FAQs on Income Tax (for Salaried Person)

Salaries

 QWhat is salary and what does salary include?

QWhat are allowances and which allowances are exempt?

QWhat are perquisites?

QWhich are the perquisites exempted from Income Tax?

QWhat is included in Fringe Benefits and how are they taxed?

QWhich investments are eligible for deductions u/s 80C?

QWhat is salary and what does salary include?

Answer

WHAT IS "SALARY"

Salary is the remuneration received by or accruing to an individual, periodically, for service rendered as a result of an express or implied contract. The actual receipt of salary in the previous year is not material as far as its taxability is concerned. The existence of employer-employee relationship is the sine-qua-non for taxing a particular receipt under the head "salaries." For instance, the salary received by a partner from his partnership firm carrying on a business is not chargeable as "Salaries" but as "Profits & Gains from Business or Profession". Similarly, salary received by a person as MP or MLA is taxable as " Income from other sources", but if a person received salary as Minister of State/ Central Government, the same shall be charged to tax under the head "Salaries". Pension received by an assessee from his former employer is taxable as "Salaries" whereas pension received on his death by members of his family (Family Pension) is taxed as "Income from other sources".

WHAT DOES "SALARY" INCLUDE

Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of "Salaries" including therein (i) Wages (ii) Annuity or pension (iii) Gratuity (iv) Fees, Commission, perquisites or profits in lieu of salary (v) Advance of Salary (vi) Amount transferred from unrecognized provident fund to recognized provident fund (vii) Contribution of employer to a Recognised Provident Fund in excess of the prescribed limit (viii) Leave Encashment (ix) Compensation as a result of variation in Service contract etc. (x) Contribution made by the Central.

QWhat are allowances and which allowances are exempt?

Answer

Allowance is defined as a fixed quantity of money or other substance given regularly in addition to salary for meeting specific requirements of the employees. As a general rule, all allowances are to be included in the total income unless specifically exempted. Exemption in respect of following allowances is allowable to the exent mentioned against each :-

House Rent Allowance:- Provided that expenditure on rent is actually incurred, exemption available shall be the least of the following :

(i)    HRA received.
(ii)   Rent paid less 10% of salary.
(iii) 40% of Salary (50% in case of Mumbai, Chennai, Kolkata, Delhi) Salary here means Basic + Dearness Allowance, if dearness allowance is provided by the terms of employment.

Leave Travel Allowance: The amount actually incurred on performance of travel on leave to any

place in India by the shortest route to that place is exempt. This is subject to a maximum of the air economy fare or AC 1st Class fare (if journey is performed by mode other than air) by such route, provided that the exemption shall be available only in respect of two journeys performed in a block of 4 calendar years.

Certain allowances given by the employer to the employee are exempt u/s 10(14). All these exempt allowance are detailed in Rule 2BB of Income-tax Rules and are briefly given below:

For the purpose of Section 10(14)(i), following allowances are exempt, subject to actual expenses incurred:

(i) Allowance granted to meet cost of travel on tour or on transfer.

(ii) Allowance granted on tour or journey in connection with transfer to meet the daily charges incurred by the employee.

(iii) Allowance granted to meet conveyance expenses incurred in performance of duty, provided no free conveyance is provided.

(iv) Allowance granted to meet expenses incurred on a helper engaged for performance of official duty.

(v) Academic, research or training allowance granted in educational or research institutions.

(vi) Allowance granted to meet expenditure on purchase/ maintenance of uniform for performance of official duty.

Under Section 10(14)(ii),  the following allowances have been prescribed as exempt.

