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Income from Salary

1.3 Income under the head ‘salary’ comprises of remuneration in any form (including perquisites) received by an employee from employer. Thus, there should be contractual employer-employee relationship. The contract may be express, oral or implied.

Salary is chargeable on due or receipt basis.  Arrears of salary paid or allowed are includible if not charged to income tax for any earlier previous year [section 15 of Income Tax Act]

‘Salary’ includes * wages * dearness allowance * Bonus * gratuity *  annuity or pension * advance of salary * Fees / Commissions perquisites/ profits received from employer in addition to salary * Leave encashment while in service * Employer’s contribution to provident fund in excess of 12% of salary of employee * profit in lieu of salary [section 17(1) of Income Tax Act]

In Karamchari Union v. UOI 2000 AIR SCW 806 = AIR 2000 SC 1226 = (2000) 109 Taxman 1 = 2000 LLR 897 =  243 ITR 143 (SC), it has been held that CCA (City Compensatory Allowance), DA (Dearness Allowance) and HRA (House Rent Allowance) are in nature of income forming part and parcel of salary and are taxable.

1.3-1 Allowances

House rent allowance – Exemption will be lowest of (a) 50% of salary where residential accommodation is in Mumbai, Kolkata, Delhi or Chennai and 40% of at other place (b) Excess of rent paid over 10% of salary (c) Actual allowance paid. There will be no exemption if the residential accommodation is owned by employee or employee has not paid any rent for residential accommodation used by him [section  10(13A) of Income Tax Act and rule 2A]

Salary means basic plus DA (if forming part of retirement benefits) plus commission (if fixed as a percentage of turnover).

Gratuity – Gratuity for Government employees is fully exempt [section 10(10)(i)]. In case of employees covered under Payment of Gratuity Act, exemption is upto Rs 3,50,000 to be reduced by such exemptions claimed in the past or 15 days salary for every completed year of service, whichever is lower.. Salary means basic plus DA (if forming part of retirement benefits) [section 10(10)(ii) of Income Tax Act]  Any other gratuity is also exempt to same extent [section 10(10(iii)]of Income Tax Act]

Leave encashment – Encashment of earned leave on retirement of employees of Central/State Govt is fully exempt [section 10(10AA)(i) of Income Tax Act] . Leave encashment while in service is treated as part of salary. In other cases, leave encashment of earned leave on retirement will be lowest of 10 months’ salary, Rs three lakhs or actual sum received [section 10(10AA)(ii) of Income Tax Act]

LTA/LTC – Leave Travel Assistance/Leave Travel Concession is allowed twice in a block of four years. It is limited to amount actually spent on travelling of employee and his family members. It is limited to economy class of air fare or AC first class fare [section 10(5) of Income Tax Act and rule 2B]

The allowance is exempt subject to amount of expenses actually incurred by the employee for such travel. The employee will have to keep account of actual expenses incurred. It appears that actual travel by air or AC is not required, but the overall ceiling on expenses is subject to limit of air fare / rail fare.

VRS (Voluntary Retirement) – It is exempt upto Rs five lakhs if VRS is as per prescribed conditions.

Medical treatment – Reimbursement of amount actually spent for medical treatment upto Rs 15,000 is exempt in a financial year. In addition, reimbursement of insurance premium for self, spouse, children and dependent brothers, sisters and parents is exempt.

In case of treatment in Government or approved hospital, or expenditure on medical treatment outside India, reimbursement of medical expenses is exempt without any ceiling.

1.3-2 Valuation of perquisites – The employer often gives some perquisites to the employees. Value of these perquisites is added to the income of employees. The valuation of perquisites is done as follows :

Rent Free unfurnished Accommodation – –  In case of private sector employees, value of perquisite of rent free unfurnished accommodation is taken as follows – (a) If owned by employer – If population of city exceeds 25 lakhs – 15%, if population exceeds 10 lakhs but below 25 lakhs – 10% (c) In other cases – 7.5%.

