EMPLOYEES HOW TO SAVE INCOME TAX CONTENTS Chapter-heads I-5 1 BASIC CONCEPTS 1.1 Assessment year/previous year 1 1.1-1 Previous year 1 1.2 Residential status and incidence of tax 2 1.2-1 Rule of residence in brief 2 1.2-2 Tax incidence 3 1.3 Scheme of the Act 4 2 HOW TO COMPUTE SALARY INCOME 2.1 Are you an employee 5 2.1-1 Master and servant relationship 5 2.1-1a Servant v. Agent 5 2.1-1b Managing Director 6 2.1-1c High Courts/Supreme Court Judges 6 2.1-1d Advocate General 6 2.1-1e Chief Minister 7 2.1-1f Union Public Service Commission 7 2.1-2 Contract of employment v. Contract for employment 7 2.2 Basis of charge 8 2.3 Salary components and their tax treatment 8 2.4 Salary while in service 9 2.4-1 Basic salary 9 2.4-2 Advance salary 9
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EMPLOYEES HOW TO SAVE INCOME TAX - · PDF fileEMPLOYEES HOW TO SAVE INCOME TAX CONTENTS Chapter-heads I-5 1 ... 3.9 Sweat equity shares 67 3.10 Other fringe benefits 69 3.10-1 Constitutional
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EMPLOYEES HOW TO SAVE INCOME TAX
CONTENTS
Chapter-heads I-5
1
BASIC CONCEPTS
1.1 Assessment year/previous year 1
1.1-1 Previous year 1
1.2 Residential status and incidence of tax 2
1.2-1 Rule of residence in brief 2
1.2-2 Tax incidence 3
1.3 Scheme of the Act 4
2
HOW TO COMPUTE SALARY INCOME
2.1 Are you an employee 5
2.1-1 Master and servant relationship 5
2.1-1a Servant v. Agent 5
2.1-1b Managing Director 6
2.1-1c High Courts/Supreme Court Judges 6
2.1-1d Advocate General 6
2.1-1e Chief Minister 7
2.1-1f Union Public Service Commission 7
2.1-2 Contract of employment v. Contract for employment 7
2.2 Basis of charge 8
2.3 Salary components and their tax treatment 8
2.4 Salary while in service 9
2.4-1 Basic salary 9
2.4-2 Advance salary 9
2.4-3 Arrears of salary 9
2.4-4 Leave salary 10
2.4-5 Bonus 10
2.4-6 Salary in lieu of notice 10
2.4-7 Fees or commission 10
2.4-8 Remuneration for extra work 10
2.4-9 Voluntary payments/gifts from employer 10
2.4-10 Compensation/annuity from employer 11
2.4-11 Encashment of unutilised leave 11
2.4-12 Tips received by hotel employees 11
2.4-13 Others 11
2.5 Allowances 11
2.5-1 City compensatory allowance 11
2.5-2 Dearness allowance 12
2.5-3 House rent allowance 12
2.5-3a Conditions to be satisfied 12
2.5-3b Quantum of exemption 12
2.5-3c Meaning of ‘salary’ 13
2.5-4 Entertainment allowance 14
2.5-5 Special allowances 14
2.5-6 Tiffin allowance/Fixed medical allowance/ Servant
allowance 16
2.5-7 Other allowances 16
2.5-7a Government employees rendering services
outside India 16
2.5-7b High Court Judges 16
2.5-7c Supreme Court Judges 17
2.6 Leave encashment on retirement 17
2.6-1 Government employees 17
2.6-2 Other employees 18
2.6-2a Basic conditions 18
2.6-2b Whether resignation is covered 18
2.6-2c Quantum of exemption 18
2.6-2d When amount is received from more
than one employer 19
2.6-3 Leave encashment paid to legal heirs 20
2.7 Retrenchment compensation 20
2.7-1 Quantum of exemption 21
2.7-2 Meaning of ‘average pay’ 21
2.7-3 Meaning of ‘wages’ 21
2.7-4 Compensation awarded by Supreme Court 22
2.7-5 Compensation on closing down of undertaking 22
2.8 Pension 22
2.8-1 Pension totally exempt from tax 22
2.8-1a Gallantry award winners 22
2.8-1b United Nations Organisation Personnel 23
2.8-1c Family pension to widow/children/
nominee of military personnel 23
2.8-2 Uncommuted pension 23
2.8-3 Commuted pension in case of Government
employees 24
2.8-4 Commuted pension in case of non-Government
employees 24
