Dear all
What comprises - Income from salary
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’ 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.
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.
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 :
* Perquisite of Rent Free Accommodation is valued according to following rules. - In case of private sector employees, value of perquisite of rent free unfurnished accommodation is taken as 10% of salary of employee, if accommodation is in city with population exceeding 4 lacs as per 1991 census. Otherwise, it will be 7.5%. In case of Government Employees, value will be ‘licence fee’ determined by Central / State Government. If some rent is recovered from the employee, the value of perquisite will be reduced to that extent. This is not applicable for accommodation in remote are like mining site, onshore oil exploration site etc.
* If temporary accommodation upto 15 days on transfer is provided, it will also be valued @ 24% of salary paid for the period or actual hotel charges, whichever is lower.
* If accommodation is furnished, in addition to above, 10% of cost of furniture (including TV, radio, refrigerator, AC etc.) 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.
* If motor car is provided by employer, valuation is done depending on HP of motor car, whether chauffeur is provided and whether car is for exclusive private use or partly for official and partly for personal purposes.
* If sweeper, watchman or gardener is provided by employer, the perquisite will be valued at the actual cost to the employer.
* Some benefits like gas, electricity, water are valued at actual cost to employer. Cost of education of employee’s children is also valued at cost incurred.
* If amenities like interest free or concessional interest loan, travelling expenses for holiday to employee or his relatives, free meals, gifts over Rs 5,000 per annum, payment of credit card expenses of employees for personal expenses, club memberships etc. are provided, these will be valued at cost and treated as perquisites.
* If some movable asset is provided to employee, perquisite will be @ 10% of the actual cost of perquisite (In case of computer, depreciation @ 50% and in case of car, depreciation @ 20% is allowed to find ‘actual cost’)
* Reimbursement of medical expenses for medical treatment of employee or member of family of employee is exempt upto Rs 15,000 per year. 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.
* House Rent Allowance (HRA) is partly exempt as provided in the rules. It should be noted that if the employee stays in his own house or if he incurs no expenditure on house rent, the whole HRA is taxable. The rules for granting exemption from HRA are quite complicated, but broadly, these can be summarised as follows - (a) If employee does not pay any house rent, whole of HRA received is treated as perquisite. (b) If the actual amount of rent paid by him is less than 10% of salary of the employee, in that case also, whole of HRA is taxable and there is no exemption. (c) If the actual amount of rent paid by him is more than 10% of salary of the employee, the HRA received in excess of 10% of salary is exempt. In other words, HRA received to the extent of only 10% of salary is taxable and balance is exempt. However, maximum HRA that can be eligible for exemption under this clause is 50% of salary in case of accommodation in four metropolitan cities and 40% of salary in other cities.
For purpose of calculating amount exempt from HRA, the term ‘salary’ includes only basic and DA but does not include any other allowance or perquisite.
* Leave Travel Allowance to any place in India is available only two times in a block of four years. It is for self, family and upto two children. The allowance is limited to economy airfare or AC first class rail fare by shortest route. 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.
* If shares of a company are issued to employees at price lower than the price at which the shares are offered to other shareholders / public, the difference will be treated as a perquisite. If the shares are offered only to employees, difference between market price and the price at which shares are offered to the employee will be treated as perquisite. [However, in case of ESOP of listed companies, it is not treated as perquisite. Capital gains are payable only when the shares are sold].
* 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.
Certificate from employer – Employer is required to issue certificate in form 12BA, giving details of value of each perquisite provided to the employee, if the value of perquisites exceeds Rs 1.50 lakhs. If value of perquisites is less than Rs 1.50 lakhs, the relevant details should be given in From 16 itself, which every employer is required to issue to the employee.
Standard Deduction from Salary Income - No standard deduction is alloable for AY 2006=- (FY 2005-06). Earlier, employees were eligible for standard deduction.
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 (w.e.f. 1.8.1997)
* 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.
* Gratuity received under Payment of Gratuity Act is exempt upto 15 days of wages for each completed year of service or part of year in excess of six months, on the basis of wages last drawn by employee. The exemption is subject to ceiling of Rs 3.50 lakhs. Death-cum- retirement Gratuity received by employees of Central Government, State Government, public sector employees and members of defence services are totally exempt without any limit.
* Voluntary retirement amount received by an employee upto Rs five lakhs is exempt. The voluntary retirement scheme should be as per Income Tax Rules.
* Payment received from approved superannuation fund is exempt.
* Leave encashment at the time of retirement is exempt upto 30 days for every year of completed service. Earned leave so encashed should not be for more than 8 months. Maximum eligible amount for exemption is Rs 1,35,360. In case of Central or State Government employees, it is fully exempt without any ceiling.
