Income from Salary

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UNIVERSITY OF MUMBAI

RAYAT SHIKSHAN SANTHA’S

KARMAVEER BHAURAO PATIL COLLAGE

VASHI, NAVI MUMBAI

PROJECT REPORT ON

INCOME FROM SALARY

SUBMITTED BY

HARSHAD M. NAGARKAR

ROLL NO.

PROJECT GUIDE

PROF.MR. VIVEK H. BOHIR

IN PARTIAL FULFILMENT FOR THE COURSE OF

MASTERS IN COMMERCE (DIRECT AND INDIRECT TAX)

M.Com. Semester - III

ACADEMIC YEAR 2014-2015

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ACKNOWLEDGEMENT

I, would take this opportunity to thank the University of Mumbai for providing me an opportunity to study on a project on Income from salary. This has been a huge learning experience for me.

With great pleasure I take this opportunity to acknowledge people who have made this project work possible. First of all I would sincerely like to express my gratitude towards my project Guide Prof. VIVEK BOHIR for having shown so much flexibility, guidance as well as supporting me in all possible ways whenever I needed help. I am thankful for the motivation provided by my project guide throughout and helped me to understand the topic in a very effective and easy manner.

I would like to thank Principal Dr. V. S. Shivankar, and the coordinator of the course Prof. K.G.Tapase for their indirect support throughout. Aniket Patil. Without their support and conviction this project would not have been possible. I acknowledge my indebtedness and express my great appreciation to all people behind this work.

Signature

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DECLARATION

I, Harshad Milind Nagarkar student of KARMAVEER BHAURAO PATIL, COLLEGE, VASHI Studying in M.com.Sem.-III hereby declare that I have completed this project on Income from Salary as per the requirements of University of Mumbai as a part of the curriculum of M.com. Sem.-III course and this project has not been submitted to any other University or institute for the award of any degree, diploma etc. the information is submitted by me is true and original to the best of my knowledge.

Date: - --- ---Place: Vashi, Navi Mumbai.

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RAYAT SHIKSHAN SANTHA’S

KARMAVEER BHAURAO PATIL COLLEGE VASHI, NAVI MUMBAI – 400703

CERTIFICATE

This is to certify Harshad Milind Nagarkar Student of M.com. Sem. - III has completed this project on “Income from salary” and has submitted a satisfactory report under the guidance of Prof. in the partial fulfillment of M.com.Sem.-III course of University of Mumbai in the academic year 2014-2015

--- --- Project Guide Coordinator principal

---External

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OBJECTIVES

After reading this lesson, you should be able to understand: • Classification of income into various heads.

• Concept of salary income • Incomes forming part of salary

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• Types of commission an employee can get • The concept of allowances

• Various income tax provisions for computing taxable value of allowances • Computation of taxable value of allowances

RESEARCH METHODOLOGY

SECONDARY DATA

The secondary data has been collected from books, internet and research engine. There has been immense and valuable data which put forth for the compulsion of my project.

Index

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1 Introduction to salary 1-9

2 Allowances under salary 10-16

3 Perquisites under salary 7-20

4 Deductions under salary 21-22

5 Exemption under salary 23-29

7 Computation of salary 30-37

8 Conclusion

Biligophy

38

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Chaper1 INCOME FROM SALART (U/S 15-17) INCOME FROM HOUSE PROPERTY U/S 22-27 HEADS OF INCOME

PROFIT AND AGAIN FROM BUSINESS PROFESSINTON U/S (28-44)

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CAPTIAL GAINS U/S (45-55)

INCOME FROM OTHER SOURCE S U/S (56-59)

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Meaning of salary

The term salary usually refers to a payment for services. It means remuneration for services rendered to another person.

Basic elements of salary

 Payer and payee must have employer and employee relationship.

 Any payment received by an individual from a person other than his employer cannot be termed as salary.

Basis of charge

 Salary is chargeable to tax on due or on receipt basis whichever is earlier;  Salary received in advance is taxable in the year of receipt. Such salary

not be included again in the total income when it become due;

 Outstanding salary is taxable on due basis i.e. salary is taxable in the year in which it falls due.