2.8-5 Commuted pension from LIC fund 24
2.8-6 Other points 24
2.9 Gratuity 25
2.9-1 In case of Government employees 25
2.9-2 LIC employees 25
2.9-3 LIC agents 26
2.9-4 Gratuity received under Payment of Gratuity Act 26
2.9-4a Scheme of the Gratuity Act 26
2.9-4b Conditions for eligibility 26
2.9-4c Amount fixed as gratuity 26
2.9-4d Quantum of exemption 27
2.9-5 Any other gratuity 28
2.9-5a Conditions to be satisfied 28
2.9-5b Quantum of exemption 28
2.9-5c Points to be noted 29
2.10 Payments received on voluntary retirement/separation 31
2.10-1 Prescribed categories of employees 31
2.10-2 Guidelines for the scheme 32
2.10-2a Other issues 34
2.10-3 Meaning of ‘salary’ 35
2.10-4 Departmental clarifications for approval to scheme 35
2.10-5 Quantum of exemption 36
2.10-5a Relief under section 89(1) - Position
prior to 31-3-2009 36
2.10-5b Relief under section 89(1) – Position
from 1-4-2009 37
2.10-6 One-time benefit 38
2.10-7 Terminal benefits 39
2.10-8 Payment to widow of employee 39
2.11 Payments to and from provident funds 39
2.12 Payments to and from approved superannuation funds 41
2.13 Payments from approved gratuity funds 42
2.14 Salary/Pension received from UNO 42
2.15 Sums received under Life Insurance policies 42
2.16 New Pension Scheme 42
2.16-1 Salient features of the new scheme 43
2.16-2 Employer’s contribution is treated as ‘income’ 43
2.16-3 Deduction on contributions under section 80CCD 44
2.16-4 Incentive to new entrants 44
2.17 Leave travel concession 44
2.17-1 Conditions to be satisfied 44
2.17-2 Meaning of ‘family’ 45
2.17-2a Position qua Central Government
employees 45
2.17-3 Quantum of exemption 46
2.17-4 Points to be noted 46
2.17-5 Restricted concession for children under sub-rule
(4) of rule 2B 48
2.18 Taxability of shares allotted under ESOP/ESOS 49
2.19 Profits in lieu of salary 49
2.19-1 Compensation 49
2.19-1a Compensation for denial of job after
being selected 49
2.19-1b Compensation for premature termination
of employment 50
2.19-2 Other payments 50
2.19-3 Keyman insurance policy 50
2.19-4 Lump sum incentives 51
2.20 Deductions from gross salary 51
2.20-1 Entertainment allowance 51
2.20-2 Profession tax 51
2.21 Computation of salary income 51
Annex 2.1 Gallantry Awards notified under section 10(18) 53
3
VALUATION OF PERQUISITES
3.1 The statutory background 54
3.2 What is a perquisite 54
3.2-1 Dictionary meanings 54
3.2-2 ‘Perquisite’ is ‘income’ 55
3.3 Statutory definition 55
3.4 Certain basic principles 56
3.4-1 Employee must have a vested right 56
3.4-2 Amounts disallowed in employer’s assessment 57
3.4-3 Reimbursement of necessary disbursements 57
3.5 Benefit/Amenity to specified employees 57
3.5-1 Meanings of ‘benefit’ and ‘amenity’ 57
3.5-2 Benefit must have been authorised by employer 58
3.5-3 The specified employees 58
3.5-4 Salary received from more than one employer 58
3.5-5 Legal expenses of employee met by employer 59
3.5-6 Transport facility between residence and place of
work 59
3.5-7 Cash reimbursement of medical expenses 60
3.5-8 Notional interest on interest-free security deposit 60
3.6 Discharge of employee’s obligations by employer 60
3.6-1 Meaning of ‘obligation’ 60
3.6-2 Actual payment is contemplated 61
3.6-3 Income-tax due by employee paid by employer 61
3.6-4 Personal accident insurance 62
3.6-5 Foreign tour expenses of relatives 63
3.6-6 Where obligation could not be said to exist 63
3.6-7 Interest subsidy directly paid to financial institutions 63
3.7 Life Insurance/annuity payments 64
