Assessment
What is Income Tax?
Income tax is an annual tax on income. The Indian Income Tax Act (Section 4) provides that in respect of the total income of the previous year of every person, income tax shall be charged for the corresponding assessment year at the rates laid down by the Finance Act for that assessment year. Section 14 of the Incometax Act further provides that for the purpose of charge of income tax and computation of total income all income shall be classified under the following heads of income:
A. Salaries
B. Income from house property
C. Profits and gains of business or profession.
D. Capital gains
E. Income from other sources.
The total income from all the above heads of income is calculated in accordance with the provisions of the Act as they stand on the first day of April of any assessment year. In this booklet an attempt is being made to discuss the various provisions relevant to the salaried class of taxpayers as well as pensioners and senior citizens.
Source: Income Tax Department
What is the mechanism by which the department checks the correctness of my return of income?
Based on information available with the department a small percentage of returns are picked up for verification. This process is called scrutiny. You will be given full opportunity to put forth views and evidences to support your claims.
What recourse is available to me if I am unhappy with the order passed by my Assessing officer?
The Income tax Act has provided for filing appeals in such cases. The first appellate authority is the Commissioner (Appeals). Subsequently the matter can be taken to the Income Tax Appellate Tribunal, then to the High Court and Supreme Court.
What is salary and what does salary include?
WHAT IS “SALARY”
Salary is the remuneration received by or accruing to an individual, periodically, for service rendered as a result of an express or implied contract. The actual receipt of salary in the previous year is not material as far as its taxability is concerned. The existence of employer-employee relationship is the sine-qua-non for taxing a particular receipt under the head “salaries.” For instance, the salary received by a partner from his partnership firm carrying on a business is not chargeable as “Salaries” but as “Profits & Gains from Business or Profession”. Similarly, salary received by a person as MP or MLA is taxable as “ Income from other sources”, but if a person received salary as Minister of State/ Central Government, the same shall be charged to tax under the head “Salaries”. Pension received by an assessee from his former employer is taxable as “Salaries” whereas pension received on his death by members of his family (Family Pension) is taxed as “Income from other sources”.
WHAT DOES “SALARY” INCLUDE
Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of “Salaries” including therein (i) Wages (ii) Annuity or pension (iii) Gratuity (iv) Fees, Commission, perquisites or profits in lieu of salary (v) Advance of Salary (vi) Amount transferred from unrecognized provident fund to recognized provident fund (vii) Contribution of employer to a Recognised Provident Fund in excess of the prescribed limit (viii) Leave Encashment (ix) Compensation as a result of variation in Service contract etc. (x) Contribution made by the Central.
Source: Income Tax Department
What are allowances and which allowances are exempt?
Allowance is defined as a fixed quantity of money or other substance given regularly in addition to salary for meeting specific requirements of the employees. As a general rule, all allowances are to be included in the total income unless specifically exempted. Exemption in respect of following allowances is allowable to the exent mentioned against each :-
House Rent Allowance:- Provided that expenditure on rent is actually incurred, exemption available shall be the least of the following :
(i) HRA received.
(ii) Rent paid less 10% of salary.
(iii) 40% of Salary (50% in case of Mumbai, Chennai, Kolkata, Delhi) Salary here means Basic + Dearness Allowance, if dearness allowance is provided by the terms of employment.
Leave Travel Allowance: The amount actually incurred on performance of travel on leave to any
place in India by the shortest route to that place is exempt. This is subject to a maximum of the air economy fare or AC 1st Class fare (if journey is performed by mode other than air) by such route, provided that the exemption shall be available only in respect of two journeys performed in a block of 4 calendar years.
Certain allowances given by the employer to the employee are exempt u/s 10(14). All these exempt allowance are detailed in Rule 2BB of Income-tax Rules and are briefly given below:
For the purpose of Section 10(14)(i), following allowances are exempt, subject to actual expenses incurred:
(i) Allowance granted to meet cost of travel on tour or on transfer.
(ii) Allowance granted on tour or journey in connection with transfer to meet the daily charges incurred by the employee.
(iii) Allowance granted to meet conveyance expenses incurred in performance of duty, provided no free conveyance is provided.
(iv) Allowance granted to meet expenses incurred on a helper engaged for performance of official duty.
(v) Academic, research or training allowance granted in educational or research institutions.
(vi) Allowance granted to meet expenditure on purchase/ maintenance of uniform for performance of official duty.
Under Section 10(14)(ii), the following allowances have been prescribed as exempt.
Type of Allowance
Amount exempt
(i) Special Compensatory Allowance for hilly areas or high altitude allowance or climate allowance.
Rs.800 common for various areas of North East, Hilly areas of UP, HP. & J&K and Rs. 7000 per month for Siachen area of J&K and Rs.300 common for all places at a height of 1000 mts or more other than the above places.
