Tax Treatment Of Various Forms Of Salary Like ‘Bonus’, ‘Overtime Pay’, ‘Salary In Lieu Of Notice Period’, Etc. (Practical)

1.

Tax Treatment Of Advance Salary

2.

Tax Treatment Of Advance Salary

3.

Tax Treatment Of Arrears Of Salary

4.

Tax Treatment Of Nature Of Bonus

5.

Tax Treatment Of Arrears Of Bonus

6.

Tax Treatment Of Commission

7.

Tax Treatment Of Commission

8.

Tax Treatment Of Salary In Lieu Of Notice Period

9.

Tax Treatment Of Gifts Received From Employer

10.

Tax Treatment Of Gifts Received From Employer

11.

Tax Treatment Of  Compensation Received From The Employer

12.

Tax Treatment Of Pay For Extra Work

13.

Tax Treatment Of Allowances, Perquisites And Retirement Benefits

14.

Tax Treatment Of  House Rent Allowance

15.

Tax Treatment Of  Transport Allowance

16.

Tax Treatment Of  Children’s Education Allowance

17.

Tax Treatment Of  Hostel Allowance

18.

Tax Treatment Of  Transport Allowance

19.

Tax Treatment Of  Perquisite In Respect Of Concessional Accommodation

20.

Tax Treatment Of  Perquisite In Respect Of Reimbursement Of School Fees

21.

Tax Treatment Of  Perquisite In Respect Of Provision Of Movable Asset

22.

Tax Treatment Of  Perquisite In Respect Of Transfer Of Movable Asset By The Employer

23.

Tax Treatment Of Leave Encashment

24.

Tax Treatment Of Gratuity

25.

Tax Treatment Of Commuted Pension

26.

Tax Treatment Of Salary Received By A Partner

27.

Tax Treatment Of Salary Received By An Indian Citizen Deputed Outside India

28.

Tax Treatment Of Salary Received By An Indian Citizen Deputed Outside India

29.

Tax Treatment Of Surrender Of Salary To The Central Government

30.

Tax Treatment Of  Computation Of Relief In Respect Of Arrears Of Salary

1.      Tax Treatment Of Advance Salary

 

Illustration

On 31st January, 2013, Mr. Shailesh received advance salary of Rs. 1,84,000 pertaining to the months of February, March, April and May, 2013. As per the accountant of his company, advance salary will be charged to tax in the year to which salary pertains to and, hence, advance salary for the month of April, 2013 and May, 2013 will not be charged to tax in the year 2012-13. However, Mr. Shailesh is confused regarding the tax treatment of advance salary. He wants to know the exact legal provisions relating to the tax treatment of advance salary. Advise him in this regard and determine the year of taxability of advance salary.

 

**

 

Salary is charged to tax on due or receipt basis, whichever is earlier. Hence, advance salary received by an employee will be charged to tax in the year of receipt.

 

Considering the above provision, advance salary pertaining to the months of April and May, 2013 received in January, 2013, i.e., received during the financial year 2012-13, will be charged to tax in the previous year 2012-13, i.e., the year of receipt.

 

2.      Tax Treatment Of Advance Salary

 

Illustration

Mr. Kapoor is working in Essem Ltd. Due to financial crises he requested his employer to give him advance salary of 3 months. His employer refused to give him advance salary, however, to enable him to overcome financial crises he agreed to provide him loan of Rs. 2,52,000 which will be deducted from his salary in 10 equal installments. The accountant of the company informed Mr. Kapoor that loan of Rs. 2,52,000 will be treated as advance salary, since it is going to be deducted from his salary. Advise Mr. Kapoor in this regard and assist him in determining the tax treatment of loan received from the employer.

 

**

 

Loan received from the employer cannot be treated as advance salary, even though it is going to be deducted from the salary of the employee. Salary and loan are different items. Salary is the reward of the work done by the employee and loan is an obligation on the employee which is to be repaid to the employer. Thus, if loan is not to be directly repaid but is to be repaid in the form of deduction from salary it will not entitle the loan to be taxed as salary. However, in case of interest free loan or concessional loan, taxable value of perquisite in respect of interest element will arise in the hands of the employee. The tax treatment of perquisite arising from concessional or interest free loan is already discussed in advance learning on perquisite.

 

3.      Tax Treatment Of Arrears Of Salary

 

Illustration

On 1st January, 2013, Mr. Rajesh received arrears of salary of Rs. 2,52,000 pertaining to the years 2008-09 to 2011-12. As per the chief accountant of the company, arrears will be charged to tax in the year of receipt since they were not taxed in the year to which they pertain to. However, Mr. Rajesh is of the opinion that arrears pertains to different years and, hence, cannot be charged to tax in one year. As per his view, arrears are to be charged to tax in different years. Advise him in this regard and determine the year of taxability of arrears of salary.

 

**

 

Arrears of salary received by an employee are taxed in the year of receipt if the same were not taxed earlier on due basis. The rule will remain same even if the arrears pertain to different years. Hence, in this case arrears of salary of Rs. 2,52,000 will be charged to tax in the year of receipt of arrears (since they were not taxed earlier). However, in this case Mr. Rajesh can claim relief under section 89 in respect of arrears of salary.

 

4.      Tax Treatment Of Nature Of Bonus

 

Illustration

Mr. Sudhir received bonus from his employer. The details of bonus received by him are as follows :

 

        Contractual bonus Rs. 84,000.

