Income Tax 2018-19 – How various income earned by Salaried Employees treated under Income Tax ?

Income Tax 2018-19 – How Salary Income such as Salary, Gratuity, Leave Encashment, and allowances such as children education allowance, transport allowance, etc are treated under Income Tax provisions ?

1. Medical Facility:-

Treatment of medical facility provided by the employer to employee is as follows:

Medical facility In India:

Hospital Nature of medical facility Expenditure Is chargeable to tax?
Maintained by employer Any Incurred by the employer Not chargeable to tax with no monetary ceiling
Maintained by:-

  • Central or State Govt.
  • Local authority
  • Any other person approved by Govt.
Any Incurred or reimbursed by employer Not chargeable to tax with no monetary ceiling
Approved by chief commissioner For treatment of prescribed diseases given in Rule 3A(2) Incurred or reimbursed by employer Not chargeable to tax with no monetary ceiling
Health insurance policy Medical insurance premium paid or reimbursed by employer Not chargeable to tax with no monetary ceiling
Maintained by any other person Any Incurred or reimbursed by employer Not chargeable to tax upto Rs. 15000 per assessment year (This exemption is not applicable from A.Y 2019-20)

Note: Fixed medical allowance given by employer to employee is fully chargeable to tax.

Medical facility outside India:

Expenditure incurred by the employer on medical treatment of employee is taxable subject to the conditions given below:-

Perquisites not chargeable to tax Condition to be satisfied
Medical treatment of employee or any member of family of such employee outside India Expenditure shall be excluded from perquisites only to the extent permitted by RBI.
Cost of travel of the employee or any member of his family or any one attendant who accompanies the patient in connection with treatment outside India Expenditure shall be excluded from perquisites only in the case of an employee whose gross total income as computed before including therein the expenditure on travelling does not exceed Rs. 2,00,000
Cost of stay aboard of the employee or any member of the family for medical treatment and cost of stay of one attendant who accompanies the patient in connection with such treatment Expenditure shall be excluded from the perquisites only to the extent permitted by RBI.

​​2. Rent Free Accommodation:-

Rent free accommodation given by employer to employee shall be treated as perquisites in hands of employee and income tax would be levied in the manner specified below:-

Calculation of perquisite value, is given hereunder:

Accommodation provided by:- Perquisite value in case of Unfurnished Accommodation Perquisite value in case of Furnished Accommodation
Government Employer License fees determined by the Central or state government minus Rent paid by employee (if any) License fees determined by the central or state government minus rent paid by employee and lease charge of furniture or 10% depreciation of furniture as the case may be.
Non-Government Employer (accommodation is owned)
  1. If population (*) exceed 25 Lakhs : 15% of salary minus rent paid by employee
  2. If population (*) exceeds 10 lakhs but up to 25 lakhs: 10% of salary minus rent paid by employee.
  3. If population (*) up to 10 lakhs : 7.5% of salary minus rent paid by employee

* Population as per 2001 census

Value of perquisites as calculated in case of unfurnished accommodation shall be increased by 10% p.a. cost of furniture or actual rent of furniture minus amount paid by employee.
Non-Government employer (accommodation is taken on lease) Rent paid by the employer or 15% of salary (whichever is lower) minus rent paid by employer. Value of perquisites as calculated in case of unfurnished accommodation shall be increased by 10% p.a. cost of furniture or actual rent of furniture minus amount paid by employee.
Accommodation provide in a Hotel NA 24% of salary or lease charges payable in hotel (whichever is lower) minus amount paid by employee.

 

3. Transport Allowance :-

Transportation allowance granted to the employee to meet his expenditure for the purpose of commuting between place of his residence and the place of duty is exempt upto Rs. 1,600/- per month. (This exemption is not applicable from A.Y 2019-20)

Further, if employee who is blind or deaf and dumb or orthopaedically handicapped with disability of lower extremities to meet his expenditure for the purpose of commuting between the place of his residence and the place of duty the Transportation allowance is exempt upto Rs. 3,200/- per month.

4. Children education and hostel allowance:-

Children education allowance (by whatever name called) is exempt upto Rs. 100/- per month per child up to a maximum of two children.

Further, any allowance granted to an employee to meet the hostel expenditure on his child (whatever name called) is exempt upto Rs. 300/- per month per child up to a maximum of two children.

