Guide to .. Tax Management ,Tax Planning and Tax Saving
 

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