Tax presentation salaries part i

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Tax presentation salaries part i

  1. 1. Taxation of Salaries Section 15 to 17 Vikram Singh Sankhala
  2. 2. What is Salary • Normally, the term ‘Salary’ signifies the consideration for services rendered by a person. • The person who renders the services is called the ‘employee’ while the person who receives the services and pays the consideration is called the ‘employer’.
  3. 3. Nature of Relationship • The expression ‘employment’ means existence of relationship of master and servant between the employer and the employee. • This relationship is governed by a contract of employment whether expressed or implied which is absolutely essential in order to tax the amount so received under the head ‘Income from Salaries’.
  4. 4. Consultant versus Employee • Thus, a medical practitioner, an advocate or a chartered accountant not employed by the employer but appointed as a consultant or a retainer cannot be called an employee and the amount so received by such persons will not be taxable under the head ‘Salaries’.
  5. 5. • Where such persons are appointed in a regular job under a contract, verbal or written or implied, then they constitute employees and their remuneration is taxable under the head ‘Salaries’.
  6. 6. Master and Servant Relation • A master is one who not only prescribes to the servant the end of his work but may direct the means also. • A servant works under the supervision and direction of his employer. • An independent contractor is his own master. • He is not under the order and control of the person for whom he does it.
  7. 7. Employer Employee Relationship • The employer employee relationship is a contract of service as distinct from a contract of service.
  8. 8. What is a Contract for Service • The master can order what is to be done but does not exercise detailed supervision or control.
  9. 9. Contract of Service • The master can order not only what is to be done but also how it shall be done.
  10. 10. Director and Managing Director • Fees paid to a Director are independent of any special contract of service and fall under ‘Income from other Sources’. • A Managing Director is an Employee and his remuneration comes under ‘Salary’.
  11. 11. Tax free Salary • When the employer has paid the tax on the employee’s salary, the tax paid would be considered as Salary for the employee.
  12. 12. MPs and Ministers • Salaries of MP’S & MLA’S fall under Income from other sources. • Salaries of Ministers of the Central or State Government fall under Salaries
  13. 13. Family Pension • Pension received by employee from his former Employer is taxed as Salaries, while ‘Family Pension’ received on his death by members of his family, is taxed as ‘Income from other Sources’.
  14. 14. PLACE OF ACCURAL OF SALARY u/s 9(1) • SALARY , PENSION, LEAVE SALARY FOR SERVICE RENDERED IN INDIA IS DEEMED TO ACCRUE OR ARISE IN INDIA • EVEN IF IT IS PAID OUTSIDE INDIA OR IT IS PAID AFTER CONTINUATION OF EMPLOYMENT IN INDIA COMES TO AN END.
  15. 15. Basis of charge [ U/S 15] • Any salary due • Any salaries paid or allowed • Any arrears of salaries paid or allowed to him in the previous year by or on behalf of any employer or a former employer, if not charged to income tax for any earlier previous year.
  16. 16. BASIS OF CHARGE u/s 15 • ACURAL SALARY + ADVANCE SALARY + ARREARS • SALARY IS TAX ON DUE OR RECEIPT BASIS WHICHEVER EARLIER
  17. 17. Bonus • Bonus is taxable on receipt basis. Therefore it will be included in Salary only in the year in which it is received.
  18. 18. • Sec 17 of the Income Tax Act, 1961, gives an inclusive definition of salary. Broadly, it includes: – Basic Salary; – Fees, Commission and Bonus; – Taxable portion of cash allowances; – Taxable value of Perquisites; – Retirement Benefits etc.
  19. 19. • Although all the components of salary income are included in salary, there are certain incomes in each of these categories which are either fully exempt or exempt upto a certain limit. • The aggregate of all the above incomes, after the exemption(s) available, if any, is known as ‘Gross Salary’.
  20. 20. • From the ‘Gross Salary’, the following deductions are allowed u/s 16 of the Act to arrive at the figure of ‘Net Salary’. – Deduction for entertainment allowance u/s 16(ii); – Deduction on account of any sum paid towards tax on employment u/s 16(iii).