5. House Rent Allowance ​:-

House rent allowance received by an employee is taxable. However exemption is available under section 10(13A). The exemption is based on certain set of conditions.

Exemption for House rent allow​ance is regulated by rule 2A. The least of the following is exemption from tax:

a. an amount equal to 50 per cent of salary, where the residential house is situated at Bombay, Calcutta, Delhi or Madras and an amount equal to 40 per cent of salary where the residential house is situated at any other place;

b. house rent allowance received by the employee in respect of the period during which the rental accommodation is occupied by the employee during the previous year; or

c. the excess of rent paid over 10 per cent of salary.

The taxable HRA is a part of income from salaries. While filing Income-tax return, the same should be shown under the income from salary.​

​​6. How Deductions from Salary Income are allowed under Chapter VI-A (Section 80 C to 80U)​:-

​​Section 80C to 80U provides certain deductions which can be claimed from Gross Total Income (GTI). After claiming these deductions from GTI, the income remaining is called as Total Income. In other words, GTI less Deductions (under section 80C to 80U) = Total Income (TI). Total income can also be understood as taxable income. Following table gives a better understanding of the difference between GTI and TI:

Computation of gross total income and Taxable Income

Particulars Amount
Income from salary XXXXX
Income from house property XXXXX
Profits and gains of business or profession XXXXX
Capital gains XXXXX
Income from other sources XXXXX
Gross Total Income XXXXX
Less : Deductions under Chapter VI-A (i.e. under ​section 80C to​​​ 80U) (XXXXX)
Total Income (i.e., taxable income) XXXXX

7. ​​A Brief on calculation of Tax on Income:

After ascertaining the total income, i.e., income liable to tax, the next step is to compute the tax liability for the year. Tax liability is to be computed by applying the rates prescribed in this regard. For rates of tax, refer “Tax Rate” section. Following table will help in understanding the manner of computation of the total tax liability of the taxpayer.

Computation of total income and tax liability for the year

Particulars Amount
Income from salary XXXXX
Income from house property XXXXX
Profits and gains of business or profession XXXXX
Capital gains XXXXX
Income from other sources XXXXX
Gross Total Income XXXXX
Less : Deductions under Chapter VI-A (i.e., under section 80C to 80U)) (XXXXX)
Total Income (i.e., taxable income) XXXXX
Tax on total income to be computed at the applicable rates (for rates of tax, refer “Tax Rate” section) XXXXX
Add: Surcharge XXXXX
Tax Liability After Surcharge XXXXX
Add: Education cess @ 2% on tax liability after surcharge (not applicable from A.Y 2019-20) XXXXX
Add: Secondary and higher education cess @ 1% on tax liability after surcharge (not applicable from A.Y 2019-20) XXXXX
Add: Health and education cess @ 4% on tax liability after surcharge (applicable from A.Y 2019-20) XXXXX
Tax liability before rebate under  sections 90, 90A and 91 (if any) (*) XXXXX
Tax liability for the year before pre-paid taxes XXXXX
Less: Prepaid taxes in the form of TDS, TCS and advance tax (XXXXX)
Tax payable/Refundable XXXXX

(*) Rebate under sections 90, 90A and 91 is available to a taxpayer in respect of double taxed income, i.e., income which is taxed in India as well as abroad.

Note: For provisions relating to Minimum Alternate Tax (MAT) in case of corporate taxpayers refer tutorial on “MAT/AMT”.

Click here to view prevalent tax rates

8. Income from house property:-

Section 22 of the Act is the charging section for taxing any income under the head “Income from house property”.

The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him, the profits of which are chargeable to income-tax shall be chargeable to income-tax under the head “Income from house property”

Manner of computation of income from house property:

Gross annual value XXXX
Less:- Municipal taxes paid during the year XXXX
Net Annual Value (NAV) XXXX
Less:- Deduction under section 24
• Deduction under section 24 (a) @ 30% of NAV XXXX
• Interest on borrowed capital under section 24 (b) XXXX
Income from house property XXXX

9. Relief under section 89:-

An employee can claim relief under section 89 in respect of

  • Arrears of salary received by an employee are taxed in the year of receipt if the same were not taxed earlier on due basis.
  • Amount of commuted pension which is not exempt from tax
  • Leave salary
  • Gratuity
  • Compensation received on termination of employment/ voluntary retirement

Under section 89, read with Rule 21A(2), an employee can claim relief in respect of arrears of salary.