3.7-1 The excluded funds 64
3.7-2 Employee must have obtained indefeasible right 64
3.7-3 Annuity to ex-employee 65
3.8 Contributions to superannuation funds 65
3.9 Sweat equity shares 67
3.10 Other fringe benefits 69
3.10-1 Constitutional validity 69
3.10-2 Meaning of ‘fringe benefits’ 70
3.10-3 Whether applicable to all employees 70
3.10-4 Abolition of fringe benefit tax 71
3.11 Rule 3 effective from 1-4-2009 71
3.11-1 Constitutional validity of rule 3 as amended in 2001 71
3.11-2 Perquisite may be provided directly or indirectly 72
3.11-3 Perquisite need not necessarily be non-monetary 72
3.11-4 Perquisites provided to household members are
also covered 72
3.11-5 Definition of ‘household members’ 72
3.11-6 Taxable perquisites 73
3.11-7 Concept of ‘cost to the employer’ 73
3.12 Rule 3 is mandatory 74
3.13 Provision of residential accommodation 74
3.13-1 Departmental clarifications 74
3.13-2 Scope of the rule 74
3.13-3 Constitutional validity of rule 3 as amended in 2001 75
3.13-4 Some basic propositions 75
3.13-4a When employee does not use the
accommodation provided 75
3.13-4b When employee is the tenant 76
3.13-4c Provision of accommodation during
official visits 76
3.13-4d When rent is reimbursed to employee 76
3.13-4e Relevance of fact as to who owned the
accommodation 77
3.13-5 Meaning of ‘accommodation’ 77
3.13-6 Accommodation provided to certain employees is
excluded 77
3.13-6a Meaning of ‘Remote area’ 78
3.13-6b Employees working in project
execution sites 78
3.13-7 Definition of ‘Salary’ 78
3.13-7a Items includible under ‘salary’ 78
3.13-7b Items excludible under ‘salary’ 79
3.13-7c Salary must be taken on ‘due’ basis 79
3.13-7d ‘Salary’ must be period-related 79
3.13-7e Salary received from more than one
employer 80
3.13-7f Rewards from employer to employee 80
3.13-8 Valuation of unfurnished accommodation 80
3.13-8a Government employees 81
3.13-8b Government employees on
deputation to body/undertaking
controlled by Government 81
3.13-8c All other employees 82
3.13-8d Meaning of ‘lease rent’ 83
3.13-9 Value of furnished accommodation 84
3.13-10 Accommodation provided in hotel 85
3.13-10a Meaning of ‘hotel’ 85
3.13-10b Value of the perquisite 86
3.13-10c Relief to employees proceeding on
transfer 87
3.13-11 Value of accommodation provided at concessional
rent 88
3.13-11a The background 88
3.13-11b High Court's ruling 89
3.13-11c Supreme Court's ruling 90
3.13-11d The amendment 91
3.13-12 When employer derives corresponding benefit 94
3.13-13 Additional relief to employees proceeding on
transfer 94
3.13-14 Official residences provided to Judges 96
3.13-15 Illustrations 96
3.14 Provision of domestic servants 99
3.14-1 Departmental clarification 99
3.14-2 Contents of the sub-rule 99
3.14-3 Certain domestic servants excluded 99
3.14-4 Meaning of ‘personal attendant’ 100
3.14-5 Degree of service by personal attendant is not
relevant 100
3.14-6 Meaning of ‘actual cost to employer’ 100
3.14-7 Illustration 100
3.14-8 No double taxation is involved 101
3.15 Supply of Gas/Electricity/Water 101
3.15-1 Contents of the sub-rule 102
3.15-2 Determination of ‘cost to the employer’ 102
3.16 Educational facilities 103
3.16-1 Departmental clarifications 103
3.16-2 Gist of the provision 103
3.16-3 When educational institution is maintained and
owned by employer 104
3.16-4 When educational institution is patronised by
the employer 107
3.16-5 When facility is provided in any other educational
institution 107
3.16-6 Deduction towards recoveries 107
3.16-7 Assistance provided through welfare trusts 107
