Salary Tax

Salary Tax
Money which you earn from different sources is taxed differently. So if you are a salary earner, your salary income to be taxed will be calculated in a different way from gains. The term "Salaries" includes remuneration in any form for personal service, under an expressed or implied contract of employment or service. Section 17 of Income Tax Act defines salary to include:-
# Wages # Pensions or Annuities # Gratuities # Advance of Salary # Any cess, commission, perquisites or profits in lieu of or in addition to salary or wages. # Any encashment of leave salary. # Any amount of credit to provident fund of employee to the extent it is taxable.
Therefore "salary" includes basic salary, encashment of leave salary, advance of salary, arrears of salary, various allowances such as dearness allowance, entertainment allowance, house rent allowance, conveyance allowance and also includes perquisites by way of free housing, free car, free schooling for children of employees, etc.The following are the essential conditions for income to be treated as salary income:-
# There must be relation of employer and employee between the payer of income and receiver of income.
# Salary may be from more than one employer.
#Salary may be received from not just the present employer but also a prospective employer and in some cases even from a former employer for example pension received from a former employer.
# Salary income must be real and not fictitious there must an intention to pay and receive salary.
# Forgoing of salary ie if an employee surrenders his salary to the central government, then the salary so surrendered will not be treated as taxable income of the employee.# Salary paid tax free - Tax free salary means the salary on which income tax is borne not by the employee but by the employer. Tax free salary is also taxable in the hands of the employee.
Salary is taxable in the year of receipt or in the year of earning of the salary income, whichever is earlier. i.e. if the salary has been received first, then it will be taxable in the year of receipt. If it has been earned first but not yet received then it will be taxable in the year of earning. Salary income is taxable in the hands of individuals only. No other type of person such as a firm or HUF, companies can earn salary income.
Allowances House Allowances
The exemption of House Rent Allowance (HRA) received is exempt to the least of the following:HRA received the period during which the rental accommodation is occupied by the employee in the previous year.
Excess of rent paid over 10 percent of salary.
50% of the salary, if the rented accommodation is situated at Mumbai, Calcutta, Delhi or Chennai and 40% of salary in other cities. The salary is taken for the period during which the rental accommodation is occupied by the employee in the previous year.
Salary: Includes basic salary and dearness allowance if terms of employment so provide but does not include any other allowance. However, any commission payable at a fixed percentage of turnover achieved by the employee is included.
Entertainment Allowances
Taxable in our case.

Transport Allowances
Transport allowance provided to an employee for commuting between his residence and the place of his duty shall be exempt up to Rs. 800 per month. However, in case blind or orthopaedically handicapped employee's, a sum of Rs. 1,600 per month is exempt from tax.
Education Allowances
Education allowance of Rs. 50 per month per child for up to 2 children of the employee is exempted. In case the children are in hostel, the exemption available is Rs.150 per month per child for up to 2 children.
Special Allowances
The following allowances are exempt from tax:
Expenses incurred on conveyance in the performance of duties of office;
Cost of travel on tour or on transfer;
Daily ordinary charges incurred by the employee on account of absence from his normal place of duty during a tour;
Expenditure on a helper where such helper is engaged for the performance of the duties of office;
Allowances granted for encouraging the academic research and training pursuits in educational and research institutions; or
Expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of office.
Leave Travel Assistance
LTA is paid for meeting traveling expenses incurred by an individual as also family members (this includes only the spouse, two children and dependent parents, brothers and sisters) while on holiday in India. The amount of exemption depends upon the mode of journey. This exemption is available in respect of 2 journeys undertaken in a block of four calendar years.
Medical Allowances
This exemption is available in respect of :
Reimbursement up to Rs.15,000 for medical treatment of the employee and family members.Reimbursement of expenditure incurred by an employee and family members in approved hospitals, dispensaries etc.
Group medical insurance for an employee and family members or reimbursement of premium paid by an employee for medical insurance.
For medical treatment abroad, the actual expenditure incurred, including on travel and stay abroad of the patient and one attendant (if permitted by the RBI). The ceiling for the gross total income excluding the amount to be reimbursed is Rs.2 lakhs.
Lunch and Refreshment
Refreshment at free or concessional rate is not taxable.
Exemptions of medical expenses incurred by or on behalf of the employee# The following medical facilities provided to an employee are exempt from income tax:# Treatment of an employee or his family in any hospital maintained by the employer;# Reimbursement of any medical expenditure actually incurred by the employee for himself or his family :
In any hospital maintained or approved by the Government, any local authority; or For prescribed diseases or ailments in any hospital approved by the Chief Commissioner, or Up to Rs. 15,000, actually incurred by the employee on medical (other than the treatment referred to above);
Premium paid by the employer towards medical insurance on the health of such employee
Reimbursement by the employer of premium paid by the employee towards insurance on his health or of that of his family .
Expenditure incurred by the employer on Medical treatment of the employee whose family is outside India;
Travel and stay abroad of the employee or his family including one attendant accompanying the patient for medical treatment.
The expenditure on medical treatment and stay abroad shall be excluded from perks :only to the extent permitted by the Reserve Bank of India; and the employee's gross total income, as computed before including the said expenditure, does not exceed Rs 2 lakhs.
"Family" in relation to an individual means:
the spouse and children of the individual; and parents, brothers and sisters of the individual wholly or mainly dependent on the individual
Of late, Indian salaries have seen a quantum leap on the back of a sound economic growth.

