Salary Structuring, CTC Components, Documentations, Records, Tax Return Filings
Ø Taxability of Annuity
Ø Taxability of Pension
Ø Taxability of Allowances:
Ø Taxability of Perquisites
Ø FRINGE BENEFITS
Ø Taxability of Retrenchment Compensation
Ø Voluntary Retirement Receipts
Ø Income-tax paid by employer
Deductions:
ü Standard Deductions
ü House rent allowance
ü LTA
Salary and Perquisites
Income under the head ‘Salaries’
As per sec 15 of the Income Tax Act 1961 salary is taxable:-
a) On due or receipt basis whichever is earlier
b) Any arrears of salary received are fully taxable in the year of receipt subject to relief u/s 89(1).
Salary in common parlance means any amount paid by an employer to his employees in lieu of services rendered by them. However income tax act 1961 defines the term “ salary” u/s 17(1) to include the following monetary as well as non-monetary payments :-
a) Wages, b) Annuity or pension, c) Any Gratuity, d) Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages, e) Any Advance of Salary, f) Leave Encashment, g) Employers contribution to provident fund in excess of 12% of Salary, h) The contribution by the central government or any other employer in the Previous year to the account of an employee under a pension scheme u/s 80CCD
Taxability of Annuity
1. Annuity received from present employer is taxed as “ Salary”
2. Annuity received from past employer is taxed as “ Profits in Lieu of Salary”
3. Annuity received from a person other than employer is taxed under” Income from Other Sources”, such as “LIC ANNUITY”. However you are given exemption of Rs.15, 000/-.
4. All annuities received are chargeable to tax and there is no exemption whatsoever.
Taxability of Pension
Pension is any amount of periodic payment made by an employer to the employee in consideration of past service payable after retirement. Pension is of 2 Kinds:-
Uncommuted Pension: This is pension received periodically. It is fully taxable in the hands of both government and non-government employees.
Commuted Pension: Commuted pension means lump sum amount taken by commuting the whole or part of the pension as per terms of the plan:
· Commuted pension received by employees of the central government/local authorities/ statutory corporation/members of the defence services is fully exempt from tax.
· Commuted pension received by non-government employees is taxable subject to exemption u/s 10(10A) of the Income Tax Act, 1961 as under:-
ü Cases, wherein, the employees receive any gratuity- The commuted value of 1/3rd of the pension which the employee is normally entitled to receive is exempted.
ü In any other case- The commuted value of 1/2 of the pension which the employee is normally entitled to receive is exempted
Gratuity: Gratuity is a voluntary payment made by an employer in appreciation of services rendered by an employee.
a. Gratuity received by Non-government Employee is fully taxable under the income tax act 1961 subject to exemption provided by sec 10(10):-
b. Where the employee is covered by payment of gratuity act 1972:-
Least of the following is exempt:-a) Rs 20,00,000 b) Gratuity received c) 15/26 * Last drawn salary( * no of completed year of service or part thereof in excess of 6 Months (Where an employee has worked for 8 years 7 months, the completed year of service shall be considered 9)
Salary for this purpose means: Basic Salary + Dearness Allowance
c. Where the employee is not covered by the Payment of Gratuity act 1972:-
Least of the following is exempt: - a) Rs 20, 00,000 b) Gratuity received c) 1/2 * Average salary of last 10 months * completed year of service (where an employee has worked for 8 Years 7 Months, the completed years shall be considered as 8)
Salary for this purpose means: Salary + Dearness allowance (If provided in terms of employment for retirement benefits) + commission as a % of turnover.
Taxability of Retrenchment Compensation [Section 10(10B)]: Least of the following is exempt: a) Amount received b) Rs. 5, 00,000/- c) 15/26*Average Salary of last 3 months*Completed years of service.
Taxability of Voluntary Retirement Receipts (VRS): Sum received by an employee who opts for a Voluntary Retirement Scheme is known as Voluntary Retirement Receipt. Taxability is Least of the following is exempt: a) Actual amount received a) Rs. 5, 00,000/-
Tax on perquisites paid by the employer [Section 10(10CC)]
Perquisites to employees mean any facility provided by the employer to the employees. There are two types of perquisites, viz., monetary and non-monetary. Value of perquisite is charged to tax in the hands of the employees; however, the employer may, at his will pay tax (on behalf of employees) on such perquisites. In such a case, the amount of tax paid on such perquisites by the employer on behalf of the employees will be treated as income of the employees and is charged to tax in his (i.e., in employee’s) hands. However, by virtue of section 10(10CC) tax paid by employer (on behalf of employee) on non-monetary perquisites will be exempt from tax in the hands of employees. Such tax paid by the employer shall not be allowed as a deductible expenditure in the hands of employer under section 40. Section 10(10CC) provides exemption only in respect of tax on non-monetary perquisites. In other words, this section does not provide exemption in respect of perquisites or tax paid on monetary perquisites.