        Gratuitous bonus Rs. 25,200.

 

What will be the tax treatment of above items?

 

**

Contractual bonus is charged to tax as salary and gratuitous bonus is charged to tax as perquisite. In this case Mr. Sudhir has received contractual as well as gratuitous bonus, hence, contractual bonus of Rs. 84,000 will be charged to tax as salary and gratuitous bonus of Rs. 25,200 will be charged to tax as perquisite.

 

5.      Tax Treatment Of Arrears Of Bonus

 

Illustration

During the previous year 2012-13, Mr. Kapoor received arrears of bonus of earlier years amounting to Rs. 84,000. This amount was not charged to tax earlier. The accountant of the company deducted tax on the amount of bonus and intimated Mr. Kapoor that entire bonus will be charged to tax and he cannot claim relief under section 89 in respect of arrears of bonus. Advise Mr. Kapoor in this regard.

 

**

 

Bonus is charged to tax on receipt basis if the same was not taxed earlier on due basis. In the current case, arrears of bonus of Rs. 84,000 were not charged to tax in earlier year and, hence, these will be charged to tax in the year of receipt, i.e., previous year 2012-13. However, in respect of arrears of bonus of Rs. 84,000, Mr. Kapoor can claim relief under section 89.

 

6.      Tax Treatment Of Commission

 

Illustration

Apart from other pay, Mr. Kumar received commission of Rs. 25,200 from his employer. The commission was paid in addition to salary. Mr. Kumar is of the view that commission of Rs. 25,200 will be charged to tax as income from other sources and not as salary income since it is paid in addition to salary. Advise him in this regard.

 

**

 

Commission received from employer will be charged to tax as salary income, irrespective of the fact whether it is paid in addition to salary or in lieu of salary. Thus, in the present case, commission of Rs. 25,200 will be charged to tax as salary income and not as income from other sources.

 

7.      Tax Treatment Of Commission

 

Illustration

Mr. Kumar is receiving monthly commission of Rs. 8,400 from his employer. The accountant of the company informed Mr. Kumar that the company will be treating the commission of Rs. 8,400 as salary income and deduct tax accordingly. Is the view of accountant correct?

 

**

 

Fees or commission received by the employee from the employer are charged to tax as salary income. Commission will be taxed as salary income, irrespective of the fact whether it is received as fixed monthly amount or is received as a percentage of any particular items like turnover achieved by the employee.

 

Thus, in the present case, commission of Rs. 8,400 will be charged to tax as salary income and the view of the accountant is correct.

 

8.      Tax Treatment Of Salary In Lieu Of Notice Period

 

Illustration

Mr. Soham was working in Essem Ltd. The company removed him from the job without giving him any notice. As per the terms of his employment, the employer had to give one month notice or pay salary equivalent to one month‟s salary. The employer paid him salary of one month amounting to Rs. 84,000 and terminated his job without giving him any notice. In this case, Mr. Soham feels that salary in lieu of notice will be charged to tax as income from other sources. Advise him in this regard.

 

**

 

Any payment received by an employee from his present employer or former employer or prospective employer will be charged to tax under the head “Salaries” (as profits in lieu of salary). Hence, salary in lieu of notice period is charged to tax as salary income and is charged to tax on receipt basis, i.e., it is charged to tax in the year of receipt.

 

Thus, Rs. 84,000 will be taxed as salary income and will not be charged to tax as income from other sources.

 

9.      Tax Treatment Of Gifts Received From Employer

 

Illustration

Mr. Kapoor is working in SM Ltd. During the year 2012-13 his employer gifted him clothes valuing Rs. 2,520. He is of the opinion that gift received by an employee from his employer is not charged to tax. Advise him in this regard.

 

**

 

Any voluntarily gift received by the employee from his employer is charged to tax as salary income (perquisite). Value of any gift, gift vouchers, etc., received from the employer by the employee or member of his household, shall be equal to the amount of such gift. Nothing shall be charged to tax, if aggregate value of such gift, vouchers, etc., during the previous year does not exceed Rs. 5,000. In the present case the value of the gift is less than Rs. 5,000 and, hence, nothing will be charged to tax in the hands of Mr. Kapoor.

 

10.    Tax Treatment Of Gifts Received From Employer

 

Illustration

Mr. Krunal is working in SM Ltd. During the year 2012-13 his employer gifted him Rs. 2,520, i.e., cash gift. He is of the opinion that gift received by an employee from his employer is not charged to tax. Advise him in this regard.

 

**

 

Any voluntarily gift received by the employee from his employer is charged to tax as salary income (taxed as perquisite). Value of any gift, gift vouchers, etc., received from the employer by the employee or member of his household, shall be equal to the amount of such gift. Nothing shall be charged to tax, if aggregate value of such gift, vouchers, etc., during the previous year does not exceed Rs. 5,000. However, the exemption of Rs. 5,000 is applicable only in respect of non-monetary gift. Thus, entire amount of cash gift of Rs. 2,520 will be charged to tax since the exemption of Rs. 5,000 is not available in case of monetary gifts.

 

11.    Tax Treatment Of  Compensation Received From The Employer

 

Illustration

Mr. Sohil is working in Essem Ltd. at a monthly salary of Rs. 84,000. As per the terms of his employment, if there is any change in the terms and conditions of his service, then the employer will pay him compensation on the basis of change of the terms of service. In April, 2013 the terms of service of Mr. Sohil were changed and for this change the employer gave him a compensation of Rs. 2,52,000. Mr. Sohil is of the opinion that such compensation being capital in nature will not be charged to tax and will be exempt from tax. Advise him in this regard.

