Income Under the Head Salaries

Comprehensive practice flashcards covering definitions, statutory rules, valuation norms, allowances, perquisites, and deductions under the head Salaries as per ICAI Income Tax Law.

Section 15 (Basis of Charge)

The statutory provision dictating that salary is chargeable to income tax on a "due" basis or on a "receipt" basis, whichever occurs earlier.

Advance Salary vs. Advance Against Salary

Advance salary is remuneration received prior to becoming due and is taxed in the year of receipt on a receipt basis. Advance against salary is an adjustable loan from the employer that cannot be taxed as salary.

Surrender of Salary

Salary surrendered by an employee in the public interest to the Central Government under section $2$ of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, which is completely exempt from taxable income.

Section 10(10CC)

The provision stating that income tax paid by an employer on non-monetary perquisites on behalf of an employee is fully exempt from tax in the hands of the employee.

Section 10(7)

A provision under which any allowances or perquisites paid or allowed outside India by the Government to a citizen of India for rendering services outside India are fully exempt from tax.

House Rent Allowance (HRA) Exemption [Section 10(13A)]

An allowance exempt under the optional tax regime to the extent of the lowest of: (1) actual HRA received, (2) rent paid minus $10\%$ of salary, or (3) $50\%$ of salary in metro cities (Delhi, Mumbai, Kolkata, Chennai) or $40\%$ of salary in other cities.

Transport Allowance Exemption

An exemption under both tax regimes of up to $\text{` } 3,200\text{ p.m.}$ granted exclusively to employees who are blind, deaf and dumb, or orthopedically handicapped with disability of the lower extremities of the body for commuting between residence and duty.

Children Education Allowance Exemption

An allowance exempt under the optional tax regime up to $\text{` } 100\text{ per month per child}$ for a maximum of two children.

Children Hostel Allowance Exemption

An allowance exempt under the optional tax regime up to $\text{` } 300\text{ per month per child}$ for a maximum of two children.

Uncommuted Pension

A periodic pension payment received periodically by a retiree, which is fully taxable in the hands of both government and non-government employees.

Commuted Pension [Section 10(10A)]

A lump-sum amount received by commuting future pension rights. It is fully exempt for government, local authority, and statutory corporation employees. For non-government employees, it is exempt up to $\frac{1}{3}\text{rd}$ of full pension if receiving gratuity, or $\frac{1}{2}$ of full pension if not receiving gratuity.

Gratuity Exemption under Payment of Gratuity Act, 1972 [Section 10(10)(ii)]

Exemption for covered employees calculated as the least of: (1) statutory limit of $\text{` } 20,00,000$, (2) actual gratuity received, or (3) $\frac{15}{26} \times \text{last drawn salary} \times \text{completed years of service or part in excess of } 6\text{ months}$.

Gratuity Exemption for Non-Covered Employees [Section 10(10)(iii)]

Exemption for non-covered employees calculated as the least of: (1) statutory limit of $\text{` } 20,00,000$, (2) actual gratuity received, or (3) $\frac{1}{2} \times \text{average salary of last 10 months} \times \text{completed years of service (ignoring fractions)}$.

Leave Encashment on Retirement [Section 10(10AA)]

Exemption for non-government employees upon retirement calculated as the least of: (1) $\text{` } 25,00,000$, (2) actual leave salary received, (3) $10\text{ months} \times \text{average salary of last 10 months}$, or (4) cash equivalent of unavailed earned leave (maximum $30\text{ days}$ per year of service).

Retrenchment Compensation [Section 10(10B)]

Exemption available up to the lowest of: (1) compensation actually received, (2) statutory limit of $\text{` } 5,00,000$, or (3) $15\text{ days' average pay} \times \text{completed years of service and part in excess of } 6\text{ months}$.

Voluntary Retirement Compensation [Section 10(10C)]

Exemption for eligible undertakings' employees up to the least of: (1) compensation actually received, (2) $\text{` } 5,00,000$, (3) $3\text{ months' salary} \times \text{completed years of service}$, or (4) last drawn salary multiplied by remaining months of service.

Recognised Provident Fund (RPF) Contribution Limits

Employer contribution to an RPF is taxable in excess of $12\%$ of salary. Interest credited to an RPF is taxable in excess of $9.5\%\text{ p.a.}$

Employer Contribution Perquisite [Section 17(2)(vii)]

The perquisite representing the aggregate employer contributions to a recognized provident fund, NPS under section 80CCD(1), and an approved superannuation fund to the extent it exceeds $\text{` } 7,50,000$ in a previous year.

