Income from Salary
What is meant by Income from Salary?
Largest number of taxpayers (more than 80%) file their income tax returns reporting income from salary. The salary is the remuneration received by or eligible to be received by an individual against the services rendered by him to his employer as per the express or implied contract of terms of service (letter of appointment). It is important to remember that even if a receipt in the hands of an individual is named as salary or remuneration, the same may not be qualified as ‘salary income’ within the meaning of Income Tax Act. There must exist a relationship of employer-employee or master- servant between the payer and payee of the remuneration. Again, the instance of mere payment of the amount will not qualify certain receipt as salary but there must exist a ‘right to receive’ remuneration on the part of an employee from the employer.
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The salary or remuneration received by a member of parliament (MP) or Member of Legislative Assembly (MLA) is NOT salary whereas the remuneration received by a Minister is taxable as ‘salary’.
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The remuneration received by a partner of the firm is taxable NOT as salary but is taxable as Income form business and profession
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The pension received by an employee for past employment is taxable as salary whereas the pension received by his family (family pension) after his death is taxable as income from other sources
The salary income is taxed either on receipt basis or due basis whichever is earlier. This means, if your salary is due on the last day of the month but you have received the salary in next month, then the salary becomes taxable in the month when it was due. If the employer does not pay the salary within time and some of the salary or all the salary is not paid by the employer in any financial year, the salary will still be taxable on due basis.
Sections of Income Tax Act on salary
The sections of the Income tax Act which deal with income from salary are as under
Section of the I T Act | Sub-section | Contents |
|---|---|---|
Section 15 | Charging section of salary, it defines the meaning of salary and what is included under salary | |
Section 16 | Deductions from Salary; Standard Deduction | |
Section 17 | 1 | Salary includes pension, wages, annuity etc. (mentions inclusions in income from salary) |
2 | Perquisites to be included; valuation of perquisites | |
3 | Profits in lieu of salary and what is included therein |
Components of Income from Salary
The section 17 of the Income Tax Act mentions various receipts which are taxable as income from salary. Broadly, these are categorized into basic salary or wages, allowances and perquisites and Profits in lieu of salary. These receipts are discussed below:
Basic Salary
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This is the wages for the work done or services rendered by an employee to an employer through an employer-employee relationship. This is mentioned in the pay-slip of an employee as a basic salary.
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This is fully taxable as Income from salary
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Sometimes, the basic salary is received as advance salary. This amount of advance salary is taxed on the receipt basis
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Sometimes the basic salary is received for the services rendered by the employee in past. Such salary is called as ‘arrears of salary’. This is fully taxable in the year in which it is received on receipt basis if it is not taxed in the year when it was due. However, the taxpayer can claim relief under section 89 of the I T Act.
Dearness Allowance
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The cost of living increases during a period and such increase is called as ‘inflation’. This inflation is measured through Consumer Price Index (CPI). In order to offset the effects of inflation, the employer pays Dearness Allowance (DA) to the employees.
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The DA is paid generally paid by the Government to its employees and the employees in public sector units. The DA is computed as a percentage of basic salary. This percentage is computed keeping in mind the Consumer Price Index and the formula recommended by Central Pay Commission.
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The Dearness Allowance is fully taxable as a part of basic salary. The amount of basic salary and DA is often needed for computation of various allowances under the head of income from salaries.
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Know More about Dearness Allowance
House Rent Allowance
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The salaried employees who live in a rented accommodation tend to receive House Rent Allowance from their employer to meet the expenses on rent for accommodation. Such an allowance is a part of salary and is indicated separately in the salary slip. The total amount of HRA received in one year or the period of the year with a particular employer (if an employment is for a part of the year with a particular employer) is mentioned separately in Form No. 16.
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Entire amount of HRA is not taxable in all cases. For TDS to be done by your employer, you must provide the correct amount of taxable HRA to the employer for inclusion in the taxable salary on which TDS is deducted.
