INCOME UNDER THE HEAD “SALARIES”

What do you understand by expression “salary?”

-> Salary income refers to the compensation received by an employee from a current or former employer for the execution of services in connection with employment. Thus, income is taxable as salary under Section 15 only if an employer-employee relationship exists between the payer and payee. Salary income could be in any form such as gift, pension, gratuity, usual remuneration and so on. In this article, we look at various aspects of salary income under the Income Tax Act.

Meaning of Salary under Income Tax Act

Under the Income Tax Act, the term salary is defined to include the following:

• Wages;
• Annuity or pension;
• Gratuity;
• Fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;
• Advance of salary;
• Payment received by an employee in respect of any period of leave not availed by him/her;
• The portion of annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund to the extent it is taxable;
• Transferred balance in a recognized provident fund to the extent it is taxable;
• Contribution by the Central Government to the account of an employee under a pension scheme referred to in section 80CCD (i.e. NPS);

Computing Total Salary Income

While computing the chargeability to tax, salary consists of:

• Any salary due from an employer (current or former) to an assessee in the previous year, whether actually paid or not;
• Any salary paid or allowed to an employee in the previous year by or on behalf of an employer though not due or before it became due; and
• Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer, if not charged to income tax for any earlier previous year.

Salary income is chargeable to tax either on a due basis or on receipt basis. Once salary has accrued, it is subsequent waiver is only an application of income and is liable to be taxed.

                       Calculation of Income from salary

What is basis of charge of Salary Income?

-> 

Salary is taxable on “due” or “receipt” basis whichever is earlier – 

Basis of charge in respect of salary income is fixed by section 15. Salary is chargeable to tax either on “due” basis or on “receipt” basis, whichever matures earlier. 

For Example:

if salary of 2019-20 is received in advance in 2018-19, it is included in the total income of the previous year 2018-19 on “receipt” basis (as tax incidence matures earlier on “receipt” basis, “due” basis is not relevant in this case; therefore, salary will not be included in total income of the previous year 2019-20). 

On the other hand, if salary which has become due in 2017-18 and received in 2018-19, is included in total income of the previous year 2017-18 on “due” basis (as incidence of tax matures earlier on “due” basis, “receipt” basis is inapplicable; salary will, therefore, not be included in total income of the previous year 2018-19). 

 Accounting method of the employee not relevant –

It is worthwhile to mention that salary is chargeable to tax on “due” or “receipt” basis (whichever matures earlier) regardless of the fact whether books of account, in respect of salary income, are maintained by the assessee on mercantile basis or cash basis. Method of accounting cannot, therefore, vary the basis of charge fixed by section 15.

What are the different forms of Salary?

-> The term “salary” signifies a recompense or consideration given to any person for pains bestowed upon another person’s business.

Tax treatment of different receipts is given below- 

What are the different forms of allowances?

-> Allowance is generally defined as a fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the services rendered by the employee or as compensation for unusual conditions of that service. It is fixed, pre-determined and given irrespective of actual expenditure. Under the Act, it is taxable under section 15 on “due” or “receipt” basis, whichever comes earlier, irrespective of the fact that it is paid in addition to or lieu of salary. Tax treatment of different allowances is given below:

House Rent Allowance (HRA)

HRA is the best among all types of allowances from an employee’s perspective. The extent of HRA tax deduction available to you is dependent on your basic salary, dearness allowance and other factors. If the value of your rent payments in a financial year is more than Rs. 1 lakh, you have to submit your landlord’s PAN Card.

The following factors will determine the extent of HRA tax deductions you can get on your tax return: 

• Total HRA provided by your employer on your salary structure
• 50% of basic salary + dearness allowance (DA) in metro cities
• 40% of basic salary + DA in non-metro cities
• Actual rent paid minus 10% of basic salary + DA

Leave and travel allowance (LTA)

Leave and travel allowance is also a major component in your salary structure. With LTA you can avail tax deduction for a trip taken only with your spouse, children and dependent parents and siblings within India. The extent of exemption is equal to the actual expenses incurred on the trip which has to be claimed by submitting original bills. LTA exemption is available for only two journeys within a span of four years.

Dearness allowance

Some employers also provide dearness allowances (DA) to employees as part of the salary structure. However, DA is fully taxable at the hands of the employer. Thus, you cannot enjoy any tax benefits on them.

Standard deduction

Standard deduction is a default deduction that the government allows on your taxable income to help you bring down your tax burden. Prior to Budget 2019, individuals could claim a standard deduction of Rs. 40,000, but that has now been increased to Rs. 50,000. 

If your annual income is Rs. 3 lakh, then Rs. 50,000 is taxable, but with a standard deduction of Rs. 50,000, your taxable income is reduced to 0; therefore you don’t have to pay any taxes. That is how standard deduction helps taxpayers.