In such a scenario, remuneration planning plays an important issue. Normally, a salary structure comprises basic salary, dearness allowance and other allowances.
Sometimes these allowances form a substantial part of the salary. Under the Income Tax Act, certain allowances are either fully exempt or exempt to a specified limit or fully taxable.
So the remuneration should be structured in such a way that the total taxable income will come down. We will consider an example to clarify this issue.
Mr. X is working as a manager for ABC Pvt Ltd. The company offers him two alternative remuneration packages. In one package, the firm gives allowances, and in the other, reimbursement. The salary packages are illustrated in Table I. Now we will consider the effects of each allowance to arrive at the taxable income.
TABLE I
ITEMS
Package-I
Package-II
Basic salary
Rs 5,00,000
Rs 5,00,000
Dearness Allowance
Rs 1,00,000
-
House rent allowance(hra) (actual rent paid rs.80,000)
Rs 1,00,000
-
Rent free accommodation (fair rent)
-
Rs 1,00,000
Transport allowance
Rs 12,000
-
Conveyance from residence to office(estimated cost)
-
Rs 10,000
Conveyance allowance (utilised rs. 20,000)
Rs 40,000
-
Free 1600 cc car (estimated expenses)
-
Rs 60,000
Education allowance for 2 children
Rs 10,000
-
Free education (estimated cost)
-
Rs 10,000
Medical allowance
Rs 15,000
-
Medical reimbursement
-
Rs 15,000
Telephone allowance
Rs 10,000
-
Telephone reimbursement
-
Rs 10,000
Dearness allowance is fully taxable. If dearness allowance is considered for retirement benefits, then while considering salary for calculating HRA exemption and the value of rent free accommodation it is added to the basic salary.
TABLE II
ITEMS
Package-I
Package-II
Basic salary
Rs 5,00,000
Rs 5,00,000
Dearness allowance
Rs 1,00,000
Rs 1,00,000
House rent allowance
Rs 70,000
-
Rent free accommodation
-
Rs 50,000
Transport allowance
Rs 2,400
-
Conveyance from residence to office
-
EXEMPT
Conveyance allowance
Rs 20,000
-
Free 1600cc car
-
EXEMPT
Education allowance
Rs 7,600
-
Free education
-
Rs 10,000
Medical allowance
Rs 15,000
-
Medical reimbursement
-
EXEMPT
Telephone allowance
Rs 10,000
-
Telephone reimbursement
-
EXEMPT
Taxable salary
Rs 7,25,000
Rs 6,60,000
Tax
Rs 1,67,500
Rs.1,48,000
Education cess
Rs 3,350
Rs 2,960
TOTAL TAX
Rs 1,70,850
Rs 1,50,960
Only if you are staying in a rented accommodation, you can claim HRA exemption to the specified limit. HRA is exempt to the extent of minimum of i) Actual HRA received; ii) 50 per cent of salary; iii) Rent paid - 10 per cent of salary.
So in Package-I: Rs 30,000 is exempt from HRA and Rs 70,000 is taxable. Sometimes, the company provides rent-free accommodation to employees. This is a perquisite and its taxable value is 10 per cent of the salary. So in Package-II, the taxable value of rent-free accommodation is Rs 50,000 per cent.
In case of transport allowance, the exemption is up to Rs 800 per month, that is, Rs 9,600 per annum. So in Package-I, Rs. 9,600 is exempt and Rs 2,400 is taxable. In case of conveyance allowance, the facility is tax free in the hands of employees. So in Package-II, such conveyance facility is provided and is fully exempt - irrespective of the cost. Such allowance is exempt from I-T to the extent it is utilized.
Since Mr X has utilised Rs 20,000 of the Rs 40,000, the balance is taxable. Previously free-car facility was considered as a perquisite and its value is added while calculating taxable income, but from assessment year 2006-07 onwards it is not considered as a perquisite. So under Package-II, such facility is received by Mr X and is exempt.
Now in Package-I, Mr X has received education allowance of Rs 10,000 for two children. As per I-T Act, such allowance is exempt to the extent of Rs 100 per month per child. So in this case Rs 2,400 is exempt and Rs 7,600 is taxable. In Package-II, the company is providing free education to the employee's children at a school run by the employer at an estimated cost of Rs 10,000. In this case, there is no exemption and it is fully taxable.
In Package-I, Mr X has received a medical allowance of Rs 15,000. Such allowance is fully taxable as per I-T Act. Sometimes the firms reimburse medical expenses. Such reimbursements up to Rs 15,000 is exempt. In Package-II, Mr X has received Rs 15,000 as medical reimbursement, which is fully exempt. Telephone allowance is fully taxable. So in Package-I, Mr X telephone allowance of Rs 10,000 is fully taxable, but reimbursement of the same is fully exempt.
Now we will calculate the taxable income and the tax liability of Mr X under both the packages. We can notice that by restructuring a remuneration package one can very well reduce his taxable salary. Further some company provides LTC, leave travel concession facility to the employees, such facility is tax-free provided the assessee has availed LTC, twice in a block of 4 years. So the employee should take a note of this fact.