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For computing the taxable HRA, you must know your basic salary and DA, the city you live in whether it is a metro city or a non-metro city, the amount of HRA for a year and the amount of rent paid by you. Then the taxable amount of HRA shall be least of the following
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Please note that if you live in your own house or if you have not paid any rent in the year, then your entire HRA shall be taxable
Calculate my HRA exemption (link to HRA calculator)
Other Allowances
Sr. No. | Allowance granted by an employer | Amount exempt from tax |
|---|---|---|
1 | Children education allowance | Up to Rs. 100 per month per child up to a maximum of 2 children is exempt |
2 | Hostel expenditure allowance | Up to Rs. 300 per month per child up to a maximum of 2 children is exempt |
3 | Transport allowance granted to an employee to meet expenditure on commuting between place of residence and place of duty for the blind persons and persons with disability | Rs. 3200 per month for blind and handicapped employees is exempt |
4 | Allowance granted to an employee working in any transport business to meet his personal expenditure during his duty performed during running of such transport from one place to another place provided employee is not in receipt of daily allowance. | mount of exemption shall be lower of following:
a) 70% of such allowance; or
b) Rs. 10,000 per month. |
5 | Conveyance allowance granted to meet the expenditure on conveyance in performance of duties of an office | Exempt to the extent of expenditure incurred for official purposes |
6 | Travelling allowance to meet the cost of travel on tour or on transfer | Exempt to the extent of expenditure incurred for official purposes |
7 | Daily allowance to meet the ordinary daily charges incurred by an employee because of absence from his normal place of duty | Exempt to the extent of expenditure incurred for official purposes |
8 | Helper/Assistant allowance | Exempt to the extent of expenditure incurred for official purposes |
9 | Research allowance granted for encouraging the academic research and other professional pursuits | Exempt to the extent of expenditure incurred for official purposes |
10 | Uniform allowance | Exempt to the extent of expenditure incurred for official purposes |
11 | Any allowance or perquisite paid or allowed by Government to its employees (an Indian citizen) posted outside India | Fully Exempt |
12 | Allowances paid by the UNO to its employees | Fully Exempt |
13 | Special compensatory Allowance (Hilly Areas) (Subject to certain conditions and locations) | Amount exempt from tax varies from Rs. 300 to Rs. 7,000 per month. |
14 | Border area, Remote Locality or Disturbed Area or Difficult Area Allowance (Subject to certain conditions and locations) | Amount exempt from tax varies from Rs. 200 to Rs. 1,300 per month. |
15 | Tribal area allowance in (a) Madhya Pradesh (b) Tamil Nadu (c) Uttar Pradesh (d) Karnataka (e) Tripura (f) Assam (g) West Bengal (h) Bihar (i) Orissa | Up to Rs. 200 per month is exempt |
16 | Compensatory Field Area Allowance. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations) | Up to Rs. 2,600 per month is exempt |
17 | Compensatory Modified Area Allowance. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations) | Up to Rs. 1,000 per month is exempt |
18 | Counter Insurgency Allowance granted to members of Armed Forces operating in areas away from their permanent locations. If this exemption is taken, employee cannot claim any exemption in respect of border area allowance (Subject to certain conditions and locations) | Up to Rs. 3,900 per month is exempt |
19 | Underground Allowance to employees working in uncongenial, unnatural climate in underground mines | Up to Rs. 800 per month is exempt |
20 | High Altitude Allowance granted to armed forces operating in high altitude areas (Subject to certain conditions and locations) | a) Up to Rs. 1,060 per month (for altitude of 9,000 to 15,000 feet) is exempt
b) Up to Rs. 1,600 per month (for altitude above 15,000 feet) is exempt |
21 | Highly active field area allowance granted to members of armed forces (Subject to certain conditions and locations) | Up to Rs. 4,200 per month is exempt |
22 | Island Duty Allowance granted to members of armed forces in Andaman and Nicobar and Lakshadweep group of Island (Subject to certain conditions and locations) | Up to Rs. 3,250 per month is exempt |
Perquisites
What are perquisites
As per the Income tax Act, the taxable salary includes basic salary, allowances, perquisites and profits in lieu of salary. Normally it is very difficult to perceive the difference between perquisites and allowances. The allowances are generally paid in cash and are because of reimbursement of certain expenses incurred by employee in discharge of duties. These allowances are part of the pay package of the employee however the perquisites are not explicitly mentioned as a pay package of the employee.
