Tuesday, February 19, 2013

Income Under the head Salary (Part 1)

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 service 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.
a. only receipts from employer is 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 exployement is taxable.
d. Salary in lieu of notice is taxable.
e. Salary are 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:
A) 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.
B) 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.

(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-practising 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