Income Tax on Salary Income- Basis of Charge, Allowance, HRA, Taxability of Perks, Gratuity, Pension, Leave Encashment, Providend Funds & Deductions from Salary

INCOME FROM SALARIES

Important Points to be considered

An income is chargeable to tax under the head “salary” if & only if there exits an employer-employee relationship between the payer and the payee. 

Basis of Charge

Salary is chargeable to tax on DUE BASIS (accured) or on RECEIPT basis (advance) whichever is earlier.

Taxability of Allowance

Fully Taxable Allowances
Sr. No.	Allowance Type	Particulars
1	Dearness Allowance (DA)	Extra amount given to an employee to meet the burden of inflation or increase cost of living.
2	City Compensatory Allowance	Compensation for the high cost of living in metropolitan & Large cities.
3	Fixed Medical Allowance	Fixed allowance paid to the employees on a monthly basis irrespective of whether they submit the bills to substantiate the expenditure or not.
4	Transport Allowance	To meet expenditure for commuting between the place of residence & the place of duty.

Partly Taxable Allowances
Exempt to the extent of amount expended for the purpose for which they are given.
Sr. No.	Allowance Type	Particulars
1	Travelling Allowance	Granted to meet the cost incurred by the employee on travelling, tour or transfer.
2	Conveyance Allowance	Granted to meet the cost incurred by the employee on conveyance for performance of official duties.
3	Daily Allowance	Granted to meet daily charges incurred on tour.

Exempt to the extent of amount notified
Sr. No.	Allowance Type	Particulars
1	Transport Allowance- Granted to an employee who is blind or deaf and dumb or orthopedically handicapped	Rs. 3,200.00 per month
2	Children Education Allowance	Rs. 100 per month per child for a maximum of 2 children
3	Hostel Expenditure Allowance	Rs. 300 per month per child for a maximum of 2 children

NOTE : These list are not exhaustive. I had mentioned the most common allowance only.

HOUSE RENT ALLOWANCE (HRA)

Least of the following is exempt from Tax-

1. Actual HRA received

2. Rent paid minus 10% of Salary

3. 50% of salary (40% of salary if the house is not in Mumbai, Delhi, Kolkata, Chennai)

*SALARY= Basic Pay + DA + Fixed Percent- wise commission on turnover.

CONDITION:

1. The employee must stay in a rented house

2. Must have actually incurred expenditure on payment of rent.

3. HRA exemption is available for one house only.

Maximum Tax exemption by claiming HRA

Payment of rent in other city-  You can claim HRA exemption even if you own a house but stay in different city because of job location.

For eg. You own a House in Mumbai but stay in rented house in Tirupur for Job, you can claim HRA exemption for the payment of rent in Tirupur.

Payment of rent to close relatives- Exemption is available even if the house is owned by a close relative (wife/ husband/ father or mother). 

So you can pay rent to your close relative but in such case, they have to show this income in their Income Tax Return.

All you have to do is to enter into a rental agreement with your relatives.

What you have to do as an Accountant?

1. Obtain rent receipt or rent agreement from employees (no rent receipt if monthly  rent is less than Rs. 3000/-)

2. Obtain PAN of the Landlord if rent payment is more than Rs. 1,00,000/- per year.

3. Ensure one rupee revenue stamp is affixed with the signature of the person who has received the rent if receipt of more than 5,000/- is made in cash.

LEAVE TRAVEL ALLOWANCE

When a person goes for a personal tour, lots of expense are there like travel, hotel, car fare, sight-seeing, food etc. Under the Income Tax Act, only the travelling expenses paid by the employer for leave to any place in India for himself & his family is exempt from Tax.

Note : If the actual amount of expense incurred by the employee is less than the abovementioned amount, actual amount incurred will be exempt.

Family : Spouse, Children (maximum 2 ), parents, dependent brothers & sisters.

Illustration

Mr. Mangesh, an employee of ABC pvt ltd, travelled from Mumbai to Goa and back through business class flight, total expense on air ticket was 70,000/-  his employer reimbursed 1 lac, which includes, 20k for hotel booking, 10k for sight seeing. The economy class air from kolkata to Goa is 35,000/-. 

How much LTA is exempt from tax?

Sol- The economy class air fare is exempt from tax. Amount expensed for hotel booking and sight is not exempt. So, the amount of exemption is Rs. 35000 i.e. the economy class air fare only.