Perquisites are nothing but the benefits that are enjoyed by or entitles to a person because of his position or job. The perquisites are to be included in the taxable salary for the purposes of computation of taxable salary income. Since most of the time, the perquisites are paid in kind and not in cash, they need to be valued for an equivalent amount of cash to be included in salary income. The employee must value them and provide such a valuation to his/her employer for the purposes of deduction of tax (TDS). The valuation of perquisites is given in Rule 3 of Income tax Rules.
Most Common Perquisites
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Rent free accommodation
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Provision of motor car
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Free or concessional educational facility
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Supply of gas, electricity and water
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Provision for sweeper, gardener, watchman or personal attendant
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Interest free or concessional loans
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Club membership provided by the employer
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Employee Stock Ownership Plan (ESOP)
Valuation of perquisites
The taxable value of the perquisites is generally the amount of expenditure incurred by the employer for providing such services to the employee. However, in some cases such value is determined as prescribed in Rule 3 of Income tax Rules. Few important perquisites and their valuation are discussed below.
Rent free accommodation
Facility | Government Employees | Other than Government Employees |
|---|---|---|
Un-furnished accommodation | License Fees as determined minus rent paid by the employee | 5% of salary in cities having population exceeding 25 lakhs as per 2001 census;
0% of salary in cities having population exceeding 10 lakhs but not exceeding 25 lakhs as per 2001 census;
7.5% of salary in other areas |
Furnished accommodation | License Fees as determined minus rent paid by the employee + 10% of the cost of furniture and if the furniture is hired from a third party, then hire charges for the furniture less any hire charges paid by an employee | Value as determined for unfurnished accommodation + 10% of the cost of furniture and if the furniture is hired from a third party, then hire charges for the furniture less any hire charges paid y an employee |
Hotel accommodation | NA | 24% of salary paid or payable for the previous year or the actual charges paid or payable to such hotel, which is lower, for the period during which such accommodation is provided as reduced by the rent, if any, paid or payable by the employee |
Note: In case, the accommodation is taken on rent by an employer from a third party then such value of the perquisites shall be the rent paid by an employer to such third party or 15% of the amount of salary whichever is lower. If the employee pays a part of the rent or rent such a rent paid shall be reduced from the amount of value of perquisites.
Provision of motor car
This is a very common perquisite. The valuation of this perquisite depends upon the ownership of the motor car, who maintains the car and use of the car for official and personal purposes. This is discussed in detail below:
Sr. No. | Circumstances | Where cubic capacity of engine does not exceed 1.6 litres | Where cubic capacity of engine exceeds 1.6 litres |
|---|---|---|---|
1 | Motor car is owned or hired by the employer | ||
(a) Solely used for official purposes | No value: | No value: | |
(b) solely for private or personal use of employee | Actual amount of expenses incurred by an employer for running car and chauffeur and depreciation minus amount charged by employer to an employee’s account | Actual amount of expenses incurred by an employer for running car and chauffeur and depreciation minus amount charged by employer to an employee’s account | |
(c) Partly official and personal use | |||
(i) Car running expenses are met by employer | Rs. 1,800 (+ Rs. 900 for chauffeur) | Rs. 2,400 (+ Rs. 900 for chauffeur) | |
(ii) Car running expenses are met by employee | Rs. 600 (+Rs. 900 for chauffeur) | Rs. 900 (+ Rs. 900 for chauffeur) | |
2 | Employee owns the car but car running expenses are met by the employer | ||
(a) Solely used for official purposes | No value | No value | |
(b) Partly official and personal use | Actual amount of expenditure incurred by employee reduced by Rs.1800 (+ Rs. 900 for chauffeur) | Actual amount of expenditure incurred by employee reduced by Rs.2400 (+ Rs. 900 for chauffeur) |
Free or concessional educational facility:
Sr. No. | Nature of facility | Value of perquisite |
|---|---|---|
1 | Educational facility owned and maintained by employer or employer can influence admission in such facility | Cost of such education in nearby locality minus the cost borne by the employee minus Rs.12,000/- |
2 | Educational facility NOT maintained and owned by employer | The cost of such educational facilities in nearby locality minus the cost borne by the employee |
Supply of gas, electricity and water
Sr. No. | Facility | Value of a perquisite |
|---|---|---|
1 | Supply of gas, electricity and water from a facility owned by employer | Cost of manufacturing such products or service |
2 | Supply of gas, electricity and water from a facility NOT owned by employer | Actual amount paid for by the employer for providing such products or services minus the amount paid by or recovered from the employee |
Provision for sweeper, gardener, watchman or personal attendant
The amount paid by the employer for purchasing such services meaning the amount of salary paid to these personnel reduced by the actual amount paid by the employee or recovered from the employee.
