Q. What is the meaning of salary?

A. The term salary is defined to include the following:
1. Wages
2. Any annuity or pension
3. Any gratuity
4. Any fees, commissions, perquisites or profits in lieu of, or in addition to, any salary or wages
5. Any advance of salary
6. Any payment received by an employee in respect of any period of leave not availed by him
7. The portion of the annual accretion in any previous year to the balance of an employee participating in a recognized provident fund to the extent it is taxable
8. Transferred balance in a recognized provident fund to the extent it is taxable
9. Income is taxable as salary only if an employer-employee relationship exists between the payer and the payee

Q. What are Allowances and how are they taxed?

A. Allowances are fixed sums of money paid regularly in addition to salary for the purpose of meeting some particular requirement. From the Income Tax point-of-view, there are 3 types of allowances:

• Taxable allowances
• Partially-exempted allowances
• Fully-exempted allowances
  

Q. What is the maximum amount not chargeable to tax for leave salary whether on Superannuation or otherwise?

A. The maximum amount not chargeable to tax beginning from July 1, 1997, is Rs. 2,40,000 as specified by the Government.

Q. What is the maximum amount of Gratuity not chargeable to tax?

A. The maximum amount of Gratuity not chargeable to tax beginning from September 24^th, 1997, is Rs. 3,50,000.

Q.What are the provisions of section 10(10) regarding taxability of gratuity?

A. Any gratuity received by an employee of the central government, any state government or a local authority is wholly exempt from tax.

Any gratuity received by an employee covered by the Payment of Gratuity Act, 1972, is exempt from tax to the extent of :
(i) 15 days’ salary (7 days in case of seasonal establishments) based on salary face=Arial size=2> last drawn for every completed year of service or part thereof in excess of six months
(ii) Rs. 3,50,000, or
(iii) gratuity actually received, whichever is less.

Any other gratuity (not covered in (a) and (b) above), received by an employee on retirement, death, termination, resignation or on his becoming incapacitated prior to his retirement is exempt from tax to the extent of the least of the following :
(i) Rs. 3,50,000
(ii) gratuity actually received, or
(iii) half month’s salary for each completed year of service.

Q. What is the maximum limit on non-taxable compensation received at the time of voluntary retirement?

A. U/s 10(10C) of the Income Tax Act, a sum upto Rs. 5,00,000 received at the time of voluntary retirement is not taxable, provided the Voluntary Retirement Scheme (VRS) is approved or framed as per the Rules. For details, please see the module on Income from Salaries.

Q. Is TDS mandatory on the amount received under an approved VRS?

A. If all the specified conditions are satisfied, the employer need not deduct tax at source on the amounts paid under the VRS. However, TDS will become mandatory on amounts exceeding the prescribed monetary limit of Rs. 5 lakh paid under the Scheme.

Q. What is the exemption limit for House Rent Allowance (HRA)?

A. The least of the following is exempt from tax:
1. Amount equal to 50 per cent of salary where the residential house is situated in Delhi, Mumbai, Calcutta or Madras. For residential house situated at any other place, an amount equal to 40 per cent
2. HRA actually received by the employee
3. Excess of rent paid over 10 per cent of the salary

The exemption will not be available if the employee lives in his own house, or in a house for which he does not pay any rent or pays rent which does not exceed 10% of salary.

Salary for the aforesaid purpose, means< basic pay plus dearness allowance if terms of employment so provide. It also includes commission based on a fixed percentage of turnover achieved by the employee as per the terms of contract of employment, but excludes all other allowances and perquisites.

Q. Will any amount be taxed in the hands of the employee in case he is provided an unfurnished residential accommodation?

A. Based on the nature of the employer, the employees have been divided into three categories and the taxability of each of the three categories is mentioned below:/FONT>

1. Central & State government employees: - The value of the perquisite will be equal to the rent which would have been determined as payable by the concerned employer in accordance with the rules framed by the Government for allotment to its officers
2. Semi-government employees: - Value of perquisite will be equal to 10% of the salary of the concerned employer or the fair rental value of the accommodation, whichever is less
3. Private sector employees: - Where fair rent is less than 10% of salary, fair rent is the taxable value of the perquisite. Where fair rent is 10% or more but not more than 50% of salary(60% for Delhi, Mumbai,Calcutta,Chennai), 10% of salary is the taxable value of the perquisite; and if it exceeds 50% of salary, fair rent minus 40% (50% for Delhi, Mumbai, Calcutta and Chennai) of the salary is the taxable value of the perquisite.

Q. What is the additional amount taxable, in case of a rent-free furnished accommodation?

1. 10 per cent per annum of the original cost of furniture, if furniture is owned by the employer;
2. actual hire charges payable, if furniture is hired by the employer.
   

