UNIT V- Taxation

SALARY
• Salaries is the remuneration received by an employee for the
services rendered by him to that employer. The primary
criteria of classifying an income under Salaries is that of
“Employer Employee Relationship”.

• Example :

(i)Directors of the company regarded as Employees.

(ii) A Doctor visiting a company on a particular day of a week

and paid a fixed remuneration will still not be regarded as an
employee.

(iii) High Court, Supreme Court Judges – They will be regarded

as Employees (Government Servants).

MPs and MLAs – They will not be regarded as employees as

they are Public Servants. The Honorarium received by them
will be taxable under Income from Other Sources.
• Definition of Salary – Sec. 17(1) 

Salary Includes –

• Wages

• Annuity or Pension

• Gratuity

• Any fees, commission, perquisites and profit in

lieu of salary

• Advance Salary

• Leave Salary

• Annual Accreation to the Credit of a

recognized Provident Fund in excess of
specified limits.

• Transfer of Balance in recognized Provident

Fund.

• Contribution made by Central Government

under a Pension Plan.
• For the purpose of taxing salary, the study is under “5” Heads.
A. General
B. Allowances
C. Perquisites
D. Terminal Benefits
E. Profit in lieu of salary 
General :-
• Basic Pay – This is the primary source upon which other computations are
made. It is computed in 2 ways.
– Acrual Amount – Where specific amount is given
– Grade system of Basic Pay – Predetermination of increment

• Bonus / Commission 
These may be paid annually or periodical basis. This is fully taxable.

• Incentive – Fully taxable

 
ALLOWANCES 
• Fixed monetary payments for an ear marked purpose. In other words, payment a
made by an Employer to an employee and employer also specified for what purpose t
payment should be utilized.
• Allowances are taxable based upon its utilization. For this purpose allowances a
bifurcated into Three
1) Fully taxable allowances
2) Fully exempt Allowances
3) Partly taxable allowances
• Fully taxable allowances -
It means that the whole of the amount received is taxable

i. Dearness Allowances (DA) – Allowance paid for meeting the cost of employment
known as DA. DA is fully taxable irrespective of the fact that it is forming part or not. 
ii. City Compensatory Allowance (CCA) – Allowance paid for meeting the high cost
living of a particular place is known as CCA.
iii. Medical Allowance : Fully taxable
iv. Lunch Allowance : Fully taxable
• Fully Exempt Allowance :-
i. Allowances paid to High Court / Supreme Court Judges

ii. Allowances paid to High Commissioners / Ambassadors outside

India. 

• Partly Taxable Allowances

House Rental Allowances (HRA) : Allowance paid for meeting

the cost of accommodation is known as HRA. U/s 10(13A)
exemption in HRA is as follows:-

– Actual HRA received

– Excess of rent paid over 10% of Salary (Rent Paid – 10% of

Salary)

– 50% (Metros) or 40% (Non-Metros) of Salary 

Salary = Basic Pay + DA (forming part) + commission paid as a
fixed % of turnover 

For determining the HRA exemption four factors are being

considered

 HRA received

 Rent Paid

 Salary; and

 Place of stay 
 
• Children Education Allowance :Exempt up to Rs.100/- per month per child for maximum of
2 Children. 

• Hostel Allowance : Exempt up to Rs.300/- per child per month for maximum
of 2 children.

• Travelling Allowance : If it is officially spent wholly exempt.(Between cities)

• Conveyance Allowance : officially spent wholly exempt.(within city)

• Transport Allowance : Rs.800/- pm is exempt. Irrespective of actual spent

• Uniform Allowance : Officially spent is wholly exempt.

• Hill Area Allowance : Varies from Rs.300/- to Rs.7000/- based upon the altitude of
the hill.

• Border Area Allowance : varies based upon the intensity of the border.

• Underground Allowance : Whatever is actually paid is fully exempt.

• Transport Allowance for Physically Challenged :Exempt up to Rs.1600/- irrespect of

actual spent. 
 PERQUISITES
• The other component of an employer’s
remuneration is perquisites. A perquisites is
defined as a gain or profit incidentally made from
employment in addition to regular salary or wages,
especially of a kind expected or promised.

