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Income Tax 2016-17 – Income chargeable under Salaries as per Income-Tax Act

Income Tax 2016-17 – CBDT definition about computation of Income under the Salaries Head as per Income Tax Act.

Ministry of Finance has issued a circular about details of Income chargeable under Salari2es as per Income-Tax Act

COMPUTATION OF INCOME UNDER THE HEAD “SALARIES”

INCOME CHARGEABLE UNDER THE HEAD “SALARIES”:

(1)  The following income  shall  be  chargeable  to income-tax under the head “Salaries” :

(a)         any salary due from an employer or a former employer to an assessee in the previous  year, whether paid or not;

(b)         any salary paid or allowed to him in the previous year by or on behalf of an employer or a  former employer though not due or before  it became due to him.

(c)         any arrears of salary paid or allowed to him in the previous year by or on   behalf of   an employer or a former employer, if not charged to income-tax for any earlier previous year.

(2) For the removal of doubts, it is clarified that where any salary paid in advance is included in the  total income  of any person for any previous year it shall not be included again in the total income of the person when  the salary  becomes  due.

Any salary,  bonus,  commission  or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as “Salary”.

DEFINITION OF “SALARY”, “PERQUISITE” AND “PROFIT IN LIEU OF SALARY” (SECTION 17):

“Salary”  includes:-

i.       wages,  fees,  commissions, perquisites, profits in lieu of, or, in addition to salary, advance  of salary, annuity or pension, gratuity,  payments in respect  of  encashment of leave etc.

ii.       the portion of the annual  accretion  to the balance at the credit of the employee participating in a recognized provident fund as consists of {Rule  6 of Part A of the Fourth Schedule of  the Act}:

a) contributions   made by the employer to the account of the employee in a recognized provident fund    in excess  of  12%  of the salary of the employee, and

b) interest credited on the balance to the credit of the employee in so far as it is allowed at a rate exceeding such rate as may be fixed by Central Government. [w.e.f. 01-09-2010 rate is fixed at 9.5% – Notification No SO1046(E) dated 13-05-2011]

iii.       the contribution made by the Central Government or any other employer to the account of the employee under the New
Pension Scheme as notified vide Notification F.N. 5/7/2003- ECB&PR dated 22.12.2003 (enclosed as Annexure VII) referred to in section 80CCD (para 5.5.3 of this Circular).

It may be noted that, since  salary  includes   pension,   tax  at  source would have to  be  deducted from pension also, unless otherwise so required. However, no tax is required to be deducted from the commuted portion of pension to the extent exempt under section 10 (10A).

Family Pension is chargeable to tax under head “Income from other sources” and not under the head “Salaries”. Therefore, provisions of section 192 of the Act are not applicable. Hence, DDOs are not required to deduct TDS on family pension paid to person.

Perquisite includes:

I.           The value of rent free accommodation provided to the employee by his employer;

II.           The value of any concession in the matter of rent in respect of any accommodation provided to the employee by his employer;

III.         The value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:

i)          By a company to an employee who is a director of such company;

ii)        By a company to an employee who has a substantial interest in the company;

iii)       By an employer (including a company)to an employee, who is not covered by (i) or (ii) above and whose  income  under  the head  “Salaries”  (whether  due from  or  paid  or  allowed  by  one or  more employers), exclusive of the value of all benefits and amenities not provided by way of monetary payment, exceeds Rs.50,000/-.

[What constitutes concession in the matter of rent have been prescribed in Explanations 1 to 4 below section 17(2)(ii) of the Act] IV.         Any sum paid by the employer in respect of any obligation which would otherwise have been payable by the assessee.

V.          Any sum payable by the employer, whether directly or through a fund, other than a recognized provident fund or an
approved superannuation fund or other specified funds u/s 17, to effect an assurance on the life of an assessee or to effect a contract for an annuity.

VI.         The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the employee and for this purpose, .

(a)         “specified  security”  means  the  securities  as  defined  in  section  2(h)    of  the  Securities  Contracts (Regulation) Act, 1956 and, where employees’ stock option has been granted under any plan or scheme therefor, includes the securities offered under such plan or scheme;

(b)“sweat equity shares” means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called;

(c) the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from the assessee in respect of such security or shares;

(d)“fair market value” means the value determined in accordance with the method as may be prescribed (refer Rule 3(9) of the IT Rules);

(e) “option” means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price;

VII.         The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees; and

VIII         The value of any other fringe benefit or amenity as prescribed in Rule 3.

