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Income under the head
“Salaries” and its computation
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Expression “Salary”
• Relationship between Payer and Payee: If this
relationship does not exist then income generated
will be taxable under other heads.
• No difference between salaries and wages.• Salary from more than one source.
• Salary from former employer, present employer or
prospective employers.
• Salary income must be real and not fictitious.
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Salary under section 17(1)
Under section 17(1), salary is defined to include thefollowing:
a. Wages.
b. Any gratuity or pension.
c. Any gratuity.d. Any fees, commission, perquisites or profits in lieu
of or in addition to any salary or wages.
e. Any advance of salary.
f. Any payment received by an employee in respectof any period of leave not availed by him.
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Computation of Salary Income
• Basic, DA, Advance Salary, Arrears of Salary,
Salary in lieu of notice, fees, commission,
bonus and annuity, and remuneration for extra
work.• Gratuity
• Leave Encashment
• Pension• Retrenchment Compensation
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Place of accrual of salary income
(ii )income which falls under the head “Salaries”, if it is earned in India.
(a) service rendered in India; and
(b) the rest period or leave period which ispreceded and succeeded by services renderedin India and forms part of the service contract of employment, shall be regarded as incomeearned in India ;]
(iii ) income chargeable under the head “Salaries”payable by the Government to a citizen of Indiafor service outside India ;
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Who is
employee
Who isemployer
Where serviceis rendered
Is it taxable in India
Salary Allowance /Perks
1 Indian Citizen Government of India
Outside India Yes No
2 NRI Any Outside India No No
3 Resident andordinarilyresident
Any Anywhere Yes Yes
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Leave Salary
• In case of a Central/State Governmentemployee, any amount received as cashequivalent of leave salary in respect of period of earned leave at his credit at the time of retirement is exempted from tax.
• In case of leave encashment during continuity of employment it is chargeable to tax irrespectiveof Government or Non-Government Employees.
• In the case of a non –Government employeeleave salary is exempt from tax on the basis of the following rule:-
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Leave Salary for
Non-Government Employee• Period of earned leave (in number of months) to
the credit of the employee at the time of retirement or leaving the job X Average monthlysalary.
• 10 X Average Monthly Salary (For calculationssalary includes basic salary and dearnessallowance)
• The amount specified by the Government
[i.e.Rs.3,00,000 applicable from April 1, 1998• Leave encashment actually received at the timeof retirement
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Gratuity (Retirement Benefits)
• Any death cum retirement gratuity
received by Government employees is
wholly exempt from tax.
• Any gratuity received by an employee
covered by the Payment of Gratuity
Act,1972 is exempted from the tax on
following basis
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Gratuity in case of employee covered under
payment of gratuity act, 1972
• 15 days’ salary(15/26)* X Length of
service
• Rs. 3,50,000
• Gratuity actually received
*For calculation purpose salary includes
basic salary and dearness allowance
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Calculation of Length of Service for
employees covered under gratuity act, 1972
26 years, 5 months and29 days
26 years
26 years and 6 months 26 years
26 years, 6 months and 1day
27 years
26 years, 11 months and29 days
27 years
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Gratuity in case of employee not covered
under payment of gratuity act, 1972
• Half months average service(15/30) X
Length of service
• Rs. 3,50,000
• Gratuity actually received
*For calculation purpose salary includes
basic salary and dearness allowance
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Calculation of Length of Service for
employees not covered under
gratuity act, 197226 years, 5 months and29 days
26 years
26 years and 6 months 26 years
26 years, 6 months and 1day
26 years
26 years, 11 months and29 days
26 years
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Pension
Pension Status of Employee
It is chargeableto tax
Uncommuted
Pension
Government
/Non-Governmentemployee
Chargeable
CommutedPension
Governmentemployee
Fully exempted
CommutedPension
Non-Governmentemployee
Fully or partlyexempted
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Pension
• In the case of Government employees the entireamount (commuted) is exempt from tax.
• In the case of non-Government employees the
maximum amount exempt from tax is restricted to the commuted value of 1/3rd of pension(gratuity received)
• In the case of non-Government employees the
maximum amount exempt from tax is restricted to the commuted value of 1/2 of pension(gratuity not received)
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• X retires from Government employee on June 30, 2009. He
gets pension of Rs. 20,000 per month up to January 31, 2010.
