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Income from Salary notes

Income from Salary: Covering the provisions of Income Tax

Jun 10, 2022

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Income From Salary

Under the heads of Income specified in the Indian Income Tax Act, Income from Salary is the first and foremost to be considered. The Tax filing season is one of the important times of the year when salaried individuals are concerned as well as busy filing their tax returns. But the smart ones are those who are one step ahead and are well-planned. 

Irrespective of the industry one works in, the Income from Salary component should be clearly understood and the tax slab in which one falls. With this article, HA has tried its level best to explain it from scratch regarding it.

Income from Salary: It is a regular payment that is made by the employer to employees according to a specific contract. Their earnings are supplemented by paid holidays and other insurances. The Income from Salary is changing from country to country. In western countries, market forces play a huge role whereas in an eastern country like Japan, tradition and social structure plays a huge role. 

According to Section 17 (1), Income from Salary of an individual is defined as (i) Wages (ii) Annuity or pension (iii) Gratuity (iv) fees, commission, perquisites or profits in lieu of salary (v) Advance salary (vi) Receipt from provident fund (vii) Contribution of the employer to a recognised provident fund in excess of prescribed limit (viii) Leave encashment (ix) compensation as a result of variation of service contract etc. (x) Government contribution to a pension scheme.

Apart from this, there are a few conditions that are not included in the salary head purview, such as, from partnership firm business, salary received by MLA or MP and money received by the family member as a pension when an employee has died. 

So as to estimate the tax liability one has to focus on the following points:

  1. The employee and employer relationship is formed first which subsequently lead to the responsibility on the employer side to compute the gross salary of their employers 
  2. This Gross Salary then has to be reduced by payments that are tax exempted.
  3. Deductions which are under the Section 16 has to be made to get Net Payable Salary and also Standard deductions should be reduced.

(Note: Income chargeable under any other head as reported by the employee is to be added and accordingly the gross total income (GTI) is to be computed.)

  1. Chapter VI- A under Deduction is to be reduced from the Gross Total Income. 
  2. And finally, the tax liability which is to be computed on the total income should be computed.

(Note: The tax liability so computed is to be increased by the surcharge payable (if any) and education cess payable at the prescribed rate, to arrive at the total tax payable.)

As a matter of fact, 1/12th of the total tax which has to be paid at the point of the source is deducted by the employer. 

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Prerequisites under Income from Salary

It is defined as any attached benefits which an individual gets when he/ she serves an organisation. 

Elaboration of perquisite is defined under Section 17(2) of the Income Tax Act as:

  1. The value of rent-free accommodation provided to the assessee by his employer [sec. 17(2)(i)];
  2. The value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer [sec. 17(2)(ii)];
  3. The value of any benefit or amenity granted or provided free of cost or at a concessional rate in any of the following cases:
    1. by a company to an employee who is a director thereof;
    2. by a company to an employee, being a person who has a substantial interest in the company;
    3. by any employer (including a company) to an employee to whom provisions of (i) and (ii) above do not apply and whose income under the head “Salaries” is exclusive of the value of all benefits or amenities not provided for by way of monetary benefits, exceeds Rs. 50,000 [sec. 17(2)(iii)];
  4. Any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee [sec. 17(2)(iv)];
  5. Any sum payable by the employer, whether directly or through a fund other than a recognised provident fund or approved superannuation fund or a deposit-linked insurance fund, to effect an assurance on the life of the assessee or to effect a contract for an annuity [sec. 17(2)(v)];
  6. the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at a concessional rate to the assessee [sec. 17(2)(vi)];
  7. the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds Rs. 1,50,000 [sec. 17(2)(vii)]; and
  8. the value of any other fringe benefit or amenity as may be prescribed [sec. 17(2)(viii)].

This is further divided into three categories such as:

  • Taxable
  • Not Taxable
  • Taxable for certain types of employees

In concern with the first perquisites, it is a cause of concern to the employees as it’s a cost to them. The detail about this can be found in Rule 3 under Income Tax Rules. Some of the examples of the first prerequisite are:

  1. Rent accommodation
  2. Any benefit which is granted free
  3. Sum of the amount payable by the employer with respect to the obligation which was actually paid by the employee
  4. Free of cost motor car use for personal purpose 
  5. Fringe Benefits
  6. Gas supply, electric energy or water
  7. Concessional Educational Facility 

And some more

Perquisites valuation 

The taxable perquisites for the employees are considered to be the cost to the employer. But there are specific rules for valuation as per Rule 3 of the Income Tax rule. This rule provides the valuation of perquisite by the employer directly to the assessee or to any member of his household by reason of his employment is to be determined in accordance with the sub-rules which are briefly given below.