  21. 21. Entertainment Allowance Govt. Employee Non-Govt. Employee 1. Rs.5,000/- 2. 20% of Basic Salary 3. Amount of Entertainment allowance granted during the previous year Entertainment Allowance is not deductable Salary = Salary – Allowances – Benefits – Perquisites
  22. 22. COMPONENTS OF SALARY u/s 17(1)
  23. 23. Question 1 • Mr.Z has joined ICC Ltd. on 1st July 2005 in the scale of Rs.15,000-1,500-21,000-2,500-31,000. • Compute gross salary for the previous year 2008-09.
  24. 24. Answer 1 • Gross Salary Rs 2,29,500
  25. 25. Solution 1: • Workings: • Previous Year April to June July to March • 2005-06 Nil 15,000 • 2006-07 15,000 16,500 • 2007-08 16,500 18,000 • 2008-09 18,000 19,500
  26. 26. Solution 1: • Previous Year: 2008-09 1. Salary for (i) April 2008 to June 2008 = 18,000 × 3 = 54,000 2. (ii) July 2008 to March 2009 = 19,500 × 9 = 1,75,500 • Gross Salary Rs 2,29,500 (54,000 + 1,75,500)
  27. 27. Question 2 • Mr.Kabir is getting a salary of Rs.12,000 p.m. w.e.f. 1.4.2008. • He is promoted w.e.f. 31.12.2007 • and got arrears of Rs.75,000. • Bonus for the year 2008-09 is Rs.15,000 remains outstanding • but bonus of Rs.12,000 for the year 2007-08 was paid on 1st January 2009. • In March 2009, he got two months salary i.e. April and May 2009 in advance. • Compute the gross salary for the assessment year 2009-10.
  28. 28. Answer 2 • Gross Salary 2,55,000
  29. 29. Solution 2 • Gross Salary for the Assessment Year 2009-10 • Salary : Rs.12,000 × 12 1,44,000 • Arrears of Salary 75,000 • Bonus for the year 2008-09: (Receivable) — • Note: Bonus is taxable on receipt basis • Bonus for the year 2007-08: (Received) 12,000 • Advance of Salary: April & May 2009 (12,000 × 2) 24,000 • Gross Salary 2,55,000
  30. 30. ALLOWANCES • Allowance is a fixed monetary amount paid by the employer to the employee (over and above basic salary) for meeting certain expenses, whether personal or for the performance of his duties.
  31. 31. TAXABLE VALUE OF ALLOWANCES • The allowances are generally taxable and are to be included in gross salary unless specific exemption is provided in respect of such allowance. For the purpose of tax treatment, these allowances can be divided into 3 categories: I. Fully taxable cash allowances II. Partially exempt cash allowances III. Fully exempt cash allowances
  32. 32. FULLY TAXABLE ALLOWANCES • This category includes all the allowances, which are fully taxable. So, if an allowance is not partially exempt or fully exempt, it gets included in this category. The main allowances under this category are enumerated in the following slides:
  33. 33. (i) Dearness Allowance and Dearness Pay • This allowance is paid to compensate the employee against the rise in price level in the economy. • Although it is a compensatory allowance against high prices, the whole of it is taxable. • When a part of Dearness Allowance is converted into Dearness Pay, it becomes part of basic salary for the grant of retirement benefits • and is assumed to be given under the terms of employment.
  34. 34. (ii) City Compensatory Allowance • This allowance is paid to employees who are posted in big cities. The purpose is to compensate the high cost of living in cities like Delhi, Mumbai etc. However, it is fully taxable.
  35. 35. (iii) Tiffin / Lunch Allowance • It is fully taxable. It is given for lunch to the employees.
  36. 36. (iv) Non practicing Allowance • This is normally given to those professionals (like medical doctors, chartered accountants etc.) who are in government service and are banned from doing private practice. It is to compensate them for this ban. It is fully taxable.
  37. 37. (v) Warden or Proctor Allowance • These allowances are given in educational institutions for working as a Warden of the hostel or as a Proctor in the institution. They are fully taxable.
  38. 38. (vi) Deputation Allowance • When an employee is sent from his permanent place of service to some place or institute on deputation for a temporary period, he is given this allowance. It is fully taxable.
  39. 39. (vii) Overtime Allowance • When an employee works for extra hours over and above his normal hours of duty, he is given overtime allowance as extra wages. It is fully taxable.
  40. 40. (viii) Fixed Medical Allowance • Medical allowance is fully taxable even if some expenditure has actually been incurred for medical treatment of employee or family.
  41. 41. (ix) Servant Allowance • It is fully taxable whether or not servants have been employed by the employee.
