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Sunday, August 04, 2013

Income From Salary (Part 1)

Allowances and Deduction: Study Notes and Practical Problems

Salaries Defined: Section 15
Under Sec. 15, the following incomes are chargeable to Income tax under the head “Salaries”:
(a)    Any salary due form an employer or a former employer to an assessee in the previous year whether paid or not;
(b)   Any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it becomes due to him;
(c)    Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer if not charged to income tax for any earlier previous year.
Characteristics of Salaries:
For any payment to be made taxable under the head “Salaries”, it must fulfill the following characteristics:
a)      There must a relationship of an employer and employee between the payer and the payee.
b)      Any amount of salary received or due from one or more than one employer shall be taxable under this head.
c)       Salary from Present, Past or Prospective employer is taxable under this head.
d)      Any amount or benefits received from persons other than the employer, would not be taxable under this head even if such income arises by reason of his employment or while he was discharging his normal duties.
e)      Salaries accrue at that where services are rendered.
f)       If salaries are received after certain deductions made by the employer on account of professional tax, contribution to PF, TDS etc., the salary will be Gross salary due to the employee.
g)      Payment received after cessation of employment from employer is also taxable under this head.
h)      Voluntary foregoing of salary is taxable whether it is paid or not but voluntary surrender of salaries is exempted from tax.
i)        Salary is taxable on due or receipt basis whichever is earlier.

Essentials for Taxability of an Income Under the head “Salary”:
a)      Employer and employee relationship
b)      Place for accrual of Salary
c)       Basis of Charge
Employer and employee relationship
An income can be taxed under the head "Salaries" only if there is a relationship of an employer and employee between the payer and the payee. An employer is one who not only directs what and when a thing is to be done but how it is to be done, and the employee is one who is bound to carry out the instruction given to him by such employer. Exceptions:
(a)    Salary of a member of parliament — Taxable under the head other sources. However, salary of a Cabinet Minister or Chief Minister is taxable under the head salary.
(b)   Salary of a partner in the same has been allowed to the firm — Taxable under the head PGBP
(c)    Salary of a guest lecturer — Taxable under the head other sources

Place of Accrual
Salary will be deemed to accrue or arise at a place where the services are rendered.
Exception: Salary receivable by a citizen of India who is a Government employee and who is posted outside India shall be deemed to accrue or arise in India although services are rendered outside India. However, overseas allowances and perquisites received outside India by him shall be exempt under section 10(7).

Basis of Charge [Section 15]
As per section 15, the following income shall be chargeable to income-tax under the head "Salaries":
(a)    any salary due from an employer or a former employer to an assessee in the previous year, whether paid in that previous year or not;
(b)   any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due in that previous year or before it became due to him;
(c)    Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to Income-tax in any earlier previous year.

Meaning of Salary
"Salary" is the remuneration received by or accruing to an individual, periodically, for service rendered as a result of an express or implied contract. The actual receipt of salary in the previous year is not material as far as its taxability is concerned. The existence of employer-employee relationship is the sine-qua-non for taxing a particular receipt under the head “salaries.”
For the purpose of Income Tax, “Salary” includes [Sec. 17(1)]:
Ø  Wages
Ø  Annuity or pension
Ø  Gratuity
Ø  Fees, Commission, perquisites or profits in lieu of salary
Ø  Advance of Salary
Ø  Receipt from Provident Fund
Ø  Contribution of employer to a Recognised Provident Fund in excess of the prescribed limit
Ø  Leave Encashment
Ø  Compensation as a result of variation in Service contract etc.
Note:
a. only receipts from employer are taxable under this head, others excluded.
b. If salary forgone under legal obligations it is exempted, but if foregone voluntarily, it is taxable.
c. salary received after cessation of employment is taxable.
d. Salary in lieu of notice is taxable.
e. Salary is always shown on gross basis i.e. after adding amount of contribution already deducted with salary.

Deduction From Salary [Sec. 16]:
The following two deductions are allowed under section 16:
ii) Entertainment allowance: This deduction is allowed only to a Government employee the extent of minimum of the following 3 limits:
Ø  Actual entertainment allowance received during the previous year.
Ø  20% of his salary exclusive of any allowance, benefit or other perquisite.
Ø  Rs. 5,000.
ii) Tax on employment (also known as Professional Tax):  A deduction of any sum paid by the assessee on account of a tax on employment within the meaning of clause (2) of article 276 of the Constitution, leviable by or under any law.

