INCOME UNDER THE HEAD SALARY

Meaning of Salary Salary under the Income Tax Act is defined U/s 17(1), which includes the following: Wages Any Annuity or Pension; Any Fees, Commission, Perquisites or Profits in Lieu of salary; Any Gratuity; Any Advance of Salary; Any payment received by an employee in respect of any period of leave not availed by him, known as leave encashment; Transferred balance in a recognized provident fund to the extent it is taxable; Contribution made by central govt. to the account of an employee under the pension scheme U/s 80 CCD;
Meaning of Basis of Charge Basis of Charge of an Income lets us know that on what grounds Income earned by a person is chargeable to tax. It specifically defines whether Income so received is tax chargeable on receipt basis or accrual basis, or in case of variations in accounting method how tax should be charged. All five heads of Income have different Basis of Charge which you will come to know as you surf through each head of Income. Basis of Charge for Salary Income Salary Income is chargeable to tax on DUE OR RECEIPT BASIS WHICHEVER IS EARLIER Income Tax Act however specifically states that where any salary in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due. It is also worthwhile to note that the Accounting Method employed by the Assessee is absolutely irrelevant to violate the chargeability rule as stated above in bold. the following examples will provide more clarity on this rule: You being an employee of a MNC are faced with the following alternative situations during the P.Y. 2007-08 (A.Y. 2008-09) 1) You received your annual salary of Rs. 7,00,000/- due & receivable by you in the previous year. The salary of Rs. 7,00,000/- will be chargeable to tax in P.Y. 2007-08 in your hands.

2) An Annual salary due to you of Rs. 7,00,000/- out of which only Rs. 5,50,000/- was received during the P.Y. 2007-08 and rest was received by you in the next P.Y. i.e., 2008-09. The whole salary amount of Rs. 7,00,000/- will be chargeable to tax in your hands in the P.Y. 2007-08 i.e., A.Y. 2008-09. The salary of Rs 1,50,000/- received in P.Y. 2008-09 will not be chargeable to tax again in P.Y. 2008-09 i.e., A.Y. 2009-10 since it has already been taxed earlier.

3) Advance salary received during the P.Y. 2007-08 pertaining to P.Y. 2008-09 of Rs. 2,50,000/-. The salary received of Rs. 2, 50,000/- will be chargeable to tax in the P.Y. 2007-08 instead of P.Y. 2008-09 since the rule specifically says due or receipt whichever is earlier, however it will not be charged to tax again in P.Y. 2008-09.

4) Arrears of salary pertaining to P.Y. 2005-06 received in P.Y. 2007-08 amounting to Rs. 1,00,000/-. The amount so received of Rs. 1,00,000/- will not be tax chargeable in your hands in P.Y. 2007-08 since it must had been already taxed in your hands in P.Y. 2005-06, i.e., A.Y. 2006-07.

Taxation of various forms of Salary

1)Advance salary [Sec.17 (1)(v)] Advance salary is taxable on receipt basis, in the assessment year relevant to the previous year in which it is received, irrespective of the incidence of tax in the hands of the employee. The recipient can, however, claim relief in terms of section 89. However, a loan taken from employer is not taxable as advance tax salary. Provision illustrated Salary of X is Rs. 3000 per month. During the month of March 2007, he gets salary of the next two months in advance. In this case, for the previous year 2006-07, salary of 14 months i.e. Rs. 42,000 is taxable (relief under section 89 is claimable). For the previous year 200708, salary of 10 months, i.e. Rs. 30,000 will be chargeable to tax and not of 12 months.

2)Arrear of Salary
It is taxable on receipt basis if the same has not been subjected to tax earlier on due basis. In this case also recipient can claim relief under section 89. Provision illustrated - The following illustrations are given to have a better understanding:

On March 10, 2007, X receives a sum of Rs. 20,000 as arrears of bonus pertaining to the previous year 2002-03 it was not taxed during the previous year 2002-03.

