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Tax Planning

Income From Salary

Now that we have understood the basic structure of taxes in India. We will start discussing how taxes are levied on income from salary.

 

What is the chargeability section of the income from salary?

 

Section 15 of the Act denoted the chargeability section of the income from salary. So for taxation purpose, salary shall comprise of the following:

  • any amount of salary due from the current or the former employer to an assessee in the previous year whether the salary is paid or not;
  • any amount of salary paid or allowed to the assessee , whether due or not;
  • arrear salary paid or allowed, if not taxed in the previous year.

Note:

  • Income from salary is chargeable either on receipt or due basis.
  • For the salary to be charged under section 15, the employer-employee must exist.

What are allowances and their treatment under the Act?

Allowances are part of the salary, which is paid as a fixed amount on a regular basis for a certain specific purpose. There are two types of allowances:

  • Taxable allowance
  • Exempt allowance

Let us discuss few of the important exempt allowances classified as below:

 

 

* The amount of allowance allowed means the amount given by the company.
* Other allowances not mentioned here can be read in details from the Income Tax Rules

 

Now, we will discuss about the third category of allowance which is based on the specific method of computation:

 

What is House Rent Allowance (HRA)?

HRA is the amount paid by an employer to an employee for meeting the rental expenditure.
As per the provisions of section 10(13) read with rule 2A, exemption for HRA shall be computed as follows:

 

Lower of the following:

  • 50% of salary (when residential house is located in the metro cities like Mumbai, Kolkata, Chennai or Delhi) and 40% when located in any other place.
  • HRA received  and incurred by the employee
  • Actual Rent paid – Minus 10% of salary

Let us understand this computation with the help of an example:

 

Example:

Ram is a sales engineer in XYZ limited, located in Jalandhar and the company is paying him the following:

  • Salary p.m. = ₹90,000 p.m.
  • HRA = ₹10,000 p.m.
  • Rent paid by him = ₹20,000 p.m.
  • Dearness Allowance = ₹12,000 p.m.

Computation of HRA:

Step 1: First we need to compute the exemption allowed, which will be lower of the following:

40% * Salary = 40* 1224000 = ₹4,89,600/-, where salary will be (90,000 + 12,000 = 102000*12 = 12,24,000). 

Annual HRA = 10,000 * 12 = 1,20,000

Rent paid – 10% of salary
= (20,000 * 12) -  10% (90,000*12)
= 2,40,000 – 10% * 10,80,000
= 2,40,000 – 1,08,000
=₹1,32,000

Lower  of the above shall be Rs. 1,20,000

 

Step 2: Computation of taxable HRA will be :

Annual HRA = 10,000 * 12 = 1,20,000
Less: Exemption as computed in step 1 = 1,20,000


                                         Taxable HRA     NIL

 

Note:  Practice a similar sum with the HRA amounting to ₹15,000 p.m

 

Perquisites

As per the provisions of section 17(2) of the Act, perquisites mean any benefit provided by the employer to the employee. 

In this section, we will discuss majorly about one of the most important perquisites taxable in the hands of employee – Rent Free Accommodation (RFA)

 

 

If the employer provides a hotel accommodation to the employee:

 

Lower of:

  • 24% of salary
  • Hotel charges paid

What is an Employment Provident Fund (PF)?

This scheme is set up for providing the employees with the retirement benefits. Under this, both employer and employee contribute the same sum towards the fund. While in the case of employees, the amount is deducted directly from their salary. 

The amount contributed by the employer and employee are invested in approved securities and any income earned from them are also credited in the employees account.

The cumulative amount of EPF is given to the employee at the time of retirement or resignation.

 

Different Types 

 

* However, a salaried employee may also contribute to this fund separately for himself and also for a minor on his/her behalf.

 

How are these funds treated for taxation purposes?

The tax treatment of each of the fund is shown below:

 

 

Key Points:

  • Standard deduction is the fixed amount of deduction from gross salary allowed to all the employees. For example, If total yearly salary income is ₹500,000 & standard deduction is ₹50,000, then Taxable income is ₹(500,000-50,000)= ₹450,000. It is climbed as an exemption. 
  • Leave encashment means the amount received for the un availed leave. This amount shall be taxed, when received during the period of service.
  • Gratuity is the amount received by the employee (who has completed five years of service or more) for the services rendered to the employer.

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