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Definition of salary

As per section 17 (1) of the Income Tax, Salary includes: i) wages;

(ii) Any annuity or pension

(iii) Any gratuity;

(iv) Any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;

(v) Any advance of salary

(vi) Any payment received by an employee in respect of any period of leave not availed of by him;

(vi) The annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule; and

(vii) The aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule 11 of Part A of the Fourth Schedule of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof;

(viii) The contribution made by the Central Government [or any other

employer] in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD;

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1. The relationship of payer and payee must be of employer and employee for an income to be categorized as salary income. For example: Salary income of a Member of Parliament cannot be specified as salary, since it is received from Government of India which is not his employer.

2. The Act makes no distinction between salary and wages, though generally salary is paid for non-manual work and wages are paid for manual work.

3. Salary received from employer, whether one or more than one is included in this head.

4. Salary is taxable either on due basis or receipt basis which ever matures earlier:

I) Due basis – when it is earned even if it is not received in the previous year.

ii) Receipt basis – when it is received even if it is not earned in the previous year.

iii) Arrears of salary- which were not due and received earlier are taxable when due or received, whichever is earlier.

Chapter 2

Allowances

Extra compensation paid by the employer, apart from salary, due to presence of some unusual conditions in rendering the service is called allowance.

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Allowances by whatever name called is taxable. However following allowance are exempt to certain extent.

Some common allowance, which are exempt to the extent of amount received or the received other limit specified, whichever is less;

sr

no Nature of Allowance

limit specified (amount up to which exempt)

1 Children Education Allowance

Maximum of Rs. 100 p.m. per child up to maximum of 2 children

2 Hostel Expenditure Allowance for _{the children}

Maximum of Rs. 300 p.m. per month per up to maximum of 2 children

3

Transport Allowance to meet the expenditure for the purpose of commuting between the place of residence and the place of work

Maximum of Rs. 800 p.m. (Rs. 1600 p.m. if the employment is blind or orthopedically

handicapped).

Fully Exempt from tax Fully Taxable Allowance 1. Allowances to Govt. employees

outside India 1. Dearness Allowance 2. Allowances to high court

&Supreme Court judges.

2. City Compensatory Allowance

3. Allowance from United Nations

Organizations. 3. Rural Allowance 4. Special allowance 4. Proctorship Allowance

5. Warden ship Allowance 6. Project Allowance

7. Deputation Allowance 8. overtime Allowance 9. Interim Allowance 10.Tiffin Allowance

11.Fixed Medical Allowance 12.Servant Allowance

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Other Special Allowances

 Children Education Allowance

 Tribal Area Allowance

 Hostel Expenditure Allowance

 Remote Area Allowance

 Compensatory Field Area Allowance

 Counter Insurgency Allowance

 Border Area Allowance

 Hilly Area Allowance

Entertainment Allowance

It is the amount paid by employer for availing entertainment services. Under section 16(ii) of Income Tax Act, 1961 it is entitled to deduction in tax from is salary. But in this case deduction is given to his gross salary which also includes entertainment allowance. Deduction in tax against this allowance can be divided into two parts :

In case of Government employee entitled to minimum deduction of  Entertainment allowance received

 20% of basic salary excluding any other allowance

 Rs. 5000 In case of other employee entitled to minimum deduction of  (a) Entertainment allowance received

 20% of basic salary excluding any other allowance  Rs. 7500

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Specific allowances that are fully exempt in the hands of employees Allowance Conditions to claim full exemption

Travelling allowance Should be provided by the employer and spent by the employee to meet the cost of official tour or transfer

expenses. Cost of travel or transfer includes payments for transfer,

packing and transportation of personal effects.

Daily Allowance Should be spent by the employee for meeting the daily charges incurred on a tour or transfer.

Conveyance allowance Should be used by the employee to meet the expenditure on

conveyance in performance of official duties

Helper allowance Should be used by an employee to meet the expenditure on a helper who assists him in the performance of official duties

Academic allowance Should be used by the employee for his academic research and training pursuits.

Uniform allowance Should be spent by the employee for purchasing/maintaining office uniform for official duties.

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HOUSE RENT ALLOWANCE [Sec. 10(13A) Rule 2A] Conditions for claiming exemption:

• Assessed is in receipt of HRA • Pays rent

• Rent paid is more than 10% of salary.