Interest free or concessional loans
The value of the perquisite shall be the amount of interest on such loans at the interest rates charged by State Bank of India in case of the loans for the same purpose as have been obtained by the employee. Such value will be reduced by the amount of interest paid by the employee on such loans.
Club Membership provided by the employer
The value of such a perquisite shall be the actual amount of expenditure incurred by the employer for getting membership of such a club. If the club membership is obtained through a corporate arrangement, then the initial fees for such a membership may not be included in the value of such perquisites.
Employee Stock Ownership Plan
Taxability of ESOPs
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An employee stock ownership plan (ESOP) is a qualified defined-contribution employee benefit plan designed to invest primarily in the stock of the sponsoring employer. The ESOPs are beneficial to the employee, the selling shareholder and the company since each of them may get some or the other benefits. These ESOPs are employed as a corporate strategy by employers to build partnership and belongingness towards a corporate organization.
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These may act as an incentive to the employees for working towards building a value for shareholders. These are also called as ‘Sweat Equity Shares’. These securities or shares are transferred to the employee either free of cost or at a concessional rate.
How are ESOPs taxed?
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The ESOPs are taxed in the hands of the employees as a perquisite as per Section 17(2) of the Income tax Act, 1961. However, there will be an issue with determination of value of such shares or securities which are transferred to the employees. This value is determined as follows:
In case of shares listed on a Recognized Stock Exchange
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In a case where, on the date of exercise of the option, the share in the company is listed on a recognized stock exchange in India, the fair market value shall be the average of the opening price and closing price of the share on that date on the said stock exchange.
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Where, however, on the date of exercise of the option, the share is listed on more than one recognized stock exchanges, the fair market value shall be the average of opening price and closing price of the share on the recognized stock exchange which records the highest volume of trading in the share.
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Where on the date of exercise of the option, there is no trading in the share on any recognized stock exchange in India, the fair market value shall be the closing price of the share on any recognized stock exchange on a date closest to the date of exercise of the option and immediately preceding such date.
What does ‘Price’ mean?
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The “closing price” of a share on a recognized stock exchange on a date shall be the price of the last settlement on such date on such stock exchange. Where the stock exchange quotes both “buy” and “sell” prices, the closing price shall be the “sell” price of the last settlement. “Opening price” of a share on a recognized stock exchange on a date shall be the price of the first settlement on such date on such stock exchange. Where the stock exchange quotes both “buy” and “sell” prices, the opening price shall be the “sell” price of the first settlement.
In case of shares NOT listed on a Recognized Stock Exchange
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In such cases, the fair market value shall be such value of the share in the company as determined by a merchant banker on the date of exercise of the option or any date earlier than the date of exercise of the option, not being a date, which is more than 180 days earlier than the date of exercise of the option.
Profits in lieu of Salary
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This is an important component of the income from salary and must be considered while computing income under the head SALARY
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The salaried individual is entitled to receive certain kinds of receipts which are qualified to be computed as profits in lieu of salary. These are discussed below.
Leave Encashment on Retirement (section 10(10AA) of the Income tax Act)
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When an employee retires on completion of a service with employer, sometimes he is paid cash amount equivalent of the unutilized leave at the time of such retirement.