Relocation allowance

As companies today operate in multiple locations, employees might be asked to report to work to a different city and it may even come along with a promotion. Relocation incurs huge costs as you have to move furniture, vehicles and make other costly arrangements in a new city. As per section 10(14) of the Income-tax Act, 1961, read with rule 2BB of the Income-tax Rules, 1962, any allowance granted to meet the cost of travel on transfer (including packing and transportation of personal effect) or the ordinary daily charges incurred during the period of journey in connection with transfer can be claimed as exempt from tax. So you can claim the relocation allowance as exempt from tax to the extent of actual specified expenses incurred on your transfer. 

If the amount paid by the employer is more than the actual specified expenses incurred, the difference shall be taxable as salary income in your hands. You should maintain necessary documents substantiating payment of expenses towards transfer.

Utilizing Sec 80C, 80CCC, 80CCD (1) deductions

Apart from various types of allowances, you can reduce your tax burden by investing in tax-saving instruments such as ULIPs, pension plans, NPS, PPF and tax-saving fixed deposits. You can also avail tax deductions on home loan interest paid under Section 24 and on interests paid on education loan as per Section 80E of the Income Tax Act.

Investing in ULIPs is one of the best ways to avail maximum tax benefits, get life protection and generate wealth in the long term. Since ULIPs are EEE investment instruments, investors get the triple benefit of enjoying tax benefits on premiums paid, returns on investment, and on maturity/death benefit. Start with Invest 4G ULIP Plan from Canara HSBC Oriental Bank of Commerce Life Insurance and meet your financial goals while maximizing tax savings and returns.

Perquisite- When Taxable/ Not Taxable?

-> Perquisites, in essence, can be described as privileged gains or profits that are incidental to regular salary. In fact, they serve as benefits availed over and above one’s salary. One must note that there are both taxable and exempted perquisites. To account for the accompanying taxes and make the most of available exemptions, salaried individuals must find more about the taxability of perquisites. Individuals should try to become familiar with the underlying concept.

These can be defined as benefits that an individual receives courtesy of his/her official designation. It is received in addition to one’s salary or wages.

As per the definition mentioned in Section 17(2) of the Income Tax Act, perquisites include –

• Value of concessional or rent-free accommodation that is provided by the employer.
• Value of any benefit or amenity that is granted for free or at a concessional rate to certain employees.
• An amount paid by the employer for an obligation that was supposed to be paid by the assessee in question.
• Contributions made by employers to a superannuation fund concerning the assessee in question.
• Value of specified shares or securities that are transferred/allotted either directly or indirectly to employees by the former or current employer. Such shares or securities are extended either at a concessional rate or for free of cost.

One must note that perquisites can be tax-free or taxable based on their nature. On the basis of taxability of perquisites, it is categorised under three heads.

 Perquisites are Classified into:-

Based on the taxability of perquisites, they are classified into these following –

• Taxable perquisites

The taxable category of perquisites includes – supply of water, electricity and gas, rent-free accommodation, professional tax, the salary of domestic help hired by the employee, medical expense reimbursements, etc.

Further, other fringe benefits like free meals, club and gym facilities and gifts worth more than Rs. 5000 are subject to tax.

This table helps gain an idea about the tax imposed on the type of accommodation provided to the employee –

• Tax-free perquisites

These are the perquisites that are exempted from taxes. The most common tax-free perquisites include – travel allowance, medical and recreational facilities, laptop or desktop provided by the company, refreshments provided during office hours and interest-free salary loans. Other than these, the use of facilities like a sports club, health club and telephone lines are also included in this tax-free category.

• Perquisites taxed by employees

Generally, this category of perquisites includes cars (owned by employers but is necessarily used by employees), service of domestic help and education opportunities for children, among others.

This table below helps gain an insight into the rate of tax on cars provided by the employers –

Perquisite Taxes are paid by:-

The Finance Act, 2005 states – Perquisites will be taxed by the government when such benefits have been provided or are considered to have been provided to employees by employers.

Ideally, perquisites are taxed at the rate of 30% of the entire value of the availed fringe benefits. Notably, the perquisite tax is paid by the employers who provide these above-mentioned benefits to their employees. They can be either a firm, a company, a body of individuals or an association of individuals.

 Perquisites Calculation:-

Generally, taxability of perquisite is determined as an average of income tax that is calculated based on these following –

• Rate of tax for the given fiscal year.
• Income charged under ‘salaries’.
• Value of perquisites for the amount of tax paid by the employer.