5.2.2A Rules for valuation of such benefit or amenity as given in Rule 3 are as under :  –

I.   Residential Accommodation provided by the employer [Rule 3(1)]:-

“Accommodation” includes a house, flat, farm  house or part thereof , hotel   accommodation, motel, service apartment, guest house, a caravan,  mobile  home, ship or other floating structure.

A. For valuation  of  the perquisite of rent free unfurnished  accommodation, all employees are divided into two categories:

(i) For  employees of the Central and State governments the value  of  perquisite  shall be equal to  the  licence fee charged for such accommodation as reduced by the rent actually paid by the employee. Employees of autonomous, semi-autonomous institutions, PSUs/PSEs & subsidiaries,  Universities, etc. are not covered under this method of valuation.

(ii) For  all others, i.e., those salaried taxpayers not in employment of  the  Central   government  and  the  State government, the valuation  of perquisite  in respect  of accommodation  would  be at prescribed rates, as discussed below:

a) Where the accommodation provided to the employee is owned by the employer:

Sl No Cities having population as  per the  2001 census

Perquisite

1

Exceeds 25 lakh

15% of  salary

2

Exceeds 10 lakhs but does not exceed 25 lakhs 10% of salary

3

For  other  places

7.5 % of salary

b) Where the accommodation so provided is taken on lease/ rent by the employer:

The prescribed rate is 15% of the salary or the actual amount of lease rental payable by the employer, whichever is lower, as reduced by any amount of rent paid by the employee. Meaning of ‘Salary ‘for the purpose of calculation of perquisite in respect of Residential Accommodation :

a. Basic Salary ;

b. Dearness Allowance, or Dearness Pay if it enters into the computation of superannuation or retirement benefit of the employees;

c. Bonus ;

d. Commission ;

e. All other taxable allowances (excluding the portion not taxable ); and

f. Any monetary payment which is chargeable to tax (by whatever name called).

Salary from all employers shall be taken into consideration in respect of the period during which an accommodation is provided. Where on account of the transfer of an employee from one place to another, he is provided with accommodation at the new place of posting while retaining the accommodation at the other place, the value of perquisite shall be determined  with reference to only one such accommodation which has the lower value for a period not exceeding 90 days and thereafter the value of perquisite shall be charged for both such
accommodation.

B   Valuation of the perquisite of furnished accommodation– the value of perquisite as determined by the above method (in A)
shall be increased by-

i)    10% of the cost of furniture, appliances and equipments, or
ii)     where the furniture, appliances and equipments have been taken on hire, by the amount of actual hire charges payable and the value so arrived at shall be reduced by any charges paid by the employee himself.

It is added that where the accommodation is provided by the Central Government or any State Government to an employee who is serving on deputation with any body or undertaking under the control of such Government,-

(i).           the employer of such an employee shall be deemed to be that body or undertaking where the employee is serving on deputation; and

(ii).          the value of perquisite of such an accommodation shall be the amount calculated in accordance with Table in A(ii)(a) above, as if the accommodation is owned by the employer.

C.          Furnished Accommodation in a Hotel: The value of perquisite shall be determined on the basis of lower of the following two:

1. 24% of salary paid or payable in  respect of period during which the accommodation is provided; or
2. Actual charges paid or payable by the employer to such hotel,
for the period during which such accommodation is provided as reduced by any rent actually  paid or payable by the employee. However, nothing in (C) shall be taxable if following two conditions are satisfied :

1. The hotel accommodation is provided for a total period not exceeding in  aggregate 15 days in a previous year, and
2. Such accommodation is provided on an employee’s transfer from one place to another place.

It may be clarified   that   while services provided as an integral part of the accommodation, need not be valued separately as perquisite, any  other services over and above  that  for which the employer makes payment or reimburses the employee  shall be valued as a perquisite as per the residual clause. In other  words, composite tariff for accommodation will be valued  as per the Rules and any other charges for  other facilities provided by the hotel will be separately valued under  the residual clause.

D.          However, the value  of any accommodation  provided to  an employee  working  at  a  mining site or  an on-shore  oil exploration  site  or  a  project   execution  site or a dam site or a power generation site  or  an off-shore site will not be treated  as a perquisite if:

i)    such accommodation is located in a “remote area” or
ii)   where it is not located in a “remote area”, the accommodation is of a temporary nature having plinth area of not more than 800 square feet and should not be located within 8 kilometers of the local limits of any municipality or cantonment board.