With effect from February 1, 2010, he gets 60 percent of
pension commuted for Rs. 10,71,000. He also receivesgratuity. Does it make any difference if X is non government
employee?
Commuted Value - Government Employee
• Commuted Value of pension Rs.10,71,000 is not taxable.
Uncommuted Value – Government Employee
• Uncommuted Value of pension Rs. 20,000 is taxable.
(20,000*12) = 2,40,000
• (8000*2) = 16,000
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• Uncommuted Value (Non-Government Employee)
• 60% commuted value of pension is 10,71,000.• Full value of pension is (10,71,000 / 0.6) = 17,85,000.
• If X receives gratuity then,
• Amount exempted (1/3 of commuted value of pension
i.e. 1/3 x Rs.17, 85,000 = 8,92,500• Commuted pension chargeable to tax as salary
(i.e. Rs. 10,71,000 – Rs.8,92,500) = Rs.1,78,500
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Provident Fund
• Employees provident fund may be of the
following types:
a. Statutory Provident Fund – Government
Employee
b. Recognized Provident Fund – Non-
Government Employee
c. Unrecognized Provident Fund.
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StatutoryProvident Fund
RecognizedProvident Fund
Unrecog.Provident
Fund
Employer’scontribution to PF
Exempt from tax Exempted upto12% of salary
Exempt from tax
Deduction under
80cc
Available Available Not Available
Interest credited toprovident fund
Exempted Exempted upto9.5%
Exempted
Lump sumpayment at time of retirement
Exempted Exempted in somecases
Interest of employee’scontribution istaxable
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Retrenchment
Compensation[Sec.10(10B)]
• Compensation received by a workman at
the time of retirement is exempted from
tax.
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Allowances
• CCA, Tiffin Allowance, Fixed Medical
Allowance, Servant Allowance
• HRA
• Entertainment Allowance
• Special Allowance
• Foreign Allowance• Any Other Cash Allowance
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Other Allowances…
• Tiffin Allowance
• Fixed Medical Allowance
• Servant Allowance• Transport Allowance
• Washing Allowance
• Dating Allowance• Stitching Allowance
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City Compensatory Allowance
• It is always taxable.
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House Rent Allowance
• Exemption in respect of house rent allowanceis regulated as follows:
1. An amount equal to 50% of salary*, where
residential house is situated in Metros and an
amount equal to 40% of salary whereresidential house in non metros.
2. HRA received
3. Excess of rent paid over 10% of salary*Salary for calculation means basic salary,
dearness allowance and commission.
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Entertainment Allowance
1. a deduction in respect of any allowance in the
nature of an entertainment allowance
specifically granted by an employer to the
assessee who is in receipt of a salary from theGovernment,
• a sum equal to one-fifth of his salary (exclusive
of any allowance, benefit or other perquisite)
• or five thousand rupees, whichever is less;]
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Transport Allowance
• It is exempted upto Rs. 800 per month
(Rs.1600 per month in the case of an
employee who is blind or handicapped)
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Definition of Perquisites
• Perquisites are benefits or amenities
provided in kind by the employer free of
cost or at a concessional rate.
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Perquisites and Specified
Employee
The specified employees include the following:-
a) Director employee, whether full time or parttime.
b) Employee who is beneficial owner of equity inthe employer's company carrying 20% or morevoting power.
c) The employees other than those mentioned
above, drawing salary in excess of Rs. 24,000(w.e.f. 13th April 2002 this limit is Rs. 50,000) inmonetary terms.
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Valuation of Rent Free
Accommodation
• In case of Government employees value
of the perquisites will be equal to the
licence fee which would have been
determined by the Central Govt.
• In case of Private Sector employees value
of the perquisites would depend upon
salary of the employee.
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Population of city asper 2001 censuswhereaccommodation is
provided
Where the accomdn.Is owned by theemployer
Where theaccomodation istaken on lease or rentby employer
Exceeding 25 lakh 15% salary Amount of lease rentpaid or 15% of salary,whichever is lower
Exceeding 10 lakhbut not 25 lakh
10% salary Same as above
Any other 7.5% salary Same as above
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Valuation of rent free furnished
accomodation
Case 1: A furnished accommodation (not
being a hotel accommodation)
Case 2: Accommodation provided in hotel
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A furnished accommodation (not
being in a hotel)
Step 1: Find out value of the perquisite on theassumption that the accommodation isunfurnished.