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Valuation of residential accommodation provided by the employer (Rule 3(1)):-

A] Value of Furnished rent-free accommodation

Value of Unfurnished accommodation

Plus: 10% per annum of the cost of furniture, if the furniture is owned by the employer or actual rent of furniture

B] Value of Unfurnished rent-free accommodation

i) Central and State Government employees

A license fee of House determined will be taxable

ii) Private sector employees or other employees

a) If it is owned by the employer

    • The city that has a population up to 10 lakhs as per the 2001 census – 5% of Salary
    • A city having a population exceeding 10 lakhs but up to 25 lakhs as per the 2001 census – 10% of Salary
    • The city that has a population exceeding 25 lakhs as per the 2001 census – 15% of Salary

b) If taken on lease by the employer

    • Actual lease rent paid by the employer
    • 15% of Salary

Whichever is less will be taxable

C) Taxability for Hotel Accommodation

a) If Hotel Accommodation is unfurnished

It is not taxable

b) If Hotel Accommodation is furnished

    • Actual charges paid or payable for such hotel
    • 24% of the salary

Whichever is less will be taxable

Note: If the hotel accommodation is provided for not more than 15 days on the transfer of an employee from one place to another then it will not be taxable

 

Perquisite of the motor car provided by the employer Rule 3(2):-

1. If the motor car is owned or leased by the employer

a) Used exclusively for official purpose

If the car is used for only official purposes, it will not be taxable in the hands of employees irrespective of the cubic capacity of the engine.

b) Used for both official and personal purposes

i) If running and maintenance cost is reimbursed by the employer

Cubic Capacity within 1.6 litre – Rs 1,800 p.m. + Rs 900 p.m. (If driver is provided)

Cubic Capacity exceeding 1.6 litre – Rs 2,400 p.m. + Rs 900 p.m. (If the driver is provided)

ii) If running and maintenance cost is reimbursed by the employee

Cubic Capacity within 1.6 litre – Rs 600 p.m. + Rs 900 p.m. (If the driver is provided)

Cubic Capacity exceeding 1.6 litre – Rs 900 p.m. + Rs 900 p.m. (If the driver is vided)

c) Used exclusively for personal purpose

If the car is used for only personal purposes, it will be fully taxable in the hands of employees irrespective of the cubic capacity of the engine.

The taxable value is as under:

The actual cost of Running and Maintenance of a motor car

Plus: driver’s salary

Plus: normal wear and tear @10% per annum of the actual cost of the motor car

Less: any charges recovered from the employe

2. If the motor car is owned by the employee but running and maintenance and driver’s salary reimbursed by an employer:

a) Used exclusively for official purpose

If the car is used for only official purposes, it will not be taxable in the hands of employees irrespective of the cubic capacity of the engine.

b) Used for both official and personal purposes

If running and maintenance cost is reimbursed by the employer

Cubic Capacity within 1.6 litre – Actual expenses fewer than Rs 2,700 p.m.

Cubic Capacity exceeding 1.6 litre – Actual expenses fewer than Rs 3,300 p.m.

3. If Employee owns any other automotive conveyance but running and maintenance is reimbursed by the employer

a) Used exclusively for official purpose

If the car is used for only official purposes, it will not be taxable in the hands of an employee if the cubic capacity of the engine is within 1.6 litres.

b) Used for both official and personal purposes

If running and maintenance cost is reimbursed by the employer

Cubic Capacity within 1.6 litre – Actual expenses fewer than Rs 900 p.m.

Cubic Capacity exceeding 1.6 litre – Not Applicable

The perquisite value in concern with the gardener, personal attendant, watchman or Gardner is considered to be the actual cost to the employer as reduced by the employee with respect to such services.

Whereas, the perquisite which arises due to the supply of gas, water or electricity is determined by the amount which is being paid by the employer to the agency supplying the same.

In the case of the educational facility aspect, the expenditure is incurred by the employer. . If the educational institution is maintained & owned by the employer, the value would be nil if the value of the benefit per child is below Rs. 1000/- P.M. or else the reasonable cost of such education in a similar institution in or near the locality [Rule 3(5)].

 

Free/Concessional journeys provided by an undertaking engaged in the carriage of passengers or goods Rule 3(6)-

The value of perquisite is the value at which such benefit or such amenity is offered by such employer to the public as reduced by the amount, if any, paid or recovered from the employees for such benefit or amenity. However the aforesaid will not be applicable to the employer of an airline or railways.

 

Basic head of Income

Perquisites exempt from Income from Salary-Income Tax Exemption

Some instances of perquisites exempt from tax are given below :

I) Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India (Sec. 10(7)).

II) Rent free official residence provided to a Judge of High Court or Supreme Court or an Officer of Parliament, Union Minister or Leader of Opposition.

III) No prerequisite shall arise if interest-free/concessional loans are made available for medical treatment of specified diseases in Rule 3A or where the loan is petty not exceeding in the aggregate Rs. 20,000/-.

IV) No prerequisite shall arise in relation to expenses on telephones including a mobile phone incurred on behalf of the employee by the employer.

Allowances

In simple terms, it is the financial benefit given to the employer above salary. These allowances cover benefits to cover expenses for personal as well official duties.

Just like perquisites, allowances are taxable, non-taxable and partly taxable. Examples of taxable allowances are dearness, entertainment, meals etc whereas allowances paid to Government servants, employees of UNO and judges are not taxable.

As the whole topics have a lot of points and discussing each of them opens-up detailed road on explanation. At HA we look from the point of perspective of our clients, so as to ease things we have not provided exhaustive.

Ring to HA, and get going with all the concepts. With an age-old experience our virtual experts know how to make Finance, Accounting and Taxation never simpler than before!

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