UNIT V- Taxation

SALARY
• Salaries is the remuneration received by an employee for the services rendered by him to that employer. “Employer Employee Relationship”. • Example : (i)Directors of the company regarded as Employees. (ii) A Doctor visiting a company on a particular day of a week and paid a fixed remuneration will still not be regarded as an employee. (iii) High Court, Supreme Court Judges – They will be regarded as Employees (Government Servants). MPs and MLAs – They will not be regarded as employees as they are Public Servants. The Honorarium received by them will be taxable under Income from Other Sources. The primary criteria of classifying an income under Salaries is that of

Definition of Salary – Sec. 17(1)  Salary Includes –

• • • •

Wages Annuity or Pension Gratuity Any fees, commission, perquisites and profit in lieu of salary

• • •

Advance Salary Leave Salary Annual Accreation to the Fund Credit in of a of

recognized

Provident

excess

specified limits. • Transfer of Balance in recognized Provident Fund. • Contribution made by Central Government under a Pension Plan.

For the purpose of taxing salary, the study is under “5” Heads.

A. General B. Allowances C. Perquisites D. Terminal Benefits E. Profit in lieu of salary  General :• Basic Pay – This is the primary source upon which other computations are made. It is computed in 2 ways. – Acrual Amount – Where specific amount is given – Grade system of Basic Pay – Predetermination of increment • Bonus / Commission  These may be paid annually or periodical basis. This is fully taxable. •   Incentive – Fully taxable

ALLOWANCES 
• Fixed monetary payments for an ear marked purpose. payment should be utilized. • Allowances are taxable based upon its utilization. bifurcated into Three 1) Fully taxable allowances 2) Fully exempt Allowances 3) Partly taxable allowances • Fully taxable allowances It means that the whole of the amount received is taxable

In other words, payment a

made by an Employer to an employee and employer also specified for what purpose t

For this purpose allowances a

i. Dearness Allowances (DA) – Allowance paid for meeting the cost of employment

known as DA. DA is fully taxable irrespective of the fact that it is forming part or not.  living of a particular place is known as CCA. iii. Medical Allowance : Fully taxable iv. Lunch Allowance : Fully taxable

ii. City Compensatory Allowance (CCA) – Allowance paid for meeting the high cost

• i. ii.

Fully Exempt Allowance :Allowances paid to High Court / Supreme Court Judges Allowances paid to High Commissioners / Ambassadors outside India. 

Partly Taxable Allowances House Rental Allowances (HRA) : Allowance paid for meeting the cost of accommodation is known as HRA. exemption in HRA is as follows:– – Actual HRA received Excess of rent paid over 10% of Salary (Rent Paid – 10% of Salary) – 50% (Metros) or 40% (Non-Metros) of Salary  U/s 10(13A)

Salary = Basic Pay + DA (forming part) + commission paid as a fixed % of turnover  For determining the HRA exemption four factors are being considered    
 

HRA received Rent Paid Salary; and Place of stay 

Children Education Allowance :Exempt up to Rs.100/- per month per child for maximum of 2 Children. 

Hostel Allowance of 2 children.

:

Exempt up to Rs.300/- per child per month for

maximum

• • • • •

Travelling Allowance : Conveyance Allowance Transport Allowance : Uniform Allowance Hill Area Allowance the hill. : :

If it is officially spent wholly exempt.(Between cities) : officially spent wholly exempt.(within city)

Rs.800/- pm is exempt. Irrespective of actual spent Officially spent is wholly exempt. Varies from Rs.300/- to Rs.7000/- based upon the altitude of

• • •

Border Area Allowance Underground Allowance

: :

varies based upon the intensity of the border. Whatever is actually paid is fully exempt.

Transport Allowance for Physically Challenged :Exempt up to Rs.1600/- irrespect of actual spent. 

PERQUISITES
• The other component is of A an employer’s is remuneration perquisites. perquisites defined as a gain or profit incidentally made from employment in addition to regular salary or wages, especially of a kind expected or promised. • Their main characteristic is that they are payable only during the continuance of employment and are directly dependent on the service. • The normal meaning of the word denotes

something that benefits an employee by going directly to his pocket. It therefore does not apply to reimbursement of expenses actually incurred in the interest of official work.

• Perquisites   Free Gas, Water, Electricity provided by an employer.  Provision of watchman, sweeper, gardner and personal attendant to the employee. • General Perquisites 1. Medical Facility – This perquisites discusses the provision of taxation w.r.t. Medical facility provided by the employer to employee or his family members. 1.Where the facility provided in a hospital owned by the employer, then also it is wholly exempt. In all other cases exemption is applicable up to Rs.15,000/- p.a. • Medical facility also includes Mediclaim Insurance premium paid. Hence it is wholly exempt.

3.

Leave Travel Concession Facility :-

LTC is a facility provided by an employer, where the employer takes care of the expenditure for the personal tour of employee and his family members (same like medical). For the purpose of this benefit, 4 years are together known as a block.