Very Important:

• The exemption shall be calculated on the basis of where the accommodation is situated.

• If the place of employment is the same for the whole year, then exemption shall be calculated for the whole year.

• If there is a change in place during the previous year, then it will be calculated on a monthly basis

• Exemption should be calculated in respect of the period during which rental accommodation is occupied by the employee during the previous year.

• Salary for the period during which rental accommodation is not occupied shall not be considered.

Salary for HRA= Basic Pay + DA(considered for retirement benefits) +

Commission ( if received as a fixed percentage on turnover as per terms of employment)

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CALCULATION OF TAXABLE HRA

PARTICULAR AMOUN

T

AMOUN T

Amount received during the financial year for HRA XXX Less: Exemption u/s 10(13A) Rule 2A Least of the

followings:

(a) Actual amount received

(b) 50% of the salary if house is placed at Delhi, Mumbai, Kolkata, and Chennai

OR

40% of the salary in it is placed in any other city

(c) Rent paid less 10% of Salary

xxx xxx

xxx

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GRATUITY

1. Government Employee: Fully exempted from tax u/s 10(10)(i). 2. Non-Govt. Employee:

(a) Employee covered by Payment of Gratuity Act,1972

Computation of Taxable Gratuity:

PARTICULAR AMOUN

T

AMOUN T

Amount received as Gratuity XXX Less: Exemption u/s 10(10)(ii)

Least of the followings: (i) Actual amount received

(ii) 15/26 × Last drawn salary × No. of years of completed

service or part thereof in excess of 6 months (iii) Maximum Limit

xxx

10,00,000

Taxable Gratuity XXX

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Taxability of Commuted Pension :

(a) Pension is received in lump sum as per the terms of the employment on retirement or superannuation.

(b) Full Value of Commuted Pension = Amount received on commutation / percentage of commutation.

Recipient Amount Taxable

Government employee ( Central/State/Local

Authority or Statutory Corporation)

Fully exempted u/s 10(10A)(i)

Non-Govt. employee who has also received

Gratuity u/s 10(10A)(ii)

Amount Received

Less: 1/3 of Full Value of Commuted Pension

Non-Govt. employee who has not received

Gratuity u/s 10(10A)(iii)

Amount Received

Less:1/2 of Full Value of Commuted Pension

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Perquisite

Under section 17(2) of Income Tax Act, 1961 perquisite is defined as:

 Amount paid for the rent-free accommodation provided to the assessed by his employer

 Any concession in the matter of rent respecting any accommodation provided to the assesses by his employer

 Any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:

1. Employer may provide accommodation facility to the employee with or with furniture. Such accommodation may be rent free at a concessional rent.

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a) For Rent free Accommodation

The amount taxable for such perquisite is as follows:

Type of employee

Taxable amt for unfurnished accommodation (1) Taxable amt to be added if furniture is provided (2)

Taxable amt for furnished accommodation (3) a. Government employees

Amt payable as per Govt. rules 10% per annum of cost of furniture or rent payable (1) Plus (2)

b. Non - Government employees: If house is owned by the employer  15% of salary if population exceeds 25 lakhs. 10% per annum of cost of furniture or rent payable. (1) Plus (2)  10% of salary if population is between 10 to 25 lakhs.  7.5% of salary if population is below 10 lakhs. If house is not owned by the employed 15% of salary or lease rent, whichever is lower 10% per annum of cost of furniture or rent payable (1) Plus (2)

Note: Salary for the purpose of above includes basis, D.A, bonus, commission, free and all taxable allowance by whatever name called, but doesn’t include allowance which are exempt or doesn’t form part of salary for the calculation of retirement benefit and also does not include the employer’s contribution to PF. 2. Car Facility Motor car facility provided by an employer is taxable in the hands of the

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Car is owned by

Car is maintained by

Used by

employees for Taxable Value

Person chargeable

Employer

Official

purpose Not a Perquisite

Not applicable Personal Purpose Maintenance + 10% Depreciation Specified Employee Both Purpose Rs. 1,800 /Rs. _{2,400 p.m} Employer Employee Official

Not applicable Personal Purpose Hire charges of the car /10%

depreciation _EmployeeSpecified Both Purpose Rs.600/900 p.m

Employee Employer

Official

Not applicable Personal Purpose Maintenance Specified Employee Both Purpose Actual expenditure incurred - Rs 1,800 /2,400+ (Rs 900p.m. for driver, if any)

Employee Any Purpose Not a Perquisite Not _applicable # depends on the cubic capacity of the car whether it exceeds 1.6 liters or not.