Relief can be computed in the following manner:

Step 1: Calculate total tax liability (including surcharge and cess, if any) on the total income , including the additional salary of the previous year in which such salary is received.

Step 2: Calculate total tax liability (including surcharge and cess, if any) on the total income , excluding the additional salary of the previous year in which such salary is received.

Step 3: Find the difference between tax computed at (1) and (2) above.

Step 4: Calculate total tax liability (including surcharge and cess, if any) on the total income , including the additional salary of the previous year(s) to which such salary relates to

Step 5: Calculate total tax liability (including surcharge and cess, if any) on the total income , excluding the additional salary of the previous year(s) to which such salary relates to.

Step 6: Find the difference between tax computed at (4) and (5) above.

Relief undersection 89 is the excess of tax computed at Step 3 over tax computed at Step 6. No relief is available, if tax computed at Step 3 is less than tax computed at Step 6.

If the additional salary pertains to more than one previous year, then relief shall be computed in above manner by spreading such salary over the previous years to which such salary pertains to.

Motor Car Facility:-

Value of perquisite in respect of motor car is determined as follows:

  • Value of perquisites if running and maintenance expenses met by the employer in respect of a car owned by the employee.
  • Value of perquisite in respect of motor car provided by the employer (expenditure on running and maintenance of motor car are met by the employer)
  • Value of perquisite in respect of motor car provided by the employer (expenditure on running and maintenance of motor car are met by the employee)
  • Value of perquisite in respect of perquisite arising on account of running and maintenance expenditure met or reimbursed by the employer in respect of any automotive conveyance (other than car) owned by the employee.

 

10. How Concessional or Interest free loan granted by Employer is treated under Income Tax?:-

The value of perquisite arising on account of interest free loan or concessional loan granted by the employer will be computed on the basis of the rate of interest on such loans charged by the State Bank of India as on the 1st day of the relevant previous year, in respect of loans for the same purpose advanced by it (i.e., State Bank of India). The value of perquisite will be determined as follows:

Particulars Interest free loan Concessional loan
Interest on the respective loan computed on the basis of rate of interest on such loan charged by State Bank of India prevailing on the first day of the previous year XXXXXX XXXXXX
Less: Amount recovered from the employee for the respective loan XXXXXX XXXXXX
Perquisite in respect of interest free or concessional loans XXXXXX XXXXXX

Interest shall be computed on monthly basis by considering maximum outstanding monthly balance.

11. Should I Pay Income Tax on Gratuity ?

Tax treatment of gratuity can be classified as follows:

(A) Gratuity received by Government employees and employees of local authority [Section 10(10)(i)] – In case of a Government employee, any death-cum-retirement gratuity received is wholly exempt under Section 10(10)(i). It should be noted that employees of statutory corporation will not fall under this category.

(B) Gratuity received by non-Government employees : This category will further be classified as follows :

(1) Exemption in respect of gratuity in case of employees covered by the Payment of Gratuity Act, 1972. [Section 10(10)(ii)]

Exemption in this case will be lower of the following amounts :

1. 15 days’ salary (*) × years of service

2. Maximum amount specified by the Central Government, i.e., Rs. 10,00,000 / Rs. 20,00,000 * .

3. Gratuity actually received.

(2) Exemption in respect of gratuity in case of employees not covered by the Payment of Gratuity Act, 1972. [Section 10(10)(ii)]

Exemption in respect of gratuity will be least of the following :

1. Half month’s average salary for each completed year of service, i.e.,

[Average monthly salary (**) × ½] × Completed years of service.

2. Maximum amount specified by the Central Government, i.e., Rs. 10,00,000 / Rs. 20,00,000 *

3. Gratuity actually received.

* Rs. 20,00,000 ceiling limit is applicable if Gratuity is becoming payable on or after 29th March 2018.

**Average monthly salary is to be computed on the basis of average of salary for 10 months immediately preceding the month (not the day) of retirement.