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The Government employees are universally paid this amount at the time of retirement if they have leave at their credit. In this case the entire amount of leave encashment is TAX FREE
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The taxability of such an amount of leave encashment in respect of employees other than Government employees is as under:
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In respect of other employees least of the following shall be exempt from tax (Applies to leave encashment received from more than one employer)
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Cash equivalent of leave entitlement to the maximum extent of 30 days for every completed year of actual service rendered for the employer from whose service the employee has retired.
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10 months’ average salary. Average salary is to be calculated based on average salary drawn during the period of 10 months immediately preceding the retirement/superannuation
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Actual amount of leave encashment received at the time of retirement.
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300,000/-
Retrenchment Compensation (section 10(10B) of the Income tax Act)
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Retrenchment means the termination of the employment of employee other than dismissal out of punishment or voluntary retirement. This is generally done as a measure to reduce the expenditure by an organization when it is going through financial difficulties.
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When the employees are subjected to retrenchment, an organization pays them the compensation which is termed as ‘retrenchment compensation’. This compensation is exempt upto certain amount u/s 10(10B) of the Income tax Act as follows:
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Least of the following amount shall be not taxable:
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Amount calculated at 15 days’ average pay for every completed year of continuous service (service more than 06 months will be considered as a year)
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500,000 OR
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Actual amount of compensation received
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Pension (Section 10 (10a) of Income Tax Act)
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Pension is received by the employee on retirement from service. Part of such pension can be claimed by employee on a lump sum basis and is called as commuted pension and rest is un-commuted
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If the employee is eligible for a pension of Rs. 50,000/- he may claim commuted pension of Rs. 10000/- per month for next ten years. Hence, his commuted pension in lump sum is Rs.12,00,000/- and then he will receive Rs. 40,000/- as pension for 10 years and afterwards 50,000/- per month.
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The taxability of pension depends upon whether it is a commuted pension or un-commuted pension. The un-commuted pension is fully taxable except in cases of Gallantry Award winners and United Nations employees.
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The family pension received by the widows and children of military personnel where the death of such personnel occurred during circumstances involving operational duties is exempt from tax.
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The commuted pension in case of Government Employees is fully exempt and not taxable.
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The commuted pension in case of employees other than Government employees is exempt up to a certain limit as follows:
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Where employee has received gratuity, commuted value of one-third of pension is exempt.
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In other cases, commuted value of one-half of such pension is exempt.
Illustrated:
A pension of a retired employee is fixed at Rs.60000 per month. He commuted Rs.30000 out of his pension for next ten years and received Rs. 36,00,000/- as commuted pension amount. Then,
In case of (a) commuted value equivalent to one third of pension shall be exempt which works out to (3600000 X 20000/30000) Rs. 24,00,000/- shall be exempt.
In case of (b) above, 1200000 X 30000/10000=36,00,000/- shall be exempt from tax.
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In case the Pension is received by an individual from the LIC Pension Fund or any other Insurer, the entire pension received is exempt from tax.
Know more about pension and taxation of retirement benefits
Gratuity
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The gratuity received by the Government employees is fully exempt from tax.
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In case of the employees other than the Government employees, the least of the following amounts shall be exempt from tax:
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Actual amount of gratuity received
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Amount calculated at 15 days’ wages for each completed year of service or part thereof more than 6 months
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Amount of Rs. 20,00,000/-
Know more about gratuity and taxation of retirement benefits
Compensation on Voluntary Retirement from Service (VRS)
Employees of some of the undertakings of Government are eligible to be covered under the Voluntary Retirement Scheme (VRS). On such VRS, they are eligible to receive a certain amount in lumpsum which is known as VRS compensation.
The employees of following organizations are eligible for VRS
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Public sector companies.
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Any other company.
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Authority established under a Central, State or Provincial Act.
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A Local authority.
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A Co-Operative society.
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Universities.
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Indian Institutes of Technology.