 

**

 

Compensation received from the employer in connection with modification of terms of employment will be charged to tax as salary income, i.e., profits in lieu of salary.

Considering above, Rs. 2,52,000 received on change in terms of service will be charged to tax and will be charged to tax under the head “Salaries”.

 

12.    Tax Treatment Of Pay For Extra Work

 

Illustration

Mr. Kapoor is working in Essem Ltd. His office hours are from 10:00 an from to 5.00 pm. During the month of March, due to work pressure he had to perform additional duties and for the same he was paid additional salary of Rs. 8,400. He is of the opinion that this additional amount is not paid to him on routine basis and, hence, will not be charged to tax as salary income. Advise him in this regard.

 

**

 

If an employee receives any payment in respect of extra work done by him then the same is charged to tax under the head “Salaries”. In other words, remuneration received for extra work will be charged to tax as salary income.

 

Considering above, remuneration for extra work amounting to Rs. 8,400 received by Mr. Kapoor for additional work carried on by him in the month of March will be charged to tax under the head “Salaries”.

 

13.    Tax Treatment Of Allowances, Perquisites And Retirement Benefits

 

Illustration

Illustrations on tax treatment of various allowances have already been discussed in the advance learning material on allowances, perquisites and retirement benefits. However, considering the importance of allowance, perquisites and retirement benefits in the field of TRPs and for a quick revision and to continue the flow of learning, illustrations on major allowances, perquisites and retirement benefits are provided over here.

 

14.    Tax Treatment Of  House Rent Allowance

 

Illustration

Mr. Raja is residing in Mumbai. His salary structure for the previous year 2012-13 was as follows:

 

Particulars

(Rs.)

Basic salary

5,84,000

Dearness allowance forming part of salary while computing all retirement benefits

4,16,000

City compensation allowance

20,000

House rent allowance

1,20,000

Other allowances (fully taxed)

1,00,000

Commission @ 8.4% of the turnover achieved by him

1,00,000

Fixed monthly commission (@ Rs. 5,000 per month)

60,000

Total

14,00,000

 

Monthly rent paid by him for residential accommodation : Rs. 20,000.

 

He wants to know the amount of exemption in respect of HRA.

 

**

 

Exemption in respect of HRA will be lower of the following amounts:

 

(1)       50% of salary, when residential house is situated at Mumbai, Kolkata, Delhi or Chennai and 40% of salary where residential house is situated at any other place.

 

(2)       HRA actually received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year.

 

(3)       Rent paid in excess of 10% of salary.

 

In this case, he resides in a metro city, hence, the exemption will be lower of the following amounts :

 

(1)       50% of salary of Rs. 11,00,000 (Note 1) : Rs. 5,50,000.

 

(2)       Actual amount of HRA : Rs. 1,20,000

 

(3)       Rent paid in excess of 10% of salary : Rs. 1,30,000 (Note 2)

 

Exemption in respect of HRA will be Rs. 1,20,000. Taxable HRA will be computed as follows :

 

Particulars

(Rs.)

Total HRA received during the year

1,20,000

(–) HRA exempt under section 10(13A) (as computed above)

1,20,000

Taxable HRA

Nil

 

Note 1: Salary for the purpose of computing exemption in respect of HRA will include basic salary, dearness allowance forming part of salary while computing all retirement benefits and commission based on fixed percentage of turnover achieved by the employee. Apart from this, salary for this purpose does not include any other allowances/ perquisites. Considering above provisions, salary will be computed as follows :

 

Particulars

(Rs.)

Basic salary

5,84,000

Dearness allowance forming part of salary while computing all retirement benefits

4,16,000

Commission @ 8.4% of the turnover achieved by him

1,00,000

Total

11,00,000

 

Note 2:

10% of salary (as computed in Note 1) will come to Rs. 1,10,000. Rent paid by him for the year is Rs. 2,40,000 (i.e., Rs. 20,000 per month). Rent in excess of Rs. 1,10,000 will come to Rs. 1,30,000.

 

15.    Tax Treatment Of  Transport Allowance

 

Illustration

Mr. Krunal is working in a transport organisation. His employer pays him Rs. 8,400 per month on account of allowance to meet his personal expenditure during his duty performed in the course of running of such transport from one place to another place. Mr. Krunal is not in receipt of daily allowance. Mr. Krunal wants to know the taxability of this allowance.

 

**

 

As per rule 2BB(2), exemption in above case will be 70% of the amount of allowance or Rs. 10,000 per month, whichever is lower. In this case 70% of allowance will come to Rs. 5,880, which is lower than Rs. 10,000. Hence, out of Rs. 8,400, Rs. 5,880 will be exempt from tax.

16.    Tax Treatment Of  Children’s Education Allowance

 

Illustration

Mr. Suraj receives children‟s education allowance of Rs. 300 per month per child for his 3 children. His friend who is an accountant told him that he can claim exemption upto Rs. 100 per month per child upto two children. However, Mr. Suraj is of the view that exemption can be claimed for all the 3 children and would not be limited to 2 children. Advise him in this regard.

 

**

 

As per rule 2BB(2), an employee can claim exemption in respect of children‟s education allowance of lower of the amount of allowance or Rs. 100 per month per child. This allowance is limited to 2 children of the employee. In this case, the exemption will be as follows :

 

Particulars

(Rs.)