3.16-8 Certain other issues 108
3.16-8a Training of employees 108
3.16-8b Fixed education allowance 108
3.16-8c Payment of school fees of employees’
children 108
3.16-8d Reimbursement of school fees of
employees’ children 108
3.17 Concessional/Interest-free loans 108
3.17-1 Departmental clarifications 109
3.17-2 A drafting error in the sub-rule 109
3.17-3 Contents of the sub-rule 109
3.17-3a Loans to household members are
also included 110
3.17-3b Certain loans are excluded 110
3.17-3c Prescribed rates 111
3.17-3d Method of computation 111
3.17-3e Illustration 112
3.17-4 When loan is arranged at a concessional rate 112
3.17-5 Others 113
3.18 Use of employer’s movable assets 113
3.18-1 Departmental clarification 113
3.18-2 Contents of the sub-rule 113
3.18-3 Prior use by employer or age of asset is not
relevant 114
3.18-4 Meaning of ‘use’ 114
3.18-5 Only movable assets are covered 114
3.18-5a Exclusion of certain electronic
equipments 114
3.18-6 Asset must ‘belong’ to employer 114
3.19 Transfer of employer’s movable assets 114
3.19-1 Departmental clarifications 115
3.19-2 Contents of the sub-rule 115
3.19-3 Illustration 116
3.20 Provision of motor-car and other conveyances : Rule 3(2) 117
3.20-1 Departmental clarifications 117
3.20-1a Constitutional validity 117
3.20-2 Use must be authorised by the employer 117
3.20-3 Big v. Small cars 118
3.20-4 Car used exclusively for official purposes 118
3.20-5 Valuation when car is exclusively used for
personal purposes 118
3.20-6 Valuation where one car is used both for official
as well as personal purposes 119
3.20-6a Car owned or hired by employer 119
3.20-6b Car owned by employee 120
3.20-7 Valuation when more than one car is provided for
both official and personal use 120
3.20-8 Valuation in the case of other conveyances 120
3.20-9 Conveyance allowance not covered 121
3.20-9a Transport facility between office and
residence 121
3.20-10 Illustrations 121
3.21 Transport facility allowed by transport undertakings 123
3.21-1 Departmental clarification 123
3.21-2 The requirements to be satisfied 123
3.21-3 Meaning of ‘any other arrangement’ 123
3.21-4 Journeys on leave travel/tour/transfer are excluded 124
3.21-5 Journeys by chartered conveyances 124
3.21-6 The value of the perquisite 124
3.21-7 Exemption to railway and airline employees 124
3.21-8 Employees affected by the rule 124
3.21-9 When facility is extended to retired employees 125
3.22 Holiday facilities 125
3.22-1 Departmental clarification 125
3.22-2 Contents of rule 3(7)(ii) 125
3.22-3 Constitutional validity of rule 3 as amended in
2001 126
3.22-4 Types of expenses covered 127
3.22-4a ‘Travelling’ v. ‘Touring’ 127
3.22-4b Meaning of ‘accommodation’ 127
3.22-4c Facility maintained by employer 127
3.22-5 Types of tours covered 128
3.22-5a Official tours 128
3.22-5b Official tours extended as vacation 128
3.22-5c Private/Holiday tours 128
3.22-5d Illustrations 129
3.22-6 Household member accompanying on official
tours 130
3.22-7 Leave travel concession is excluded 130
3.22-8 Value of the perquisite 130
3.23 Free food and non-alcoholic beverages 130
3.23-1 Departmental clarification 130
3.23-2 Position under the sub-rule 130
3.23-3 Monetary limit fixed 131
3.23-4 When such ‘food and non-alcoholic beverages’
are supplied from employer’s canteen 132
3.23-5 Refreshments are excluded 133
3.23-6 Remote area excluded 133
3.23-7 Allowances are taxable 133
3.23-8 Deduction towards recoveries 133
3.24 Gifts on ceremonial occasions 133