  42. 42. (x) Other allowances • There may be several other allowances like family allowance, project allowance, marriage allowance, education allowance, and holiday allowance etc. which are not covered under specifically exempt category, so are fully taxable.
  43. 43. PARTIALLY EXEMPT ALLOWANCES • This category includes allowances which are exempt upto certain limit and on certain conditions. • For certain allowances, exemption is dependent on amount of allowance spent for the purpose for which it was received and for other allowances, there is a fixed limit of exemption.
  44. 44. House rent allowance • Exemption will be lowest of – 50% of salary where residential accommodation is in Mumbai, Kolkata, Delhi or Chennai and 40% of at other place – Excess of rent paid over 10% of salary – Actual allowance paid. • Salary means basic plus DA (if forming part of retirement benefits) plus commission (if fixed as a percentage of turnover) • There will be no exemption if the residential accommodation is owned by employee or employee has not paid any rent for residential accommodation used by him.
  45. 45. Question 3 • Mr. X is employed in A Ltd. getting basic pay of Rs.20, 000 per month and dearness allowance of Rs.7, 000 per month (half of the dearness allowance forms part of salary for the purpose of retirement benefits). The employer has paid bonus @Rs.500 per month, Commission @1% on the sales turnover of Rs.20 lakhs, and house rent allowance of Rs.6, 000 per month. X has paid rent of Rs.7,000 per month and was posted at Agra. • Compute his gross salary for the assessment year 2009-10
  46. 46. Answer 3 • Gross Salary: 3,68,200
  47. 47. Solution 3 • Computation of Gross Salary Amount / Rs. Basic Salary (Rs.20,000 x 12) 2,40,000 Dearness Allowance (Rs.7,000 x 12) 84,000 Bonus (Rs.500 x 12) 6,000 Commission (1% of Rs.20,00,000) 20,000 House Rent Allowance (Rs.6,000 x 12 – Amount exempt Rs.53,800) 18,200 Gross Salary: 3,68,200
  48. 48. Calculation of exempt HRA • Amount of HRA exempt is least of 3 amounts: 1. 40% of Salary (Rs.2,40,000 + Rs.42,000 + Rs.20,000) = Rs.3,02,000 2. Actual HRA received (Rs.6, 000 x 12) = Rs. 72,000 3. Rent paid (Rs.7, 000 x 12 – 10% of salary Rs.30, 200) = Rs. 53,800 • Amount of HRA exempt is = Rs. 53,800
  49. 49. Question 4 • A, is entitled to a basic salary of Rs.5,000 p.m. and dearness allowance of Rs.1,000p.m., • 40% of which forms part of retirement benefits. • He is also entitled to HRA of Rs.2,000 p.m. • He actually pays Rs.2,000 p.m. as rent for a house in Delhi. • Compute the taxable HRA.
  50. 50. Answer 4 • Taxable HRA • = Rs 6,480
  51. 51. Solution 4 • Computation: • Salary for HRA= Basic Pay + D.A. (considered for retirement benefits) + Commission (if received as a fixed percentage on turnover as per terms of employment) • = (5,000 × 12) + (40% × 1,000 × 12) = 64,800
  52. 52. Solution 4 • Taxable HRA: • Amount received during the financial year for HRA 24,000 • Less: Exemption u/s 10(13A) Rule 2A Least of the followings: • (a) Actual amount received 24,000 • (b) 50% of Salary of Rs.64,800 32,400 • (c) Rent paid less 10% of Salary • [2,000 × 12 – 10% of 64,800] = Rs 17,520 • Least of these is Rs 17,520 which is exempt • Taxable HRA (Received – Exempt)(24,000 – 17,520) • = Rs 6,480
  53. 53. a) Children Education Allowance • This allowance is exempt to the extent of Rs.100 per month per child for maximum of 2 children (grand children are not considered).
  54. 54. b) Children Hostel Allowance • Any allowance granted to an employee to meet the hostel expenditure on his child is exempt to the extent of Rs.300 per month per child for maximum of 2 children.
  55. 55. c) Transport Allowance • This allowance is generally given to employees to compensate the cost incurred in commuting between place of residence and place of work. • An amount uptoRs.800 per month paid is exempt. • However, in case of blind and orthopaedically handicapped persons, it is exempt up to Rs. 1600p.m.