Total children‟s education allowance per month (Rs. 300 per child or Rs. 900 for 3 children)

900

(–) Exemption as per rule 2BB(2) per month (Note 1)

200

Taxable value of allowance per month

700

 

Note 1: Exemption will be lower of the amount of allowance or Rs. 100 per month per child (upto 2 children). In this case, employee is receiving Rs. 300 per month per child. Exemption will be Rs. 100 per month per child and it will be limited upto 2 children. Hence, exemption will be Rs. 200 per month.

 

17.    Tax Treatment Of  Hostel Allowance

 

Illustration

Mr. Sudhir receives hostel allowance of Rs. 500 per month per child for meeting the hostel expenditure of his 3 children. His friend who is an accountant told him that he can claim exemption upto Rs. 100 per month per child upto two children. However, Mr. Sudhir is of the view that exemption can be claimed for all the 3 children and would not be limited to 2 children. Advise him in this regard.

 

**

 

As per rule 2BB(2), an employee can claim exemption in respect of allowance granted for meeting the hostel expenditure of his child. Exemption will be lower of the amount of allowance or Rs. 300 per month per child. This allowance is limited to 2 children of the employee. In this case, the exemption will be as follows :

 

Particulars

(Rs.)

Total hostel allowance per month (Rs. 500 per child or Rs. 1,500 for 3 children)

1,500

(–) Exemption as per rule 2BB(2) per month (Note 1)

600

Taxable value of allowance per month

900

 

Note 1: Exemption will be lower of the amount of allowance or Rs. 300 per month per child (upto 2 children). In this case, employee is receiving Rs. 500 per month per child. Exemption will be Rs. 300 per month per child and it will be limited upto 2 children. Hence, exemption will be Rs. 600 per month.

 

18.    Tax Treatment Of  Transport Allowance

 

Illustration

Mr. Ramesh is receiving transport allowance of Rs. 1,000 per month from his employer. He is confused whether this allowance will be taxed or will be exempt. Advise him in this matter.

 

**

 

As per rule 2BB(2), exemption in respect of transport allowance will be lower of the amount of allowance or Rs. 800 per month. In this case, Mr. Ramesh is receiving transport allowance of Rs. 1,000 per month. Hence, exemption will be limited to Rs. 800 per month and taxable amount will be Rs. 200 per month.

 

transport allowance

 

Illustration

Mr. Soham is blind. He is working in A Ltd. and is receiving transport allowance of Rs. 2,000 per month from his employer. He is confused whether this allowance will be taxed or will be exempt. Advise him in this matter.

 

**

 

As per rule 2BB(2), exemption in respect of transport allowance will be lower of the amount of allowance or Rs. 800 per month. However, in case of an employee who is orthopaedically handicapped or blind, the exemption will be increased to Rs. 1,600 per month. In this case, Mr. Soham is blind, hence, exemption will be Rs. 1,600 per month. He is receiving transport allowance of Rs. 2,000 per month, hence, exemption will be limited to Rs. 1,600 per month and taxable amount will be Rs. 400 per month.

 

transport allowance

 

Illustration

Mr. Kapil is working in A Ltd. and is receiving the following allowances :

 

Tiffin allowance : Rs. 840 per month

 

Medical allowance : Rs. 2,520 per month

 

Servant allowance : Rs. 200 per month

 

Electricity allowance : Rs. 1,840 per month.

 

He is confused whether these allowances will be taxed or will be exempt. Advise him in this matter.

 

**

 

An employee can claim exemption in respect of allowances mentioned in rule 2BB(1) and rule 2BB(2). The above mentioned allowances received by Mr. Kapil are not covered under rule 2BB, hence, the above mentioned allowances will be fully taxed in the hands of Mr. Kapil.

 

19.    Tax Treatment Of  Perquisite In Respect Of Concessional Accommodation

 

Illustration on

Mr. Rupesh is working with A Ltd. During the year 2012-13, his employer has provided him with a furnished accommodation in Mumbai. Other details are as follows:

 

        Basic salary for the year 2012-13 : Rs. 3,84,000.

 

        Dearness allowance forming part of salary for computing all retirement benefits: Rs. 3,13,000.

 

        Employer‟s contribution to Provident Fund : Rs. 84,000.

 

        Transport allowance received during the year : Rs. 12,600.

 

        Value of other perquisites : Rs. 2,84,000.

 

        The accommodation is owned by the employer.

 

        Cost of various furnitures provided by the employer : Rs. 1,50,000.

 

        Employer has also provided him with an air-conditioner. The air-conditioner is hired by the employer for which he pays a rent of Rs. 10,000 per annum.

 

        His employer has recovered Rs. 4,800 from him towards rent of the accommodation.

 

From the above information assist Mr. Rupesh in computing the value of concessional accommodation.

 

**

 

In this case, the employer has provided a concessional furnished accommodation, hence, the value will be computed as follows :

 

Compute the value of accommodation considering accommodation as rent free furnished accommodation

XXXXX

Less: The amount recovered from the employee

XXXXX

Value of furnished accommodation (if positive)

XXXXX

 

Value of rent free furnished accommodation will be computed as follows :

 

Particulars

(Rs.)