3)Leave salary
As per Service rules every employee is entitled to certain no. of leaves per annum. If an employee does not utilize all his leaves available to him per annum such unutilized either get lapsed or get carry forward which can be enchased later. If such carry forward leaves are liquidated in cash form during the continuity of employment or on retirement, it is known as leave salary. The taxation of Leave salary for various categories of employees is shown here under: Status of Employee Government/ NonGovernment employee Government employee Non-Government employee Nature of Leave Encashment Leave encashment during Continuity of employment Leave encashment at the time of retirement / leaving job Leave encashment at the time of retirement / leaving job

Taxability It is chargeable to tax. However relief can be taken under section 89 It is fully exempt from tax under section 10(10AA)(i) It is fully or partially exempt from tax in some cases under section 10(10AA)(ii)

In Simple words from the above tabloid summary we can conclude that Leave Salary is chargeable to tax only in two cases first accumulated leave being enchased by any class of employee- Govt. or Non Govt. during the continuation of employment whereof it is fully chargeable to tax. Second being accumulated leaves enchased by a non govt. employee on his/ her retirement whereof the complicated part of calculation of exempted leave salary comes into picture which can be calculated as LEAST of the following: Period of earned leave (in no. of months) to the credit of the employee at the time of his retirement leaving the job Average monthly salary. 10 Average monthly salary. The amount specified by the Government i.e., Rs. 3,00,000 /-; Leave encashment actually received at the time of retirement.

1. 2. 3. 4.

How to find out leave standing to the credit of an employee at the time of retirement or leaving the job THREE STEPS THEORY Step (a) Find out duration of services in number of years (ignore any fraction of year). Step (b) Find out rate of earned leave entitlement from the service rules how many days leave is credited at the rendered for each year of services (earned leave entitlement can not exceed 30 days for every year of actual services rendered for the employer from whose services he has retired). For instance, if earned leave is credited at the rate of 45 days leave for each year of service, for step (b) calculation shall be made at the rate of 30 days leave for each year of service. If, however, earned leave is credited at the rate of 23 days leave for each year of service, for step (b) calculation shall be made at the rate of 23 days leave for each year of service. Step (c) Find out earned leave actually taken or enchased (in number of days) during the service time, the computation shall be made as follows:Step (a) Step (b) minus Step (c) 30 How to find out Average monthly salary? Salary, for this purpose, means basic salary and includes dearness Allowance if terms of employment so provide. It also includes commission based upon fixed percentage of turnover achieved by an employee, (if any). Average Salary for the aforesaid purpose is to be calculated on the basis of average salary drawn during the period of 10 months ending on the date of retirement.

Gratuity
Gratuity being a retirement benefit is generally payable at the time of employment and on basis of duration of service. Where the payment of Gratuity Act, 1972, is inapplicable, an employee can claim gratuity under the terms of contract of employment. BROAD TAX TREATMENT

Status of Employee Government employee Non-Government employee covered by the payment of Gratuity Act, 1972

Whether Gratuity is taxable It is fully exempt from tax under section 10(10)(i) It is fully or partly exempt from tax under section 10(10)(ii)

Non-Government employee not covered by the payment of Gratuity Act, 1972

It is fully or partly exempt from tax under section 10(10)(iii)

In Simple words, the taxation part comes into picture only in the last two cases, which are dealt below in detail: IN THE CASE OF EMPLOYEES COVERED BY THE PAYMENT OF GRATUITY ACT, 1972, [SEC. 10(10)(ii)]:Any gratuity received by an employee, covered by the Payment of Gratuity Act, 1972, is exempt from tax on the following basis 15 days salary( 7 days salary in the case of employee of a seasonal 1. establishment) based on salary last drawn for each of service (i.e., 15 days salary length of service) 2. Rs. 3,50,000 3. Gratuity actually received. How to find out length of service If the period of service is 6 months or less than 6 months, it shall be ignored for this purpose. Conversely, if the period of the service is more than 6 months it shall be taken as one full year. Meaning of Salary Salary for the purpose of the aforesaid limits means salary last drawn by the employee and includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages and any other allowance. Salary of 15 days Salary of the 15 days is calculated by dividing salary last drawn by 26, i.e. maximum number of working days, in a month. For instance, if monthly salary at the time of retirement is Rs. 1000, 15 days salary would come to Rs. 576.92/- (i.e., Rs. 1000 15 26). IN THE CASE OF EMPLOYEES NOT COVERED BY THE PAYMENT OF GRATUITY ACT, 1972, Any gratuity received by an employee, not covered by the Payment of Gratuity Act, 1972, is exempt from tax on the following basis 1. Rs. 3,50,000 2. Half months average salary for each completed year service. 3. Gratuity actually received. How to find out length of service Same as Above Meaning of Salary Same as Above

Half Months Average Salary Average Salary being calculated on same lines as in case of Leave Salary, such Average monthly salary divided by 2 is Half months Average Salary.