Step 2: To the value so arrived at, add value of furniture. Value of the furniture for this purposeis as follows:
a. 10 per cent per annum of the original cost of
furniture, if furniture is owned by the employer.b. Actual hire charges payable (whether paid or payable), if furniture is hire by the employer
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A furnished accommodation in a
hotel
1. 24% of salary paid or payable for the
period during which such
accommodation is provided in the
previous year.
2. Actual charges paid or payable by the
employer to such hotel.
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Exception
Condition 1: Not chargeable to tax if provided in a
“remote area”
Condition 2: Hotel Accommodation for 15 days (in
aggregate in a previous year) can be providedimmediately after transfer at the new location.
Condition 3: If it is provided to a High Court Judge,
Supreme Court Judge, Union Minister, Leader of
Opposition in Parliament and an Official in
Parliament.
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Valuation of accommodation provided
at concessional rent [sec. 17(2) (ii)]
Step 1: Find out the value of perquisite on
the assumption that no rent is charged by
the employer.
Step 2: From the value so arrived at, deduct
the rent charged by the employer from the
employee.
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• Amount spent for providing free education facilities to,and training of the employee, is not taxable.
• Fixed Education Allowance given in cash by the
employer to meet the cost of education of the familymembers of the employee is exempt from tax to theextent of Rs. 100 per month per child (up to maximumof two children). Moreover, any allowance granted toan employee to meet hostel expenditure of his child is
exempt from tax to the extent of Rs. 300 per month per child for a maximum of two children.
• School fees of the family members of the employees,paid by the employer directly to the school, is taxable
as a perquisite in all cases.• Reimbursement of expenditure incurred for theeducation of the family members of the employee istaxable as perquisite in all cases.
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Different Situation Amount chargeable to tax
a. Where educationfacility is provided tothe employee’schildren:
2. Where cost of education does notexceed Rs.1000/-
3. It exceed Rs.1000/-
---Nil---
Amount excess thanRs.1000/-
b. Where educationalfacility is provided tomember of family.
Actual cost of educationin vicinity institution minusamount recovered from
employee
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• Exception:
• Not taxable if employee is a non-specified.
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Valuation of perquisite in respect of
free domestic servants• Value of free service of all personal attendants
including a sweeper, gardener, or watchman isto be at actual cost to the employer. Whereattendant(s) is provided at the residence of
employee, full cost will be taxed as perquisite inthe hands of employee irrespective of degree of personal service rendered to him. Any amountpaid by the employee for such facilities shall bereduced from the above amount.
Exception:Not taxable if the employee is a non-specified
employee.
Valuation of perquisite in respect of
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Valuation of perquisite in respect of
gas, electricity energy or water
supplyMode of Valuation
Purchased byemployer fromoutside
Supplied byemployer
Step 1- Find outcost to theemployer
Step 2 – Amountrecovered fromemployee
Amount payableby the employer
Recovered froman employee
Manufacturingcost per unit
Recovery froman employee
Valuation of perquisite in respect of
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Valuation of perquisite in respect of
gas, electricity energy or water
supplyException:
Not taxable if the employee is non –
specified.
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Employee’s obligation met by
employer [sec. 17(2) (iv)]
• Amount paid by an employer in respect of
any obligation which otherwise would have
been payable by the employee is taxable
in all cases.
Valuation of perquisite in respect of interest
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Valuation of perquisite in respect of interest
free loan or loan at concessional rate of
interestStep 1: Find out the “maximum outstanding monthly
balance”
Step 2: Find out rate of interest charged by the State BankOf India.
Step 3: Calculate interest for each month of the previousyear on the outstanding amount mentioned in Step 1 atthe rate of interest given in Step 2.
Step 4: From the total interest calculated for the entireprevious year under Step 3, deduct interest actuallyrecovered, if any, from the employee during the previousyear.
Step 5: The balancing amount is taxable value of theperquisite.
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When loan is not chargeable to tax
Exemption 1: If loan is made available for
medical treatment in respect of diseases
specified in rule 3A.