Type of Allowance	Amount exempt
(i)      Special Compensatory Allowance for hilly areas or high altitude allowance or climate allowance.	Rs.800 common for variousareas of North East, Hilly areasof UP, HP. & J&K and Rs. 7000 per month for Siachen area of J&K and Rs.300 common for all places at a height of 1000 mts or more other than the above places.
(ii)     Border area allowance or remote area allowance or a difficult area allowance or disturbed area allowance.	Various amounts ranging from Rs.200 per month to Rs.1300 per month are exempt for various areas specified in Rule 2BB.
(iii)    Tribal area/Schedule area/Agency area allowance available in MP, Assam, UP., Karnataka, West Bengal,Bihar, Orissa, Tamilnadu, Tripura	Rs.200 per month.
(iv)    Any allowance granted to an employee working in any transport system to meet his personal expenditure during duty performed in the course of running of such transport from one place to another place.	70% of such allowance upto a maximum of Rs.6000 per month.
(v)     Children educationallowance.		Rs.100 per month per child upto a maximum 2 children.
(vi)    Allowance granted to meet hostel expenditure on employee's child.		Rs.300 per month per child upto a maximum two children.
(vii)    Compensatory fieldarea allowanceavailable in various areas of ArunachalPradesh, ManipurSikkim, Nagaland, H.P., U.P. & J&K.		Rs.2600 per month.
(viii) Compensatory modified field area allowance available in specified areas of Punjab, Rajsthan, Haryana, U.P., J&K, HP., West Bengal & North East.		Rs.1000 per month
(ix)    Counter insurgencyallowance to members of Armed Forces.		Rs.3900 Per month
(x)     Transport Allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of residence & duty.		Rs.800 per month.
(xi)    Transport allowance granted to physically disabled employee for the purpose of commuting between place of duty and residence.		Rs.1600 per month.
(xii)    Underground allowance granted to an employee working in under ground mines.	Rs.800 per month.

QWhat are perquisites?

Answer

"Perquisite" may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages.

"Perquisite" is defined in the section17(2) of the Income tax Act as including:

(i) Value of rent-free/concessional rent accommodation provided by the employer.

(ii) Any sum paid by employer in respect of an obligation which was actually payable by the assessee.

(iii) Value of any benefit/amenity granted free or at concessional rate to specified employees etc.

(iv) The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assesssee.

(v) The amount of any contribution to an approved superannuation fund by the exployer in respect of the assessee, to the extent it exceeds one lakh rupees; and

(vi) the value of any other fringe benefit or amenity as may be prescribed.

QWhich are the perquisites exempted from Income Tax?

Answer

Some instances of perquisites exempt from tax are given below:

Provision of medical facilities (Provision to Sec. 17(2)): Value of medical treatment in any hospital maintained by the Government or any local authority or approved by the Chief Commissioner of Income-tax. Besides, any sum paid by the employer towards medical reimbursement other than as discussed above is exempt upto Rs.15,000/-.

Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India (Sec. 10(7)).

Rent free official residence provided to a Judge of High Court or Supreme Court or an Official of Parliament, Union Minister or Leader of Opposition in Parliament.

No perquisite shall arise if interest free/concessional loans are made available for medical treatment of specified diseases in Rule 3A or where the loan is petty not exceeding in the aggregate Rs.20,000/-No perquisite shall arise in relation to expenses on telephones including a mobile phone incurred on behalf of the employee by the employer.

QWhat is included in Fringe Benefits and how are they taxed?

Answer

Introduction:

The Finance Act 2005 has introduced a new tax called 'Income-tax on fringe benefits' w.e.f. 01.04.2006. This shall be in the form of additional income tax levied on fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year.

Rate of Tax :-

The tax on fringe benefits shall be levied at the rate of 30% on the value of fringe benefits provided.

Liability to Pay: -

The liability to pay this tax is to be borne by the employer including
i)     a company
ii)    a firm
iii) an association of persons or body of individuals excluding any fund or trust or institution eligible for exemption u/s 10(23C) or 12AA.
iv)   a local authority
v)    an artificial juridical person

What is included in 'Fringe Benifits' :-

Fringe benefits have been defined as including any consideration for employment provided by way of

a)    any privilege, service, facility or amenity provided by an employer directly or indirectly including reimbursements.

b) any free or concessional ticket provided by the employer for private journeys of his employees or their family members.

c) any contribution by the employer to an approved superannuation fund for employees.

d) any specified security or sweat equity shares allotted/ transferred, directly or indirectly by the employers free of cost or at concessional rate to his employees. The detailed provisions in respect of this are included in Chapter XII H of the I.T. Act.