Pension
Pension is a payment made by the employer after the retirement/ death of the employee as a reward for past services, following table gives a broad tax treatment of pension:-

Case Case 1

Particulars Pension is received from UNO by the employee or his family members Family pension received by the family members of armed forces (after the death of the employee) Family pension received by the family members of other cases (after the death of the employee) Pension received by an employee (during his lifetime) in any other cases.

Tax treatment It is not chargeable to tax

Case 2

It is exempt under section 10 (19) in some cases.

Case 3

It is taxable in the hands of recipients under section 56 under the head income from other sources. Standard deduction is available under section 57 which is 1/3 of such pension or Rs. 15000, whichever is lower. Tax treatment depends on whether Pension is Commuted or Uncommuted (Refer Below).

Case 4

Uncommuted pension whether received by a Govt. or a Non Govt. employee is chargeable to tax in both cases However Commuted pension in case of Govt. is fully EXEMPT from tax but in case of Non Govt. employee is exempt on following basis:

Situation If Gratuity is received

Tax Exemption available One-third of the pension, which he is normally entitled to receive, is exempt.

If Gratuity is not received ILLUSTRATION

One-half of the pension which he is normally entitled to receive is exempt.

A retires from services of XYZ Ltd. on May 31, 2007. He gets pension of Rs. 900 per month up to December 31, 2007: (i.e. Rs. 900 7). With effect from January 1, 2007, he gets One Third of his pension commuted for Rs. 62000 and is not in receipt of Gratuity. While uncommuted pension is chargeable to tax, commuted pension is exempt from tax in the case of Government Employees. Therefore, pension of Rs. 62000 is exempt from tax. The amount of uncommuted pension will be calculated as under: Rs. Uncommuted pension up to December 31, 2007 (i.e. Rs. 900 7) Uncommuted pension from January 1, 2007 to March 31, 2007 (i.e. 2/3 900 3) Total Uncommuted pension chargeable to tax as salary 8100 1800 6300

Certain payments made by the Employer to his employee in lieu or in addition to his salary or wages are taxed under this head dealt hereunder: a. Terminal Compensation: Any compensation received by an assessee from his Current/ Former employer in respect of Termination on account of Premature termination, resignation/ Modification in Terms of employment. Payments from an Unrecognized PF/ Superannuation fund: Payment received by an assessee consisting of Employers contribution & Interest on such Employers contribution only.

b.

c. Payment under Key man Insurance Policy: Any payment due for receipt on account of Key man Insurance Policy including Bonus is taxable. d. Receipts from Any person: Any sum received from any person in connection with:

e.

Before his joining employment with that person; or, After cessation of employment with that person.

Any other Sum received except following to the extent exempt U/s 10:

i. ii. iii. iv. v. vi.

vii.

Death-cum- retirement gratuity. Commuted value of Pension. Retrenchment compensation. Receipts from a Statutory PF. Receipts from a Recognized PF. Any other receipts from an Approved superannuation fund. House Rent Allowance.

Compensation received on Voluntary Retirement under VRS.

Compensation is received/ receivable by an employee of the following undertakings:

a. b. c.

A Public Sector Company Any other Company

An Authority established under the State, Central or Provincial Act.

d. e. f.

A local authority A Co-operative society

A University established under Central, State or Provincial Act and an institution declared to be a university under Section 3 of the University Grants Commission Act 1956.

g. h. i.

An Indian Institute of Technology

Such Institute of Management as the Central Govt. may specify. State Govt.

j. k.

Central Govt.

Institutes having importance throughout India/ State(s) as notified. QUANTUM OF EXEMPTION: It is the Actual amount of compensation available or Rs. 5, 00,000/whichever is lower. However one point is must notice that this exemption is available only once, if it is availed in any assessment year, it will not be available for any other assessment year. GUIDELINES: RULE 2BA : These provide that the Scheme of VRS should be in accordance with the following requirements, namely:-

1.

The Scheme should be applicable to an Employee who has completed 10 yrs. of Service or has completed 40 yrs. of age; this requirement not be applicable in case of amount received by an employee of a Public Sector company. 2. It should apply to all employees including workers & executives of a company or of a Co-operative society, as the case may be, excepting Directors of a company or of a Co-operative society. 3. The Scheme of Voluntary retirement/ separation should have been drawn to result in overall reduction in the existing strength of the employees.

4.