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Notified Institutes of Management:
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Indian Institute of Management, Ahmadabad
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Indian Institute of Management, Bangalore
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Indian Institute of Management, Calcutta
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Indian Institute of Management, Lucknow
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Indian Institute of Foreign Trade, New Delhi
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Central Government (from 1-4-2002).
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State Government (from 1-4-2001)
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Other notified Institutions are as under:
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International Crops Research Institute for the Semi-Arid Tropics.
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Action for Food Production, New Delhi (AFPRO).
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Government Tool Room & Training Centre, Rajajinagar Industrial Estate, Bangalore.
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The compensation received because of VRS is eligible for exemption from tax upto Rs. 500,000/- or received whichever is lower.
The exemption is available ONLY once and cannot be claimed in more than one A Y.
What are the guidelines laid down for VRS Scheme?
These guidelines are laid down in rule 2BA of the Income tax Rules, which stipulate that the scheme framed by the employer should be in accordance with the following requirements:
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It applies to an employee who has completed ten years of service or completed 40 years of age.
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It applies to all employees except directors of a company or of a co-operative society.
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The scheme of voluntary retirement or separation is intended to result in overall reduction in the existing strength of the employees.
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The vacancy caused by voluntary retirement or voluntary separation is neither to be filled up nor the retired or separated employee be absorbed in any other company or concern under the same management.
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The amount received or receivable on VRS of the employees does not exceed the amount equivalent to three months’ salary for each completed year of service OR salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation.
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What does the salary mean for computation of VRS compensation? The salary in connection with computation of VRS compensation means the Basic Salary and Dearness allowance and turnover commission, if it has formed the basis of computation of income from salary.
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A lump sum payment made gratuitously or by way of compensation or otherwise to the widow or other legal heirs of an employee, who dies while still in active service, is not a taxable income. Circular No. 573, dated 21-8-1990.
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There can be situations in which a person or his heir receives ex gratia payment from the Central Government/State Government/Local Authority/Public Sector Undertaking, consequent upon injury to the person/death of a family member, while on duty. Such an ex gratia payment will not be liable to income-tax. Circular No. 776, dated 8-6-1999
Know more about gratuity and taxation of retirement benefits
Taxability of receipts from and payments to various Provident Funds
What are the kinds of provident funds?
There are different kinds of provident funds, which are utilized by a person for the purposes of investments and regular savings. These funds differ from each other in their operation and taxability. They are also governed by different set of rules.
The Provident Funds are categorized as follows:
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Statutory Provident Fund/General Provident Fund– This is set up under the Act of the Parliament i.e. Provident Funds Act, 1925. This fund is maintained by Government and Semi-Government organizations. The Government employee contributes a certain amount of salary to this fund. The accumulations in this fund are paid to the Government employee at the time of retirement or superannuation. Every Government employee can have this account but the GPF is not available to the private sector employees. This fund can be used to draw advances known as GPF advances which are interest free and are to be repaid in monthly installments. There is no bar on number of GPF advances. This fund matures at retirement or superannuation.
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Recognized Provident Fund– This fund is one which is recognized by the Commissioner of Income-tax according to the rules and provisions contained in the Income-tax Act. It includes a provident fund established under a scheme framed under the Employees’ Provident Funds Act, 1952. This fund is maintained by private sector organizations. This is a popular Employees Provident Fund. Any employer with 20 or more employees must register with this EPF and contribute to this Fund.
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Public Provident Fund– This Fund is an investments and tax saving instrument for Resident Individuals. The PPF account can be opened at any of selected branches and subsidiaries of designated nationalized banks and selected post office branches. The minimum contribution for investment is Rs. 500 and maximum is Rs.1.5 lacs. It is a 15 years scheme and the account mature only after 15 years. There is no room for premature withdrawal with PPF. There is no facility of loans or advance from PPF or against PPF.
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Unrecognized Provident Fund – Unrecognized provident fund is that provident fund which is neither a statutory provident fund nor a recognized provident fund and which is also not a public provident fund.