Allowances [Section 17(3)]:
The term allowance has been derived from the word “To allow”. As per oxford dictionary the word “Allowance” means “any amount or sum allowed regularly”. As such allowances are given in cash along with salary by the employer. These allowances are given to an employee to meet some specific type of loss or expenditure of the employee or to help him to meet certain type of expenses. These are divided into various categories based on the basis of their tax treatment. These are:
(i) Allowances for performance of official duties are exempt to the extent of actual amount received or the amount spent for the performance of the duties of an office or employment of profit, whichever is less. These allowances are:
a.      Conveyance allowance
b.      Helper allowance
c.       Academic research allowance
d.      Uniform allowance
e.       Travelling allowance

(ii) Partly taxable allowance
House Rent Allowance Section 10(13A) and Rule 2A: HRA is exempt under section 10(13A) to the extent of the minimum of the following three amounts:
House situated in Delhi, Mumbai Chennai & Kolkata
House situated in any other city
Minimum of the following 3 limits
Minimum of the following 3 limits
(i) Allowance actually received; or
(i)    Allowance actually received; or
(ii) Rent paid in excess of 10% of salary; or
(ii)    Rent paid in excess of 10% of salary; or
(iii) 50% of salary
(iii)   40% of salary
Meaning of salary: Basic salary plus D.A. to the extent the terms of employment so provide plus commission if fixed percentage of turnover. Salary is to be taken on due basis.

Some other allowances are:
Nature of benefit/allowance/perquisite
Amount of exemption
                (i)            Children education allowance
Rs. 100 p.m. per child for a maximum of 2 children
                (ii)           Hostel expenditure allowance
Rs. 300 p.m. per child for a maximum of 2 children
                (iii)          Special compensatory (Tribal area/ Schedule area/Agency area) allowance
Rs. 200 p.m.
                (iv)         Transport allowance
Rs. 800 p.m. but for handicapped employees Rs. 1600 p.m.
                (v)          Allowance to transport employees
70% of the allowance, maximum Rs. 6000 p.m.
                (vi)         Underground allowance
Rs. 800 p.m.

(iii) Fully exempted allowance
a.      Allowances to a citizen of India, who is a Government employee, rendering services outside India. [Section 10(7)]
b.      Allowances to High Court judges
c.       Sumptuary allowance given to High Court and the Supreme Court judges.
d.      Allowance received by an employee of UNO from his employer.

(iv) Fully taxable allowance: All other allowances excepting those discussed above are fully taxable. Some of such allowances are enumerated as under:
a.      Dearness Allowance (DA)
b.      City Compensatory Allowance (CCA)
c.       Medical Allowance: Fully taxable.
d.      Lunch Allowance/Tiffin allowance
e.       Overtime Allowance
f.        Servant Allowance
g.      Warden Allowance
h.      Non-practicing Allowance
i.         Family Allowance
j.        Entertainment allowance. But in case of government employee’s a deduction is allowed u/s 16(ii) at the least of the following:
(a)    Statutory limit: 5000
(b)   1/5th of basic salary
(c)    Actual entertainment allowance

Practical problems:
Q1. Mr. X receives Rs. 120000 p.a. as net salary. Employer has deducted Rs. 10000 as employee’s contribution to RPF, Rs. 5000 as TDS and Rs. 2500 as Professional tax. During the year employer had deducted Rs. 5000 towards the recovery of house building advance taken by Mr. X. Calculate his gross salary.

Q2. Mr.Z has joined ICC Ltd. on 1st July 2010 in the scale of Rs.15, 000-1,500-21,000-2,500-31,000 with two advance increments. Compute gross salary for the previous year 2012 – 13:
a)      If salary is due on the first date of every month; and
b)      If salary is due on the last day of every month.

Q3. Mr.X is getting a salary of Rs.12, 000 p.m. w.e.f. 1.4.2010. He is promoted w.e.f. 31.12.2009 and got arrears of Rs.75, 000. Bonus for the year 2012-13 is Rs.15, 000 remains outstanding but bonus of Rs.12, 000 for the year 2007-08 was paid on 1st January 2013. In March 2013, he got two months’ salary i.e. April and May 2013 in advance. Compute the gross salary for the assessment year 2013-14.

Q4. Mr.Pradip, a foreign technician is employed with an Indian company. His contract of service was approved by the Government. He was in receipt of bonus from the said Company where he is working. The Assessing Officer subjected the amount to tax on the ground that bonus receipt falls outside the purview of the contract of service. Is the Assessing Officer justified?

Q5. Amal Kumar, an Indian citizen, is posted in the Indian High Commission at Nairobi during the previous year 2012-13. His emoluments consist of Basic Pay of Rs.1, 50,000 per month and overseas allowance of Rs. 60,000 per month. Besides, he is entitled to & for journey to India and also use Government’s car at Nairobi. He has no taxable income except salary income stated above. Compute tax liability if (i) he is a non-resident during the previous year 2012-13 and (ii) he is a foreign citizen.