The vacancy caused by voluntary retirement is not to be filled up, nor the retiring employee is to be employed in another company or concerned belonging to the same management; 5. The amount receivable on account of voluntary retirement/ separation of the employee does not exceed: amount equivalent to one The and Three month's salary for each completed year of service or; Salary at the time of retirement balance months of service left before date of retirement/superannuating. PLEASE NOTE: Voluntary Retirement Compensation claimed as exempt under this head must be received/ receivable by the employee on his actual retirement or separation.

Approval of such scheme of VRS is not required.

Salary here includes Basic+ DA+ Commission based on fixed % of turnover. Scheme under which VRS is received must be framed as per Rule 2BA guidelines as explained above. Where exemption has been allowed to an employee U/s 10(10C) in any earlier assessment years, no exemption there under shall be allowed to him in relation to any other assessment year. Relief can be claimed here U/s 89.

Leave travel concession

Any amount received by employee from his employer in connection of his proceeding on leave to any place in/ outside India is exempted under this head subject to following:

i. Journey done by Air: Economy class national carrier via shortest

route.

ii. Journey done by Railways: AC 1st Class fare via shortest route. iii. Journey done by any other mode of transport: If recognized
Public transport exists then 1st Class deluxe fare else amount equivalent to AC 1st class Rail fare. PLEASE NOTE: In case of situation 3 above where journey performed by any other mode of transport, where in the place of origin of journey and destination are connected by railways. The amount of air condition first class rail fare by the shortest route OR the amount actually spent, whichever is less shall be exempted. Maximum exemption claimable is to the extent of Actual Expenditure subject to amount of L.T.C received. Exemption can be claimed in respect of TWO journeys in a BLOCK of FOUR calendar years. Exemption is available only in respect TWO Children.

In case L.T.C is encashed without performing the journey, entire L.T.C becomes taxable.

 Family for this purpose includes- Spouse & Children of the Employee; Parents, brothers, sisters of the employee wholly/ mainly dependent on the employee. It is not necessary that family members should perform journey along with the Employee only. Only Travel Fare incurred for the shortest route is exempted and no other expenses.

broad tax treatment:- Provident Fund

Particulars Statutory P.F

Recognized P.F.

Unrecognized P.F.

Public provident fund

Employers contributio n to P.F.

Not treated as income up to Not treated 12 per cent of as Income salary excess of the year in of employers which contribution contribution over 12 per is made cent of salary is taxable

Not treated as income of the year in which contribution is made

Employer does not contribute

Deduction under section 80C on employees contributio n

Available

Available

Available

Available

Interest credited to P.F.

Lump sum payment at the time of retirement or

Not treated as Income if Not treated rate of interest as Income (i.e. 9.5 per of the year in cent), excess which of interest interest is over the credited notified rate is, however, taxable Exempt from Exempt from tax tax in some cases. When not exempt P.F. will be

Not treated as Income of the year in which interest is credited

Exempt from tax

Not treated as Income of the year in which contribution is made

Exempt from tax

termination of service

treated as an unrecognized fund from the beginning.

Allowances: House Rent Allowances: Commonly known as HRA, exemption

being bestowed through section 10(13A) briefed as:

1.

An amount equal to 50 per cent of salary, where residential house is situated at Mumbai, Kolkata, Delhi or Chennai and an amount equal to 40 per cent of salary, where residential house is situated at any other place. House rent allowance received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year. Rent paid minus 10 per cent of salary

2. 3.

PLEASE NOTE: Salary here means Basic+ D.A+ Commission based on fixed % of turnover achieved by an employee. MODE OF COMPUTATION OF EXEMPTION: Under section 10(13A), the amount of exemption in respect of house rent allowance received by an employee depends upon the following: Salary of the employee; House rent allowance; Rent paid; and The Place where house is taken on rent.

When these four are same throughout the year, the exemption under section 10(13A) should be calculated on ANNUAL basis. When, however, there is a Change in respect of any of the above factors will make the calculation to be done on MONTHLY Basis.

Entertainment Allowance
Exemption on receipt of this allowance is allowable only to Central/ State Govt. Employees and not to Private Sector employees. Exemption being calculated as least of the following: Rs. 5,000/Entertainment allowance actually received.