An employee is eligible for 2 such trips in a block of 4 years. Where the employee fails to avail one trip or both the trips then he can carry forward one such trip to next block of 4 years. d. – Exemption is as follows :-  If the trip is undertaken in a flight – Amount exempt will be economy class fare by the national airlines by the shortest route. – If the journey is performed by train – Amount exempt will be first class A/C fare by the shortest route. – If the journey is performed by any other transport system – deluxe class fare of such transport system. – Where there is no recognized transport facility, first class A/C fare, had there been a recognized train facility.

CALCULATION OF INCOME TAX • Income from Salary
Gross salary -Special deduction under sec.10& sec 16 = Net salary Income

+
• Income from House property
Gross House property Income– Special deduction = Net House property Income

+ • Income from Business or profession
Gross business or profession income– Special deduction = Net business or profession income

+ • Income from Capital Gains
Gross Capital Gains income– Special deduction = Net Capital Gains income

+ • Income from other sources
Gross other sources income– Special deduction = Net other sources income

== GROSS TOTAL INCOME

GROSS TOTAL INCOME – GENERAL DEDUCTION u/s 80 = Taxable Income TAX + 3% educational Cess = Amount to be paid towards tax

INCREASING POST VALUE COMPENSATION AFTER TAX
• A proper understanding of various tax shelters will help individuals to minimize their tax liabilities and companies to review the tax benefits they give to their employees with a view to reduce their own cost, increase employee's satisfaction and reviews the tax burden for both. • Remuneration received by the employees should qualify for concessional rate of taxation so that their post tax income is maximized. This is an important consideration because the post tax income is perceived as the real income by the employees and therefore, as significant implication for his morale, motivation and commitment to the organization.

TAX PLANNING
• Tax planning includes all financial arrangement which allow a taxpayer to reduce to the minimum his tax liability without violating any legal provision and without resorting to any colorable device. • Although tax planning and tax avoidance are two distinct legal concepts, the line of demarcation is very thin and substantially blurred. There is an element of malafide intent behind the tax avoidance. Any tax planning though done strictly according to law would amount to tax avoidance if the basic intention of the legislature is defeated.

While considering tax planning from the angle of the employer, provisions relating to disallowances should be carefully examined to ensure that any payment made as salary or perquisite is not disallowed as permissible business expense. Apart from complying with the requirement of the above provisions, employer has to ensure that tax is deducted at source.

TAX EFFICIENT COMPENSATION PACKAGE 1. Medical Reimbursement :  Medical expenses reimbursed by your employer are tax-exempt up to Rs.15000 per year. Such payment should be a reimbursement against the production of bills or vouchers, and not on allowance, which you may or may not spend.  Besides reimbursement, hospitalization of you and your family members borne by your employer are also exempt provided disease is notified by chief commissioner of income tax.  Instead of reimbursing hospitalization expenses, some employers prefer to reimburse the premium paid by you on a mediclaim policy. such Reimbursement of medical insurance premium is a tax-free perquisite without any limit.

Interest –free loan: • A loan taken by you from your employer for any purpose on which you don’t pay interest, or pay a concessional rate of interest, is not a taxable perquisite. Transport Allowance : • This is meant to compensate you for the cost incurred in commuting to your place of work. Transport allowance is exempt to the extent of Rs.800 per month, irrespective of the amount actually spent by you in commuting to your work place. This exemption is not available to you if your employer has provided you free conveyance.

DIFFERENT FORMS OF SALARYRETIREMENT BENEFITS
• • • • • 1. Leave encashment salary 2.Gratuity 3.Pension 4.Retrenchment compensation 5.Provident Fund

17

LEAVE ENCASHMENT
• It is not related to casual leave • For every completed year of service employee is entitled to receive a certain number of days of paid leave. Employee either can take leave or en cash it while in service or after retirement. • Note: Any thing received while in service is normally taxable. After retirement there are some concessions given.

18

MR.A PAY SLIP WORKING IN MADURAI/MONTH
• Basic pay = Rs 10000 (1,20,000) =Rs 5000 (60,000) • Dearness allowance • HRA =Rs 3000 (36,000) • CCA = Rs 1000 (12,000) • Medical allowance = Rs 500 (6000) • Entertainment allowance =Rs 600 (7,200) • He pays a house rent of 7000/per month. He pays Rs1500 as professional tax. He contributes Rs 700per year to the Prime minister relief fund. He subscribes Rs.40000 to GPF. He invests Rs.30,000 in mutual fund. He purchases a NSC for Rs 20,000. He pays LIC policy premium of Rs.15, 000. He pays Rs.5000 as mediclaim premium. Calculate the income tax ?