Compute the value of accommodation considering accommodation as unfurnished accommodation

XXXXX

Add : 10% per annum of the original cost of furniture to the employer or actual hire charges (paid or payable) by the employer (if the furniture is hired by the employer)

XXXXX

Value of furnished accommodation

XXXXX

 

Value of rent free unfurnished accommodation will be computed as follows :

 

In this case, the accommodation is owned by the employer. Hence, the value will be computed as follows :

Population of the city (based on 2001 Census ) where the property is located

Value of perquisite

Not exceeding 10 lakhs

7.5% of the salary

Exceeding 10 lakhs but not exceeding 25 lakhs

10% of the salary

Exceeding 25 lakhs

15% of the salary

 

Accommodation is located at Mumbai (i.e., population of more than 25 lakhs). Hence, the value of the accommodation will be 15% of the salary. Salary will be computed as follows :

 

Particulars

(Rs.)

Basic salary

3,84,000

(+) Dearness allowance forming part of salary while computing all retirement benefits

3,13,000

(+) Transport allowance Rs. 12,600 – Rs. 9,600 (exempt @ Rs. 800 per month)

3,000

Salary for the purpose of computing value of accommodation

7,00,000

 

Value of unfurnished accommodation will come to Rs. 1,05,000 (15% of Rs. 7,00,000).

 

Value of furnished accommodation will be computed as follows :

 

Particulars

(Rs.)

Value of unfurnished accommodation

1,05,000

(+) Value of furniture

(a) 10% of cost of furniture of Rs. 1,50,000

15,000

(b) Rent of air-conditioner

10,000

Value of furnished accommodation

1,30,000

(–) Amount recovered from the employee in respect of the accommodation

4,800

Value of concessional accommodation

1,25,200

 

20.    Tax Treatment Of  Perquisite In Respect Of Reimbursement Of School Fees

 

Illustration

Mr. Sandip is a salaried employee. He annually pays Rs. 84,000 on account of school fees of his children. However, later on his employer reimburses the school fees to him. Mr. Sandip wants to know the tax treatment of perquisite arising from reimbursement of school fees of his children by his employer. Advise him in this regard.

 

**

 

Reimbursement of expenditure incurred for the education of the children\members of the household of the employee is taxable as a perquisite in all cases (i.e., specified employee as well as non-specified employee). Thus, in above case the value of perquisite in the hands of Mr. Sandip will be the amount of school fees reimbursed by the employer, i.e., Rs. 84,000 will be charged to tax as perquisite in respect of reimbursement of school fees of the children of the employee.

 

21.    Tax Treatment Of  Perquisite In Respect Of Provision Of Movable Asset

 

Illustration

Mr. Rupal is a salaried employee. His employer has provided him throughout the previous year following movable assets for his personal use :

 

(1) A washing machine (purchased by the employer on 1-4-2009 for Rs. 18,400).

 

(2) An air-conditioner (hired by the employer, annual rent being Rs. 2,520).

 

(3) A laptop (purchased by the employer for Rs. 84,000 on 1-4-2011).

 

Assist Mr. Rupal in computing the value of perquisite arising on account of above movable assets provided by the employer. His employer recovers Rs. 108 for the use of above assets.

 

**

 

The perquisite will be valued as follows :

 

Particulars

(Rs.)

Value of perquisite on account of washing machine (value of perquisite will be @ 10% of the cost of machine to the employer)

1,840

(+) Value of perquisite on account of air-conditioner (value of perquisite will be actual rent paid/payable by the employer)

2,520

(+)Value of perquisite on account of laptop (nothing shall be charged in respect of use of laptop)

Nil

Gross value of perquisite

4,360

(–) Amount recovered from the employee

108

Value of perquisite charged to tax in respect of use of movable asset

4,252

 

22.    Tax Treatment Of  Perquisite In Respect Of Transfer Of Movable Asset By The Employer

 

Illustration

On 25-1-2013, Mr. Rupesh purchased certain furniture from his employer for Rs. 25,200. The furniture was purchased by his employer on 25-2-2010 for Rs. 84,000. What will be the value of perquisite in this situation?

 

**

 

In this situation, taxable value of perquisite will be computed as follows:

 

Particulars

(Rs.)

Original cost of furniture to the employer

84,000

(–) Depreciation @ 10% of cost, for 2 years (See note 1)

16,800

Gross value of furniture

67,200

(–) Amount paid to employer to acquire the furniture

25,200

Taxable value of perquisite

42,000

 

Note 1: WDV of such an asset will be computed after deducting depreciation @ 10% for 2 years, i.e., completed year of ownership by the employer. Depreciation will be computed by considering the cost of such asset to the employer. The furniture was purchased by the employer on 25-2-2010 and was transferred on 25-1-2013, hence, the employer owned it for 2 years and 11 months (or two completed years). Based on this, depreciation for 2 years @ 10% on original cost of Rs. 84,000 will come to Rs. 16,800.

 

Suppose in above example the furniture is transferred on 28-2-2013, then instead of 2 years depreciation will be for 3 years.

 

23.    Tax Treatment Of Leave Encashment

 

Illustration

Mr. Raja retired from A Ltd. (a private sector company) on 23rd February, 2013, after serving for a period of 24 years and 8 months. As per service rules, he is entitled to leave of 28 days for each completed year of service. Following are other details:

 

Leave availed during service period

84 days

Leave encashed during earlier years

252 days

Leave encashed during the year 2012-13

6 days

Basic salary per month during 10 months preceding retirement

Rs. 30,000

 

Dearness allowance (per month) during 10 months preceding retirement:

 

(a) Forming part of salary for computing retirement benefits

Rs. 24,000

(b) Not forming part of salary for computing retirement benefits

Rs. 30,000

Leave salary received at the time of retirement

Rs. 9,24,000

 

From the above information, assist Mr. Raja in computing the amount of leave salary chargeable to tax for assessment year 2013-14.