The issue of taxability in respect of these funds arises at the time of paying contributions into the fund, receiving the matured amount from the fund and the interest earned on the fund. The taxability at each of the stage is discussed as under:
Type of Provident Fund | Statutory provident fund | Recognized provident fund | Unrecognized provident fund | Public Provident Fund |
|---|---|---|---|---|
Employer’s contribution to provident fund | Exempt from tax | Exempt up to 12 per cent of salary; excess of employer’s contribution over 12 per cent of salary is taxable | Exempt from tax | Not Applicable
(even if employee deposits into your PPF, it will be treated as part of salary) |
Deduction under section 80C on employee’s contribution | Available | Available | Not available | Deduction is available on contribution made by account holder |
Interest credited to provident fund | Exempt from tax | Exempt from tax if rate of interest does not exceed the notified rate; otherwise, excess of interest over the notified rate is taxable | Exempt from tax | Fully exempt |
Lump sum payment at the time of retirement or termination of service. | Exempt from tax | Exempt from tax in some cases, otherwise provident fund will be treated as an un-recognized fund from the beginning | Payment received in respect of employee’s own contribution is exempt from tax, Interest on employee’s contribution is taxable under the head “Income from other sources” and balance is taxable under the head “Income From Salaries”. However, relief can be claimed under section 89(1) | Fully exempt |
Taxability of receipts from and payments to Approved Superannuation Funds
Kind of receipt income | Taxability |
|---|---|
Employer’s contribution to Superannuation Fund | Fully exempt |
Deduction under section 80C on employee’s contribution | Available |
Interest on accumulated balance | Fully exempt |
Lump sum payment at the time of retirement or termination of service. | Exempt from tax with following conditions:
Exemption is available only in respect of the payments received on retirement at or after a specified age.
Payments made on resignation will be exempt only if it is after the specified age.
Amount transferred from approved superannuation fund to New Pension System account shall be exempt |
Leave Travel Concession
An employee (particularly a Government Employee) receives an amount against expenses incurred by him towards Leave Travel Concession. Such an amount is part of the Income from Salary. However, such an amount is exempted from tax vide the provisions of section 10(5) of the Income Tax Act.
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The exemption is admissible in respect of actual expenditure incurred for journeys performed, not only by the assessee but also by his family and not in respect of expenses other than journey
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LTC as well as exemption is available in respect of only TWO children.
Compensation
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The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the modification of the terms and conditions of the employment is taxable as profits in lieu of salary. The assessee can, however, claim relief under section 89(1) of the I T Act.
Lump sum incentives
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Any amount due to or received, whether in lump sum or otherwise, by any assessee from any person, before his joining any employment with that person, or after his cessation of employment with that person, will be treated as ‘profits in lieu of salary’ and brought to tax under the head, ‘Income from Salary’.
Keyman Insurance Policy
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Sums received under Keyman Insurance Policy are taxable under the head ‘Salaries’, if the recipient is an employee.
Other receipts qualifying as profits in lieu of salary are as under:
Sr. No. | Component | What it means | Taxability |
|---|---|---|---|
1 | Bonus | This is received by employee as a reward for performance | This is taxable in the year of receipt |
2 | Notice Salary | Salary received in lieu of notice by the employer or employee | This is taxable in the year of receipt |
3 | Remuneration for extra work | The remuneration paid by the employer against extra work done by the employee | This is fully taxable as income from salary |
4 | Compensation | This is received against termination of employment or modification of terms of employment | This is fully taxable as Income from salary |
5 | Annuity | An annuity is received from the employer on termination of service | This is taxable as profits in lieu of salary in the year of receipt |
New Pension Scheme and its taxability
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A New Pension Scheme (NPS) is a Defined Contribution Pension Scheme which was introduced by Government of India from 01.01.2004. Initially, the Scheme was meant only for all new entrants to Central Government service on or after 1-1-2004. Later, the Scheme was made open also to the employees of the State Governments and other Government Bodies.
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Further from 1-5-2009, the NPS Scheme is opened for all those citizens of India falling in the age groups of 18 to 55.