Q6. Z is employed in A Ltd. As on 31.3.12, his basic salary Rs.6, 000 p.m. He is also entitled to a dearness allowance of 50% of basic salary. 70% of the dearness allowance is considered for retirement benefits. The company gives him HRA Rs.3, 000 pm. With effect from 1/1/13 he receives an increment of Rs.1, 000 in his basic salary. was staying with his parents till 31.10.2012. From 1.11.12 he takes an accommodation on rent in Delhi and pays Rs.2, 500 pm as rent for the accommodation. Compute taxable HRA for the assessment year 2013-14.

Q7. X, is employed at Delhi as Finance Manager of R Ltd. The particulars of his salary for the previous year 2012-13 are as under: Basic Salary Rs.16, 000 p.m. Dearness allowance Rs.12, 000 p.m. Conveyance Allowance for personal purpose Rs.2, 000p.m.; Commission @2% of the turnover achieved which was Rs.9, 00,000 during the previous year and the same was evenly spread. HRA Rs.6, 000 pm. The actual rent paid by him Rs.5, 000 pm for an accommodation at till 31.12.12. From 1.1.13 the rent was increased to Rs.7, 000 pm. Compute taxable HRA.

Q8. Mr. X is employed in ABC Ltd., Amritsar and is getting basic pay of Rs.11,200 per month, dearness allowance 70% of basic pay (half of it is included for retirement benefits). The employee is working in the purchase department and is allowed commission @ 1.5% on purchase turnover of Rs.39 lakhs up to 28th February, 2013. Employer has paid house rent allowance of Rs.5, 000 per month. The employee has paid rent of Rs.3, 000 per month. The employee has submitted his resignation with effect from 1st March, 2013. Compute his gross salary for assessment year 2013-14.

Q9. Compute gross salary of Mr. X from information given below for each situation separately:
a.       Basic salary Rs. 3500 p.m.
b.      DA Rs. 1000 p.m.
c.       CCA Rs. 200 p.m.
d.      HRA Rs. 1000 p.m.
e.      Commission on turnover achieved by him Rs. 6000
Situation (a) Living in own house
(b) Living in rented house at Delhi as DA enters into pay for retirement benefits and rent paid is Rs. 1500 p.m.
(c) Living in a rented house at Punjab and DA does not enter into pay for retirement benefits and rent paid is Rs. 1000 p.m.

Q10. Mr. X who is working with a company at Delhi submits the following information about the salary income for the previous year 2012-13:
Salary Rs. 8000 p.m.
DA Rs. 2000 p.m.
Bonus Rs. 15000 (Outstanding)
Bonus Rs. 15000 (Paid)
His employer paid him Rs. 2000 p.m. as HRA upto 30-11-2012 and it was raised to Rs. 5000 p.m. from 1-12-2012. He lived with his parents in a house owned by his father and no rent was paid by him. From 1-9-2012 he shifted to a rented house and paid Rs. 5000 p.m. as rent. Compute his gross salary for the assessment year 2013-14 if salary is due on the last date of every month.
Q11. Mr. X is employed in P Ltd. getting basic pay of Rs.20, 000 per month. The employer has paid him the following emoluments:
Dearness Allowance 5000 Per month
Dearness Pay 4000 Per month
Bonus 6,000 per annum (Outstanding)
Bonus 6000 for the year 2009-10, received during previous year
Entertainment Allowance 15000 Per annum
Domestic Servant Allowance 500 per month (Full amount spent on engaging a domestic servant)
City Compensatory Allowance 6000 Per month
Project Allowance 1000 per month
Lunch Allowance 300 per month
Transport Allowance 900 per month
Deputation Allowance 1000 per month
Children Education Allowance (for 3 children) 400 per month
Hostel Expenditure Allowance (for 3 children) 600 per month
Professional tax paid during previous year 2500
House Rent Allowance 10000 per month. He is having a family house at the place of his posting but he is living in a rented house and is paying a rent of 7000 per month. Compute his gross salary and taxable salary for the assessment year 2013-14.

Q12.Mr. X Joined central governments job on 1st oct 2009 in the grade of 30000-2000-50000-500 with two advance increment. The employer has paid him the following emoluments:
Dearness Allowance 5000 Per month
Dearness Pay 4000 Per month
Commission on Turnover 5000
Entertainment Allowance 50000 Per annum
Water and Electricity allowance 2000 Per month
Non Practicing Allowance 50000 Per annum
Marriage Allowance 500 Per month
Helper Allowance 15000 Per annum (Actual expenditure 10000)
Academic Research Allowance 15000 Per annum (Actual expenditure 10000)
Conveyance Allowance 15000 Per annum (Actual expenditure 10000)
Children Education Allowance (for 3 children) 400 per month
Hostel Expenditure Allowance (for 3 children) 600 per month
Professional tax paid during previous year 2500 by employer on behalf of Mr. X
House Rent Allowance 10000 per month. He is having a family house at the place of his posting but he is living in a rented house and is paying a rent of 7000 per month. Compute his gross salary and taxable salary for the assessment year 2013-14.