PERQUISITES(Perks)

Any extra benefits granted to an employee in addition to its salary is called perks. It may be in cash or in kind(non- cash)

It’s include-

a) Rent free Accomodation

b) Sale of movable asset to employees

c) Use of movable asset belonging to the employer

d) Car facility

e) Gas, electricity, water facility

f) Free servant

g) Education facility

h) Interest free or concessional loan facility (based on SBI interest rate on the 1st day of relevant Previous Year)

Taxability of perks-

Normally the cost of the facility provided by the employer (or specific amount in some case) is taxable in the hands of the employee. Amount paid, if any, by the employee is deducted from such amount.

Other important things to know-

Sr No	Perquisite	Taxability
1	Gifts	Received in cash- Fully Taxable Received in kind- Exempt upto Rs. 5000/-
2	Credit Card Facility	Actual Expenditure incured is taxable. Expenditure incurred for official  Purpose is not taxable.
3	Club Facility	Actual Expenditure incured is taxable. Expenditure incurred for official  Purpose is not taxable.
4	Meals	Actual Expenditure incured is taxable. Rs. 50 per meal and meals in remote area or offshore installation are exempt.
5	LIC Premium Paid	Taxable in hands of the employee.

GRATUITY

1. Taxability of gratuity received by a Government employee-

    A) Any gratuity received by an individual after his retirement or death is eligible for exemption under         the income tax Act.

    B) Where a government employee has received gratuity, the entire amount so received is exempted             from tax.

2. Taxability of gratuity received by an employee covered under the payment of Gratuity Act, 1972.

A) Any gratuity received by an individual after his retirement or death is eligible for exemption.

B) Computation of Taxable Gratuity:

Step 1. Computation of Salary:

Salary = Basic Salary + Dearness Allowance (Salary means last drawn salary)

Step 2. Taxable Gratuity

Particulars	Rs	Rs
Amount received as Gratuity		xxx
Less: Exempt = Least of the Following -
a) Actual Gratuity received by the Individual	xxx
b) 15/26 x Last Drawn salary x No. of years of completed services or part thereof in excess of 6 month	xxx
c) Notified amount (i.e. Rs. 10,00,000) (Rs 20 lakhs from 29th March, 2019)	xxx	xxx
Taxable Amount of Gratuity		xxx

Note : In case of seasonal employment, instead of 15 days, 7 days shall be considered.

3. Taxability of gratuity received by an employee not covered under the payment of gratuity Act, 1972

    a) Any gratuity received by an individual after his retirement or death is eligible for exemption.

    b) Computation of Taxable Gratuity:

Step 1. Computation of Salary : Salary = 10 month average salary preceding the month of retirement.

Step 2. Computation of Salary = Basic + Dearness Allowance for retirement benefits + commission at a              fixed percentage of Turnover.

Step 3. Taxable Gratuity

Particulars	Rs	Rs
Amount received as Gratuity		xxx
Less- Exempt = Least of the following-
a) Actual Gratuity received by the Individual	xxx
b) 1/2  x Average salary for 10 months preceding the month of retirement x no. of fully                       completed year of service	xxx
c) Notified Amount (i.e. Rs 10 lakhs)	xxx	xxx
Taxable Amount of Gratuity		xxx

Some points to be considered in case of Non- Government Employees-

1. Where an individual receives retirement gratuity from more than one employer, he can claim         exemption in respect of both of them.

2. However, the maximum amount of exemption should not exceeds Rs. 10 lakhs

3. When Gratuity is received from more than one employer during different periods of time, the           maximum exemption claimed by the assessee in his life should not exceeds Rs. 10 lakhs

PENSION

1. Taxability of Uncommuted Pension or Monthly Pension:

a) Nature of Pension: Pension received periodically by the retire employee.

b) Recipient of Pension: Government or Non- Government Employees.

c) Amount taxable: Fully Taxable under the head salaries.

2. Taxability of commuted Pension:

a) Nature of Pension: Pension received in Lump sum as per the terms of the employment on retirement or superannuation.

b) Full Value of Pension = Amount received on commutation / Ratio or percentage of commutation

c) Taxability:

Recipient	Amount Taxable
Government Employee (Central / State Govt./ Local Authority or Statutory Corporation)	Fully Exempt
Non-Government employee who is in receipt of Gratuity	Amount Received Less: 1/3 of full value of pension he is entitled to received
Non-Government employee who is not  in receipt of Gratuity	Amount Received Less: 1/2 of full value of pension he is entitled to received

LEAVE ENCASHMENT

While in Service: Leave encashment while in service is fully taxable as income of previous year in which it is encashed.