A project execution site here means a site of project up to the stage of its commissioning. A “remote area” means an area  located at least 40 kilometers away from a town having a population not exceeding 20,000 as per the latest published all-India census.

II Perquisite on Motor car provided by the Employer [ Rule 3(2)]:

(1)         If an employer provides motor car facility to his employee, the value of such perquisite shall be :
a) Nil, if the motor car is used by the employee wholly and exclusively in the performance of his official duties.
b) Actual expenditure incurred by the employer on the running and maintenance of motor car including remuneration to chauffeur
as increased by the amount representing normal wear and tear of the motor car and as reduced by any amount charged from the employee for such use (in case the motor car is exclusively for private or personal purposes of the employee or any member of his household).
c) Rs. 1800/- (plus Rs. 900/-, if chauffeur is also provided) per month (in case the motor car is used partly in performance of duties and partly for private or personal purposes of the employee or any member of his household if the expenses on maintenance and running of motor car are met or reimbursed by the employer). However, the value of perquisite will be Rs.
2400/-(plus Rs. 900/-, if chauffeur is also provided) per month if the cubic capacity of engine of the motor car exceeds 1.6 litres.
d) Rs. 600/- (plus Rs. 900/-, if chauffeur is also provided) per month (In case the motor car is used partly in performance of duties and partly for private or personal purposes of the employee or any member of his household if the expenses on maintenance and running of motor car for such private or personal use are fully met by the employee). However, the value of perquisite will be Rs. 900/- (plus Rs. 900/-, if chauffeur is also provided) per month if the cubic capacity of engine of the motor car exceeds
1.6 litres.

(2)         If the motor car or any other automotive conveyance is owned by the employee but the actual running and maintenance charges are met or reimbursed by the employer, the method of valuation of perquisite value is different and as below:

a) where the motor car or any other automotive conveyance is owned by the employee but actual maintenance & running expenses (including chauffeur salary, if any) are met or reimbursed by the employer, no perquisite shall be chargeable to tax if the car is used wholly and exclusively for official purposes. However following compliances are necessary:

Ø    The employer has maintained complete details of the journey undertaken for official purposes;
Ø    The employer gives a certificate that the expenditure was incurred wholly for official duties.

However if the motor car is used partly for official or partly for private purposes then the amount of perquisite shall be the actual expenditure incurred by the employer as reduced by the amounts in c) referred to in (1) above.

Normal wear and tear of the motor shall be taken at 10 % per annum of the actual cost of the motor car.

III  Personal  attendants etc. [Rule 3(3)]:  The  value of free service of all personal  attendants   including  a  sweeper, gardener and a watchman is to be  taken at   actual  cost  to  the  employer.   Where  the  attendant  is   provided  at the residence of the employee, full cost will be  taxed   as  perquisite  in  the   hands  of   the   employee irrespective  of the degree of personal service rendered  to him. Any amount paid by the employee for such facilities or services shall be reduced from the above amount.

IV Gas, electricity & water for household consumption [Rule 3(4)]:The value of perquisite in the nature of gas, electricity and water shall be the amount paid by the employer. Where the supply is made from the employer’s own resources, the manufacturing cost per unit incurred by  the  employer would  be taken for the valuation of perquisite. Any amount paid by the employee  for such facilities or services shall be reduced from the perquisite value.

V Free or concessional education [Rule 3(5)]:  Perquisite on account of free or concessional education for any member of the employee’s household shall be determined as the sum equal to the amount of  expenditure incurred by the employer in that behalf. However, where such educational   institution itself is maintained and owned by the employer or where such free educational facilities are provided in any institution by  reason of his being in employment of that employer, the value of the perquisite to the employee shall be determined with reference to the cost of such education in a similar institution in or near the locality if the cost of such education or such benefit per child exceeds Rs.1000/- p.m. The value of perquisite shall be reduced by the amount, if any, paid or recovered from the employee.

VI Carriage of Passenger  Goods [Rule 3(6)]:  The value of any benefit or amenity resulting from the provision by an employer, who is engaged in the carriage of passengers or goods, to any employee or to any member of his household for personal or private journey free of cost or at concessional fare, in any conveyance owned, leased or made available by any other arrangement by such employer for the purpose of transport of passengers or goods shall be taken to be the value at which such benefit or amenity is offered by such employer to the public as reduced by the amount, if any, paid by or recovered from the employee for such benefit or amenity. This will not apply to the employees of any airline or the railways.