(ii) Border area allowance or remote area allowance or a difficult area allowance or disturbed area allowance.
Various amounts ranging from Rs.200 per month to Rs.1300 per month are exempt for various areas specified in Rule 2BB.
(iii) Tribal area/Schedule area/Agency area allowance available in MP, Assam, UP., Karnataka, West Bengal, Bihar, Orissa, Tamilnadu, Tripura
Rs.200 per month.
(iv) Any allowance granted to an employee working in any transport system to meet his personal expenditure during duty performed in the course of running of such transport from one place to another place.
70% of such allowance upto a maximum of Rs.6000 per month.
(v) Children education allowance.
Rs.100 per month per child upto a maximum 2 children.
(vi) Allowance granted to meet hostel expenditure on employee’s child.
Rs.300 per month per child upto a maximum two children.
(vii) Compensatory field area allowance available in various areas of Arunachal Pradesh, Manipur Sikkim, Nagaland, H.P., U.P. & J&K.
Rs.2600 per month.
(viii) Compensatory modified field area allowance available in specified areas of Punjab, Rajsthan, Haryana, U.P., J&K, HP., West Bengal & North East.
Rs.1000 per month
(ix) Counter insurgency allowance to members of Armed Forces.
Rs.3900 Per month
(x) Transport Allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of residence & duty.
Rs.800 per month.
(xi) Transport allowance granted to physically disabled employee for the purpose of commuting between place of duty and residence.
Rs.1600 per month.
(xii) Underground allowance granted to an employee working in under ground mines.
Rs.800 per month.
(xiii) Special allowance in the nature of high altitude allowance granted to members of the armed forces.
Rs. 1060 p.m. (for altitude of 9000-15000 ft.) Rs.1600 p.m. (for altitude above 15000 ft.)
(xiv) Any special allowance granted to the members of the armed forces in the nature of special compensatory highly active field area allowance
Rs. 4,200/- p.m.
(xv) Special allowance
granted to members of
armed forces in the
nature of island duty
allowance.
(in Andaman & Nicobar
& Lakshadweep Group
of Islands)
Rs. 3,250/- p.m.
Source: Income Tax Department
What are perquisites?
“Perquisite” may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages.
“Perquisite” is defined in the section17(2) of the Income tax Act as including:
(i) Value of rent-free/concessional rent accommodation provided by the employer.
(ii) Any sum paid by employer in respect of an obligation which was actually payable by the assessee.
(iii) Value of any benefit/amenity granted free or at concessional rate to specified employees etc.
(iv) 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 assesssee.
(v) The amount of any contribution to an approved superannuation fund by the exployer in respect of the assessee, to the extent it exceeds one lakh rupees; and
(vi) the value of any other fringe benefit or amenity as may be prescribed.
Source: Income Tax Department
Salaries
Which are the perquisites exempted from Income Tax?
Some instances of perquisites exempt from tax are given below:
Provision of medical facilities (Provision to Sec. 17(2)): Value of medical treatment in any hospital maintained by the Government or any local authority or approved by the Chief Commissioner of Income-tax. Besides, any sum paid by the employer towards medical reimbursement other than as discussed above is exempt upto Rs.15,000/-.
Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India (Sec. 10(7)).
Rent free official residence provided to a Judge of High Court or Supreme Court or an Official of Parliament, Union Minister or Leader of Opposition in Parliament.
No perquisite shall arise if interest free/concessional loans are made available for medical treatment of specified diseases in Rule 3A or where the loan is petty not exceeding in the aggregate Rs.20,000/-No perquisite shall arise in relation to expenses on telephones including a mobile phone incurred on behalf of the employee by the employer.
Source: Income Tax Department
What is included in Fringe Benefits and how are they taxed?
Introduction:
The Finance Act 2005 has introduced a new tax called ‘Income-tax on fringe benefits’ w.e.f. 01.04.2006. This shall be in the form of additional income tax levied on fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year.
Rate of Tax :-
The tax on fringe benefits shall be levied at the rate of 30% on the value of fringe benefits provided.
Liability to Pay: -
The liability to pay this tax is to be borne by the employer including
i) a company
ii) a firm
iii) an association of persons or body of individuals excluding any fund or trust or institution eligible for exemption u/s 10(23C) or 12AA.
iv) a local authority
v) an artificial juridical person
What is included in 'Fringe Benifits' :-
Fringe benefits have been defined as including any consideration for employment provided by way of
a) any privilege, service, facility or amenity provided by an employer directly or indirectly including reimbursements.
b) any free or concessional ticket provided by the employer for private journeys of his employees or their family members.
c) any contribution by the employer to an approved superannuation fund for employees.
d) any specified security or sweat equity shares allotted/ transferred, directly or indirectly by the employers free of cost or at concessional rate to his employees. The detailed provisions in respect of this are included in Chapter XII H of the I.T. Act.