ALLOWANCES Dependent on EXPENDITURE INCURRED:

1)ALLOWANCES SPECIFICALLY EXEMPTED TO THE EXTENT OF EXPENDITURE INCURRED: Allowance Traveling/ Transfer Allowance Conveyance Description Any Allowance granted to meet the cost of travel on tour or on transfer including any sum paid on connection with transfer, packing and transportation of personal effects on such transfer. Any Allowance whether granted on tour of for the

Allowance

period of journey in connection with transfer to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty. Any Allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office or employment of profit, provided that free conveyance is not provided by the employer. Any Allowance granted to meet the expenditure incurred on a helper where such helper is engaged for performance of the duties of an office or employment of profit. Any Allowance granted for encouraging the academic, research and training pursuits in educational and research institutions. Any Allowance granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of duties of an office or employment of profit

Daily Allowance

Helper Allowance Research Allowance Uniform Allowance

20% of Salary (Salary= Basic+ DA+ Commission based on

fixed % of turnover) 2)ALLOWANCES WHOSE EXEMPTION IS NOT DEPENDENT ON EXPENDITURE: Allowance Special Compensatory (Hill Areas) Allowance Tribal Area Allowance Allowance for Transport Employees Exemption Specified Exemption may range from Rs. 300/- to Rs. 7000/per month Exemption available in specified states upto Rs. 200/-p.m An employee working in any transport system for meeting his personal expenditure during his duty performed in the course of running of such transport from one place to another place, provided that such employee is not in receipt of daily allowance up to 70% of allowance subject to a maximum of Rs. 6,000 p.m. Rs. 100 p.m. per child up to a maximum of 2 children. Rs. 300 p.m. per child up to a maximum of 2 children. In specified areas @ Rs. 2,600 p.m.

Children education allowance Children hostel allowance Compensatory Field Area Allowance.

Compensatory modified field area allowance Transport Allowance

In specified areas @ Rs. 1,000 p.m.

Exempt up to Rs. 800 p.m (in case of Orthopedically handicapped employees exempt up to Rs. 1600 p.m) For employees in underground coal mines @ Rs. 800 p.m For members of armed forces operating in high altitude areas @ Rs. 1,060 p.m. for Altitude of 9000 to 15000 feet and @ Rs. 1,600 for altitude above 15000 feet. Available to members of armed forces @ Rs. 4,200 p.m. Available to members of armed forces @ Rs. 3,250 p.m. Available to members of Armed forces @ 3,900 p.m Available to members of Armed forces @ 200 p.m to 1,300 p.m

Underground Allowance High Altitude Allowance

Special Compensatory highly active field area allowance Island duty Allowance Counter Insurgency Allowance Border Area Allowance

3) Perquisites
Perquisite Value Rent free unfurnished accommodation Rent free Unfurnished Accommodation less Any rent recovered from the Employee

Central/ State Govt. employee

License fee on the basis of rule framed by Govt.for allotment of houses to officers.

Depends on two factors, viz,

1.
Other Sectors employee s

Population size of the city where accommodation is Whether Accommodation is owned or leased. Population > 25 Lacs. Population Population < < 10 Lacs. 25Lacs>10 Lacs 15% of 10% of 7.5% of Salary Salary Salary Lease Rent payable or 15% of Salary, whichever is lower.

given.

2.

Nature of Accommodatio n Owned Leased

PLEASE NOTE: Salary here is calculated to include all taxable benefits excluding Perquisites and deductions from salary. In case of Hotel Accommodation perquisite value equals 24% of the Salary or Actual rent charges paid, whichever is lower. Subject to Hotel accommodation does not exceed 15 days & is only for relocation of employees. Salary is to be calculated on accrual basis Mr.B, a Director in a private sector company having its regd. Office at Mumbai draws the following salary package during the previous year 2007-08: Particulars Basic Pay Dearness Allowance Bonus@ 30% of Basic Commission @ 3% of turnover achieved amounting to Rs 10,00,000 Transport Allowance Children Education Allowance (Mr. B has only one daughter) Research Allowance (Actual Expenditure Rs. 9000/-) Servant appointed by Mr. B, whose Salary @ Rs. 1500/- p.m is borne by the company Watchman appointed by Mr. B, whose Salary @ Rs. 3000/- p.m is borne by the company LIC premium paid during the year Amount (Rs.) 3,00,000.00 1,20,000.00 90,000.00 30,000.00 10,000.00 5,000.00 20,000.00 18,000.00 36,000.00 30,000.00

Advance Salary Received

50,000.00

Above all Mr. B has also been provided with a rent free unfurnished accommodation in Mumbai in Company's owned flat. You are required to calculate the Perquisite value of such Rent Free Unfurnished Accommodation in view of the applicable provisions for Assessment Year 2008-09.