  56. 56. Running allowance for the transport employees • An allowance granted to an employee working in a transport system to meet his personal expenses in performance of his duty in the course of running of such transport from one place to another is exempt upto 70% of such allowance or Rs.6000 per month, whichever is less.
  57. 57. Leave Travel Concession (LTA) • LTA is the value of any travel concession or assistance received from his employer by the employee for him and his family. • This concession can be claimed for a maximum of two journeys in a block of 4 years.
  58. 58. • The reimbursement would be restricted to actual travel expenses. However, there is an overall ceiling on this, which is restricted to: - Air travel Economy fare of national carrier by the shortest route (India Airlines or Air India) - Rail travel First class AC fare - Road Public transport – First class or deluxe class - If there is no recognized transport – Equivalent of first class AC fare
  59. 59. III. FULLY EXEMPT ALLOWANCES • (i) Foreign allowance This allowance is usually paid by the government to its employees being Indian citizen posted out of India for rendering services abroad. It is fully exempt from tax. • (ii) Allowance to High Court and Supreme Court Judges are exempt from tax. • (iii) Allowances from UNO to its employees are fully exempt from tax.
  60. 60. Special Allowances for meeting official expenditure • Certain allowances are given to the employees to meet • expenses incurred exclusively in performance of official duties and hence are exempt to the extent actually incurred for the purpose for which it is given.
  61. 61. • These include – travelling allowance, – daily allowance, – conveyance allowance, – helper allowance, – research allowance – and uniform allowance.
  62. 62. Notified Special Allowance – 10(14) • (14) (i) any such special allowance or benefit, not being in the nature of a perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit,7 [as may be prescribed], to the extent to which such expenses are actually incurred for that purpose ; • (ii) any such allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides, or to compensate him for the increased cost of living, 8 [as may be prescribed and to the extent as may be prescribed] :] • These are prescribed in Rule 2BB of the Income Tax Rules
  63. 63. a)Travel on Tour or Transfer • a)any allowance granted to meet the cost of travel on tour or on transfer; • Explanation : For the purpose of clause (a), allowance granted to meet the cost of travel on transfer includes any sum paid in connection with transfer, packing and transportation of personal effects on such transfer.
  64. 64. b)Daily Charges • b)any allowance, whether, granted on tour or for the 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;
  65. 65. c)Conveyance Allowance • (c)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;
  66. 66. d)Helper Allowance • (d)any allowance granted to meet the expenditure incurred on a helper where such helper is engaged for the performance of the duties of an office or employment of profit;
  67. 67. e)Academic Allowance • e)any allowance granted for encouraging the academic, research and training pursuits in educational and research institutions;
  68. 68. f)Uniform Allowance • (f)any allowance granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit.
  69. 69. PROFIT IN LIEU OF SALARY [ U/S 17(3) ] • profits in lieu of salaries include: • Any compensation due or received by an employee from his employer in connection with the termination of the employment or due to modification of the terms and conditions of his employment. • Payments from an employer or former employer from provident fund or such other funds, excluding the amounts exempt from tax under Section 10 and excluding the amounts of contribution made by the assessee and the interest thereon.
  70. 70. Other Payments • Any payment in the form of: • Gratuity • Commuted value of pension • Retrenchment compensation • House rent allowance • Received or due to be received to the extent which is not exempt, and which it does not consist of contribution made by the employee, or interest thereon, is taxable as profits in lieu of salary.
  71. 71. PROFIT IN LIEU OF SALARY [ U/S 17(3) ] • Keyman Insurance Policy: Surrender value of the policy endorsed in favor of the employee, or the sum received by him at the time of retirement, will be taxable as profit in lieu of salary. • Lump-sum Incentives: • Any amount due or received: • before joining employment or • After leaving employment, it is Taxable as profit in lieu of salary.
  72. 72. Retirement Benefits • Leave Salary • Pension • Gratuity • Retrenchment Compensation • Compensation on Voluntary Retirement • Provident Fund
  73. 73. Government Employee • In case of Gratuity full exemption is for Government Employees and Employees of Local Authorities. • In case of Pension, it is Government Employees and Employees of Local Authorities and Employees of a Corporation established by a Central, State or Provincial Act. • In case of Leave encashment, it is only for Employees of the Central and State Governments and not for Employees of Local Authorities or Public Sector Undertakings.