3. Gas, Electricity or Water Supply

Employer may also provide gas, electricity or water supply to the employee either free of cost or at concessional price.

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Following will be the taxable amount.

Situations (1) If employer provides the above free of cost (2)

If employer provides the above at a concessional rate

(3) If the employer

purchases it from outside:

Cost incurred by the employer to provide the

same

Column (2) - amount recovered from the

employee. if the employer

provides it from its own source:

Manufacturing cost per unit

Column (2) - amount recovered from the

employee.

Insurance paid by the employer

Any premium borne by the employer to run an assurance on the life of the employees’ taxable in the hands of the employee.

Chapter 4

DEDUCTION FROM SALARY

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(1) Entertainment allowance (2) Professional tax

ENTERTAINMENT ALLOWANCE



  ONLY TO GOVERNMENT EMPLOYEE

It is initially included in gross taxable salary. Thereafter, section 16(ii) allows a deduction from Salaries only to the Government employees to the least of the following:

a. 1/5th_{of the Basic Salary.}

b. Rs. 5000

c. Amount of entertainment allowances actually received.

 NON GOVERNMENT EMPLOYEE

It is not entitled to any deduction for entertainment allowances. BASIC SALARY above would include Dearness Allowance if it forms part of salary but exclude bonus, allowances, benefits and perquisites.

PROFESSIONAL TAX

Section 16(iii) allows a deduction from salaries of the amount of tax on employment imposed by or under any law by the State Government under Article 276 of the constitution.

COMPUTING DEDUCTIONS UNDER CHAPTER VI A

ASSESSEE:

PREEVIOUS YEAR: ASSESSMENT YEAR:

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DEDUCTIONS UNDER CHAPTER VI A

1.

SECTION 80C

 Life insurance premium

 Deferred annuity

 Deferred annuity by government

 Contribution to statutory P.F

 Contribution to P.P.F

 Contribution to recognized P.F

 National saving scheme

 National savings certificates

 Unit linked insurance plan

 P.O cumulative time deposits

 Pension fund of UTI

 Housing finance deposits

 New house

 Tuition fees

 Infrastructure debentures

 Bank fixed deposits

 NABARD bonds



 P.O. 5 year time deposit____________________

2.

Section 80D : medical insurance

 Self, spouse, dependent children 15000

 Parents 15000



 Additional ( senior citizen) 5000______ 3. Section 80DD maintenance of handicapped ( Rs.

50000 to Rs. 100000)

4. Section 80DDB medical treatment (40000 to 60000) 5. Section 80E interest on higher education loan

6. Section 80U blind/handicapped/retarded ( lump sum) ( 50000 or 100000) TOTAL DEDUCTIONS xxxxx xxxxx xxxxx xxxxx xxxxx XXXXX Chapter 5

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Exemption from salary

LEAVE ENCASHMENT

1. Leave encashment while in service is fully taxable as income of previous year in which it is enchased.

2. Leave encashment on retirement: if

(a) an individual receives leave encashment on his retirement, then the amount received will be eligible for exemption. The amount of exemption is based on his employment:

(b) Government employee: fully exempted from tax

(c) Non-Govt. employee: An individual who is not a Government employee is also entitled for exemption in respect of Leave Encashment compensation received by him.

3. Computation of exemption from Leave Encashment:

Step 1 : Computation of Salary = 10 months average salary preceeding the

month of retirement.

Step 2 : Salary = Basic Pay + Dearness Allowance (forming a part of salary for

retirement benefits) + Commission

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Step3 : This calculation is only applicable where the employer has sanctioned

leave to the employee in excess of 30 days for every completed year of service.