Taxability of Advance salary: Salary is taxable on due or receipt basis whichever is earlier. As such if any salary has been received by an assessee in advance, the same is taxable in the year of receipt.
Taxability of Leave Encashment means the amount received by an employee from his employer on account of encashment of un-availed leaves standing to the credit of his account.
· Leave salary received by an employee during the period of service is fully taxable.
· Leave salary received by a government employee at the time of retirement is fully exempt.
· Maximum entitlement for leaves under the income tax law is 30 days of leave per year.
· In case of government employees, leave encashment is taxable subject to the exemption provided u/s 10(10AA).
As per the provisions of sec 10(10AA), least of the following is exempt from leave encashment: a) Rs 3,00,000, b) Leave salary actually received, c) 10 month’s salary (on the basis of average salary of last 10 months preceding date of retirement), d) Leave due * Average salary (Salary + Dearness allowance + commission as a % of turnover) p.m. 30 Days (Average salary to be calculated on the basis of average salary of last 10 months preceding date of retirement)
Taxability of Employer’s contribution to provident fund: Any amount contributed by an employer to a recognized provident fund in excess of 12% of salary is taxable under the head salary. Effective 1st April, 2020 if the employer's contribution to EPF, NPS and superannuation fund on aggregate basis exceeds Rs 7.5 lakh in a financial year, then the excess amount will be taxed in the hands of an employee.
Interest on PF contribution above Rs 5.00 lakh to be taxable: Budget 2021 has taken away some of the tax-free havens widely used by high-salary income earner HNIs. The interest earned by the Provident Fund contributions above Rs 5 lakh a year will now be added to the taxable income and taxed at the normal rates. Last year’s budget had capped the tax exemption on employers’ contribution to Provident Fund, NPS and superannuation fund to Rs 7.5 lakh. Interest earned on Old PF Balance will continue to be Tax free including annual Employee’s contribution up to Rs.5,00,000/-.
Contribution by employer to pension fund established u/s 80CCD is to be first included in the salary of the assessee and then a claim for employer and employee contribution to pension fund is deductible u/s 80CCD of the act.
Taxability of Allowances: Allowance means any amount received by employee from employer in order to meet some specific expenses.
Allowances can be classified into 3 categories:-
1) Allowances that are fully taxable
2) Allowances which are exempted for a specific amount or actual expenditure
3) Allowance which are fully exempt
Allowances that are fully taxable:- Entertainment allowance, Dearness allowance, Overtime allowance, Fixed medical allowance, City compensatory allowance, Interim allowance, Servant allowance, Project allowance, Tiffin/Lunch/Dinner allowance, Warden allowance, Non practicing allowance are all taxable allowances.
Allowances which are exempt on the basis of actual expenditure or specific amount:-The following allowances are exempt up to the amount of expenditure incurred by an employee:-
a) Traveling allowance, b) Daily allowance, c) Conveyance allowance, d) Helper allowance, e) Uniform allowance, f) Scientific research allowance g) Mobile reimbursement h) Books and Periodicals i) Food coupons (exempt up to Rs 50 per meal) i) Relocation allowance: Accommodation (15 days of boarding & lodging), Train/Air Tickets (for self & family), Brokerage paid on rented house, School admission fees, j) Notice Pay (amount deducted from an employee's salary for not serving out a notice period) and Joining Bonus (taxable income and employer would even deduct TDS) k) Gifts or vouchers provided by employer in cash or in kind up to Rs 5,000 a.m.
L) House rent allowance [Section 10(13A)) read with rule 2A] the exemption will be lower of the following amounts:
(1) 50% of salary (Basic + DA + Commission), when residential house is situated at Mumbai, Kolkata, Delhi or Chennai and 40% of salary where residential house is situated at any other place.
(2) HRA actually received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year.
