Know Your Salary

Posted In India - By NitiN Kumar Jain On Tuesday, January 13th, 2009 With 0 Comments






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Salary Defined [Section 17(1)]
The term salary normally includes wages or salary due (whether paid or not), annuity, pension, gratuity, fees, commission, perquisites, advance salary paid or allowed, payment in lieu of leaves not availed, and any other payment received by an employee from the employer received during the year.

A. Allowances
Now what is Allowances so An allowance is a fixed money or substance or compensation given regularly in addition to salary to meet some service requirements. An allowance can be fully taxable, partly taxable or not taxable. The taxable allowances include city compensatory allowance, tiffin allowance, fixed medical allowance and servant allowances. The encashment of any concession is also taxable.

Their are different type of Allowances, read carefully about Allowances.

1. House Rent Allowance [Section 10(13A) and rule 2A]
Out of house rent allowance received during the year, the least of the following three amounts is exempt from the income:

  • The amount equal to 50% of annual salary, for persons staying in Mumbai, Chennai, Calcutta or Delhi, but 40%, for others
  • The actual amount of house rent allowance received for the rental accommodation of the employee, and
  • The amount of rent actually paid in excess of 10% of annual salary

The term “Salary” includes basic salary, DA, commission, but excludes allowances and perquisites. Exemption is not available where an employee lives in his own house, or in a house for which he does not pay any rent.
Exemption is not available where an employee lives in his own house, or in a house for which he does not pay any rent.

2. Transport/Conveyance allowance [Section 10(14) and rule 2BB]
Transport allowance given to employee for meet traveling expenses from residence to office is exempt up to Rs 800 per month.Conveyance allowance granted to meet the expenditure on conveyance in performance of duties of an office is exempt to the extent it is utilized for the purpose specified.

3. Academic or Research Allowance[Section 10(14) and rule 2BB]
Allowance granted for encouraging the academic, research and other professional pursuits is not taxable to the extent the allowance is utilized for the purpose specified.

4. Children Education Allowance
The allowance is not taxable to the extent

  • Rs. 100 per month per child up to a maximum of two children.
  • Any allowance granted to an employee to meet the hostel expenditure on his child at Rs. 300 per per child up to a maximum of two children.

5. Leave Travel Concession [sec 10(5)]
The amount payed by the employer for the employee and his family for travel to any place in India or for traveling to any place in India after retirement is exempt. If the journey is by rail, the amount of air-conditioned first class rail fare by the shortest route or the amount spent, whichever is less, is not taxable. If the travel is by air, then the economy class fare is not taxable.

The exemption is available on the expenses for two journeys in a block of four calender years. The current four-years block is from January 1, 2006 to December 32, 2009.

6. Medical Reimbursement/allowance.
Reimbursement by employer of amounts spent by the employee in obtaining medical treatment for himself or any member of family from any doctor, not exceeding Rs.15,000 in a year.

B. Perquisites
The following perquisites are not taxable either under the executive instructions of the Central Board of Direct Taxes or by virtue of specific provision in the Act/Rules:

1. Rent-Free House

  • Rent-free official residence provided to a judge of a High Court or of the Supreme Court.
  • Rent-free furnished residence (including maintenance thereof) provided to an official of Parliament, a Union Minister or a Leader of Opposition in Parliament
  • Accommodation provided in a ‘remote area’ to an employee working at a mining site or an onshore oil exploration site, or a project execution site or an accommodation provided in an offshore site of similar nature.
  • Accommodation provided on transfer of an employee in a hotel for not exceeding 15 days in aggregate.

2. Car

  • Reimbursement of expenses in respect of car (which is owned by employee and used for personal and official purpose) (amount not taxable is up to Rs. 1,200 per month for car having engine capacity of not more than 1600cc, Rs. 1,600 per month for car of above 1600cc and Rs. 600 per month for driver).
  • Conveyance facility provided to High Court Judges and Supreme Court Judges.
  • Conveyance facility provided to an employee to cover the journey between office and residence.

3. Interest-Free Loan
Interest-free / concessional loan of an amount not exceeding Rs.20,000

4. Others

  • Gift-in-kind up to Rs.5,000 in a year.
  • Employer’s contribution to staff group insurance scheme.

C. Leave Encasement (What is Leave Encasement)
Leave encasement while in service is taxable. Encasement of sick leave is taxable.
Leave encashment received at the time of retirement is fully exempt in the case of Government Servants. In the case of non-Govt. Employees, leave encasement is exempt to the extent of the least of the following four amount

  • Rs. 3,00,000/-
  • Ten months’ average salary; (Here the average salary means the average of the salary drawn during the last ten months before retirement),
  • Cash equivalent of the leave due at the time of retirement;
  • Leave encashment actually received at the time of retirement.

D. Gratuity [(section 10(10)]
Any death cum retirement gratuity received by an employee of the central government, state government or local authority is exempt from tax. For Non-Government Employees the taxability depends on whether Gratuity is covered under the Gratuity Act or not.

1. Gratuity covered under the Gratuity Act
For the Gratuity covered by the Gratuity Act, total of gratuity received by an employee from various employers in whole of service is exempt from tax to the extent of least of the following three amounts:

  • 15 days’ salary, based on the last drawn salary, for each completed year of service;
  • Rs. 3,50,000/-; or
  • The gratuity actually received.

The Gratuity in excess of this limit is taxable, however, the assessee can claim relief under section 89.

2. Gratuity not covered under the Gratuity Act
For Gratuity not covered under the Gratuity Act any gratuity not covered by the Gratuity Act, is exempt from tax to the extent of least of the three amounts

  • The half month’s salary for each completed year of service; or
  • Rs.3,50,000/-; or
  • The gratuity actually received.

The Gratuity in excess of this limit is taxable, however, the assessee can claim relief under section 89.

E. Voluntary Retirement or Separation Compensation (section 10(10C))
Compensation received at the time of voluntary retirement is exempt up to Rs 5 lakhs under certain conditions.

F. Provident Fund

Provident fund is deducted at 12% of the basic salary and DA (allowances are not included). Employer also contributes an equivalent amount. From the PF deducted 3.67% will be deposited by your employer to your EPF A/C & 8.33% to your FPF A/C ( Family Pension Fund). Employee can contribute more than this, but employer has choice. If a PF account is not used for one year, there may be service charges. You can deduct PF contribution under section 80C.

G. Deductions from Salary income

  • Professional Tax which is paid, is allowed as deduction. (The professional tax paid by a person carrying on a business or trade, can be allowed to him as a deduction under section 37(1) of the Income-tax Act, 1961),
  • If salary is received in arrears or in advance, it can be spread over the years to which it relates and be taxed accordingly as per section 89(1) of the Income tax Act.

-NKJ