* 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.
regards
arun
From India, Bahadurgarh
47What comprises - Income from salary
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’ 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.
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.
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 :
* Perquisite of Rent Free Accommodation is valued according to following rules. - In case of private sector employees, value of perquisite of rent free unfurnished accommodation is taken as 10% of salary of employee, if accommodation is in city with population exceeding 4 lacs as per 1991 census. Otherwise, it will be 7.5%. In case of Government Employees, value will be ‘licence fee’ determined by Central / State Government. If some rent is recovered from the employee, the value of perquisite will be reduced to that extent. This is not applicable for accommodation in remote are like mining site, onshore oil exploration site etc.
* If temporary accommodation upto 15 days on transfer is provided, it will also be valued @ 24% of salary paid for the period or actual hotel charges, whichever is lower.
* If accommodation is furnished, in addition to above, 10% of cost of furniture (including TV, radio, refrigerator, AC etc.) 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.
* If motor car is provided by employer, valuation is done depending on HP of motor car, whether chauffeur is provided and whether car is for exclusive private use or partly for official and partly for personal purposes.
* If sweeper, watchman or gardener is provided by employer, the perquisite will be valued at the actual cost to the employer.
* Some benefits like gas, electricity, water are valued at actual cost to employer. Cost of education of employee’s children is also valued at cost incurred.
* If amenities like interest free or concessional interest loan, travelling expenses for holiday to employee or his relatives, free meals, gifts over Rs 5,000 per annum, payment of credit card expenses of employees for personal expenses, club memberships etc. are provided, these will be valued at cost and treated as perquisites.
* If some movable asset is provided to employee, perquisite will be @ 10% of the actual cost of perquisite (In case of computer, depreciation @ 50% and in case of car, depreciation @ 20% is allowed to find ‘actual cost’)
* Reimbursement of medical expenses for medical treatment of employee or member of family of employee is exempt upto Rs 15,000 per year. 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.
* House Rent Allowance (HRA) is partly exempt as provided in the rules. It should be noted that if the employee stays in his own house or if he incurs no expenditure on house rent, the whole HRA is taxable. The rules for granting exemption from HRA are quite complicated, but broadly, these can be summarised as follows - (a) If employee does not pay any house rent, whole of HRA received is treated as perquisite. (b) If the actual amount of rent paid by him is less than 10% of salary of the employee, in that case also, whole of HRA is taxable and there is no exemption. (c) If the actual amount of rent paid by him is more than 10% of salary of the employee, the HRA received in excess of 10% of salary is exempt. In other words, HRA received to the extent of only 10% of salary is taxable and balance is exempt. However, maximum HRA that can be eligible for exemption under this clause is 50% of salary in case of accommodation in four metropolitan cities and 40% of salary in other cities.
For purpose of calculating amount exempt from HRA, the term ‘salary’ includes only basic and DA but does not include any other allowance or perquisite.
* Leave Travel Allowance to any place in India is available only two times in a block of four years. It is for self, family and upto two children. The allowance is limited to economy airfare or AC first class rail fare by shortest route. 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.
* If shares of a company are issued to employees at price lower than the price at which the shares are offered to other shareholders / public, the difference will be treated as a perquisite. If the shares are offered only to employees, difference between market price and the price at which shares are offered to the employee will be treated as perquisite. [However, in case of ESOP of listed companies, it is not treated as perquisite. Capital gains are payable only when the shares are sold].
* 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.
Certificate from employer – Employer is required to issue certificate in form 12BA, giving details of value of each perquisite provided to the employee, if the value of perquisites exceeds Rs 1.50 lakhs. If value of perquisites is less than Rs 1.50 lakhs, the relevant details should be given in From 16 itself, which every employer is required to issue to the employee.
Standard Deduction from Salary Income - No standard deduction is alloable for AY 2006=- (FY 2005-06). Earlier, employees were eligible for standard deduction.
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 (w.e.f. 1.8.1997)
* 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.
* Gratuity received under Payment of Gratuity Act is exempt upto 15 days of wages for each completed year of service or part of year in excess of six months, on the basis of wages last drawn by employee. The exemption is subject to ceiling of Rs 3.50 lakhs. Death-cum- retirement Gratuity received by employees of Central Government, State Government, public sector employees and members of defence services are totally exempt without any limit.
* Voluntary retirement amount received by an employee upto Rs five lakhs is exempt. The voluntary retirement scheme should be as per Income Tax Rules.
* Payment received from approved superannuation fund is exempt.
* Leave encashment at the time of retirement is exempt upto 30 days for every year of completed service. Earned leave so encashed should not be for more than 8 months. Maximum eligible amount for exemption is Rs 1,35,360. In case of Central or State Government employees, it is fully exempt without any ceiling.
* 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.
regards
arun
From India, Bahadurgarh
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