(3) Rent paid in excess of 10% of salary.
m) Standard Deduction for Salaried Individuals up to Rs.50, 000/-
n) LEAVE TRAVEL CONCESSION: 2 journeys undertaken in a block of 4 calendar years (currently 2018-2021) by Air (Economy Class) or Train (1st AC) or by any other mode by shortest route
Exempt Allowances: Payments to government employees posted abroad, Allowance for UN employees, Sumptuary & Compensatory allowance paid to judges of Supreme Court and High Courts
Taxability of Perquisites (Section 17(2): Perquisite means any casual emolument or benefit attached to an office or position in addition to salary or wages. It also denotes something that benefits a man by going into his own pocket. Perquisites may be provided in cash or in kind. An employee may be provided with several perquisites by an employer and these are any benefits provided by an employer to employee:-
RENT FREE ACCOMMODATION
1. Rent free unfurnished Accommodation:-
(i) Government employees: - value of perquisite chargeable to tax:-license fees fixed by government.
(ii) Non-Government Employees:-
1. Where accommodation is not owned by employer:-Rent paid or 15% of salary whichever is lower
2. Where accommodation is owned by employer:-
· Accommodation in a city having population up to 10 Lakhs :- 7.5% of salary
· Accommodation in a city having population between 10 l-25 lakhs :- 10% of salary
· Accommodation in a city having population more than 25 lakhs :- 15% of salary
2. Rent free furnished Accommodation: - Value of furnishing to be calculated as under: (a) Furnishings are taken on rent: - Rent Paid, (b) Furnishings owned by employer: - 10% of actual cost
TAXABILITY OF OBLIGATION OF EMPLOYEE MET BY EMPLOYER
1. Electricity/Water/Heater/Gas: (a Where employer provides the same from own sources:-Cost of production (b Where employer provides from outside sources:-Amount Paid by the employer is taxable
2. Sweeper/Gardener/Watchman/Domestic Servant: Amount paid by employer is taxable
3. Free Education: (a) Where employer provides free education in own college:-Fee charged by similar college in nearby area (b) Where employer provides free education in any other college:-Actual amount paid by employer is taxable
4. Free Transport:-a) Free transport facility provided by employee engaged in the business of transportation of passengers/ goods: Amount charged when similar services are provided to general public (b Free tickets to railway and airline employees are exempt
5. Medical Facilities:-
· Medical facilities are provided in a government hospital in India/ Employer owned hospital in India/a hospital approved by the board are exempt from tax.
· Medical facilities in any other case up to a total value of Rs 15000 is exempt from tax
· Medical Facilities provided by employer outside India:- a) Treatment and stay expenditure are exempt up to the limits permitted by RBI b) Traveling expenditure is exempt where the Gross total income of the assessee is up to 2 Lakhs. IN case of Gross total income being in excess of Rs 2 Lakhs, the traveling expenditure is chargeable to tax.
6. Telephone Facility:-Provided by employer is completely exempt from tax.
OTHER FRINGE BENEFITS/ PERQUSITES
1. Free Meals :-a) Free meals provided by employer to employee during working hours up to a total value of Rs 50 per meal is exempt from tax b) Breakfast/snacks & tea/ brunch at work place are exempt from tax.
2. Use of Movable Property: - a) Taxable @ 10% of actual cost or rent paid by employer in respect of that asset as the case may be b) Use of Laptop and Computer are exempt from tax.
3. Transfer of Movable assets to Employee: - (a) Computer and Computer peripherals -W.D.V. of the asset as calculated after providing depreciation @ 50% p.a. on written down value of the asset for each completed year of use (b)Transfer of Car-W.D.V. of the asset as calculated after providing depreciation @ 20% p.a. on WDV of the asset for each completed year of use (C) Any other asset-W.D.V. of the asset as calculated after providing depreciation @ 10% p.a. on straight line method for each completed year of use
4. Credit card Expenses:-Expenses incurred for official purposes shall not be a taxable but used for personal nature of expenses would be taxable as perquisite
5. Club expenses:-Expenditure incurred by the employer towards annual or periodical fee etc. (excluding initial fee to acquire corporate membership) less amount recovered from the employee is a taxable perquisite. Expenses incurred on club facilities for the official purposes are exempt from tax. Use of health club, sports and similar facilities provided uniformly to all employees shall be exempt from tax.
6. Gifts or Vouchers:-Gift or vouchers received by employees or by member of his household on ceremonies or occasions are taxable perquisites in the hands of the employees in excess of Rs. 5,000/-.
7. Interest free concessional Loan:-Interest rate charged by SBI on similar loan as on 1st April of the P.Y. minus the interest rate recovered from employee.