 

**

 

As per section 10(10AA), leave encashment by a non-Government employee at the time of retirement (whether on superannuation or otherwise) is exempt. The exemption in respect of leave encashment in case of a non-Government employee at the time of retirement will be lower of the following amount :

 

        Period of earned leave standing to the credit of the employee‟s account at the time of retirement × Average monthly salary.

        Average monthly salary × 10 (i.e., 10 months‟ average salary).

        Maximum amount as specified by the Government, i.e., Rs. 3,00,000.

        Leave encashment actually received at the time of retirement.

 

Computation in this regard would be follows :

 

Total leave salary taxable for the assessment year 2013-14 will be computed as follows:

 

Particulars

(Rs.)

Total leave salary received at the time of retirement

9,24,000

Less: Leave salary exempt under section 10(10AA)(ii) (Note 1)

3,00,000

Taxable leave salary

6,24,000

 

Note 1: As per section 10(10AA)(ii), exemption in respect of leave salary received by a non-Government employee is least of the following:

 

Particulars

(Rs.)

1. Cash equivalent to earned leave (Note 2)

5,94,000

2. 10 months‟ average salary (Note 3)

5,40,000

3. Maximum specified amount

3,00,000

4. Actual amount received

9,24,000

 

Amount of exemption under section 10(10AA)(ii) will be Rs. 3,00,000, being least of above.

 

Note 2: Computation of cash equivalent to earned leave:

 

Step 1: Computation of leave earned standing to credit at the time of retirement:

 

In this case, Mr. Raja is entitled to 28 days‟ leave for each completed year of service, hence, while computing leave credit, we will consider 28 days only (since it is less than 30 days).

 

Detailed computation will be as follows:

Particulars

Days

Total leave available during the tenure of service (28 days × 24 years)

[period of 8 months (i.e., fraction of year) is to be ignored]

672 days

Less: (a) Leave availed during service

84 days

(b) Leave encashed during earlier years

252 days

(c) Leave encashed in previous year 2012-13

6 days

Leave standing to credit at the time of retirement

330 days

(÷) Days in month

30 days

Leave credit at the time of retirement

11 months

 

Step 2: Computation of average monthly salary:

 

As per section 10(10AA)(ii), salary for the purpose of computation of exemption is:

 

        10 months‟ average salary immediately preceding the retirement (i.e., day of retirement and not the month of retirement).

        Salary will include basic salary, dearness allowance forming part of salary while computing retirement benefits and commission based on fixed percentage of turnover.

 

Based on above, salary will be computed as follows:

 

Particulars

(Rs.)

Basic salary per month, for 10 months immediately preceding the retirement

30,000

Dearness allowance per month (forming part of salary while computing retirement benefits), for 10 months immediately preceding the retirement

24,000

Total monthly salary for the purpose of computing exemption

54,000

 

There is no need to convert aforesaid monthly salary of Rs. 54,000 into average monthly salary, since there is no change in salary during past 10 months.

 

Step 3: Computation of cash equivalent to earned leave:

 

= Leave standing to credit at the time of retirement × Average monthly salary

= 11 months × Rs. 54,000

= Rs. 5,94,000

 

Note 3: Computation of 10 months‟ average salary:

 

10 months‟ average salary will be computed as follows:

= Average monthly salary × 10 months

= Rs. 54,000 × 10 months = Rs. 5,40,000

24.    Tax Treatment Of Gratuity

 Illustration

Mr. Raja retired from A Ltd. on 23rd February, 2013, after serving for a period of 24 years and 8 months. Following are other details:

 

        Basic salary per month during 10 months preceding the month of retirement (i.e., monthly salary from 1-4-12 to 31-1-13) : Rs. 30,000.

        Dearness allowance per month during 10 months preceding the month of retirement (i.e., monthly DA from 1-4-12 to 31-1-13)

 

(a)        Forming part of salary for computing retirement benefits : Rs. 24,000

(b)       Not forming part of salary for computing retirement benefits : Rs. 30,000

 

        Gratuity received at the time of retirement Rs. 15,00,000. Compute the amount of exemption in respect of gratuity under section 10(10)(ii)/(iii) considering :

 

(i)         Mr. Raja is covered by the Payment of Gratuity Act, 1972

(ii)        Mr. Raja is not covered by the Payment of Gratuity Act, 1972.

 

(i) When Mr. Raja is covered by Payment of Gratuity Act, 1972

As per section 10(10)(ii), exemption in respect of gratuity received by a non-Government employee (covered by the Payment of Gratuity Act, 1972) is least of the following:

 

Particulars

(Rs.)

1. 15 days‟ salary for each completed year of service or part in excess of 6 months (Note 1)

12,11,550

2. Maximum specified amount

10,00,000

3. Actual amount received

15,00,000

 

Amount of exemption under section 10(10)(ii) will be Rs. 10,00,000, being least of above. Thus, taxable amount of gratuity will be Rs. 5,00,000 (i.e., Rs. 15,00,000 - Rs. 10,00,000)

 

Note 1: Computation of 15 days‟ salary for each completed year of service or part in excess of 6 months:

 

For the computation following points should be considered:

 

        Part of year in excess of six months will be considered as a full year.