Further, fringe benefits shall be deemed to have been provided if the employer has incurred any expenses or made any payments for various purposes namely, entertainment, provision of hospitality, conference, sales promotion including publicity, employees welfare, conveyance, tour & travel, use of hotel, boarding & lodging etc.

Various provisions relating to income tax on 'fringe benefits' have been modified by the Finance Act, 2006. Exceptions in respect of certain expenditures have been introduced including expenditure incurred on distribution of free/concessional samples and payments to any person of repute for promoting the sale of goods or services of the business of the employer. Similarly, it has been proposed that expenditure incurred on providing free or subsidized transport or any such allowance provided by the employer to his employees for journeys from residence to the place of work shall not be part of fringe benefits. Another significant amendment is regarding the contribution by an employer to an approved superannuation fund to the extent of Rs.1 lakh per employee which shall not be liable to fringe benefit tax. Further, in the case of some other expenses incurred such as expenses incurred on tour and travel, lower rates for valuation of fringe benefits @ 5% have been provided for. The Finance Act 2008 has introduced further exemption in respect of certain expenditures from the purview of Fringe Benefit Tax. These include payments through non-transferable electronic meal cards, provision of cr,che facility, organizing sports events or sponsoring a sportsman being an employee. These provisions shall come into effect from A.Y. 2009-10 onwards.

The Finance act, 2009 has withdrawn the Fringe Benefit Tax. Thus, the FBT stands abolished w.e.f. A.Y. 2010-11 and now such perquisites are taxable in hands of employees.

QWhich investments are eligible for deductions u/s 80C?

Answer

The following investments/payments are inter alia eligible for deduction u/s 80C:-

Nature Of Investment	Remarks
Life Insurance Premium	For individual, policy must be in the name of self or spouse orany child's name. For HUF, it may be on life of any member of HUF.
Sum paid under contract for deferred annuity	For individual, on life of self, spouse or any child of such individual.
Sum deducted from salary payable to Govt. Servant for securing deferred annuity for self, spouse or child	Payment limited to 20% of salary.
Contribution made under Employee's Provident Fund Scheme	-
Contribution to PPF	For individual, can be in thename of self/spouse, any child & for HUF, it can be in the name of any member of the family.
Contribution by employee to a Recognised Provident Fund.	-
Subscription to any notified securities/notified deposits scheme.	-
Subscription to any notified savings certificates.	e.g. NSC VIII issue.
Contribution to Unit Linked Insurance Plan of LIC Mutual Fund	e.g. Dhanrakhsa 1989
Contribution to notified depositscheme/Pension fund set up bythe National Housing Bank.	-
Certain payment made by wayof instalment or part payment of loan taken for purchase/ construction of residential house property.	Condition has been laid that in case the property is transferredbefore the expiry of 5 years from the end of the financial year in which possession of such property is obtained by him, the aggregate amount of deduction of income so allowed for various years shall be liable to tax in that year.
Subscription to units of a Mutual  Fund  notified  u/s 10(23D)	-
Subscription to deposit schemeof a public sector company engaged in providing housing finance.	-
Subscription to equity shares/debentures forming part of anyapproved eligible issue of capital made  by a public company or public financial institutions.	-
Tuition fees paid at the time of admission or otherwise to any school, college, university or other educational institution situated within India for thepurpose of full time education.	Available in respect of any twochildren.
Any term deposit for a fixed period of not less than fiveyears with the scheduled bank.	This has been included inSection 80C by the Finance Act2006.
Subscription to notified bondsissued by NABARD	This has been included inSection 80C by the Finance Act2007 and has come into effect from 1.4.2008.
Payment made into an account under the Senior Citizens Savings Scheme Rules, 2004	This has been introduced by Finance Act, 2008 and shallcome into effect from 1.4.2009.
Payment made as five year time deposit in an account under the Post Office Time Deposit Rules, 1981	This has been introduced by Finance Act, 2008 and shallcome into effect from 1.4.2009.

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