3.24-1 Departmental clarifications 133
3.24-2 Contents of the sub-rule 133
3.24-3 Form of the gift 134
3.24-4 Meaning of ‘ceremonial occasions’ 134
3.24-5 Monetary limit on gift 135
3.24-6 Value of the perquisite 135
3.25 Credit card facilities 135
3.25-1 Departmental clarifications 135
3.25-2 Contents of the sub-rule 135
3.25-2a Meaning of ‘provided by the employer’ 136
3.25-2b Meaning of ‘expenses’ 136
3.25-3 Value of the perquisite 137
3.25-4 Exemption to official expenses 137
3.25-4a Meaning of ‘entertainment’ 137
3.25-5 Deduction towards recoveries 137
3.26 Club facilities 137
3.26-1 Departmental clarifications 137
3.26-2 Contents of the sub-rule 137
3.26-3 The type of perquisite 138
3.26-4 The value of the perquisite 138
3.26-5 Exemption to business expenses 139
3.26-6 Exemption to use of certain facilities 139
3.27 Other benefits/amenities 139
3.27-1 The residual provision 139
3.27-2 Departmental clarifications 140
3.27-3 Types of benefit or amenity covered 140
3.27-4 Determination of value 140
3.27-5 Meaning of ‘arm’s length transaction’ 140
3.27-6 Telephone expenses excluded 140
3.28 Allotment of ESOP shares 141
3.28-1 Essential issues 141
3.29 ESOP-Related terminology 143
3.30 Analysis of the provisions of section 17(2)(vi) 144
3.30-1 Conditions to be satisfied 144
3.31 ‘Specified security’ 145
3.31-1 Specified security need not be a security issued
by the employer 146
3.32 ‘Employee stock option’ 146
3.32-1 Stock appreciation rights/plans 147
3.32-2 Date of allotment of securities issued under
Employee Stock Option Plan/Scheme 147
3.33 ‘Sweat equity share’ 148
3.34 ‘Employees’ 148
3.34-1 Employees based in India 148
3.34-2 Persons other than employees like part-time
directors, promoters, etc. 148
3.35 Directly or indirectly, by the employer or former employer 149
3.36 Free of cost or at a concessional rate 150
3.37 Where shares allotted or transferred are subject to
lock-in-period 151
3.38 Foreign companies 152
3.38-1 100% subsidiary in India of a foreign company 152
3.39 Determination of fair market value - Rule 3(8) 154
3.40 Valuation of specified security other than equity share –
Rule 3(9) 156
3.41 Clarifications from Central Board of Direct Taxes 156
3.41A Perquisites/allowances exempt from tax in the case of
Chairman/Members of UPSC (serving & retired) 157
3.42 Medical facilities 157
3.42-1 Meaning of ‘family’ 158
3.42-2 Meaning of ‘hospital’ 158
3.42-3 Meaning of ‘treatment’ 158
3.42-4 Medical treatment in India 158
3.42-4a Hospital maintained by employer 158
3.42-4b Hospitals maintained/approved by
Government, etc. 158
3.42-4c Approved hospitals for prescribed
ailments 159
3.42-4d Treatment elsewhere 159
3.42-5 Medical treatment outside India 159
3.42-6 Medical insurance premia 160
3.42-7 Others 160
3.43 Tax paid by employer on perquisites 161
3.43-1 Option to employer to pay tax on perquisites
provided to employee 161
3.43-2 The nature of the option 161
3.43-3 How to determine the tax due 161
3.43-4 How to deduct and pay tax 162
3.43-5 Grossing up provision will not apply 163
3.43-6 Tax paid by employer is not deemed as income
received 163
3.43-7 Credit to employee for tax paid by employer 163
3.43-8 Payment of tax to Government account 164
3.43-9 Furnishing certificate to employee 164
3.43-10 Employer not entitled to any deduction 164
3.43-11 Option need not be in writing 164
Annex 3.1 Departmental clarification on valuation of Perquisites
(for Financial Year 2011-12) 165
Annex 3.2 Relevant extracts of Para 5.1 of Circular No. 6/2004, dated