• Their main characteristic is that they are payable

only during the continuance of employment and
are directly dependent on the service.

• The normal meaning of the word denotes

something that benefits an employee by going
directly to his pocket. It therefore does not apply to
reimbursement of expenses actually incurred in
the interest of official work.
• Perquisites 
 Free Gas, Water, Electricity provided by an employer.
 Provision of watchman, sweeper, gardner and
personal attendant to the employee.
• General Perquisites
1. Medical Facility – This perquisites discusses the
provision of taxation w.r.t. Medical facility provided by
the employer to employee or his family members.
1.Where the facility provided in a hospital owned by
the employer, then also it is wholly exempt.
In all other cases exemption is applicable up to
Rs.15,000/- p.a.
• Medical facility also includes Mediclaim Insurance
premium paid. Hence it is wholly exempt.
3. Leave Travel Concession Facility :-

LTC is a facility provided by an employer, where the employer takes care of the
expenditure for the personal tour of employee and his family members (same like
medical). For the purpose of this benefit, 4 years are together known as a block.

An employee is eligible for 2 such trips in a block of 4 years. Where the employee
fails to avail one trip or both the trips then he can carry forward one such trip to next
block of 4 years.

d. Exemption is as follows :- 

– If the trip is undertaken in a flight – Amount exempt will be economy class fare by
the national airlines by the shortest route.

– If the journey is performed by train – Amount exempt will be first class A/C fare by
the shortest route.

– If the journey is performed by any other transport system – deluxe class fare of
such transport system.

– Where there is no recognized transport facility, first class A/C fare, had there
been a recognized train facility.
 CALCULATION OF INCOME TAX

• Income from Salary

Gross salary -Special deduction under sec.10& sec 16 = Net salary Income

+
• Income from House property
Gross House property Income– Special deduction = Net House property
Income
+
• Income from Business or profession
Gross business or profession income– Special deduction = Net business or
profession income
+
• Income from Capital Gains
Gross Capital Gains income– Special deduction = Net Capital Gains income
+
• Income from other sources
Gross other sources income– Special deduction = Net other sources income

== GROSS TOTAL INCOME

• GROSS TOTAL INCOME – GENERAL DEDUCTION u/s
80 = Taxable Income

• TAX + 3% educational Cess = Amount to be paid

towards tax
 INCREASING POST VALUE
COMPENSATION AFTER TAX
• A proper understanding of various tax shelters will help
individuals to minimize their tax liabilities and companies to
review the tax benefits they give to their employees with a view
to reduce their own cost, increase employee's satisfaction and
reviews the tax burden for both.

• Remuneration received by the employees should qualify for

concessional rate of taxation so that their post tax income is
maximized. This is an important consideration because the post
tax income is perceived as the real income by the employees and
therefore, as significant implication for his morale, motivation and
commitment to the organization.
 TAX PLANNING
• Tax planning includes all financial arrangement which allow a tax-
payer to reduce to the minimum his tax liability without violating
any legal provision and without resorting to any colorable device.

• Although tax planning and tax avoidance are two distinct legal
concepts, the line of demarcation is very thin and substantially
blurred. There is an element of malafide intent behind the tax
avoidance. Any tax planning though done strictly according to law
would amount to tax avoidance if the basic intention of the
legislature is defeated.
• While considering tax planning from the angle of the employer, provisions relating to
disallowances should be carefully examined to ensure that any payment made as salary or
perquisite is not disallowed as permissible business expense. Apart from complying with the
requirement of the above provisions, employer has to ensure that tax is deducted at source.

TAX EFFICIENT COMPENSATION PACKAGE

1. Medical Reimbursement :

 Medical expenses reimbursed by your employer are tax-exempt up to Rs.15000 per year.
Such payment should be a reimbursement against the production of bills or vouchers, and
not on allowance, which you may or may not spend.