        Salary for the aforesaid purpose will be last drawn salary.

        Salary for the aforesaid purpose will include basic salary and any dearness allowance (i.e., whether or not forming part of salary, while computing retirement benefits).

        While computing 15 days‟ salary, we will divide monthly salary by 26 days.

 

Based on above, computation will be as follows:

 

        Salary will be Rs. 84,000 (i.e., Rs. 30,000 + Rs. 24,000 + Rs. 30,000).

        15 days‟ salary will be Rs. 48,462 (i.e., Rs. 84,000/26 × 15).

        Duration of service is 24 years and 8 months, i.e., it will be taken as 25 years (for computation of exemption).

 

Thus, total amount of salary will be Rs. 12,11,550 (i.e., Rs. 48,462 × 25 years).

 

(ii) When Mr. Raja is not covered by Payment of Gratuity Act, 1972

As per section 10(10)(iii), exemption in respect of gratuity received by non-Government employee (not covered by the Payment of Gratuity Act, 1972) is least of the following:

 

Particulars

(Rs.)

1. Half month‟s average salary for each completed year of service (Note 2)

6,48,000

2. Maximum specified amount

10,00,000

3. Actual amount received

15,00,000

 

Amount of exemption under section 10(10)(iii) will be Rs. 6,48,000, being least of above. Thus, taxable amount of gratuity will be Rs. 8,52,000 (i.e., Rs. 15,00,000 - Rs. 6,48,000).

 

Note 2: Computation of half month‟s average salary for each completed year of service :

 

Following points should be considered in this regard:

 

        While computing duration of service, any part of year will be ignored.

        Salary for the aforesaid purpose will be average salary for 10 months preceding the month (not the day) of retirement.

        Salary for this purpose will include basic salary, dearness allowance forming part of salary while computing retirement benefits and commission based on fixed percentage of turnover.

        Half month‟s average salary will be computed by dividing average salary by 2.

 

Based on above, salary will be computed as follows:

 

Particulars

(Rs.)

Basic salary per month, for 10 months immediately preceding the month of retirement

30,000

(+) Dearness allowance per month (forming part of salary while computing retirement benefits), for 10 months immediately

preceding the month of retirement

24,000

Total monthly salary for the purpose of computing exemption

54,000

 

There is no need to convert aforesaid monthly salary of Rs. 54,000 into average monthly salary, since there is no change in salary during past 10 months.

Based on above, computation will be as follows:

 

        Half month‟s average salary will be Rs. 27,000 (i.e., Rs. 54,000/2).

        Duration of service will be 24 years (part of year will be ignored).

 

Thus, total amount of salary will be Rs. 6,48,000 (i.e., Rs. 27,000 × 24 years).

 

25.    Tax Treatment Of Commuted Pension

 

Illustration

Mr. Rajan is working as a chief accountant in A. Ltd. On 31-3-2012 he retired from his service. From April, 2012 and he is receiving a monthly pension of Rs. 18,400. On 31-12-2012, he commuted his 30% of pension for Rs. 2,52,000 and continued to receive balance of 70% of pension of Rs. 12,880. At the time of retirement he also received Gratuity. One of his friends who is an accountant told him that a non-Government employee cannot claim exemption in respect of pension, if he is receiving Gratuity. Advise Mr. Rajan in this regard.

 

**

 

Un-commuted pension is fully taxable. Hence, uncommuted pension of Rs. 18,400 per month and Rs. 12,880 per month will be fully taxed.

 

As per section 10(10A)(ii)(a)/(b), exemption in respect of commuted pension in case of a non-Government employee will be as follows :

 

        If the employee receives gratuity, one third of full value of commuted pension will be exempt from tax under section 10(10A) (ii)(a).

        If the employee does not receive gratuity, one half of full value of commuted pension will be exempt from tax under section 10(10A) (ii)(b).

 

In the above case, Mr. Rajan has received gratuity, hence, exemption will be one third of full value of commuted pension. Rs. 2,52,000 is 30% of full value of computed pension, hence, full value of commuted pension will come to Rs. 8,40,000. Maximum exemption will be Rs. 2,80,000 (being one third of full value of commuted pension). In this case, Mr. Rajan has received Rs. 2,52,000, hence, entire amount will be exempt from tax.

 

Suppose in above case, Mr. Rajan has not received gratuity, then maximum exemption will come to Rs. 4,20,000 being one half of full value of commuted pension.

 

26.    Tax Treatment Of Salary Received By A Partner

 

Illustration

Mr. Mitesh is a partner in MN Ltd. During the year he received salary of Rs. 25,200 from the firm. Apart from salary, he received following payments from the firm :

 

        Interest on capital : Rs. 84,000.

        Share of profit Rs. 1,84,000.

 

He is of the opinion that, since he is receiving salary from the firm, so entire amount received from the firm on account of salary, interest and share of profit will be charged to tax under the head ”Salaries”. Advise him in this regard.

 

**

 

For taxing any income under the head “Salaries”, the relation of the payer and payee should be that of the employer and the employee. In case of a partnership firm, the partners are not the employees of the firm and, hence, salary received by the partners from the firm is not charged to tax under the head “Salaries”. Salary received by partner from the firm is charged to tax under the head “Profits and gains of business or profession”.

 

Considering above discussion, amount received by Mr. Mitesh from the firm will not be charged to tax under the head “Salaries”. The tax treatment of various amounts will be as follows :

 

        Salary and interest on capital will be charged to tax under the head “Profits & Gains of Business/Profession”.