12. Whether Leave Encashment amount is liable to Income Tax ?

Leave salary is taxable on the following basis:

Central or State Government Employee Non-Government Employee
As per section 10(10AA) (i), any amount received as cash equivalent of leave salary in respect of the period of earned leave at his credit at the time of retirement/superannuation is exempt from tax. As per section 10(10AA)(ii), leave salary is exempt to the extent of the least of the following:

(a) Cash equivalent of the leave salary in respect of the period of earned leave to the credit of an employee only at the time of retirement whether on superannuation or otherwise (earned leave entitlements cannot exceed 30 days for every year of actual service rendered for the employer from whose service he has retired); or

(b) 10 months “average salary”; or

(c) Rs 300000

(d) Leave encashment actually received at the time of retirement.

“Average salary” is to be calculated on the basis of average salary drawn during the period of 10 months immediately preceding the retirement/superannuation.

“Salary” means basic salary, dearness allowance if terms of employment so provide and it also includes commission based on fixed percentage of turnover achieved by an employee as per the terms of contract of employment.

“Leave salary received during employment” is chargeable to tax in the hands of Govt./Non-Govt. Employee. However, relief can be taken u/s 89.

13. Deduction allowed under Section 80U from the Income :-

DEDUCTION IN CASE OF A PERSON WITH DISABILITY

(1) Introduction: Deduction under section 80U is available to a taxpayer having disability or severe disability or suffering from autism, cerebral palsy or multiple disabilities.

(2) Eligible taxpayer

•  The taxpayer is an individual

•  The taxpayer can be citizen of India or foreign country

•  The taxpayer must be resident(may be ordinarily or not ordinarily resident). Deduction not available if he is non-resident for the relevant assessment year.

(3) Disabilities covered    •  Blindness

•  Low vision

•  Leprosy-cured

•  Hearing impairment

•  Locomotor disability

•  Mental retardation

•  Mental illness

•  Autism, cerebral palsy & multiple disability

(4) Other provisions

  • The taxpayer shall have to obtain certificate in Form No. 10-IA from medical authority where the person is suffering from disability.
  • If deduction is claimed under this section by taxpayer for himself, no deduction is available under section 80 DD to person on whom person suffering from disability is dependent.
  • Where the condition of disability requires reassessment, a fresh certificate needs to be obtained from the medical authority in order to claim the deduction after the expiry of period of original certificate.

(5) AMOUNT OF DEDUCTION TO A TAXPAYER SUFFERING FROM DISABILITY IS AS FOLLOWS…

Taxpayer suffering with disability of….. Amount of deduction available in rupees
  ➢  Less than 40% 0
  ➢  More than or equal to 40% but less than 80% 75000
  ➢  More than or equal to 80% 125000

14. Deduction from Income under Section 80TTA:-

Deduction under Section 80TTA for Interest on Saving Account

Section 80TTA provides deduction up to Rs. 10,000 in aggregate to an assessee (being an individual or Hindu undivided family) in respect of any income by way of interest on deposits (not being time deposits) as follows:

Up to assessment year 2012-13

Rs.

From assessment year 2013-14

Rs.

Interest on savings account with a Bank, co-operative bank and Post office (deduction under section 80TTA) No deduction Deduction upto Rs. 10,000

Note: From A.Y 2019-20, the above deduction is not available in the case of senior citizen who is eligible to claim deduction under Section 80TTB.

15. Deduction under Section 80DD:-

​​DEDUCTION UNDER SECTION 80DD FOR MAINTENANCE/ MEDICAL TREATMENT OF DEPENDENT HANDICAPPED

(1) Introduction

Deduction under Section 80DD is available from Gross Total Income of a taxpayer in respect of maintenance/ medical treatment of a dependent person having disability or severe disability or suffering from autism, cerebral palsy or multiple disabilities.

(2) Prerequisites to claim deduction under Sec. 80DD

✓ Deduction is allowed for medical treatment/ maintenance of a dependent and not the tax payer himself;

✓ The taxpayer is not allowed this deduction if the dependent has claimed a deduction under section 80U for himself/herself.