Further, fringe benefits shall be deemed to have been provided if the employer has incurred any expenses or made any payments for various purposes namely, entertainment, provision of hospitality, conference, sales promotion including publicity, employees welfare, conveyance, tour & travel, use of hotel, boarding & lodging etc.
Various provisions relating to income tax on ‘fringe benefits’ have been modified by the Finance Act, 2006. Exceptions in respect of certain expenditures have been introduced including expenditure incurred on distribution of free/concessional samples and payments to any person of repute for promoting the sale of goods or services of the business of the employer. Similarly, it has been proposed that expenditure incurred on providing free or subsidized transport or any such allowance provided by the employer to his employees for journeys from residence to the place of work shall not be part of fringe benefits. Another significant amendment is regarding the contribution by an employer to an approved superannuation fund to the extent of Rs.1 lakh per employee which shall not be liable to fringe benefit tax. Further, in the case of some other expenses incurred such as expenses incurred on tour and travel, lower rates for valuation of fringe benefits @ 5% have been provided for. The Finance Act 2008 has introduced further exemption in respect of certain expenditures from the purview of Fringe Benefit Tax. These include payments through non-transferable electronic meal cards, provision of crèche facility, organizing sports events or sponsoring a sportsman being an employee. These provisions shall come into effect from A.Y. 2009-10 onwards.
The Finance act, 2009 has withdrawn the Fringe Benefit Tax. Thus, the FBT stands abolished w.e.f. A.Y. 2010-11 and now such perquisites are taxable in hands of employees.
Source: Income Tax Department
Which investments are eligible for deductions u/s 80C?
The following investments/payments are inter alia eligible for deduction u/s 80C:-
Nature Of Investment
Remarks
Life Insurance Premium
For individual, policy must be in the name of self or spouse or any child’s name. For HUF, it may be on life of any member of HUF.
Sum paid under contract for deferred annuity
For individual, on life of self, spouse or any child of such individual.
Sum deducted from salary payable to Govt. Servant for securing deferred annuity for self, spouse or child
Payment limited to 20% of salary.
Contribution made under Employee’s Provident Fund Scheme
-
Contribution to PPF
For individual, can be in the name of self/spouse, any child & for HUF, it can be in the name of any member of the family.
Contribution by employee to a Recognised Provident Fund.
-
Subscription to any notified securities/notified deposits scheme.
-
Subscription to any notified savings certificates.
e.g. NSC VIII issue.
Contribution to Unit Linked Insurance Plan of LIC Mutual Fund
e.g. Dhanrakhsa 1989
Contribution to notified deposit scheme/Pension fund set up by the National Housing Bank.
-
Certain payment made by way of instalment or part payment of loan taken for purchase/ construction of residential house property.
Condition has been laid that in case the property is transferred before the expiry of 5 years from the end of the financial year in which possession of such property is obtained by him, the aggregate amount of deduction of income so allowed for various years shall be liable to tax in that year.
Subscription to units of a Mutual Fund notified u/s 10(23D)
-
Subscription to deposit scheme of a public sector company engaged in providing housing finance.
-
Subscription to equity shares/ debentures forming part of any approved eligible issue of capital made by a public company or public financial institutions.
-
Tuition fees paid at the time of admission or otherwise to any school, college, university or other educational institution situated within India for the purpose of full time education.
Available in respect of any two children.
Any term deposit for a fixed period of not less than five years with the scheduled bank.
This has been included in Section 80C by the Finance Act 2006.
Subscription to notified bonds issued by NABARD
This has been included in Section 80C by the Finance Act 2007 and has come into effect from 1.4.2008.
Payment made into an account under the Senior Citizens Savings Scheme Rules, 2004
This has been introduced by Finance Act, 2008 and shall come into effect from 1.4.2009.
Payment made as five year time deposit in an account under the Post Office Time Deposit Rules, 1981
This has been introduced by Finance Act, 2008 and shall come into effect from 1.4.2009.
It may be noted that the aggregate amount of deductions under sections 80C, 80CCC and 80CCD are subject to an overall ceiling of Rs.1 lakh.
Source: Income Tax Department
How much of Gratuity is exempt?
GRATUITY – SECTION 10(10)
a) Any Death-cum-Retirement gratuity to Govt. Employees : Wholly exempt.
b) Any gratuity received by the employees covered under Payment of Gratuity Act, 1972. Least of the following is exempt:-
- 15 days salary (7 days in case of seasonal employment) for each completed year of service or part in excess of 6 months.
- Rs. 3,50,000.
- Amount of gratuity actually received
c) Any other gratuity, (not covered under (a) or (b)): Least of the followings is exempt:-
- Rs 3,50,000
- Half month’s salary for each completed year of service
- Amount of gratuity actually received.
Source: Income Tax Department
