashment actually received at the time of retirement
HOW TO FIND OUT
AVERAGE MONTHLY SALARY?

•Salary for this purpose means

1.basic salary and includes
2 .dearness allowances if terms of employment so provide
3.Commision if it is fixed % based on turnover

•It is calculated on the basis of average salary

drawn
during the period of 10 months immediately preceding the
retirement.( date wise)
Leave travel concession is exempted twice in a block
of FOUR years.
It is available to Indian citizen for proceeding on leave
for himself and his family (family includes spouse,
children, dependent parents ,brother and sister)
□ Amount of exemption is the actual fare paid for
travel anywhere in India by the economy class
airfare of national carrier by shortest route, or first
class air conditioned rail fare, or any other mode not
exceeding the shortest first class rail fare.
□ The Present Block is Jan 1,2006 – Dec31,2009
 GRATUITY
1. GRATUITY WHILE IN SERVICE IS FULLY
TAXABLE
2. GRATUITY AS RETIREMENT BENEFITS
□ Government employee –fully exempt
□ Non-government employee-fully or partially exempt
under section 10
□ Non-government employees not covered by the
Payment of Gratuity Act ,1972- fully or partially
exempt under section 10
GRATUITY (cont.)
□ IN CASE OF GOVT EMPLOYEES:
■ wholly exempt
□ IN CASE OF EMPLOYEES COVERED UNDER
PAYMENT OF GRATUITY ACT:
■ 15 days salary based on last drawn for each year of
service (26 days a month as working days)
■ Rs.3,50,000
■ gratuity actually received
(the least of the above 3 is exempt from tax and the balance
is taxable)
GRATUITY (cont.)

□ how to find length of service -if 6mths or

less then ignored else taken as 1 full year
□ what is salary: Salary means last drawn by
employee and includes dearness allowance
□ how to determine 15 days salary -calculated
by dividing salary last drawn by 26 days
 Provident Fund
Statutory Recognised Public Unrecognised
PF PF PF PF
Employees Eligible for No deduction
Contribution Deduction U/S 80C U/S 80C
Employers
Contribution Exempted N.A. No exemption
upto 12%
Interest Exempted as notifd No tax Taxable
Eg.8.5%
 PERQUISITES
It means any benefit in addition to salary and wages.
Any sum paid by the employer which otherwise
would have been payable by the employee.
• Eg. Rent free house accommodation,
car, amenities provided free of cost,
• concessional interest on housing loan, etc
•The benefit should be from the employer to be
charged as salary
•It could be in cash or kind
•It should have a legal origin
 Perquisites taxable (Category A
Perquisites taxable in the hands of all employees
(fringe benefit tax whether payable or not by employer)
Furnished /Unfurnished house without rent or at a
concession (not in a remote area, house for MPs, and
stay in hotel on transfer not exceeding 15 days)
Service of sweeper, gardener( not taxable for non
specified employee)
Education facility to employees family members (not
taxable for non specified employee)
Perquisites taxable (with or without FBT)
Contribution by employer to effect an
assurance on the life of the employee or to
effect an annuity
Interest free loan( exempted for loan not
exeeding Rs.20000, or loan for medical
treatment)
Use of Employers movable assets are taxable
except laptop, desktop & car
Perquisites taxable (Category B)
B1.Car or other automotive conveyance ( not taxable for
non specified employee)
B2. Transport facility by a Transport undertaking( not
railways & airlines)
B3 Traveling touring accomodation
B4 Free Food & Beverage ( Rs.50 within office hours
exempted)
B5 Gift voucher beyond Rs.5000
B6 Club Membership & credit Card
 SPECIFIED EMPLOYEE