✓ Dependent in case of an individual taxpayer means spouse, children, parents, brothers & sisters of the taxpayer. For HUF, dependent means any member of the HUF

✓ The Taxpayer should incur any of the following expenditures:

○ Option 1 ○ Option 2
Expenditure for the medical treatment(including nursing), training and rehabilitation of a handicapped dependent Paid or deposited under any scheme framed in this behalf by the Life Insurance Corporation or any other insurer, or the administrator or specified company approved by the Board in this behalf, for maintenance of handicapped dependent

✓ The amount of deduction is fixed based on the disability, irrespective of the amount incurred or deposited under Option 1 and/ or option 2.

✓ Certificate should be obtained in Form No. 10-IA from medical authority where the person is suffering from specified disability.

✓ Where the condition of disability requires reassessment, a fresh certificate needs to be obtained from the medical authority in order to claim the deduction after the expiry of period of original certificate.

(3) AMOUNT OF DEDUCTION

Dependent suffering from disability of Amount of deduction in rupees
➢ Less than 40% 0
➢ More than or equal to 40% but less than 80% 75000
➢ More than or equal to 80% 125000

16. Deduction under Section 80C:

Section 80C provides deduction to Individual/HUF in respect of various items like life insurance premium, investment in Public Provident Fund, investment in NSC, investment in notified units of mutual funds, deposit in Sukanya Samriddhi account, investment in mutual funds, amount paid for tution fees, repayment of principal component of housing loan, investment in Post Office Time Deposit Scheme, Senior Citizens Saving Scheme, etc.

17. Deduction in respect of medical insurance premium under Section 80D from Income:

Section 80D provides deduction to an individual or a HUF. In case of an individual, deduction is available in respect of medical insurance policy taken in his own name, or in the name his/her spouse, his/her parents and his/her dependent children. In case of HUF, the policy can be taken on the health of any member of such HUF.

Deduction can claim in respect of the following payments:

  • Medical insurance premium paid by assessee, being individual/HUF by any mode other than cash.
  • Any contribution made by assessee, being individual to Central Government Health Scheme or such other Scheme as may be notified by the Central Government.
  • Sum paid by assessee in cash being individual on account of preventive health check-up.

Deduction on account of medical expenditure on the health of a person who is super senior citizen * (senior citizen ** from the assessment year 2019-20) if medi-claim insurance is not paid on the health of such person.

* ‘Super senior citizen’ means an individual resident in India who is of the age of eighty years or more at any time during the relevant previous year.

** ‘Senior citizen’ means an individual resident in India who is of the age of sixty years or more at any time during the relevant previous year.

From the A.Y 2019-20, In case of a single premium health insurance policies having cover of more than 1 year, the deduction under this section shall be allowed on proportionate basis for the number of years for which health insurance cover is provided.

18. Deduction on account of payment of life insurance premium under Section 80C:

The Quantum of deduction allowed in respect of Life Insurance Premium under Section 80C is restricted to 10% of sum assured.

Overall deduction u/s 80C (along with deduction u/s 80CCC & 80CCD(1)) allowed is up to Rs. 1,50,000.

Minimum holding period

Following is the minimum holding period in respect of certain investments, deposits, etc., prescribed above which should be kept in mind while claiming deduction under section 80C:

Nature of Investments/Deposits Minimum Holding Period
ULIP of UTI or LIC 5 years
Life insurance policy 2 years
Senior Citizens Saving Scheme and Post Office Time Deposit 5 years
Principal Repayment of loan including Cost of Purchase/construction of residential house property 5 years

If any of the aforesaid investments, subscriptions, etc., is terminated, sold, etc., before the minimum holding period specified above, then the deduction allowed in earlier years would be deemed as income of the previous year of termination, sale, etc. Further, no deduction will be allowed in respect of contribution, payment, etc., made towards such policy, units, etc. (i.e., which is terminated) during the year of termination.

In case of withdrawal during the life time of depositor from Senior Citizens Savings

Scheme or Post Office Time Deposit before the aforesaid period (i.e., before 5 years), the amount received on such withdrawal (excluding interest which is already taxed in earlier years) will be charged to tax in the year of withdrawal.​

19. How Interest on NSC (National Saving Certificate) is treated under Income Tax:-

Section 80C provides deduction of investment and interest accrued on NSC. Interest on NSC is taxable on annual accrual basis. Accrued interest on NSC is taxed in the hands of the receiver and the same will be treated as an investment during the year of accrual (except for last year) and will qualify for deduction under section 80C.​

Source: Official Website of Income Tax Department

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