VII  Interest  free or concessional loans [Rule 3(7)(i)]: It  is  common practice, particularly in financial institutions, to  provide interest free or concessional loans to employees or any member of his household.  The value of  perquisite arising from such loans would be the excess of interest  payable at  prescribed  interest rate over interest, if any, actually paid  by  the employee or any member of his household.  The prescribed interest rate would  now be the rate charged per annum by the State Bank of India as on the 1st day of the relevant financial year in respect of loans of same type and for the same purpose advanced by it to the general public. Perquisite  value  would  be calculated on the basis of the maximum outstanding  monthly balance method. For valuing perquisites under this rule, any other method of calculation and  adjustment otherwise adopted by the employer shall  not be relevant. However, small loans up to Rs. 20,000/- in the aggregate are exempt.

Loans for medical   treatment of diseases   specified in Rule 3A are   also exempt, provided the amount of loan for medical reimbursement is not reimbursed under any medical insurance scheme. Where any medical insurance reimbursement is received, the perquisite value at the prescribed rate shall be charged from the date of reimbursement on  the  amount reimbursed, but not repaid against the  outstanding loan taken specifically  for this purpose.

VIII  Perquisite on account of travelling, touring, accommodation and any other expenses paid for or reimbursed by the employer for any holiday availed [Rule 3(7)(ii)]:

The value of perquisite on account of travelling, touring, accommodation and any other expenses paid for or reimbursed by the employer for any holiday availed of by the employee or any member of his household, other than leave travel concession (as per section 10(5) ), shall be the amount of the expenditure incurred by the employer in that behalf. However, any amount recovered from or paid by the employee shall be reduced from the perquisite value so determined.

Where such facility is maintained by the employer, and is not available uniformly to all employees, the value of benefit shall be taken to be the value at which such facilities are offered by other agencies to the public. If a holiday facility is maintained by the employer and is available uniformly to all employees, the value of such benefit would be exempt.

Where the employee is on official tour and the expenses are incurred in respect of any member of his household accompanying him, the amount of expenditure with respect to the member of the household shall be a perquisite.

IX Value of Subsidized / Free food / non-alcoholic beverages  provided by employer to an employee[Rule 3(7)(iii)]:

Value of taxable perquisite is calculated as under:

Expenditure incurred by the employer on the value  of food / non-alcoholic beverages including ‘paid vouchers which are not transferable and usable only at eating joints’                                                                         XXX
Less: Fixed value of a sum of Rs. 50/- per meal                                                                    XXX

Less: Amount recovered from the employee XXX XXX
Balance amount is the taxable as perquisites on the value of food
provided to the employees XXX

Note : Exemption is given in following situations :
1. Tea / snacks provided in working hours.
2. Food & non-alcoholic beverages provided in working hours in remote area or in an offshore installation.

X Membership fees and Annual Fees [Rule 3(7)(v)]: Any membership fees and annual fees incurred by the employee (or any member of his household), which is charged to a credit card (including any add-on card)  provided by the employer, or otherwise, paid for or reimbursed by the employer is taxable on the following basis:

Amount of expenditure incurred by the employer                                                  XXX Less : Expenditure on use for official purposes                                       XXX
Less : Amount, if any, recovered from the employee                              XXX   XXX Amount taxable as perquisite                                                                              XXX

However if the amount is incurred wholly and exclusively for official purposes it will be exempt if the following conditions are fulfilled
i)           Complete details of such expense, including date and nature of expenditure, is maintained by the employer.

 

ii)          Employer gives a certificate that the same was incurred wholly and exclusively for official purpose.

XI Club Expenditure [Rule 3(7)(vi)]:
Any annual or periodical fee for Club  facility and any expenditure in a club   by the employee (or any member of his household), which is paid or reimbursed by the employer is taxable on the following basis:

Amount of expenditure incurred by the employer                                                  XXX Less : Expenditure on use for official purposes                                       XXX
Less : Amount, if any, recovered from the employee                              XXX   XXX Amount taxable as perquisite                                                                                  XXX

However if the amount is incurred wholly and exclusively for official purposes it will  be exempt if the following conditions are fulfilled
i)           Complete details of such expense, including date and nature of expenditure and its business expediency is maintained by the employer.
ii)          Employer gives a certificate that the same was incurred wholly and exclusively for official purpose.