Example of Perquisite Tax Calculation: Suppose the income charged under ‘Salaries’ of a regular employee is Rs. 800000 inclusive of Rs. 90000 that is paid by the employer as non-monetary perquisites. As per the ITA, the perquisite tax will be –

Income that is charged under ‘Salaries’ – Rs. 800000

Tax on salary inclusive of education and health cess @4% – Rs. 75400

Average tax rate – 75400/800000 x 100 = 9.4%

Tax paid on Rs. 90000 = 9.24% x 90000 i.e. Rs. 8316

The amount to be deposited every month – Rs. 8316/12, i.e. Rs. 693

Hence, Rs. 693 will be paid by the employers as TDS on employee’s salary.

Tax Exempt Perquisites 

These following perquisites are exempted from taxes –

• Perquisites permitted out of India for rendering services outside the country. These perquisites come under Section 10(7) and are allowed by the Government of India to Indian citizens.
• Rent-free residence for officials. For instance, residence provided to a judge of the Supreme Court, High Court, an official of Parliament, the Union Minister, etc.
• There are no perquisites on expenses incurred by way of telephone or mobile phone bills by the employer on behalf of their employees.
• Perquisites are exempted from tax in case interest-free loans or concessional loans were made available for the treatment of diseases mentioned in Rule 3A. Alternatively, the same is not taxed in case it was a petty loan that does not exceed Rs. 200000.

Gaining a fair idea of the popular perquisites and how their values are taxed comes handy for salaried employees and helps them account for resulting taxation much better. A firm knowledge of the taxability of perquisites further eliminates lingering doubts related to TDS on their salaries and allows individuals to cooperate with their employers better.

What is Permissible Deduction from Salary Income [Section. 16?]

-> The income chargeable under the head “Salaries” is computed after making the following deductions under Section 16: 

1. Standard Deduction ; 
2. Entertainment Allowance Deduction ; and 
3. Professional Tax. 

1. Standard Deduction [Sec. 16 (i)/ (ia)] – 

• Standard deduction is Rs. 40,000 ; or 
• the Amount of Salary, 

2. Entertainment Allowance [Sec. 16 (ii)]- 

Entertainment allowance is first included in salary income under the head “Salaries” and thereafter a deduction is given on the basis enumerated in the following paragraphs: 

(A). In the case of a Government employee (i.e., a Central Government or a State Government employee), the least of the following is Deductible: 

1. Rs. 5,000; 
2. 20 % of Basic Salary; or 
3. Amount of Entertainment Allowance granted during the previous year. 

In order to determine amount of entertainment allowance deductible from salary, the following points need consideration: 

1. For this purpose “salary” excludes any allowance, benefit or other perquisites. 
2. Amount actually expended towards entertainment (out of entertainment allowance received) is not taken into consideration. 

(B). In the case of a Non-Government Employee (including employees of Statutory Corporation and Local Authority),: 

Entertainment Allowance is NOT deductible. 

3. Professional Tax or Tax on Employment [Sec. 16 (iii)] – 

Professional Tax or Tax on Employment, levied by a State under article 276 of the Constitution, is Allowed as Deduction. 

The following points should be kept in view — 

1. Deduction is available only in the year in which professional tax is paid. 
2. If the professional tax is paid by the employer on behalf of an employee, it is first included in the salary of the employee as a “perquisite” and then the same amount is allowed as deduction on account of “professional tax” from gross salary. 
3. There is no monetary ceiling under the Income-tax Act. Under article 276 of the Constitution, a State Government cannot impose more than Rs. 2,500 per annum as professional tax. Under the Income-tax Act, whatever professional tax is paid during the previous year is deductible. 

What is Tax Treatment of Provident Fund?

-> To encourage savings for the social security of employees, the Government has set up various kinds of provident funds. The employee contributes a fixed percentage of his salary towards these funds and in many cases employer also contributes. The whole contribution along with interest is credited to employee’s account. He will get payment out of this fund at the time of retirement and at some other important occasions. If the employee dies, his heirs will get the full payment. 

Provident Funds are of four kinds 

(i)       Statutory Provident Fund or the Fund to which the Act of 1925 applies (S.P.F.). 

(ii)      Recognized Provident Fund (R.P.F.). 

(iii)     Unrecognized Provident Fund (U.R.P.F.). 

(iv)     Public Provident Fund (P.P.F.).

Statutory Provident Fund (SPF)- 

Statutory provident fund is set up under the provisions of the Provident Funds Act, 1925. This fund is maintained by the Government and the Semi-Government organizations, local authorities, railways, universities and recognized educational institutions. 