        Share of profit will be exempt from tax.

 

27.    Tax Treatment Of Salary Received By An Indian Citizen Deputed Outside India

 

Illustration

Mr. Soham (an Indian citizen) is working in Essem Ltd., a private sector company. The company deputed him to its USA office. For the year 2012-13, he was deputed throughout the year in the USA and, hence, he was non-resident in India. The pay structure for the year 2012-13 was as follows :

 

        Basic salary 84,000$

        Value of various allowances 16,000$.

 

He is confused regarding the tax treatment of the above amount in his hands. He is of the opinion that in case of an Indian citizen deputed outside India, salary is charged to tax in India even if the assessee is non-resident. Advise him in this regard.

 

**

 

Salary received by an Indian citizen deputed outside India by the Government is treated as income deemed to have accrued or arisen in India and will be taxed in India. However, in such a case allowance and perquisites will be exempt from tax.

 

The above discussed provisions are applicable only in case of an Indian citizen deputed outside India by Government of India. In the present case Mr. Soham is not deputed by Government of India and he is non-resident and, hence, nothing will be charged to tax in India in respect of salary received by him in the USA.

 

28.    Tax Treatment Of Salary Received By An Indian Citizen Deputed Outside India

 

Illustration

Mr. Rohan (an Indian citizen) is a Government employee. Since 2010, he has been deputed by Government of India to the USA. For the year 2012-13 he was deputed throughout the year to USA. The pay structure for the year 2012-13 was as follows:

 

        Basic salary 1,84,000$

        Value of various allowances 25,000$.

 

He is confused regarding the tax treatment of the above amount in his hands. He is of the opinion that in case of an Indian citizen deputed outside India, salary is charged to tax in India even if the assessee is non-resident. Advise him in this regard.

 

**

 

Salary received by an Indian citizen deputed outside India by the Government is treated as income deemed to have accrued or arisen in India and will be taxed in India. However, in such a case allowance and perquisites will be exempt from tax.

 

In the above case, Mr. Rohan is a an Indian citizen and he is deputed by Government of India and, hence, he will be covered by above provisions and, thus, salary of 1,84,000$ will be charged to tax in his hands, however, allowances will be exempt.

 

29.    Tax Treatment Of Surrender Of Salary To The Central Government

 

Illustration

Mr. Sunil is working in Essem Ltd. In the month of January, 2013 he won a game show and earned Rs. 5 crores. Considering such a huge gain he decided to surrender his salary or to forego his salary. Advise him in this regard how to surrender/forego salary to minimise his tax liability.

 

**

 

Salary foregone after its accrual is charged to tax, even though it is not received by the employee. However, if salary is surrendered to the Central Government under section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, then such surrendered salary is not charged to tax.

 

Thus, if he foregoes his salary then it will be charged to tax, however, if he surrenders his salary to the Central Government under section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, then the salary surrendered by him will not be charged to tax in his hands.

 

30.    Tax Treatment Of  Computation Of Relief In Respect Of Arrears Of Salary

 

Illustration

During the previous year 2012-13, Mr. Lalit (age 29 years and resident and ordinarily resident in India) received salary of Rs. 4,84,000 and arrears of bonus for the year 2009-10 amounting to Rs. 50,000. The details of taxable income are as follows :

 

        Taxable income for the year 2012-13, excluding arrears of bonus : Rs. 4,84,000.

        Taxable income for the year 2009-10, excluding arrears of bonus : Rs. 3,84,000.

 

Compute the amount of relief under section 89 from above details.

 

**

 

Under section 89, read with Rule 21A(2), an employee can claim relief in respect of arrears of salary. Relief can be computed in the following manner:

 

Step 1 : Calculate total tax liability (including surcharge and cess, if any) on the total income, including the additional salary of the previous year in which such salary is received.

 

Step 2 : Calculate total tax liability (including surcharge and cess, if any) on the total income, excluding the additional salary of the previous year in which such salary is received.

 

Step 3 : Find the difference between tax computed at (1) and (2) above.

 

Step 4 : Calculate total tax liability (including surcharge and cess, if any) on the total income, including the additional salary of the previous year(s) to which such salary relates to.

 

Step 5 : Calculate total tax liability (including surcharge and cess, if any) on the total income, excluding the additional salary of the previous year(s) to which such salary relates to.

 

Step 6 : Find the difference between tax computed at (4) and (5) above.

 

Relief under section 89 is the excess of tax computed at Step 3 over tax computed at Step 6. No relief is available, if tax computed at Step 3 is less than tax computed at Step 6.

 

Considering above, relief will be computed as follows :

 

Tax on income of the year 2012-13, including arrears of salary (income will be Rs. 5,34,000).

:

Rs. 37,904

Tax on income of the year 2012-13, excluding arrears of salary (income will be Rs. 4,84,000).

:

Rs. 29,252

Difference (A)

:

Rs. 8,652

Tax on income of the year 2009-10, including arrears of salary (income will be Rs. 4,34,000).

:

Rs. 42,024

Tax on income of the year 2009-10, excluding arrears of salary (income will be Rs. 3,84,000).

:

Rs. 31,724

Difference (B)

:

Rs. 10,300

Difference of difference (A) – (B)

:

Rs. (1,648)

Relief under section 89(1) will amount to Nil, since (B) exceeds (A)

 

 

 
 
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