8. Income-tax paid by employer on behalf of the employee on non-monetary perquisites then such amount of Income-tax is exempt in the hands of the employee.
9. ESOP, Sweet Equity Taxation: Fair Market value of shares or securities on the date of exercise of option by the assessee, minus amount recovered from the employee in respect of such shares shall be the taxable value of perquisites. Fair Market Value shall be: a) In case of listed Shares: Average of opening and closing price as on date of exercise of option (Subject to certain conditions and circumstances) b) In case of unlisted shares/ security other than equity shares: Value determined by a Merchant Banker as on date of exercise of option or an earlier date, not being a date which is more than 180 days earlier than the date of exercise of the option.
10. Expense incurred at Medical facilities in India
A) Expense incurred or reimbursed by the employer for the medical treatment of the employee or his family (spouse and children, dependent - parents, brothers and sisters) in any of the following hospital is not chargeable to tax in the hands of the employee: (a) Hospital maintained by the employer. (b) Hospital maintained by the Government or Local Authority or any other hospital approved by Central Government (c) Hospital approved by the Chief Commissioner having regard to the prescribed guidelines for treatment of the prescribed diseases. B) Medical insurance premium paid or reimbursed by the employer is not chargeable to tax. C) Any other expenditure incurred or reimbursed by the employer for providing medical facility in India is not chargeable to tax up to Rs. 15,000 in aggregate per assessment year.
11. Expense incurred at Medical facilities outside India: Any expenditure incurred or reimbursed by the employer for medical treatment of the employee or his family member outside India is exempt to the extent of following (subject to certain condition): (a) Expenses on medical treatment - exempt to the extent permitted by RBI. (b) Expenses on stay abroad for patient and one attendant - exempt to the extent permitted by RBI. (c) Expenditure incurred on travelling of patient and one attendant- exempt, if Gross Total Income (before including the travel expenditure) of the employee, does not exceed Rs. 2, 00,000/-
12. Car Perquisite:
Where the car is owned by the employee, used completely for personal purposes and expenses are incurred by employer:-Actual amount of expense (depreciation, interest, fuel, insurance & maintenance etc.) incurred will be taxable
Where the car is owned by the employee, used partially for personal and partially for official purposes and expenses are incurred by employer: - Value of perquisite: Actual amount of expense incurred minus Rs. 1800 p.m. (where the car engine is up to 1.6L C.C.) or Rs. 2400p.m. (where the car engine is above 1.6L C.C.), Plus add Rs. 900 p.m. for driver facility
Where the car is owned/hired by the employer, used completely for personal purposes and expenses are incurred by employer: - Actual amount of expense incurred plus Salary paid to driver (If any) plus Depreciation @ 10% of Cost (if Car is owned by Employer)
Where the car is owned/hired by the employer, used partially for personal and partially for official purposes and all expenses are borne by employer:- Value of perquisite: Rs 1800 p.m. (where the car engine is up to 1.6L C.C.) or Rs 2400p.m.(where the car engine is above 1.6L C.C.) plus Rs. 900 p.m. for driver facility
Where the car is owned/hired by the employer, used partially for personal and partially for official purposes and only official expenses are borne by employer:- Value of perquisite: Rs 600 p.m. (where the car engine is up to 1.6L C.C.) or Rs 900p.m.(where the car engine is above 1.6L C.C.) plus Rs. 900 p.m. for driver facility
Note: In case of all perquisites, if any amount is recovered from the employee, then the same has to be deducted from the value of perquisite to arrive at the taxable value of perquisite.
Income-tax paid by employer
If the employer pays Income-tax on behalf of the employee on non-monetary perquisites then such amount of Income-tax is exempt in the hands of the employee.
Standard Deduction for Salaried Individuals
Standard deduction refers to a straight reduction of salary income up to Rs.50,000/-.
To get the deduction, a taxpayer should be salaried or pensioner only. Unlike other allowances, an employer is not required to submit any bill or expense vouchers for claiming the deduction. If a taxpayer’s income is less than Rs.50,000/- under the head “Income from Salary” and his total income exceeds Rs.2,50,000/-. Than such taxpayer can claim his total salary income as standard deduction and file tax return.
Standard deduction is not available in the case of Pension from other than Employer because it is taxable under the head Income from other Sources as employer-employee relationship doesn’t exist therefore it will not be taxed under the head Income from salary and the deduction is only for salary or pension income.
Frequently Asked Questions-Income Tax website