Particulars Amount (i) Leave credit available on the date

of retirement

Less: Excess leave sanctioned by the employer

(Leave sanctioned by the employer per year – 30 days per year) × No. of completed years of service)

Leave credit on the basis of 30 days credit for completed years of service

xxx

(ii) Leave salary on the basis of 30 days credit = Step 3(i) x Step 1

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Taxable Leave Salary on Retirement:

Particulars Amount Amount

Amount Received on Leave Encashment Less: Exemption u/s 10(10AA)

Least of the followings:

(i) Actual amount of Leave encashment received (ii) Average salary of the individual for the past 10 months ×10 months

(iii) Maximum Limit

(iv) Leave at credit at the rate of 30 days p.a. for every Completed

year of service as calculated in Step 3(ii)

xxx xxx xxx xxx xxx xxx Taxable Value of Leave Encashment xxx

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Provident fund scheme provides for monthly contributions from the employees as well as the employer to a Provident fund account. The balance to the credit of such accounts also earns interest. The entire balance is paid to an employee on his retirement. The taxability of employer’s contribution, interest credited annually and balance paid on retirement depends upon the type of Provident fund. There are different types of provident fund such as

1. Statutory provident fund 2. Recognizes provident fund 3. Unrecognized provident fund.

Particulars Statutory Recognized Unrecognized Contribution by Employers and employees Employers and employees Employers and employees Assessor’s contribution Deduction u/s 80c

Deduction u/s 80c No income tax benefit

Employer’s contribution

Not taxable Amount exceeding 12% of salary is taxable

Not taxable at the time of

contribution Interest

credited

Fully exempted Exempt up to 9.5% p.a. any excess is taxable.

On Employee’s contribution taxable under the head “Other Sources”

On Employer’s contribution not taxable at the time of credit.

NORMAL RATE OF TAXES

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SR NO. TOTAL INCOME RATE OF TAX 1. Where the total income

does not exceed Rs. 200000

Nil

2. Where the total income exceeds Rs. 200000 but does not exceed Rs. 500000

10 % of the amount by which the total income exceeds Rs. 200000 3. Where the total income

exceeds Rs. 500000 but does not exceed Rs. 1000000.

Rs. 30000 plus 20% of the amount by which the total income exceeds Rs. 500000

4. Where the total income exceeds Rs. 1000000

Rs. 130000 plus 30% of the amount by which the total income exceeds Rs. 1000000.

Rates of tax for every individual, resident in India, who is of the age of sixty years or more but less than eighty years at any time during the financial year.

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10 % of the amount by which the total income exceeds Rs. 250000 3. Where the total income

exceeds Rs. 500000 but does not exceed Rs. 1000000.

Rs. 25000 plus 20% of the amount by which the total income exceeds Rs. 500000

4. Where the total income exceeds Rs. 1000000

Rs. 125000 plus 30% of the amount by which the total income exceeds Rs. 1000000.

In case of every individual being a resident in India, who is of the age of eighty years or more at any time during the financial year.

Nil

20 % of the amount by which the total income exceeds Rs. 500000 3. Where the total income Rs. 100000 plus 30% of

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exceed Rs. 1000000. the amount by which the total income exceeds Rs. 1000000

COMPUTATION OF INCOME FROM SALARY.

Name of assesses

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Assessment year 2013-14

Particular Amount

Income from salary

1. salary

 gross- net + deductions

 due/ deemed to accrue in India

 advance/ arrears received

 voluntary payments less:- exempt u/s 10

2.

allowances

 dearness allowances

 entertainment allowances

 leave travel allowances( less exempt u/s10(10) )

 house rent allowances ( less exempt u/s 10(13) )

 expenses allowances ( less exempt u/s 10(14) )

3. Annuity ( less : exempt u/s 10(13))

4. Pension

 uncommented (monthly)

 commuted

less:- commuter pension exempt u/s 10(10A)

 govt employee – fully exempt  non govt :-a. gratuity, 1/3 of full commuted value XXXXX XXXXX

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b. otherwise, ½ of full commuted value

5. Gratuity (gross loss: exempt u\s

10(10)

govt employee – fully exempt employee under payment of gratuity act – least of

a) Salary p.m x 15/26 x completed year of service.

b) Rs. 10,00,000

c) Gratuity actually received.

Other employee:- lower of

a. Average salary of last 10 months x 3/2 x no. of years of service

b. Rs. 10,00,000

c. Gratuity actually received.