19

Gross salary Income = 2,41,200
(BP+Alowances+Perks) 1st deduction under sec 10(13) Actual HRA =Rs 36000 Rent paid in excess of 10% =Rs 66000 40% of (BP+DA) =Rs 72000 =Rs 36000

2nd Deduction under sec 16
a. Deduction for entertainment Allowance Deduction is Minimum of following Actual EA received 1/5th of Basic Rs.5000/- p.a.   Entertainment allowance =Rs 5000 Professional Tax =Rs 1500 =Rs 6500   Net salary Income =Rs 1,98,700

Income Income Income Income

from from from from

House property =NIL business pr prof =NIL Capital gains =NIL other sources =NIL Gross Total Income

=Rs 198700

3rd deduction U/s 80 80 C Towards Gratuity provident fund =Rs 40,000 Towards Mutual Fund =Rs 30,000 Towards NSC =Rs 20,000 Towards LIC Policy =Rs 15,000 Total =Rs 105000 Limited to 1 lakh so =Rs 100000

80D Towards Medi claim policy Limited to 10,000 80G Towards PMFR Total Taxable income

= Rs 5000

=Rs 700 =Rs 105700 =Rs 198700-Rs 105700 = Rs Tax 3% education cess =NIL

93000

Assessment year 2010-2011 Individual /HUF Upto Rs 160000= NIL 160000 to Rs 300000=10% Rs 300000 to Rs 500000 =20%+14000 Above Rs 500000 =30% + 54000   Assessment year 2010-2011 for women Upto Rs 190000= NIL 190000 to Rs 300000=10% Rs 300000 to Rs 500000 =20%+11000 Above Rs 500000 =30% + 51000 Assessment year 2010-2011 senior citizens above 65 years Upto Rs 240000= NIL 240000 to Rs 300000=10% Rs 300000 to Rs 500000 =20%+6000 Above Rs 500000 =30% + 46000

Basic Rules
Rule 1 The aggregate amount of deductions under sections 80C to 80U cannot exceed gross total income. Rule 2 These deductions are to be allowed only if the assessee claims these and gives the proof of such investments/ expenditure/ income.

CATEGORIES OF DEDUCTIONS
1. To encourage savings 2. For certain personal expenditure 3. For socially desirable activities 4. For physically disabled persons

Deduction u/s 80C
Applicable only to Individual & HUF. This section provides for deduction in respect of certain expenditure/ investments paid or deposited by the assessee in the previous year.

The gross qualifying amount under this section refer to the payment/investment under some of the following schemes:Life Insurance Premium Paid. Deferred Annuity Contract. Statutory Provident Fund and Recognized Provident Fund. 15 Year Public Provident Fund. Approved Superannuation Fund. National Savings Certificates. Unit-linked Insurance Plan (Ulip). Dhanraksha Plan of LIC Mutual Fund. Jeevan Dhara, Jeevan Akshay, New Jeevan Dhara. Notified Units of Mutual Fund or UTI.

Amount of Deduction 100% of the amount invested or Rs. 1,00,000/whichever is lower.

Deduction u/s 80CCC
Deduction in respect of Contribution to Certain Pension Funds. Individual Eligible Amount – amount paid/deposited under an annuity plan of the Life Insurance Corporation of India or any other insurer for receiving pension.

Conditions Taxable income. This must not be allowed as deduction u/s 80C. Any amount withdrawn or pension received from the plan is taxable in the hands of the assessee or nominee in the year of receipt. Amount of Deduction Amount paid or Rs. 10,000/- whichever is lower.

Deduction u/s 80CCD
Deduction in Respect of Contribution to Pension Scheme of Central Government. Individual who is an employee of Central Government on or after 1.1.2004. Eligible Amount – Deposit made under a pension scheme notified by the Central Government.

The aggregate amount of deductions under 80C, 80CCC and 80CCD put together cannot exceed

Rs.1,00,000

Deduction u/s 80D

Deduction in respect of Medical Insurance Premia. Individuals/HUF. Eligible Amount - Insurance premium paid in accordance with the scheme framed by the General Insurance Corporation of India and approved by the Central Government.

Conditions

The amount should be paid by cheque out of the taxable income. The policy is taken on the health of the assessee, on the health of spouse, dependent parents or dependent children of the assessee. In case of HUF on the health of any member of the family.

Amount of Deduction 100% of premium paid subject to a maximum of: Rs. 15,000 in case of senior citizens (above 65 years) Rs. 10,000 in case of others.

Deduction u/s 80E
Individual

Deduction in respect of repayment of loan taken for higher education.

Eligible Amount – any amount paid by way of interest on loan taken from any financial institution or any approved charitable institution for higher education.

Conditions Amount is paid out of his income chargeable to tax. Higher education means full-time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied science or pure sciences including mathematics and statistics. the deduction shall be allowed for the previous year in which the assessee starts repaying the loan or interest thereon and seven previous years immediately succeeding it or until the loan together with interest thereon is paid by the assessee in full ,whichever is earlier.

Amount of Deduction Actual interest paid or Rs. 40,000 whichever is lower.

Deduction u/s 80U
Deduction in case of person with disability. Individual resident of India. Eligible amount – Flat deduction to a person with disability.

Conditions He is certified by the medical authority to be a person with disability, at any time during the previous year. He furnishes a certificate issued by the medical authority in the prescribed form along the return of income. Amount of Deduction A fixed deduction of Rs. 50,000 in case of a person with disability Rs. 75,000 in case of a person with severe disability.( having any disability over 80%)

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