□ A director is a specified employee

□ An employee who holds 20% or more voting power
(called substantial interest)
□ Where an employee is drawing salary of more than
Rs.50,000 per year ( without considering non
monetary benefit and exemptions like HRA) but ,
since the minimum exemption limit is Rs.1,10,000,
practically all tax payers are specified employees.
Rent Free Unfurnished Accomodation
□ Classified as Central & State Government
Employees
□ Private Sector Employees
 Central & State Govt. Employees
□ Accomodation provided to MPs, judges of
High court & Supreme Courts, employees
who are in Govt. service being provided
accomodation by virtue of their employment
is exempted from any tax
Valuation of Rent Free Unfurnished
Accommodation (private sector)
Population Property owned by Leased or rent
as per 2001 Employer
census
Above 25 15% of salary for Amount of lease
lakhs the period rent or 15% of
salary
Between 10% of salary for Same as above
10- 25 lakhs the period

Any other 7.5% of salary for Same as above

the period
Meaning of salary for House
accomodation
□ Salary includes –
- basic salary
- DA ( if terms of employment provide)
- bonus, commission, fees
- all other taxable allowances
- any monetary payment chargeable to tax, but
not monetary payments in the nature of
perquisite
Exception to accomodation rules
□ It is not applicable to an accomodation located
in a remote area( 40 kms from town) and in a
mining, project ,oil exploration site
□ Where on account of transfer, an employee is
given two accomodation , only one will be
taxed for 90 days. Beyond that the lesser of
the two will be taxed.
Furnished accomodation
□ Step 1: Find out the value of the
accomodation without the value of the
furniture
□ Add 10% of the value of furniture if owned by
employer or actual hire charges when hired
( Furniture includes TV, fridge, radio and any
household appliances)
Furnished accomodation in a Hotel
It Includes accomodation in a motel, guest house.
The value of perquisite is the lower of the two.
□ 24% of salary paid during the period when
accomodation is taken or
□ Actual paid by the employer
(not taxable if provided for 15 days in a P.Y. and
when an employee is transferred)
Accomodation at a concessional value
Value is determined as follows:
□ Find out the value of accomodation as if it is
not provided at a concession
□ Deduct the value of rent charged from the
employee
Perquisite of free domestic servants
□ When servants are engaged by employee and
reimbursed by employer, taxable in all cases
□ When engaged by employer only specified
employees are taxable
□ Servant allowances are always taxable
□ If servants are provided in a rent free
accomodation , they are not valued separately
Valuation of gas, electric energy or
water supply
□ All assesses are taxable except non specified
employees
Perquisite of Motor Car
Perquisite in respect of motor car is taxable only when
the employer is not liable to fringe benefit tax (like
sole proprietor, charitable institutions, etc) Private
company employees will not pay any tax.
□ 1.Car is owned by Employee

□ 2. Car is owned or hired by Employer

a) Expenses met by Employer
b) Expenses met by Employee
Motor car perquisite
□ Car owned by Employee
a) Expenses met by Employee - No Tax
b) Expenses met or reimbursed by Employer
- Official purpose only No tax
- Used for private purpose-actual expenses
less recovery taxable
-Partly used for private purpose (cont. next
slide)
Motor car perquisite( Cont.)
Car owned by employee (cont.)
-Partly used for private purpose
1) Find actual expense incurred by employer
2) Less amount used for official purpose
ie.Rs.1200 upto 1.6lts engine capacity &
Rs.1600 above 1.6 lts
3) Balance is the value less if any recovered
from employee
2.When Car is owned or hired by
Employer
□ A. Expense by employer
a) Used only officially No tax
b) Wholly used for personal- all expense
paid by employer
c) Partly official & partly personal-
-sum of Rs.1200 upto 1.6 ltrs engine capacity
-sum of Rs.1600 beyond 1.6 ltrs capacity
2.When Car is owned or hired by
Employer (cont.)
□ B. Expense & maintenance by Employee
a) Used only officially, not perquisite so no tax
b) Wholly used for personal- 10% of cost for wear
& tear
c) Partly official & partly personal-
-sum of Rs.400 upto 1.6 ltrs engine capacity
-sum of Rs.600 beyond 1.6 ltrs capacity
and Rs.600 for chauffeur
Deductions from salary
□ Standard Deduction- No deduction is
available now.
□ Professional Tax paid in this year
□ Entertainment allowance: available only for
Government employees