Note: 1) Health club, sport facilities etc. provided uniformly to all classes of employee by the employer at the employer’s premises and expenditure incurred on them are exempt.
2) The initial one-time deposits or fees for corporate or institutional membership, where benefit does not remain with a particular employee after cessation of employment are exempt. Initial fees / deposits, in such case, is not included.

XII    Use  of  assets [Rule 3(7)(vii)]:  It is common practice for a movable  asset (other than those referred in other sub rules of rule 3) owned by  the  employer  to be used by the  employee or any member of his household. This perquisite  is  to  be  charged at the rate of  10%  of  the   original  cost  of the asset as reduced by any charges  recovered from the employee   for such  use. However, the use of Computers and Laptops would not give rise to any perquisite.

XIII    Transfer   of assets [Rule 3(7)(viii)]:   Often an employee or member of his household benefits from the transfer of movable asset (not being   shares or securities) at no cost or at a cost less than its   market   value from the employer. The difference between the original cost of the movable asset (not   being shares or securities) and the sum, if any, paid by the employee, shall  be taken as the value of perquisite. In case of a movable asset, which has already been put to use, the original cost shall be reduced by a sum  of 10% of such original cost for every completed year of use of the asset. Owing to a higher degree of obsolescence, in case of computers and electronic gadgets, however, the value of perquisite  shall  be worked out by reducing 50% of  the actual cost by the reducing   balance  method  for  each  completed  year  of  use.  Electronic gadgets in  this case means data  storage  and  handling  devices  like  computer, digital  diaries and printers. They do not include household appliance  (i.e. white  goods) like washing machines, microwave ovens, mixers, hot plates, ovens etc. Similarly, in case of  cars, the value of perquisite shall be worked out by reducing 20%   of its actual cost by the reducing   balance   method for each completed year of use.

XIV Gifts [Rule 3(7)(iv)]:

The value of any gift or vouchers or token in lieu of which such gift may be received, given by the employer to the employee or member of his household, is taxable as perquisite. However gift, etc   less than Rs. 5,000 in aggregate per annum would be exempt.

XV Medical Reimbursement by the employer exceeding Rs. 15,000/- p.a. u/s 17(2) is to be taken as perquisite.

It is further clarified that the method regarding valuation of perquisites are given in section 17(2) of the Act and in rule 3 of the Rules. The deductors may look into the above provisions carefully before they determine the perquisite value for deduction purposes.

‘Profits in lieu  of salary’ shall include

I.       the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto;

II.     any payment (other than any payment referred to in clauses (10), (10A), (10B), (11), (12) (13) or (13A) of section 10 due to or received by an assessee from an employer or a former employer or from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.

“Keyman insurance policy” shall have the same meaning as assigned to it in section 10(10D);

III.    any amount due to or received, whether in lump sum or otherwise, by any assessee from any person—

(A)  before his joining any employment with that person; or
(B)  after cessation of his employment with that person.

 

DEDUCTIONS U/S 16 OF THE ACT FROM THE INCOME FROM SALARIES

Entertainment Allowance [Section 16(ii)]:

A deduction is  also  allowed under  section  16(ii)    in respect of any allowance in the nature of an entertainment    allowance specifically   granted by an employer to the assessee, who is in receipt of a salary from the Government, a   sum  equal  to   one- fifth  of  his  salary(exclusive  of  any  allowance, benefit  or    other perquisite) or five thousand rupees whichever is less. No deduction  on account of entertainment allowance is available to non-government  employees.

Tax on Employment [Section 16(iii)]:

The tax on employment (Professional Tax) within the meaning of article 276(2)  of the Constitution of India, leviable by or  under any law,  shall also be allowed as a deduction  in computing the income under the head “Salaries”.

It may be clarified that “Standard Deduction” from gross salary income, which was being allowed up to financial year 2004-05 is not allowable from financial year 2005-06 onwards.

Also read the other provisions of Income Tax 2016-17 for Salaried Class – CBDT Circular dated 02.01.2017

Click here to Calculate Income Tax 2016-17 (Assessment Year 2017-18)

Click here to Calculate the Income Tax Relief under Section 89 for 7th Pay Commission Arrears

 

Download CBDT Circular F.No. 275/192/2016-IT(B) dated 02.01.2017

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