The perquisite value will be determined as under: Particulars Basic Pay Dearness Allowance Bonus@ 30% of Basic Commission @ 3% of turnover achieved amounting to Rs 10,00,000 Transport Allowance Less: Exempt: Rs. 800 p.m Children Education Allowance (Mr. B has only one daughter) Less: Exempt: Rs. 100 p.m per child upto a maximum of TWO children Research Allowance Less: Actual Expenditure incurred 10,000.00 9,600.00 5,000.00 1,200.00 20,000.00 9,000.00 11,000.00 5,55,200.00 83,280.00 3,800.00 400.00 Amount (Rs.) Amount (Rs.) 3,00,000.00 1,20,000.00 90,000.00 30,000.00

Salary for the purpose of determining the perquisite value of Rent free Unfurnished Accommodation Therefore Value of perquisite equals 15% of Salary as calculated above PLEASE NOTE:As per the applicable provisions for A.Y. 2008-09:

1)LIC Premium paid will not be deducted u/s 80C for determining the perquisite value. Advance salary received by the assessee will not be taken into account 2) since salary here includes only 'accrued' salary. 3)Perquisites of Servant & Watchman though taxable in hands of employee being discharge of employee's liability by the employer, will not be considered here.

Rent free Furnished Accommodation

Rent free Furnished Accommodation less Any rent recovered from the Employee. To the value of Perquisite arrived at above following need to added, In case of any amount recovered by the employee, same is deductible in valuation of perquisite: Nature of Accommodation Owned Leased Perquisite Value 10% of the Original cost of the Furniture provided Actual hire charges payable for such hired furniture.

PLEASE NOTE: Salary here is calculated to include all taxable benefits excluding Perquisites and deductions from salary. In case of Hotel Accommodation perquisite value equals 24% of the Salary or Actual rent charges paid, whichever is lower. Subject to Hotel accommodation does not exceed 15 days & is only for relocation of employees. Salary is to be calculated on accrual basis. Mr.X, a Marketing Head in a private sector company having its Head Office at Bangalore draws the following salary package during the previous year 2007-08: Particulars Basic Pay Dearness Allowance Bonus@ 20% of Basic Transport Allowance Children Education Allowance (Mr. B has only two sons) Research Allowance (Actual Expenditure Rs. 22000/-) Watchman appointed by Mr. B, whose Salary @ Rs. 3000/- p.m is borne by the company PPF paid during the year Arrears of Salary Received Annual Furniture Hire Charges for Flat paid by the Company Above all Mr. B has also been provided with a rent free Furnished accommodation in Bangalore in a flat taken by the Company on Lease @ Rs. Amount (Rs.) 5,00,000.00 1,00,000.00 1,50,000.00 9,600.00 5,000.00 20,000.00 36,000.00 22,000.00 1,00,000.00 40,000.00

20,000 per month. You are required to calculate the Perquisite value of such Rent Free Furnished Accommodation in view of the applicable provisions for Assessment Year 2008-09. SOLUTION:The perquisite value will be determined as under: Particulars Basic Pay Dearness Allowance Bonus@ 20% of Basic Transport Allowance 9,600.00 Less: Exempt: Rs. 800 p.m. 9,600.00 Children Education Allowance 5,000.00 Less: Exempt: Rs. 100 p.m per child 2,400.00 upto a maximum of TWO children Research Allowance 20,000.00 Less: Actual Expenditure incurred 20,000.00 restricted to Allowance received Salary for the purpose of determining the perquisite value of Rent free Unfurnished Accommodation Lease Rent paid by the Company for Flat @ 20,000 p.m (A) 15% of Salary as calculated above (B) Perquisite Value of Unfurnished Accommodation is lower of (A) or (B), i.e. ( C) Add: Actual Hire Charges paid by the Company on Furniture for determining the Perquisite Value of Rent Free Furnished Accommodation (D) Therefore Perquisite Value of Rent free Furnished Accommodation equals ( C) + (D) PLEASE NOTE:As per the applicable provisions for A.Y. 2008-09: 1) PPF paid will not be deducted u/s 80C for determining the perquisite value. 2) Arrear salary received by the assessee will not be taken into account since salary here includes only 'accrued' salary. 3) Perquisite of Watchman though taxable in hands of employee being discharge of employee's liability by the employer, will not be considered here. Amount (Rs.) Amount (Rs.) 5,00,000.00 1,00,000.00 1,50,000.00 -