 Besides reimbursement, hospitalization of you and your family members borne by your
employer are also exempt provided disease is notified by chief commissioner of income tax.

 Instead of reimbursing hospitalization expenses, some employers prefer to reimburse the

premium paid by you on a mediclaim policy. such Reimbursement of medical insurance
premium is a tax-free perquisite without any limit.
Interest –free loan:

• A loan taken by you from your employer for any purpose

on which you don’t pay interest, or pay a concessional
rate of interest, is not a taxable perquisite.

Transport Allowance :

• This is meant to compensate you for the cost incurred

in commuting to your place of work. Transport allowance
is exempt to the extent of Rs.800 per month, irrespective
of the amount actually spent by you in commuting to your
work place. This exemption is not available to you if your
employer has provided you free conveyance.
 DIFFERENT FORMS OF SALARY-
RETIREMENT BENEFITS

• 1. Leave encashment salary

• 2.Gratuity
• 3.Pension
• 4.Retrenchment compensation
• 5.Provident Fund

17
 LEAVE ENCASHMENT
• It is not related to casual leave

• For every completed year of service employee is

entitled to receive a certain number of days of
paid leave. Employee either can take leave or en
cash it while in service or after retirement.

• Note: Any thing received while in service is

normally taxable. After retirement there are some
concessions given.

18
 MR.A PAY SLIP WORKING IN
MADURAI/MONTH
• Basic pay = Rs 10000 (1,20,000)

• Dearness allowance =Rs 5000 (60,000)

• HRA =Rs 3000 (36,000)

• CCA = Rs 1000 (12,000)

• Medical allowance = Rs 500 (6000)

• Entertainment allowance =Rs 600 (7,200)

• He pays a house rent of 7000/per month. He pays Rs1500 as

professional tax. He contributes Rs 700per year to the Prime
minister relief fund. He subscribes Rs.40000 to GPF. He invests
Rs.30,000 in mutual fund. He purchases a NSC for Rs 20,000. He
pays LIC policy premium of Rs.15, 000. He pays Rs.5000 as
mediclaim premium. Calculate the income tax ?

19
Gross salary Income = 2,41,200
(BP+Alowances+Perks)
1st deduction under sec 10(13)
Actual HRA =Rs 36000
Rent paid in excess of 10% =Rs 66000
40% of (BP+DA) =Rs 72000 =Rs 36000

2nd Deduction under sec 16

a. Deduction for entertainment Allowance -
Deduction is Minimum of following
Actual EA received
1/5th of Basic
Rs.5000/- p.a.
 
Entertainment allowance =Rs 5000
Professional Tax =Rs 1500 =Rs 6500
 
Net salary Income =Rs 1,98,700
Income from House property =NIL
Income from business pr prof =NIL
Income from Capital gains =NIL
Income from other sources =NIL
Gross Total Income =Rs 198700

3rd deduction U/s 80

80 C
Towards Gratuity provident fund =Rs 40,000
Towards Mutual Fund =Rs 30,000
Towards NSC =Rs 20,000
Towards LIC Policy =Rs 15,000
Total =Rs 105000
Limited to 1 lakh so =Rs 100000
80D
Towards Medi claim policy = Rs 5000
Limited to 10,000

80G
Towards PMFR =Rs 700

Total =Rs 105700

Taxable income =Rs 198700-Rs 105700 = Rs

93000
Tax =NIL
3% education cess
Assessment year 2010-2011 Individual /HUF
Upto Rs 160000= NIL
160000 to Rs 300000=10%
Rs 300000 to Rs 500000 =20%+14000
Above Rs 500000 =30% + 54000
 
Assessment year 2010-2011 for women
Upto Rs 190000= NIL
190000 to Rs 300000=10%
Rs 300000 to Rs 500000 =20%+11000
Above Rs 500000 =30% + 51000

Assessment year 2010-2011 senior citizens above 65 years

Upto Rs 240000= NIL
240000 to Rs 300000=10%
Rs 300000 to Rs 500000 =20%+6000
Above Rs 500000 =30% + 46000
Basic Rules
Rule 1
The aggregate amount of
deductions under sections 80C
to 80U cannot exceed gross
total income.
Rule 2
These deductions are to be
allowed only if the assessee
claims these and gives the
proof of such investments/
expenditure/ income.
 CATEGORIES OF
DEDUCTIONS
1. To encourage savings

2. For certain personal expenditure

3. For socially desirable activities

4. For physically disabled persons

Deduction u/s
80C
Applicable only to Individual &
HUF.