 Recognized Provident Fund (RPF)-π 

A provident fund scheme to which the Employee’s Provident Fund and Miscellaneous Provisions Act, 1952 (hereinafter referred to as PF Act, 1952) applies is recognized provident fund. As per PF Act, 1952 any establishment employing 20 or more persons is covered by the PF Act, 1952 (establishments employing less than 20 persons can also join the provident fund scheme if the employer and employees want to do so). An establishment covered by the PF Act, 1952 has the following two alternatives and may join any of the following two schemes —

Unrecognized provident fund – 

As stated in 2 supra (third column), if a provident fund is not recognized by the Commissioner of Income-tax, it is known as unrecognized provident fund. 

Public provident fund – 

The Central Government has established the public provident fund for the benefits of general public to mobilize personal savings. Any member of the public (whether a salaried employee or a self-employed person) can participate in the fund by opening a provident fund account at the State Bank of India or its subsidiaries or other nationalized banks. Even a salaried employee can simultaneously become member of employees’ provident fund (whether statutory, recognized or unrecognized) and public provident fund. Any amount (subject to minimum of Rs. 500 and maximum of Rs. 1, 50,000 per annum) may be deposited under this account. The accumulated sum is repayable after 15 years (it may be extended). This provident fund, at present, carries compound interest at the rate of 8.7% per annum. Interest is credited every year but payable only at the time of maturity. 

What are the tax treatments of approved superannuation fund?

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What is Special Tax Treatment of Salary Income of Non-Resident Technicians [Section. 10(5B)]? 

-> The benefit of exemption under section 10(5B) is not available from the assessment year 2003-04.

Deduction under section 80C- How to find out?

-> Section 80C is one of the most popular and favorite sections amongst the taxpayers as it allow reducing taxable income by making tax saving investments or incurring eligible expenses. It allows a maximum deduction of Rs 1.5 lakh every year from the taxpayer’s total income. 

The benefit of this deduction can be availed by Individuals and HUFs. Companies, partnership firms, LLPs cannot avail the benefit of this deduction.
Section 80C includes subsections, 80CCC, 80CCD (1), 80CCD (1b) and 80CCD (2).

Salient features of section 80C- The following are the main provisions of section 80C-

• Under section 80C, deduction would be available from gross total income.
• Deduction under section 80C is available only to an individual or a Hindu undivided family.
• Deduction is available on the basis of specified qualifying investment/contributions/deposits/payments made by the taxpayer during the previous year.
• The maximum amount deductible under sections 80C, 80CCC and 80CCD (1) cannot exceed Rs. 1, 50,000.

Computation of deduction under section 80C- The deduction is calculated as per the following steps-

Step1- Gross qualifying amount

Step2- Net qualifying amount

Step3- Amount of deduction.

Is Salaried Employee Entitled to Relief in Respect of Salary in Arrears, advance, etc?

-> Tax is calculated on your total income earned or received during the year. If you have received any portion of your ‘salary in arrears or in advance’, or your have received family pension in arrears, you are allowed some tax relief under section 89(1).  For a taxpayer, tax liabilities for a Financial Year are calculated from the income earned during that year. Sometimes, that income includes arrears (past dues paid in the current year). Usually tax rates increase with time which means that you may have to pay higher taxes in such case. However, Income Tax Act provides you relief in those situations u/s 89(1).

COMPUTATION OF RELIEF IF SALARY RECEIVED IN ARREARS OR IN ADVANCE

The relief on salary received in arrears or in advance (i.e. additional salary) is computed in the manner laid down in rule 21A (2) as under:

1. Calculate tax payable on the total income, including additional salary – in the year it is received

2. Calculate tax payable on the total income, excluding additional salary – in the year it is received

3. Calculate difference between Step 1 and Step 2

4. Calculate tax payable on the total income of the year to which the arrears relate, excluding arrears

5. Calculate tax payable on the total income of the year to which the arrears relate, including arrears

6. Calculate difference between Step 4 and Step 5

7. Excess of amount at Step 3 over Step 6 is the tax relief that shall be allowed.

Note: If amount at Step 6 > amount at Step 3, no relief shall be allowed.

Points to remember:

• The relief u/s 89 is to be given in the assessment year in which the extra payment by way of arrears, advance, etc. is taxed.
• The encashment of leave salary on retirement whether on superannuation or otherwise has already been exempted us 10(10AA).
• No relief shall be granted in respect of any amount received by the assessee on his voluntary retirement, if an exemption in respect of such amount has been claimed by the assessee u/s 10(10C) in respect of such AY.

FILING FORM 10E:

The Income Tax Department has made it mandatory to file Form 10E if a taxpayer wants to claim relief under Section 89(1). As per Section 89(1), tax relief is provided by recalculating tax for both the years, the year in which arrears are received and the year to which the arrears pertain. The taxes are adjusted assuming arrears were received in the year in which they were due.