  74. 74. LEAVE SALARY u/s 10(10AA) DURING EMPLOYMENT GOVT/NON GOVT. TAXED RETIREMENT/LEAVING JOB GOVT. FULLY EXEMTED RETIREMENT/LEAVING JOB NON GOVT. FULL/PARTIAL EXEMPTED
  75. 75. Leave encashment at the time of retirement for the non government employees • Minimum of the following – Period of earned leave to the credit of employee at the time of his retirement or leaving the job X average monthly salary on the basis of maximum 30 days leave for every year of actual service rendered to the employer from whose service he has retired. – 10 X average monthly salary – Rs 300000 – Actually received
  76. 76. Salary Meaning • Salary includes basic, DA (if taken into account for retirement benefit),commission on turnover. • It is calculated on the basis of average salary drawn during the period of 10 months immediately preceding the retirement. • If the assessee receives leave encashment from more than one employer ,the aggregate amount shall not exceed Rs 300000
  77. 77. Question 5 • Mrs. Vandana retires on 16th October 2008 after 30 years and 8 months of service. Salary structure is given below: • FY 2008-09 Salary Rs.15,000 pm D.A.Rs.7,500 pm • FY 2007-08 Salary Rs.12,000 pm D.A.Rs.6,000 pm • 40%of dearness allowance forms a part of superannuation benefits. • Record of Earned Leave is given below: • Leave allowed for one year of completed service -20 days; Leave taken while in service-150 days; Leave encashed during the year-60 days. • Determine the gross salary in the following cases: • (i) He retires from government service • (ii) He retires from the service of Delhi Municipal Corporation • (iii) He retires from the service of Life Insurance Corporation of India • (iv) He retires from private sector
  78. 78. Answer 5 • Case(i) Case(ii) Case(iii) Case(iv) • Salary for 6months & 16 days 98,000/ 98,000 98,000/ 98,000 • Dearness Allowance 49,000/ 49,000/ 49,000/ 49,000 • Taxable amount of Leave encashment Exempted/ 1,24,980/ 1,24,980/ 1,24,980 • Gross Income from Salary 1,47,000/ 2,71,980/ 2,71,980/ 2,71,980
  79. 79. Computation • Average monthly salary for 10 months, prior to retirement: • Salary of 6 months 16 days: (1st April 2008 to 16th October 2008) = 98,000 • Salary of 3 months 14 days: (14th December 2007 to 31st March 2008) = 41,600 • Total Basic Salary 1,39,600 • Add: Dearness allowance • For 6 months 16 days: (1st April 2008 to 16th October 2008) = 49,000 • For 3 months 14 days: (14th December 2007 to 31st March 2008) = 20,800 • Total D.A. 69,800 • D.A. [40% of 69,800, forming part of retirement benefits] = 27,920 • Total salary of 10 months 1,67,520(1,39,600+ 27,920) • Average Salary = 1,67,520 / 10 = 16,752
  80. 80. Taxable amount of Leave Encashment • Amount of encashment received(Based on Last drawn Salary): • (30 x 20) – (150 +60) x (15,000 + 7,500)/ 30 = 2,92,500 • Less: Exempted u/s 10(10AA) [Least of the followings] • (i) Actual amount received 2,92,500 • (ii) 10 months salary(preceeding the month of retirement) =1,67,520 • (iii) Leave credit on the date of retirement • [(30 x 20) – (150 + 60) x (16,752 / 30)] = 2,17,776 • (iv) Maximum Limit 3,00,000 • Least of the above is 1,67,520 • Taxable amount of Leave encashment 1,24,980(2,92,500- 1,67,520)
  81. 81. Question 6 • Ms. Parineeta retired from service after 28 years from ABC Ltd. • Leave sanctioned by employer 45 days p.a. • Leave availed during service 400 days. • Leave encashment received: Rs. 4,30,000. • Average salary for 10 months preceeding the month of retirement Rs.15,000. • Compute taxable amount of Leave encashment for the Previous year 2008-09.