This section provides for

deduction in respect of certain
expenditure/ investments paid or
deposited by the assessee in the
previous year.
The gross qualifying amount under this section refer to
the payment/investment under some of the following
schemes:-
Life Insurance Premium Paid.
Deferred Annuity Contract.
Statutory Provident Fund and Recognized Provident
Fund.
15 Year Public Provident Fund.
Approved Superannuation Fund.
National Savings Certificates.
Unit-linked Insurance Plan (Ulip).
Dhanraksha Plan of LIC Mutual Fund.
Jeevan Dhara, Jeevan Akshay, New Jeevan Dhara.
Notified Units of Mutual Fund or UTI.
Amount of Deduction

100% of the amount invested or Rs. 1,00,000/-

whichever is lower.
Deduction u/s
80CCC
Deduction in respect of Contribution to
Certain Pension Funds.

Individual

Eligible Amount – amount paid/deposited

under an annuity plan of the Life Insurance
Corporation of India or any other insurer for
receiving pension.
Conditions
Taxable income.
This must not be allowed as deduction u/s
80C.
Any amount withdrawn or pension received
from the plan is taxable in the hands of
the assessee or nominee in the year of
receipt.

Amount of Deduction
Amount paid or Rs. 10,000/- whichever is
lower.
 Deduction u/s
80CCD
Deduction in Respect of Contribution to
Pension Scheme of Central Government.

Individual who is an employee of Central

Government on or after 1.1.2004.

Eligible Amount – Deposit made under a

pension scheme notified by the Central
Government.
The aggregate amount of deductions under
80C, 80CCC and 80CCD put together
cannot exceed

Rs.1,00,000
Deduction u/s
80D
Deduction in respect of Medical
Insurance Premia.

Individuals/HUF.

Eligible Amount - Insurance

premium paid in accordance with
the scheme framed by the
General Insurance Corporation
of India and approved by the
Central Government.
Conditions
The amount should be paid by cheque out of
the taxable income.
The policy is taken on the health of the
assessee, on the health of spouse, dependent
parents or dependent children of the assessee.
In case of HUF on the health of any member of
the family.

Amount of Deduction
100% of premium paid subject to a maximum
of:
Rs. 15,000 in case of senior citizens (above
65 years)
Rs. 10,000 in case of others.
Deduction u/s
80E
Deduction in respect of repayment of loan
taken for higher education.

Individual

Eligible Amount – any amount paid by way of

interest on loan taken from any financial
institution or any approved charitable
institution for higher education.
Conditions
Amount is paid out of his income chargeable to
tax.
Higher education means full-time studies for any
graduate or post-graduate course in engineering,
medicine, management or for post-graduate
course in applied science or pure sciences
including mathematics and statistics.
the deduction shall be allowed for the previous
year in which the assessee starts repaying the
loan or interest thereon and seven previous years
immediately succeeding it or until the loan
together with interest thereon is paid by the
assessee in full ,whichever is earlier.
Amount of Deduction
Actual interest paid or Rs. 40,000 whichever
is lower.
Deduction u/s
80U
Deduction in case of person with disability.

Individual resident of India.

Eligible amount – Flat deduction to a person

with disability.
Conditions
He is certified by the medical authority to be a
person with disability, at any time during the
previous year.
He furnishes a certificate issued by the
medical authority in the prescribed form along
the return of income.

Amount of Deduction
A fixed deduction of
Rs. 50,000 in case of a person with disability
Rs. 75,000 in case of a person with severe
disability.( having any disability over 80%)