Income From Salary

Income From Salary

Computation of Income from Salary: there are five components of Salary Income

Basic salary: - Basic salary, also known as base salary, is the salary amount earned by an employee before any particular addition or deduction is made to the same. Usually, the additions and deductions that an org makes to this base salary is sizably different from the paycheck that the employee receives.

Provident Funds: - There are four types of Provident Funds

1. Statutory Provident Fund: - These are maintained by Government, Semi Gov. bodies, Railways, Universities, Local Authorities etc. this provident fund is constituted under the provident fund act, 1925. The contributions made by the employee can be claimed as tax deductions under section 80c.
2. Recognized Provident Fund: - Any establishment (business entity) which employs 20 or more employees can join RPF. Most of the individuals (who are salaried) generally contribute to this type of Provident Fund. This is one of the popular types of Employees Provident Funds (EPF). (Organizations which employ less than 20 employees can also join RPF if the employer and employees want to do so)
3. Unrecognized Provident Fund: - This provident fund is the fund which is not a statutory or recognized fund. This fund is maintained by any organization 
4. Public Provident Fund: - the central government has established the public provident fund for the benefits of general public to mobilize personal savings. 

Allowances: - Allowance is defined as a fixed amount of money paid by employers to their employees to meet certain expenditures above basic salary. Allowances are classified into three groups

A. Fully Taxable Allowance

1. Dearness Allowance (D.A): - Dearness allowance is paid to employees who migrate from the city of their residence to another for job purpose. The allowance helps them to deal with inflation related expenses and difference in cost of living for employees living in different towns and cities.
2. Fixed Medical Allowance: - Medical allowance is a fixed allowance paid to the employees of a company on a monthly basis irrespective of whether they submit the bills to substantiate the expenditure or not.
3. Lunch / Tiffin Allowance: - Sometimes employer may provide tiffin/meals allowance to the employee.
4. City Compensatory Allowance (CCA): - This Allowance is given in big city due to high cost of living or inflated Costs in the cities 
5. Overtime Allowance: - Employer may provide an overtime allowance to employees working over and above the regular work hours.
6. Entertainment Allowance: - This Allowance is firstly fully Taxable then deduction is allowed under section 16 (ii)
7. Non - Practicing Allowance: - It is given to the Doctors employed by the government.
8. Cost of living Allowance: - it is part to the lower income group employee and is linked with the cost-of-living index numbers. It is just like dearness allowance and is fully included in Taxable Salary.
9. Servant's Allowance: - It is paid to employees posted at some higher posts for compensating them for the payment made by them in keeping servants for their personal or domestic works.
10. Other Allowance: - Family Allowances, Performance Allowances, Project Allowances, Warden Allowances, Washing Allowances, Education Allowance (For Employees own education), Gift Allowance and Etc. 

B. Fully Exempted Allowances

1. Foreign Allowance: - This allowance is paid by the government of India to its citizen employees for being posted outside the country.
2. Allowances from UNO to its employees: - Allowances paid by the United Nations (UNO) to its employees are not taxable under the United Nations (Privileges and Immunities) Act.
3. Allowances to High Court Judges: - Allowances paid to Judges of High Courts and the Supreme Court are not taxable.