  82. 82. Answer 6 • Taxable Value of Leave Encashment 2,80,000
  83. 83. Computation • Since leave sanctioned by the employer is more than 30days p.a., • the following calculation is required, to determine the amount of leave credit on the date of retirement. • Particulars • Leave credit available on the date of retirement • = Total Leave sanctioned during tenure of employment – Total leave availed during service • = [( 28 x 45) – 400] = 860 • Less: Excess leave sanctioned by the employer • [(45– 30 days) per year x 28) = 420 • Leave credit on the basis of 30 days credit for every completed years of service 440 (860-420)
  84. 84. • Leave salary on the basis of 30 days credit = Leave credit on the basis of 30 days credit for every completed years of service × Average Monthly salary • = 440 × (15,000/30)= 2,20,000 • Amount Received on Leave Encashment 4,30,000 • Less: Exemption u/s 10(10AA) Least of the followings: • (i) Actual amount of Leave encashment received 4,30,000 • (ii) Average salary of the individual for the past10 months • 15,000 x 10 months = 1,50,000 • (iii) Maximum Limit 3,00,000 • (iv) Leave at credit at the rate of 30 days p.a. for every Completed year of service as calculated 2,20,000 • Least of these is Rs 1,50,000 • Therefore Taxable Value of Leave Encashment 2,80,000 (4,30,000-1,50,000)
  85. 85. PENSION SEC. 17(1) (ii) • Pension is a periodical payment received by an employee after his retirement and it is also taxed as salary.
  86. 86. Pension may take two forms: • Un-commuted pension: It is periodical payment of pension - taxable as salary • Commuted pension: It is a lump-sum payment in lieu of periodical payment - exempt as per provisions explained hereinafter.
  87. 87. What are the provision regarding Commuted Pension of a Government Employee? • Any commuted pension received by a Government employee is wholly exempt from tax.
  88. 88. What are the provision regarding Commuted Pension of a Non-Government Employee • In the case where the employee receives gratuity – commuted value 1/3rd of the pension is exempt from tax • In other cases – commuted value of 50% of pension is exempt from tax
  89. 89. What is the new pension scheme for central Government Employee? • The Central Government has introduced a new Defined Contribution Pension Scheme in replacement of earlier Defined Benefit Scheme w.e.f. 01-04-2004.
  90. 90. What are the salient features of the New Pension Scheme? • The scheme is applicable to all Central Government Employees except armed forces or employees joining after 01-04-2004 • There are two tiers viz., Tier-I and Tier-II
  91. 91. • Tier-I is mandatory and employees has to make a contribution of 10% of Basic plus dearness allowance. Government will make equal contribution • Tier-II is optional and employees can make additional contribution at their discretion
  92. 92. • Tier-I is non-withdrawal while Tier-II is withdrawal • The employees can exit at or after the age of 60 years from Tire-I • At exit, it would be mandatory for the employees to invest 40% of pension wealth to purchase an annuity from an IRDA-regulated life insurance company.
  93. 93. What is the employer's contribution in New pension scheme? • With effect from the assessment year 2005- 06, the matching contribution made by the Central Government to Tier-I account of the employee will be deemed as income received by the employee during previous year • Such contribution is deductible (to the extent of 10% of the salary of the employee) under section 80CCD.
  94. 94. • Employee’s contribution to the notified pension scheme (to the extent of 10% of the salary of the employee) is also deductible under section 80CCD. • When pension is received from this amount, it will be chargeable to tax in the hands of the recipient.
  95. 95. • No deduction will be allowed under section 80C in respect of amounts on which deduction has been claimed under section 80CCD. • Salary for this purpose will include dearness allowance, if the terms of employment so provide, but will exclude all other allowances and perquisites. • The aggregate amount of deduction under section 80C, 80CC and 80CCD cannot exceed Rs 1,00,000.
  96. 96. Tax upon Gratuity • Govt. employees - In the case of govt. employees the entire amount of death-cum- retirement gratuity is exempt from tax and nothing is therefore taxable under the head Salaries.
  97. 97. Employees covered under the Payment of Gratuity Act, 1972 • The employees covered under the Gratuity Act who receive gratuity have been given exemption which is the minimum of the following amounts. Gratuity received in excess of the minimum of the amounts mentioned below is included in the gross salary for the purposes of taxation. – The amount of gratuity actually received. – 15/26 times the last drawn salary for every completed year of service or part in excess of six months. – Rs 3,50,000 • Salary means basic plus DA and is defined Section 2(3) of the payment of Gratuity Act, 1972.