In case of Government Employees, value will be rent as per rules framed by Government, as reduced by sum actually paid

Salary includes basis, DA (if taken into account for retirement benefit), bonus, commission, fees and all taxable allowances.

Valuation of furnished accommodation – If accommodation is furnished, in addition to above, 10% of cost of furniture (including TV, radio, refrigerator, AC etc.), if owned by employer, will be treated as perquisite. If the furniture is hired from third party, actual hire charges less any amount recovered from employee will be the perquisite.

Gas electricity or water supply – Some benefits like gas, electricity, water are valued at actual cost to employer. If these are provided from own sources, value will be manufacturing cost incurred per unit, less amount recovered from employee.

Domestic servants – Actual cost to employer for sweeper, gardener, watchman or personal attendant will be value of perquisite.

Use of movable assets – If some movable asset is provided to employee, perquisite will be @ 10% of the cost of asset or rent paid, as reduced by sum paid by employee.

Loans to employees at concessional rate – Calculate interest on basis of SBI lending rates, reduced interest paid by employee and difference will be the value of perquisite.

1.3-3 Perquisites which will not be added to salary if employer covered under FBT

Remaining  perquisites will be  considered as Fringe Benefit and will be considered for FBT. Hence, perquisites like motor car, lunch, refreshment, travelling, touring, gift, credit card, club etc. will be added to salary only in cases where employer in individual or HUF and is not liable to FBT.

Valuation of motor car -.If car is owned or hired by employer and provided for personal purposes of employees, valuation will be expenditure incurred by employer on running and maintenance plus remuneration of chauffer plus normal wear and tear @ 10% on actual cost less amount charged to employees.

If motor is partly for official and partly for personal purposes and expenses are reimbursed by employer, perquisite value per month is Rs 1,2000 per month if engine cubic capacity is upto 1.6 liters and Rs 1,600 per month if cubic capacity of engine exceeds 1.6 liters.

If motor is partly for official and partly for personal purposes and expenses are reimbursed by employer, perquisite value per month is Rs 1,200 per month if engine cubic capacity is upto 1.6 liters and Rs 1,600 per month if cubic capacity of engine exceeds 1.6 liters. If  chauffer is provided, value of perquisite will be Rs 600 per month.

If motor is partly for official and partly for personal purposes and expenses are met by employee, perquisite value per month is Rs 400 per month if engine cubic capacity is upto 1.6 liters and Rs 600 per month if cubic capacity of engine exceeds 1.6 liters. If  chauffer is provided, value of perquisite will be Rs 600 per month.

Other amounts paid – Club fees paid on behalf of employee, insurance premiums paid on behalf of employee, income tax paid on behalf of employee are all treated as perquisites and its cost is added to income of employee.

Gifts – Gifts upto Rs 5,000 per year are exempt.

1.3-4 Deductions from Salary Income – Following deductions are permissible from salary income –

Professional Tax paid to State Government is allowable as deduction

Entertainment allowance upto Rs 5,000 is allowable to Government employees.

1.3-3 Exemptions for salary income – Following are exempt from income tax-

Transport allowance upto Rs 800 per month granted to an employee to meet his expenditure for the purpose of commuting between place of residence and the place of his duty.

Conveyance and transport allowance granted to employee to meet cost of travel on tour are exempt. Allowance granted to meet expenditure incurred on conveyance in performance of duties of an office or employment are exempt. In LIC Officers v. LIC of India (2000) 112 Taxman 227 (Bom HC DB), it was held that conveyance allowance is exempt only if expended for meeting expenses wholly and necessarily incurred or to be incurred in performance of duties of office. Conveyance allowance at flat rate irrespective of place of residence, work and posting will not be exempt from income tax.

Conveyance and transport allowance granted to employee to meet cost of travel on transfer are exempt. Expenses granted to meet cost of travel on transfer and cost of packing and transportation of personal effects on such transfer are exempt.

Use of employer’s vehicle or transport provided for journey of employee from residence to his place of work and back is not treated as perquisite and its cost is not treated as income.

Refreshments during office hours to employees and recreational facilities provided to group of employees are not treated as perquisites.

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