Exemption 2: Where the amount of original
loan (or loans) does not exceed in the
aggregate Rs. 20000
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Mode of valuation
Computers/
Laptops/
Cars
Owned byemployer
Taken on hireby employer
Step 1: Findout cost toemployer
Nil 10%per annum of actual cost
Amount of rentpaid or payable
Step 2: Less:Amt.recovered fromemployee
Nil Recovery fromthe employee Recovery fromthe employee
Taxable valueof perquisite
Nil BalancingAmount
BalancingAmount
*All the above perqs are taxable to employer as fringe benefit tax.
V l i f i i i f
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Valuation of perquisite in respect of
lunch / refreshment
• Anything which costs to the employer inexcess of Rs.50 per meal minus amountrecovered from an employee equal to
balancing amount is taxable.• Tea or snacks in working hours provided
to an employee not taxable.
•Food and non-alcoholic beveragesprovided in working hours in remote areais not taxable.
V l ti f i it i t f
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Valuation of perquisite in respect of
gift, voucher or token
1. Gifts made in cash or convertible into
money (like gift cheques) are taxable.
2. Gifts up to Rs.5000 in aggregate per
annum would be exempted.
V l ti f i it i t f
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Valuation of perquisite in respect of
credit card
Step 1: Find out expenditure incurred by the
employer in respect of credit card used by
the employee.
Step 2: Less: Expenditure on use for official
purposes.
Step 3: Less: Amount recovered from the
employee.
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Other Valuations…
• Valuation of perquisite in respect of free
transport.
• Valuation of perquisite in respect of
travelling, touring, accomodation.
Valuation of the perquisite in respect of movable assets sold by an employer to
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Mode of valuation Electronic items Motor cars Any other asset
Step1: Find outcost of the assetto employer
Actual cost to theemployer
Actual cost to theemployer
Actual cost to theemployer
Step2: Less:Normal wear andtear for completedyears
50% for eachcompleted year
20% for eachcompleted year
10% for eachcompleted year
Step3: Less: Amt.recovered from
employee
Considerationrecovered from
the employee
Considerationrecovered from
the employee
Considerationrecovered from
the employee
Step4: Taxablevalue of the perq
BalancingAmount
BalancingAmount
BalancingAmount
employees at a nominal price
Wh i d b th
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Where car is owned by the
employeeA. When car expenses are met by the employee – Not
taxable.
B. When maintenance or running expenses are met or reimbursed by the employer.
c. If the car is used for official purpose – Not taxable.
d. If the car is used wholly for private purposes –(Actualexpenditure – amount recovered)
e. If the car is used partly used for official purposes andpartly for private purposes (actual expenditure –amount used for official purpose* – amount recoveredfrom an employee)
*A sum calculated at the rate of Rs.1200 per month wherethe cubic capacity of the engine does not exceed1.6litres(1600cc) and Rs.1600 if it exceeds 1.6litresand Rs.600 if chauffeur is provided
Wh i d hi d b
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When car is owned or hired by
employer A. When maintenance and running expenses are met or
reimbursed by employer.
a. If the car is used wholly for official purposes –Exempted.
b. If the car is used for private purposes of the employee.Step 1: Find out actual expenditure incurred by the
employer (i.e expenditure on running and maintenanceincluding remuneration of the chauffeur plus normalwear and tear of the car @10% per annum)
Step 2: Find out the amount recovered from the employee.
Balancing amount is taxable value of the perquisite.
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c. If the car is used partly for official and partly for private purposes of the employee or any member of the household.
A sum calculated at the rate of Rs.1200 per monthwhere the cubic capacity of the engine does notexceed 1.6litres(1600cc) and Rs.1600 if it exceeds1.6litres and Rs.600 if chauffeur is provided
Note: In this case nothing is deductible in respect of any amount recovered from the employee.
Wh i t d i
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When maintenance and running
expenses are met by the employeea. If the car is used for official purpose – Not taxable.
b. If the car is used for private purpose –
Step 1: Find out actual expenditure incurred by theemployer (i.e expenditure on running and maintenance
including remuneration of the chauffeur plus normalwear and tear of the car @10% per annum)
Step 2: Find out the amount recovered from the employee.
Balancing amount is taxable value of the perquisite.
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c. If the car is used partly for official and partly for private purposes of the employee or any member of the household.
A sum calculated at the rate of Rs.1200 per monthwhere the cubic capacity of the engine does notexceed 1.6litres(1600cc) and Rs.1600 if it exceeds1.6litres and Rs.600 if chauffeur is provided
Note: In this case nothing is deductible in respect of any amount recovered from the employee.