  98. 98. GRATUITY (cont.) • how to find length of service -if 6mths or less then ignored else taken as 1 full year • what is salary: Salary means last drawn by employee and includes dearness allowance but does not include any bonus, commision, HRA, Overtime wages and any other allowance(Section 2(3) of the payment of Gratuity Act, 1972). • how to determine 15 days salary -calculated by dividing salary last drawn by 26 days
  99. 99. Not Covered under Payment of Gratuity Act. • In the case of other employees the gratuity received or receivable on his retirement or on his becoming incapacited prior to such retirement or termination of his employment or any gratuity received by his heirs is exempt to the extent of the minimum of the following amounts. The amount received in excess of the sums mentioned below is included in the gross salary of the employee for the purposes of taxation. – Actual amount of gratuity received. – Half month's average salary for every completed year of service. (Average salary means the average of the salary drawn by the employee for 10 months immediately preceding the month in which he retires) – Rs 3,50,000 • Salary includes basic, DA (if taken into account for retirement benefit),commission on turnover
  100. 100. Difference • For those covered under the payment of Gratuity Act, the meaning of the term ‘salary’ is as per the meaning under the payment of Gratuity Act. (Basic plus DA). • For those not covered under the payment of Gratuity Act, Salary includes basic, DA (if taken into account for retirement benefit),commission on turnover if received as a fixed percentage of the turnover achieved by the Employee. • Length of Service for those covered under the payment of Gratuity Act is every completed year of service or part in excess of six months. • Length of Service for those not covered under the payment of Gratuity Act is every completed year of service. (Part of a year will be ignored)
  101. 101. Question 7 • Mr. Hari retires on 15th October2008, after serving 30 years and 7 months. • He gets Rs.3,80,000 as gratuity. • His salary details are given below: • FY 2008-09 Salary Rs.16,000 pm • D.A. 50% of salary. 40% forms part of retirement benefits. • FY 2007-08 Salary Rs.15,000 pm D.A. 50% of salary. 40% forms part of retirement benefits • Determine his gross salary in the following cases: • (i) He retires from government service • (ii) He retires from private sector, covered under Payment of Gratuity Act, 1972. • (iii) He retires from private sector, not covered by payment of Gratuity Act
  102. 102. Computation 1: • (i) The amount of gratuity received as a Government employee is fully exempt from tax u/s 10(10)(i)
  103. 103. Computation 2 Computation of Taxable Gratuity :• (ii) As an employee of private sector, covered by Payment of Gratuity Act, 1972 • Particulars: • Amount received as Gratuity 3,80,000 • Less: Exemption u/s 10(10)(ii) Least of the followings: • (i) Actual amount received 3,80,000 • (ii) 15/26 × Last drawn salary × No. of years of completed service or part thereof in excess of 6 months • [15/26 × 31 × 24,000] = Rs 4,29,231 • (iii) Maximum Limit 3,50,000 Least is Rs 3,50,000 • Taxable Gratuity 30,000 (3,80,000-350,000) • Note : Salary = Basic Pay + Dearness Allowance
  104. 104. Computation 3 Computation of Taxable Gratuity • (iv) As an employee of a private sector, not covered by Payment of Gratuity Act,1972 • Note: Salary = 10 months average salary preceding the month of retirement. • = Basic Pay + Dearness Allowance considered for retirement benefits + commission • (if received as a fixed percentage on turnover) • Salary for the months December’06 till September ’07 shall have to be considered. • Basic Salary: Rs. • December ’07 to March ’08 = 15,000 x 4 = 60,000 • April ’08 to September ’08 = 16,000 x 6 = 96,000 • Total Basic Salary 1,56,000 • Add: D.A.[ 50% of 1,56,000 × 40%, forming part of • superannuation benefits] 31,200 • Salary for 10 months 1,87,200 • Therefore, Average salary for 10 months = 1,87,200/10 = 18,720
  105. 105. Computation 3 (Continued) Computation of Taxable Gratuity • (iv) As an employee of a private sector, not covered by Payment of Gratuity Act,1972 • Particulars • Amount received as Gratuity 3,80,000 • Less: Exemption u/s 10(10)(iii) Least of the followings: • (i) Actual amount received 3,80,000 • (ii) 1/2 × Average salary × No. of fully completed years of service • [½ × 18,720 × 30] = 2,80,800 (Least is Rs 2,80,800) • (iii) Maximum Limit 3,50,000 • Taxable Gratuity 99,200 (3,80,000 – 2,80,800)
  106. 106. Question 8 • Mr. King is getting a salary of Rs.5,400 pm since 1.1.08 and dearness allowance of Rs.3,500 pm, 50% of which is a part of retirement benefits. • He retires on 30th November 2008 after 30 years and 11 months of service. • His pension is fixed at Rs.3,800 pm. • On 1st February 2009 he gets 3/4ths of the pension commuted at Rs.1,59,000. • Compute his gross salary for the previous year 2008-09 in the following cases: • (i) If he is a government employee, getting gratuity of Rs.1,90,000 • (ii) If he is an employee of a private company, getting gratuity of Rs.1,90,000 (Not covered under payment of Gratuity Act). • (iii) If he is an employee of a private company but gets no gratuity.