C. Partially Taxable and Partially Exempted Allowance

1. House Rent Allowance (HRA): - This allowance is given by employer to his employee for compensating him for high rents prevailing in cities. Important Note: - This exemption is not available to an Assessee who lives in his own house or he does not pay any rent
2. Special Allowance Section 10 (14) (i): - Under Section 10 (14) (i), allowances are exempted to the extent of the amount received as allowance or amount spent on certain duties, whichever is the lower figure. Allowances covered in this category are:
1. Travelling Allowance / Transfer Allowance: - Travel allowance covers costs related to travel while on tour or on transfer while on duty. This allowance also includes travel costs incurred while getting transferred to another location, including packaging or transport of personal objects.
2. Daily Allowance: - Daily allowance is given to employees to meet the daily charges incurred when on tour or for the duration of a transfer in the job. This type of allowance is granted when the employee is not in the usual place of duty.
3. Helper / Assistant Allowance: - Sometimes your employer allows you to appoint a helper for performing official duties of the office. In such cases, helper allowance is granted.
4. Research Allowance: - Allowance granted for the purpose of encouraging academic and research related training, education or professional duties is termed as academic or research allowance.
5. Uniform Allowance: - Allowance when given for the purchase or maintenance of uniform, required to be worn while on duty is referred to as uniform allowance. This allowance can be opted for only when an office duty prescribes a specific uniform.
6. Conveyance Allowance: - Allowance for conveyance is granted to employees in case of expenses incurred while travelling for duties of office. However, the employer does not pay for travel from home to work as it is not considered as a duty of the office.
7. Vehicle Allowance: - This Allowance is granted to meet expenditure incurred for vehicle used for official duties
3. Special Allowance Section 10 (14) (ii): - Under this section, allowance granted to employees for working under certain set of conditions while on duty. The amount exempted is either the amount received as allowance or the limit mentioned, whichever is lesser. The types of allowances in this category and exempt in allowances are listed below:
1. Children Education Allowance: - This is the amount given by the employer for the education of the children of the employees. Exempt up to ₹ 100 P.M per Child, up to maximum of 2 Children.
2. Hostel Expenditure Allowance: - This is the amount given by the employer for the hostel expenses of the employee’s children. Exempt up to ₹ 300 P.M per Child, up to maximum of 2 Children.
3. Tribal Area or Scheduled Area Allowance: - These allowances are provided to those employees who are located in the states of (a) Madhya Pradesh; (b)Tamil Nadu; (c) Uttar Pradesh; (d)Karnataka; (e)Tripura; (f)Assam; (g)West Bengal; (h)Bihar; (i)Orissa.  Exempted from tax up to ₹ 200 P.M  
4. Allowance for Transport Employees (Working in Transport System): - 70% of such allowance or ₹ 10,000 P.M. whichever is lower exempted from tax. Exemption is allowed only when they are not in receipt of daily allowance. If they are in receipt of daily allowance, they can claim exemption under it.
5. Transport Allowance: - 
1. Normal Assessee: Fully Taxable
2. Handicapped Assessee: In the case of employee (Who is Blind or Orthopedically Handicapped Divvying Employee) the amount is exempted up to ₹ 3,200 P.M
6. Underground Allowance: - Underground allowance is granted to an employee who is working in underground coal mines. Exemption is limited up to ₹ 800 P.M. 
7. Special Compensatory Hill Allowance: - Employees residing in hilly areas will be granted a compensatory allowance, based on certain conditions. In this case, exemption of tax would be provided for an amount ranging between ₹ 300 per month to ₹ 7,000 per month.
8. Compensatory Field Area Allowances: - Compensatory field area allowance is paid to employees located in certain specific areas of Arunachal Pradesh, Manipur, Nagaland, Sikkim, Himachal Pradesh, Uttar Pradesh and Jammu & Kashmir. Maximum exemption ₹ 2600 P.M.

Perquisites: - Perquisites are profits that come in addition to an employee's regular salary. Perquisites may be in cash or kind. Perquisites are classified into two types 

A. Tax-Free Perquisites

1. Medical Facilities: (Employees and Family Members)
1. In Employer Hospital:- Fully Exempted
2. Reimbursement of Medical Expenditure: -
1. If Treatment is taken at Govt. Hospital:- Fully Exempted
2. If Treatment is taken at Private Hospital:- Fully Taxable
3. Employers’ contribution to staff and their family members group health or medical insurance Scheme: - Fully Exempted
4. Employers’ contribution in Premium paid on life insurance or accidental insurance policy: - Fully Taxable
2. Free Meal (In working hours at remote area): - Fully Exempted (N/A In NTR)
3. Refreshment: (Tea/Coffee/Non-Alcoholic Beverage and snacks): - Fully Exempted (N/A In NTR)
4. Meal (Lunch /Dinner): - Exempted up to Rs.50 per meal (N/A In NTR)
5. Expenses Spend on education of employee or on training programme or refresher courses of management: - Fully Exempted
6. Goods manufactured or sold by the employer to his employee at concessional rates: - Concession received is exempted
7. Gift: - 
1. Gifts in Cash: - Fully Taxable 
2. Gifts in Kind: - Gifts from an employer to employee is taxable as Perquisites if their value is more than Rs 5,000. 
8. Computer / Laptop given to employee for official as well as personal use: - Fully Exempted
9. Transfer of Movable Assets (Other than computer, electronic items and car) – after using it 10 years by employer. - Fully exempted 
10. Interest Free Loan for Medical Treatment: - Fully Exempted 
11. Interest free or concessional loan if not exceeding Rs.20,000: - Fully Exempted 
12. Use of Health Club, sports or similar facilities in Employer campus: -Fully Exempted 