6. Fees and Commissions 7. Perquisites

 Perquisites taxable for all employees

 Perquisites not taxable at all.

8. Profit in lieu of salary

 Compensation for termination of employment  Compensation for modification of terms of XXXXX XXXXX

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employment  Employer’s contribution to PF + interest thereon Less:- Compensation to workman/ VRS

 Payment from statutory P.F

 Payment from

superannuation fund.

9. Leave encashment ( gross less exempt u/s 10(10AA)

Government employees , fully exempt

Non govt employee – least of

 Encashment of earned leave

 10 x average salary for last 10 months

 Rs. 300000

 Amount actually received

GROSS TAXABLE SALARY

Less :- deduction under section 16

 Entertainment allowances Govt.Empolyee – least of a. 1/5th_{of Basic salary} b. Rs.5,000 c. Actual allowance XXXXX XXXXX XXXXX

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 Professional tax

NET TAXABLE SALARY ( GROSS LESS DEDUCTION) XXXXX XXXXX XXXXX XXXXX XXXXX XXXXX

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IIIustration 1(Retiring Employee)

Mr. X retired from the services of M/s Y ltd. On 31.01.2013 after completing service of 30 years and one month. He had joined the company in 1982 at the age of 30 years and received the following on his retirement:

1) Gratuity Rs.6, 00,000. He was covered under the payment of gratuity act, 1972.

2) Leave encashment of Rs. 3, 30,000 for 330 day leave balance in his account. He was credited 30 days leave for each completed year of service.

3) As per the scheme of the company, he was offered a car which was

purchased on 01.02.2010 by the company for Rs. 5, 00,000. Company has recovered 2,00,000 from him for the car. Company depreciated vehicles at the rate of15% on straight line method.

4) An amount of Rs. 3, 00,000 as commutation of 2/3 of his pension.

5) Company presented him a gift voucher worth Rs.6,000 on his retirement. 6) His colleagues also gifted him a television ( LCD) worth 50,000 form

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Following are the other particulars;

1) He has drawn a Basis salary of Rs. 20,000 and 50% Dearness allowance per allowance per month for the period from 01.04.2012 to 31.01.2013. 2) Received pension of 5,000 per month for the period 01.02.2013 to

31.03.2013 after commutation of pension.

Compute his total income from the above for Assessment Year 2013-14.

Solution:

Computation of Gross total Income

Particular Rs. Basic Salary (20,000 *10) 2,00,000 DA (2,00,000*50%) 1,00,000 Gift voucher (6000-5000) 1000 Motor car ( WN) 56,000 Uncommitted Pension (Sec 17(1)( (5,000*2) 10,000 Commuted pension (Sec10(10A)) 1,50,000 Gratuity (Sec10(10)) 80,789 Leave salary ( Sec 10(10A)) 1,30,000 Gross Salary 7,27,769

Working notes: 1.

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Motor car ( 17(2)(viii)rule3(7)(viii) cost 5,00,0000 Less: Depreciation @20% 01.02.2010-31.01.2011 1,00,000 01.02.2011-31.01.2012 80,000 01.022013-31.01.2013 64,000 WDV 2,56,000

Less: Amount Recovered 2,00,000 Perquisite value of Car 56,000

2.

commuted pension {Sec 10(10)}

Amount received 3,00,000 (Less) Exempted (3,00,000*3/2*1/3) 1,50,000

Taxable 1,50,000

3. Gratuity {Sec10 (10)}

Least of the following is exempt 1. Gratuity received-Rs.6, 00,000 2. Rs. 10, 00,000 3. 15/26*30,000*30=5, 19,231 Received =6, 00,000 Exempt =5, 19,231 Taxable = 80,769

4. Leave Salary {Sec 10(10A)} Least of the following is exempt

1. Rs.3,30,000

2. Rs. 10*20,0000 =2,20,000 3. Rs.3,00,000

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Received = Rs. 3, 30,000 Exempt = Rs. 2, 00,000 Taxable = Rs. 1, 30,000

CONCLUSION

1. The employee or individual who earn salary has to pay tax on income of previous year in the assessment year.

2. They can also get benefits of deduction which help them to reduce tax liability.

3. The individual has to pay tax in advance if his tax liability is more than Rs. 10000 in previous year through assumption .

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