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The Scheme named a ‘Swavalamban’ was launched in Financial Year 2010-11. Under the said scheme, the Government shall pay matching contribution of maximum amount of Rs. 12000 for a year or minimum amount of Rs.1000/- per year for a period of five years for all the subscribers enrolled from 01.04.2010 to 31.03.2012. Further, under this scheme, the subscriber will be allowed to exit at the age of 50 years instead of 60 years or a minimum tenure of 20 years whichever is earlier.
What are the features of the NPS?
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This is a Defined Contribution Pension Scheme having two tiers i.e. Tier-I and Tier-II.
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Tier-I is mandatory, and individuals will have to contribute 10 per cent of salary (Basic+DA) if they are employees. Government or any other employer will make an equal matching contribution.
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Tier-II is optional, and at the discretion of the employee, into which employees can make additional contributions over and above the mandatory contribution with Tier-I. The employer is not bound to make any contribution to NPS Tier-II. However, if the employer makes any contribution to NPS, then the same shall be treated as taxable income of employee at par with the income from salary.
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The amounts invested in Tier-I cannot be withdrawn whereas the amounts invested in Tier-II can be withdrawn at the option of the assessee.
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Based on the investments of the investor employee in equities or fixed income instruments, the investor will be offered the choice of the schemes A, B or C.
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An independent Pension Fund Regulatory and Development Authority (PFRDA) will regulate and develop the pension market, to create a pension fund for everyone.
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The employee investor cannot exit from Tier-I of NPS before 60 years or after 70 years.
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At the time of exit, the employee must invest 40% of the amount of pension fund created to purchase an annuity from an Insurance company for providing insurance to himself and his spouse. In case the employee exits NPS before attaining the age of 60 years, the annuitization will be mandatorily at 80% of the pension fund.
Taxation issues in New Pension Scheme
Employer’s contribution is treated as ‘income’
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The amount of matching contribution made by the employer to the NPS account of the employee shall be treated as income from SALARY (Section 7(iii) and Section 17(1) (viii) of the Income tax Act.
Deduction on contributions under section 80CCD
The elements of NPS are the employees’/individual’s contribution, employer’s contribution and withdrawal from the NPS account at maturity. The tax treatment of these is as under:
Sr. No. | Particulars | Maximum deduction under relevant section | Cumulative maximum deduction [Sec. 80CCE] | Section of the I T Act |
|---|---|---|---|---|
1 | Employee’s contribution or assessees’s contribution towards NPS | 10% of salary OR
For a self-employed person: 10% of GTI) | 150000/- (coupled with section 80C and section 80CCC) | Section 80CCD(1) |
2 | Contribution to NPS by any individual | Rs. 50,000 | Not applicable | Section 80CCD(1B) |
3 | Contribution to NPS by any individual | Rs. 50,000 | Not applicable | Section 80CCD(2) |
Deductions from gross salary:
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Entertainment allowance
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Deduction is admissible to an assessee receiving salary from Government, equal to one-fifth of salary (exclusive of any allowance, benefit or other perquisite), or Rs. 5,000, or actual allowance received, whichever is less.
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Profession tax
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Where the employee has paid any profession tax under the relevant State law, the tax so paid is deductible from his gross salary income.
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Standard Deduction
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Beginning from F Y 2018-19 (A Y 2019-20) the Income tax Act allows standard deduction of Rs.40,000/- from income from salary. This means the employee can straightaway deduct Rs.40,000/- from the gross salary. There are no attached conditions for eligibility of such standard deduction.
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The standard deduction of Rs.40,000/- is allowed to the salaried taxpayer through insertion of clause (ia) in section 16 of the Income tax Act. Earlier, the medical expenditure allowance or the reimbursement against actual medical expenses allowed by the employer could be exempt up to maximum limit of Rs.15,000/-. However, from A Y 2019-20 this deduction is withdrawn by deleting sub-clause (v) to Proviso to section 17(2) (v) of the Income tax Act.
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Further, as per section 10 (14) and rule 2BB (1) the salaried taxpayers who were receiving transport allowance were entitled to exemption of Rs.1600/- per month i.e. 19,200/- per year. However, this is withdrawn from A Y 2019-20 and this exemption is allowed only in case of disabled persons.