At the time of retirement: If an individual receives Leaves Encashment on his retirement, then the amount received will be eligible for exemption. The amount of exemption is based on his employment i.e. whether he is a Government Employee or a Non- Government employee.

Particulars	Nature of Exemption
Government Employee	Entire amount is exempt from Tax
Non- Government Employee	Entitled for exemption as calculated below

Computation of exemption from Leave Encashment: Calculation for exemption is done as per the following steps:

Step 1: Computation of salary : Salary = 10 months average salary preceding the month of retirement

Step 2: Components of salary= Basic + Dearness Allowance considered for retirement benefits +        Commission as fixed percentage of turnover.

Step 3: Applicable only in case where employer has sanctioned leave to the employee in excess of 30 days for every completed year of service.

Sr.No.	Particulars	Rs
a)	Leave credit available on the date of retirement	xxx
	Less: Excess leave sanctioned by the employer (i.e.) (Leave sanctioned per year by the employer- 30 days) x No. of completed year of service	(xxx)
	Leave credit on the basis of 30 days credit for completed year of service	Xxx
b)	Leave salary on the basis of 30 days credit = Step 3(a) x Step 1	Xxx

Note: In case the employer sanctioned leave of 30 days or less for completed year of service then the salary for actual leave balance shall be considered and step 3(a) shall not apply.

Step 4: Taxable Leave Salary on Retirement-

Particulars	Rs	Rs
Amount Actually Received		xxx
Less: Exemption- Least of the following-
1. Actual amount of Leave Encashment Compensation Received	xxx
2. Average salary of the individual for the past 10 months x 10 months	xxx
3. Rs 3,00,000.00	xxx
4. Leave Credit at the rate of 30 days p.a. for every completed year of service as calculated in step 3(b)	xxx	(xxx)
Taxable Value		xxx

Note:

a) If the individual receives leave encashment compensation from more than one employer, the quantum of exemption will be computed independently in respect of each employer.

b) However, the total amount of exemption should not exceed Rs. 3,00,000.00 during his life time.

PROVIDEND FUNDS

Type of Provident Fund	Particulars	Details	Taxability
Statutory Provident Fund (SPF)	Periodic Contribution & Interest	Employer's Contribution	Exempt
		Employee's Contribution	Eligible for deduction u/s 80C
		Interest on Employer's Contribution	Exempt
		Interest on Employee's Contribution	Exempt
	Lump sum receipt on retirement / death	Employer's Contribution	Exempt
		Employee's Contribution	Not Taxable
		Interest on Employer's Contribution	Exempt
		Interest on Employee's Contribution	Exempt
Recognised Provident Fund (RPF)	Periodic Contribution & Interest	Employer's Contribution	Exempt upto 12% of salary
		Employee's Contribution	Eligible for deduction u/s 80C
		Interest on Employer's Contribution	Exempt upto 9.5% pa.a
		Interest on Employee's Contribution
	Lump sum receipt on retirement / death	Employer's Contribution	Exempt
		Employee's Contribution	Not Taxable
		Interest on Employer's Contribution	Exempt
		Interest on Employee's Contribution	Exempt
Unrecognised Provident Fund (URPF)	Periodic Contribution & Interest	Employer's Contribution	Not Taxable
		Employee's Contribution	Eligible for deduction u/s 80C
		Interest on Employer's Contribution	Not Taxable
		Interest on Employee's Contribution
	Lump sum receipt on retirement / death	Employer's Contribution	Taxable as salary
		Employee's Contribution	Not Taxable
		Interest on Employer's Contribution	Taxable as salary
		Interest on Employee's Contribution	Taxable as income from other sources.

DEDUCTIONS FROM SALARY

Standard Deduction u/s 16(ia) = Rs. 50,000/- or the amount of salary, which ever is lower.

Entertainment Allowance u/s 16(ii)

Deduction for entertainment allowance is allowed only to government employees. Least of the following to be deducted

a) Rs. 5000 p.a.

b) 20% of basic salary

c) Actual amount received.

Professional Tax u/s 16(iii)

You can find this amount in salary slip or Form 16 of the employee.

Hope this article will assist you while filing income tax return of a salaried person.