Annual Accretion Perquisite [Section 17(2)(viia)]

The taxable annual interest, dividend, or accretion relating to excess employer contributions over $\text{` } 7,50,000$, computed using the formula $\text{TP} = (\text{PC}/2) \times R + (\text{PC1} + \text{TP1}) \times R$.

Specified Employee [Section 17(2)(iii)]

An employee who is either a director of a company, holds a substantial interest ($20\%$ or more of voting power), or earns monetary salary exceeding the prescribed limit after allowable deductions under section 16.

Employer-Owned Accommodation Perquisite [Rule 3(1)]

For non-government employees, unfurnished value is: $10\%$ of salary in cities with population $> 40\text{ lakhs}$; $7.5\%$ of salary in cities with population $> 15\text{ lakhs} \le 40\text{ lakhs}$; and $5\%$ of salary in other areas, less any rent paid by the employee.

Employer-Leased Accommodation Perquisite [Rule 3(1)]

The value of accommodation leased or rented by an employer, determined as the lower of the actual lease rental paid/payable or $10\%$ of salary, reduced by any rent recovered from the employee.

Furnished Accommodation Valuation

The value of unfurnished accommodation increased by $10\%\text{ p.a.}$ of the original cost of furniture owned by the employer, or the actual hire charges incurred by the employer, less charges recovered from the employee.

Motor Car Perquisite (Partly Personal & Employer-Owned)

Where the car is owned/hired and run by the employer for mixed use: $\text{` } 1,800\text{ p.m.}$ for engines up to $1.6\text{ litres}$ and $\text{` } 2,400\text{ p.m.}$ for engines exceeding $1.6\text{ litres}$, with an extra $\text{` } 900\text{ p.m.}$ if a chauffeur is provided.

Transfer of Movable Assets Perquisite [Rule 3(7)(viii)]

The asset's original cost minus normal wear and tear: $50\%$ on WDV per completed year for electronic items/computers; $20\%$ on WDV per completed year for motor cars; and $10\%$ on SLM per completed year for any other asset, less amount recovered from the employee.

Use of Movable Assets Perquisite [Rule 3(7)(vii)]

The perquisite for employer-owned movable assets provided to the employee: Nil for laptops and computers; and $10\%\text{ p.a.}$ of actual cost (or hire charges) for other movable assets, minus amounts recovered from the employee.

Concessional Loan Perquisite [Rule 3(7)(i)]

Interest calculated on the maximum monthly outstanding balance using the SBI lending rate as on the first day of the relevant previous year minus actual interest paid. Loans for specified diseases or aggregating $\le \text{` } 20,000$ are exempt.

Gift Voucher Perquisite [Rule 3(7)(iv)]

A gift, voucher, or token provided by an employer which has a taxable value equal to its full amount; it is valued at Nil if the aggregate value is below $\text{` } 5,00,00\text{?}$ No, strictly below $\text{` } 5,000$ during the previous year.

Standard Deduction [Section 16(ia)]

A statutory deduction from gross salary equal to actual salary or $\text{` } 75,000$, whichever is lower, under the default tax regime; or actual salary or $\text{` } 50,000$, whichever is lower, under the optional tax regime.

Entertainment Allowance Deduction [Section 16(ii)]

A deduction available only to Government employees under the optional tax regime, equal to the least of: (1) $\text{` } 5,000$, (2) $\frac{1}{5}\text{th}$ of basic salary, or (3) actual entertainment allowance received.

Professional Tax Deduction [Section 16(iii)]

A deduction allowed under the optional tax regime for tax on employment levied by a State under Article 276 of the Constitution, granted on an actual payment basis in the previous year.

Leave Travel Concession (LTC) [Section 10(5)]

An exemption under the optional tax regime for travel assistance in India for an individual and family for $2$ journeys in a block of $4$ calendar years, restricted to economy airfare or first-class AC rail fare, and limited to a maximum of two surviving children (except multiple births after first child).

Relief Under Section 89

Tax relief granted to an assessee when advance salary, arrears of salary, or family pension arrears are received and taxed at a higher rate in a single financial year than normal, calculated as per Rule 21A.