Salary is the remuneration paid by the employer to the employee for the services rendered for a certain period of time. It is paid in fixed intervals i.e. monthly one-twelfth of the annual salary.
Section 89(1) – Relief of Salary
Tax is calculated on the taxpayer’s total income earned or received during the year. If the assessee has received any portion of salary ‘in arrears or in advance’, or received a family pension in arrears, under the Income Tax Act it is allowed to claim tax relief under section 89(1). For a taxpayer, tax liabilities for a Financial Year are calculated from the income earned during that year. Sometimes, the income includes arrears (past dues paid in the current year). Usually, tax rates increase with time which means that the assessee may have to pay higher taxes in such a case. However, the Income Tax Act provides assessees relief in those situations u/s 89(1).
Reliefs under section 89(1) for arrears of salary are available in the following cases:
- Salary received in advance or as arrears
- Gratuity
- Compensation on Termination of employment
- Commutation of Pension
Dearness Allowance
Dearness Allowance is paid by the government to its employees as well as a pensioner to offset the impact of inflation. The effective salary of government employees requires constant enhancement to help them cope up with the increasing prices. Despite several measures by the government to control the rate of inflation, only partial success has been achieved because the prices move according to the market.
Calculation of Dearness Allowance
As DA is provided to employees to protect against the price rise in a particular financial year, it is calculated twice every year – in January and July. The formula to calculate the dearness allowance was changed in 2006 by the Government. Presently, DA is calculated as per the following formula:For the employees of Central Government % of DA = {(Average of the All-India Consumer Price Index (Base year -2001 =100) for the last 12 months -115.76)/115.76} x 100For Central Public Sector Employees % of DA = {(Average of the All-India Consumer Price Index (Base year -2001 =100) for the last 3 months -126.33)/126.33} x 100
Is Stipend Taxable?
Taxation of Stipend Income has been a matter of much debate. In the Income Tax Act from a purely factual standpoint, there is no mention of ‘stipend’.
‘Salary’ received by an ‘employee is taxable in the hands of the employee.
Under Section 17(1) – Wages, pension, gratuity, fees or commission or profits in lieu of salary, advance salary, payment for leaves standing to the credit of the employee – have all been included under the definition of salary. It is evident when a salary is paid – an employer-employee relationship exists.
The Income Tax Act has further laid down that ‘scholarship granted to meet the cost of education is exempt from Income Tax under section 10(16).
HRA
HRA or House Rent Allowance is a salary component paid by the employer to employees for meeting the accommodation expense of renting a place for residential purposes. HRA forms an integral component of a person’s salary. HRA applies to both salaried as well as self-employed individuals.
How is Tax Exemption from HRA Calculated?
The deduction available is the least of the following amounts:
- Actual HRA received;
- 50% of [basic salary + DA] for those living in metro cities (40% for non-metros); or
- Actual rent paid less 10% of basic salary + DA
Claim both HRA and home loan interest deduction
Homeowners, who are paying back their home loan and getting HRA as part of their salary, can avail both the house property-related tax benefits to lower their taxable income. There can be cases where you work in one city and live on rent, your family resides in another city, and you buy a home where your family is. A homeowner can claim:
- HRA exemption towards rent payment
- Deduction on home loan interest as per Section 24
- Principal Repayment under Section 80C
LTA (Leave Travel Allowance)
As the name itself suggests, it is an exemption for allowance/assistance received by the employee from his employer for travelling on leave. Though it sounds simple, many factors need to be kept in mind before planning the travel for the purpose of claiming LTA exemption. Income tax provision has laid down rules with respect to claiming exemption of LTA.
Eligible LTA Exemption
The exemption is available only on the actual travel costs i.e., the air, rail or bus fare incurred by the employee. No expenses such as local conveyance, sightseeing, hotel accommodation, food, etc., are eligible for this exemption. The exemption is also limited to LTA provided by the employer.
Conveyance Allowance
Conveyance allowance, also referred to as Transport Allowance, is a type of allowance offered by a company or employer to the employees to compensate for their travel from their place of residence to the workplace. Conveyance allowance is only paid by the company if it does not have a transportation service available to the employees. If the company offers transportation services, it does not pay conveyance allowance to employees whether the employees avail the service or not.
Can I get a tax exemption on my conveyance allowance?
A: Yes, you can. Irrespective of which tax slab your income belongs to, you can avail a tax exemption of Rs. 1,600 per month or Rs. 19,200 per annum as the conveyance allowance exemption limit set under Section 10 sub-section 14(ii) of the Income Tax Act (1961) and Rule 2BB of Income Tax rule. The tax exemption limit can change over time but currently, it is set at Rs. 1,600 per month for all salaried employees.
Taxation of ESOPs
Tax on ESOPs is calculated at two stages:
1. First levy occurs when shares are allotted to the employee after he has exercised his option on completion of the vesting period and
2. Second levy occurs when the employee opts to sell the allotted shares under the ESOP.
Now, we will see how the ESOP Taxation will work:
First level of taxation (when the option is exercised):
ESOPs would be taxed as perquisite, the value of which would be (on date of allotment) = (FMV per share – Exercise price per share) x number of shares allotted.
(100-60) x 10,000 = 400,000
The amount calculated above as perquisite value of ESOP i.e. Rs. 4,00,000 shall form part of X’s salary and be taxable in the year of allotment of such shares. Employer is liable to deduct TDS on such amount.
Second level of taxation (when ESOPs are sold):
When Mr X decides to sell the share on January 01, 2018, he would be liable to pay capital gain tax, which shall be calculated as follows:
Capital gains = Sale proceeds – FMV of shares at the time of allotment of shares
(120 – 100) x 10,000 = Rs. 200,000
Since the holding period of shares in the hands of X is less than 12 months (will be counted from the date of allotment), gains will be classified as Short-term Capital Gains and will be taxable as per the normal slab rates applicable on X.
Understanding CTC
Gross salary is the aggregate amount of compensation discharged by an employer or company towards the employment of an employee. The aggregate compensation would be the Cost to Company or CTC to employees. An employee’s take-home pay would differ from the CTC. The employees’ CTC is the gross amount, while the amount of salary one gets to take home is the net salary. In simpler words, gross salary is the monthly or yearly salary before any deductions are made from it.
Form 16
Form 16 is an income tax form used by firms to give their employees information on the tax deducted. Form 16 is considered as the proof filing of income tax returns by your employer to the government. For example, if your income is more than the tax exemption limit, then the employer is required to deduct TDS on your salary and submit it to the government. If your salary income is less than the tax exemption limit, then in that case the employer will not deduct any TDS. When the employer provides the Form 16, it means that your employer has filed your income tax returns. The form can also be considered as your salary TDS certificate.
Simply, the Form 16 certifies how much an employee has earned during a financial year and how much has been deducted as TDS. The form has two parts — Part A and Part B.
EPF
The Government of India will pay the employer and employee contribution to EPF account of employees for another three months from June to August 2020. The benefit is for establishments with up to 100 employees and where 90% of those employees draw a salary of less than Rs 15,000 per month. The contribution to EPF is reduced to 10% from 12% for non-government organisations. The interest rate applicable to the EPF contributions is 8.5% for FY 2020-21.
Contribution towards an EPF account provides a benefit to individuals by way of a deduction under Section 80C (see how here). It would also be good to know what would be the income tax or TDS implications of EPF withdrawal.
How are withdrawals taxed?
Your EPF payout has 3 components.
- Your contribution/employee’s contribution
- Interest on your/employee’s contribution
- Employers contribution and interest on employer’s contribution