B. Taxable Perquisites

1. Valuation of Rent-Free Unfurnished Accommodation
1. If the Accommodation (निवास) is owned by the employer.
1. Having Population More than 25 lakhs 15% of Long Salary 
2. Having Population More than 10 lakhs but less than 25 lakhs 10% of Long Salary 
3. Having Population Less than 10 lakhs 7.5% of Long Salary
4. Add if in case Furniture is also provided 10% p.a. of the cost of furniture or hire charges
5. Less Rent actually paid or payable by the employee.
2. If the Accommodation is taken on lease (भाडेपट्टी) or rent by the employer.
1. The lease rent paid or payable by the employer or 15% of long salary (whichever is lower)
2. Add If in case Furniture is also Provided 10% p.a. of the cost of furniture or hire charges
3. Less Rent actually paid or payable by the employee.
3. Accommodation provided in hotel 
1. 24% of the long salary or actual charges paid to such hotel (whichever is lower)
2. Less Rent actually paid or payable by the employee.
4. Accommodation in Remote Area
1. It is tax free. A Remote area is one which has Population less than 20000
2. Valuation of Motor Car
   
   
   
1. When the motor car is owned or hired by employer AND Maintenance and running expenses are met or reimbursed by employer
   
   
   
2. When the motor car is owned or hired by employer AND Maintenance and running expenses are met by employee
   
   
   
3. When the motor car is owned by employee AND Maintenance and running expenses are met or reimbursed by the employer
   
   
   
4. When the motor car is owned by employee AND Maintenance and running expenses are met by employee
   
   
   
3. Gas, Electricity and Water Supply provided at free of cost: - Valuation = Value of services – amount recovered from employee
4. Lunch / Refreshment (Free Meal): - Valuation = Value of meal – (Rs.50 per meal + Amount recovered from employee)
5. Provision of Domestic Servant (Watchman, cook, Sweeper, PA, Gardner etc.): - Valuation – Salary paid by employer – amount recovered from employee
6. Interest Free Loan or loan at Concessional Rate of Interest: - Valuation = Interest on loan (as per SBI) – Interest paid by employee
7. Sale or Transfer of Movable Assets by an employer to the Employee-
1. Computer and Electronic Items: - Valuation = Cost of Computer or Electronic items – [50% Depreciation p.a. + Amount recovered from employee]
2. Motor Car: - Valuation - Cost of Car – [20% Depreciation p.a. + Amount recovered from employee]
3. Other Items: - Valuation = Cost of other assets – [10% Depreciation p.a. + Amount recovered from employee] (Here depreciation method should be reducing balance method)
4. Use of Employers Movable Assets: - Valuation = 10% cost of the Assets – Amount recovered from the Employee 
8. Credit Card: - Valuation = Expenses incurred on credit card – [Expenses for official purpose + Amount recovered from Employee] 
9. Club Expenditure: - Valuation = Expenses incurred on credit card – [Expenses for official purpose + Amount recovered from Employee] 
10. Allotment of Sweat Equity Shares: - Valuation = Fair Market value of shares – Amount recovered from employee
11. Education Facilities: - Training of Employee: Valuation – Nil (Tax-free) 
12. Payment of School Fees of Employees Children: Fully Taxable 
13. Education Facility to Employees Children in Employer’s Institution: -Valuation = Cost of Education – [Rs.1,000 per month per child – Amt. recovered from employee)

Deductions U/S 16: After calculation of Gross salary certain deductions are allowed to deduct from gross salary u/s 16 as follows 

1. Standard Deduction Sec. 16(i): - Rs. 50000 (also allowed in new tax regime) 
2. Entertainment Allowance 16(ii): - It is first included in gross salary
1. Private / Non-Govt. Employee: - Not Allowed 
2. Government Employee: - The Least of the Following Amount is Exempted from Tax 
1. Actual Entrainment Allowance Received
2. Rs.5,000 
3. 20% of Basic Salary 
3. Professional Tax or Tax on Employment Sec.16(iii): - = Paid during previous year = (If it is paid by employer then firstly it is added in gross salary and then deduct u/s 16(iii))

Salary Formula

1. Short Salary = Basic Pay + Dearness Allowance (for retirement benefit) + Commissions (if given at fixed % of turnover)
2. Long Salary = Basic Pay + Dearness Allowance (for retirement benefit) + Commissions + Fees + Bonus + All other taxable allowance