Q. What is the taxable amount in case of Pension received by an employee after his retirement ?
A. Taxability of Pension depends on whether it is received as a Periodic or Lumsum Payment :
1. Uncommuted Pension (Periodical Payment ) . It is taxable as Salary in case of Government as well as Non Government Employees. For instance, monthly pension of Rs.5,000 received by Mr. A, say a public sector employee is fully taxable as part of salary.

2. Commuted Pension (Lump sum Payment):
(i) Any payment in commutation of pension (i.e Lumpsum Pension ) received under the Civil Pensions (Commutation) Rules of the Central Government or under any similar scheme applicable to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all-India services or to the members of the defence services or to the members of the civil services of a State or holders of civil posts under a State or to the employees of a local authority or a corporation established by a Central, State or Provincial Act is exempt from tax;

(ii) any payment in commutation of pension received under any scheme of any other employer, to the extent it does not exceed—
(a) in a case where the employee receives any gratuity, the commuted value of one-third of the pension which he is normally entitled to receive, and
(b) in any other case, the commuted value of one-half of such pension, such commuted value being determined having regard to the age of the recipient, the state of his health, the rate of interest and officially recognized tables of mortality ;

NOTE : Pension received from UNO is not Taxable Q. What is the taxable amount in case an employee is provided a vehicle owned or hired by the employer?

A. The taxability will depend upon the use the vehicle is put to. In case the vehicle is provided and used only for official purposes, nothing will be taxable in the hands of the employee. In case the vehicle is used only for personal purposes, actual amount incurred by the employer will be taxable. In case the vehicle is used for both official and personal purposes and it is difficult to find out the reasonable amount that could be attributed towards private use, a sum of Rs. 600 per month for vehicles with a h.p. rating of less than 16; and Rs. 800 per month for vehicles with a h.p. rating of more than 16. An additional amount of Rs. 300 per month will be added in case a chauffeur is also provided along with the vehicle.

Q. What is the taxability in respect of free domestic servants?

A. From the assessment year 1996-97, Rs.120 per month, per person is taxable in the hands of the employee for the domestic servant being a sweeper, watchman or gardener engaged by the employee. If, however, the sweeper, gardener or watchman is employed by the employee and salary is paid by the employer, the entire salary paid is taxable in the hands of the employee.
In case of any other domestic servant, the entire salary paid is taxable irrespective of the mode of employment.

Q. What is the taxable amount in case of shares offered in an employees' stock option (ESOP) scheme?

A. In case the shares are offered to the employees at a price lower than the one at which the shares have been offered to other shareholders/public, the difference between the price at which they have been offered to other shareholders/public,and the price at which they have been offered to the employees shall be the taxable value of the perquisite. In case the shares have been offered only to the employees at a price lower than the market price, the difference between the market price on the date of exercise of offer and the offer price shall be the taxable value of the perquisite in the hands of the employees .

w.e.f. from Financial Year 2000-01 : The value of any benefit provided by a company free of cost or at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under the Employees’ Stock Option Plan or Scheme of the said company will not be regarded as perquisite.

Q. What is the extent of standard deduction available to an employee ?

A. With effect from the assessment year 2002-2003, the amount of that an employee can avail from her salary income shall be calculated as below:

Salary income before availing standard deduction Amount of deduction Rs. 1.5 Lakh or less One-third of gross salary or Rs. 30000 whichever is less More than Rs. 1.5 Lakh but not more than Rs. 3 Lakh Rs. 25000 More than Rs. 3 Lakh but not more than Rs. 5 Lakh Rs. 20000

Note: No Standard Deduction for Salary above Rs. 5.0 Lakhs

Q. What is the maximum amount of standard deduction in case an employee receives salary from more than one employer during the year?

A. Where the employee receives salary from more than one employer the maximum amount of deduction cannot exceed the monetary ceiling specified above.

The tax implications of the house rent allowance (HRA) seem to baffle most people. Taking the case of two individuals, A and B, who work in the same company, following questionnaire will explain this allowance in detail. Two significant differences between the two individuals, which is necessary for this study, is that A resides in his own house while B in a rental accommodation.

Are both eligible for HRA?

Yes. Because the payment of HRA by an employer does not depend upon its end-use by the employee. An employee may prefer to stay in his/her own accommodation but will still be eligible to receive HRA if it is a part of the salary package. This is so, because HRA, as its name suggests, is an Allowance supplementing the Basic Salary and Dearness Allowance/Pay, if any, in a salary package.

Is HRA taxable?

In the case of A, who stays in his own house, tax is payable on the full amount of HRA received by him. B, living in a rented accommodation, may qualify for relief on the HRA received by him, such relief being dealt with under section 10 (13A) of the Income Tax Act, 1961.

When is HRA exempt from tax?

A salaried individual, in order to get an exemption on his/her HRA, must fulfil the following basic conditions:

• The employee must not live in his/her own house
• He/she must pay rent for accommodation
• Such rent must be more than 10 per cent of his/her salary