2,600.00 7,52,600.00 2,40,000.00 1,12,890.00 1,12,890.00 40,000.00 1,52,890.00

Food & Beverages provided by employer in office/ factory or through paid non transferable vouchers usable only at eating joints. Loan given to employees up to Rs. 20,000/- or loan given for medical treatment of diseases specified in Rule 3A. Perquisites provided by India govt. to its Indian citizen employees staying outside India. Rent free official residence & Conveyance facilities provided to a Judge of Supreme/ High court. Rent free furnished residence to a Parliament officer/ Union minister/ Opposition Leader. Accommodation provided to an employee working at a Mining site/ onshore oil exploration Site/ Dam site/ Power generation site. Educational facility provided to employees children in a school owned & maintained by the Employer, subject to benefit per child not exceeding Rs. 1,000/- p.m. Use of Laptops/ Computers provided by an employer to his employees. Allotment of Shares / Debentures of Employer Company under ESOP in accordance with rules framed by Govt. on this behalf. Tax paid by employer on Non Monetary perquisites provided to employee.

ANY OTHER PERQUISITE OTHER THAN THOSE DEALT IN ABOVE CATEGORIES ARE LIABLE FOR TAXATION UNDER FRINGE BENEFIT TAX TO BE PAID BY EMPLOYER.

Interest Free/ Concessional Loan: FIVE STEP THEORY

Step 1 Step 2 Find out the maximum outstanding monthly balance (i.e. the aggregate outstanding balance for each loan as on the last day of each month). Find out rate of Interest charged by the S.B.I as on the first day of the relevant previous year in respect of loan for the same purpose advanced by it.

Step 3 Step 4 Step 5

Calculate interest for each month of the previous year on the outstanding amount mentioned in step 1 at the rate of interest given in step 2. From the total interest calculated for the entire previous year under the step 3 deduct interest actually recovered, if any, from the employee during the previous year. The balancing amount [i.e. step 3 minus step 4] is taxable value of the perquisite.

Exemption from perquisite is available if the loan is taken for treatment of diseases as specified in Rule 3A or does not exceed Rs. 20,000/PLEASE NOTE: This perquisite is chargeable in the hands of Specified as well as Non-specified Employees both Determine the taxable value of Perquisites in the following Cases of Interest Free/ Concessional loan (as the case may be) provided to the Employee: Case I

Mr. C is employed by ABC Ltd. On 22nd November' 07 the Company provides him with a Loan amounting to Rs. 10,00,000 at Zero Interest rate (repayment starting from 1st March' 2008 @ 20,000 per month) for medical treatment of his son in respect of diseases specified in Rule 3A. Mr. C also receives a medical Insurance claim of Rs. 1,00,000 on 13th January' 08 towards the treatment of the disease, which is retained by him. Solution :In this case perquisite value will not be considered under the head of Interest free loan since any Loan received by an employee for the purpose of treatment of diseases specified in Rule 3A is specifically exempted from tax. However the medical Insurance claim received by Mr. C will be chargeable to tax in the Assessment Year 2008-09 under the head income from Salaries as per applicable rates of Personal Loan specified by SBI, i.e., 15.25% for A.Y. 2008-09. The calculation of which will be done as under: Maximum Outstanding balance on 31st' 08 Maximum Outstanding balance on 31st' 08 Maximum Outstanding balance on 31st' 08 Total Interest on Concessional Perquisite Jan Feb Mar 1,00,000.00 1,00,000. 00 80,000.00 1,270.83 1,270.83 1,016.67 3,558.33

Loan taxable as

Case II

Mr. S employed with M/s XYZ has taken a loan of Rs. 20,000 at a rate of 4% per annum repayable in 24 equal monthly installments for payment of Security Deposit of his rented house in Indore. Solution:The Interest on loan taken upto Rs. 20,000 is exempt from tax as per the applicable provisions of the Income Tax Act' 1961. Case III