  107. 107. Computation • Previous Year 2008-09. Tenure of Service: 1.4.08 to 30.11.08 = 8 months • Salary 43,200 (5400*8) • D.A 28,000(3500*8) • Post-retirement period: December’08 to March ‘09= 4 months • Uncommuted Pension [(3,800×2)+(950×2)] = 9,500 • Avearge Salary for last ten months (5400 + 50% of 3500)=7150 (Not covered by Payment of Gratuity Act). • 3/4ths of the pension commuted = Rs.1,59,000 • Full Value of Commuted Pension=Amount received on commutation divided by Percentage of pension commuted • = 1,59,000 / 75% = 2,12,000 • Therefore full value of Pension = Rs 2,12,000
  108. 108. If he is a government employee, getting gratuity of Rs.1,90,000 • Salary 43,200 (5400*8) • D.A 28,000(3500*8) • Uncommuted Pension [(3,800×2)+(950×2)] = 9,500 • Gratuity Exempted • Commuted Value of Pension Exempted • Gross Salary=43,200+28,000+9500= Rs 80,700
  109. 109. If he is an employee of a private company, getting gratuity of Rs.1,90,000 (Not covered under payment of Gratuity Act) • Actual amount received 1,90,000 • Less: Exempted amount(least of the followings): • (i) Actual amount received 1,90,000 • (ii) ½ x Avg.Salary x No.of years of Completed service • [½ x 7,150 x 30] = 1,07,250 • (iii) Maximum Limit 3,50,000 Least is 1,07,250 • Taxable Gratuity 82,750(1,90,000-1,07,250) • Commuted Value of Pension (Non-govt employee, gratuity received) • Actual commuted value of pension received 1,59,000 • Less: Exempted u/s 10(10A) • 1/3rd of Full Value of Commuted Pension • [1/3 x 2,12,000] 70,667 • Taxable Commuted Value of Pension 88,333(1,59,000 – 70,667) • Salary+DA+Uncommuted Pension=43,200+28,000+9500= Rs 80,700 • Gross Salary=82,750+88,333+80,700 = Rs 2,51,783.
  110. 110. If he is an employee of a private company but gets no gratuity. • Commuted Value of Pension (Non-govt employee, gratuity not received) • Actual commuted value of pension received 1,59,000 • Less: Exempted u/s 10(10A) = 1/2 of Full Value of Commuted Pension • [1/2 x 2,12,000] = 1,06,000 • Full Value of Commuted Pension=Amount received on commutation/Percentage of pension commuted • = 1,59,000 / 75% = 2,12,000 • Taxable Commuted Value of Pension = 53,000(1,59,000-1,06,000) • Salary+DA+Uncommuted Pension=43,200+28,000+9500= Rs 80,700 • Gross Salary=53,000+80,700 = Rs 1,33,700
  111. 111. Questions for Revision • What is meant by Salary ? Discuss what is meant by the term ‘ Employer Employee Relationship’ • Under which head of Income are the following to be included: – Salaries to MPs and MLAs – Salaries to Ministers of Central and State Government.
  112. 112. Questions for Revision • What is the difference between accrual and receipt? Is Salary to be taxed on accrual or receipt. Is bonus to be taxed on accrual or receipt ? • What are the deductions allowed under Section 16 from the gross salary to arrive at the Net salary ?
  113. 113. Questions for Revision • What is an allowance. Give three examples of Fully taxable allowances ? • Discuss the taxability of the following allowances: – Children Education Allowance – Children Hostel Allowance – Transport Allowance.
  114. 114. Questions for Revision • Give three examples of fully exempt allowances ?
  115. 115. • To be Continued on 4th September, 2009

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