Mr. SSK employed with KEC Ltd. has taken a loan of Rs.10,00,000 @ 5% per annum on 22nd May' 2007 for purchase of Mitsubishi PAJERO repayable in 50 equal monthly installments starting from 1st June' 2008. Solution:In this case perquisite value will be considered under the head of Concessional loan Perquisite calculation of which will be done on the basis of monthly outstanding balance of such loan during the previous year 2007-08. The Interest rate for similar kind of loan as per SBI slab rates stands at 11.50% hence the Interest rate for perquisite valuation will be taken as @ 6.5% per annum (11.50% - 5%). Maximum Outstanding May 31st' 07 Maximum Outstanding June 30th' 07 Maximum Outstanding July 31st' 07 Maximum Outstanding August 31st' 07 Maximum Outstanding September 30th' 07 Maximum Outstanding October 31st' 07 Maximum Outstanding November 30th' 07 Maximum Outstanding December 31st' 07 Maximum Outstanding January 31st' 08 Maximum Outstanding February 29th' 08 Maximum Outstanding balance on balance on balance on balance on balance on balance on balance on balance on balance on balance on balance on 1,000,000.00 9,80,000.00 9,60,000.00 9,40,000.00 9,20,000.00 9,00,000.00 8,80,000.00 8,60,000.00 8,40,000.00 8,20,000.00 8,00,000.00 5,416.67 5,308.33 5,200.00 5,091.67 4,983.33 4,875.00 4,766.67 4,658.33 4,550.00 4,441.67 4,333.33

March 31st' 08 Total Interest on Concessional Loan taxable as Perquisite

53,625.00

SBI Lending Rates applicable for Assessment year 2008-09 Nature of Loan Rate of Interest (%) 10.25 10.75 10.75 10.75 11.5 11.75 11.75 12 14.25 11.5 13.25 15.25

Duration/ Loan Amount Upto 5 years Above 5 years but upto 10 years Above 10 years but upto 15 years Above 15 years but upto 20 years Upto 3 Years (Loan Amount Rs. 7,50,000 & above) Upto 3 Years (Loan Amount below Rs. 7,50,000) Above 3 years upto 5 years Above 5 years upto 7 years No Limits specified Loan Amount upto Rs. 4,00,000 Loan Amount above Rs. 4,00,000 No Limits specified

Housing Loan

Car Loan

Two Wheeler Loan Education Loan Personal Loan

Valuation of medical facilities to employee: Situation Description

A Medical facility in a Hospital maintained by the employer

Perquisite Value
Medical expenses incurred in this instance is not chargeable in the hands of the employee, but is chargeable as Fringe Benefit Tax in the hands of the employer

Expenditure tax exempted up to Rs. 15,000/in case of treatment taken at any Hospital/ Clinic etc. However it is fully tax free in the following cases: Expenditure incurred by an employee/ his family members at any Hospital maintained by Govt./ Local authority/ approved by govt. Medical Treatment in India Expenditure incurred by an employee/ his family members in respect of treatment of diseases specified in Rule 3A of Income Tax Rules 1962/ Hospital approved by Chief commissioner of Income tax. Any portion of Insurance premium either paid by the employer or reimbursed to the employee for the Health Insurance of his employee under a scheme approved by central Govt./ IRDA. Following expenditure incurred will be treated tax free in the hands of the employee: Expenditure incurred on medical treatment on himself/ family members to the extent permitted by RBI. Expenses on staying abroad of the employee/ any member of his family along with one attendant to the patient to the extent permitted by RBI. If the Gross total income of the employee before including the taxable medical perquisite for travel expenditure exceeds Rs. 2,00,000/-, then whole of such expenditure on treatment becomes taxable. PLEASE NOTE:

Medical Treatment outside India

 MEDICAL ALLOWANCE received by an Employee in any case is fully chargeable to tax, no exemptions as stated above are applicable for such allowance received. Any medical facilities provided to an Employee other than the ones stated exempt above are fully chargeable to tax in the hands of Specified as well as Non Specified Employees both. In case where the Medical bills in excess of Rs. 15,000/- per Assessment year are in the name of the Employer and same are paid/ reimbursed by the Employer it is chargeable to tax only in the hands of Specified Employees. In case where the Medical bills in excess of Rs. 15,000/- per Assessment year are in the name of the Employee and same are paid/ reimbursed by the Employer it is chargeable to tax in the hands of Specified as well as Non- Specified Employees both.

Deductions from the salary

Entertainment Allowance, exemption is calculated as dealt above and the Actual allowance is first added back in the salary & then exemption is deducted for calculation of Taxable value of Entertainment Allowance. Professional Tax deduction is available on PAID basis up to a maximum of Rs. 2,500/-; if tax is paid by employer on behalf of employee first it is added back in salary & then deducted on paid basis.