Salary
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Introduction
The objective of this article is to highlight the recent amendments relating
to Salary income and Income from House property. This will be helpful while
filing the return of income for the Assessment year 2005-06. Idea is to
cover the recent amendments and that is why all the basic provisions are not
discussed in this article.
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Salary income
Salary income is chargeable to income tax on “receipt” basis or, on
“due” basis whichever is earlier. Sub section (1) of section 17 defines,
salary income in an inclusive manner as, salary includes wages, any annuity
or pension, gratuity, any fees, commissions, perquisites or profit in lieu
of or in addition to salary or wages, advance salary, leave encashment,
taxable portion of annual accretion to recognized provident fund. With
effect form 1st April 2004, i.e. from Assessment Year 2004-05; contribution
made by Central Government under the pension scheme referred to in section
80CCD into the account of the employee is also added to be considered as
salary income. There are certain exemptions and deductions while computing
the taxable salary.
Let us look at the amendments relating to exemptions, deductions and
valuation of perquisites etc.
- Standard deduction from Salary (Section
16)
The standard deduction is the ad hoc deduction, which is allowable
against the salary income, which would not be allowable from Assessment year
2006-07.
| Salary income before standard deduction |
Assessment Year 2004-05 & 2005-06 |
Assessment Year 2006-07 |
| Does not exceed Rs. 5, 00,000 |
Lower of 40% of gross salary or
Rs.30,000 |
Rs.NIL |
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Exceeds Rs.5,00,000 |
Rs.20,000 |
Rs.NIL |
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Deduction in respect of
notified pension scheme to Central Government employees:
Section 80CCD:
All Central government employees are eligible for a deduction under section
80CCD, in respect of the contribution to a notified pension scheme on or
after 1-1-2004. The maximum deduction allowable under this section is
restricted to 10% of salary. Salary for this purpose includes dearness
allowance, if the terms of employment so provide, but excludes all other
allowances and perquisites. The amount paid or deposited in the eligible
pension scheme in respect of which the deduction is allowed under this
section, will not be again considered for the purposes of rebate under
section 88. However the amount received by the said employee or his nominee,
a) on closure or his opting out of the pension scheme or b) as pension
received from annuity plan purchased or taken on such closure or opting out,
would be chargeable to tax in the year of receipt.
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Amount received on
voluntary retirement
With effect from assessment year 2004-05, the provisions of section
10(10C) have been amended so as to provide that any ‘amount received or
receivable’ by an employee on his voluntary retirement or termination of his
service, is exempt to the extent of Rs.5 lakhs. The earlier provision
allowed the exemption on the ‘amount received’ and that too at the time of
retirement. The effect of this change is that even if the amount is
received, not in lump sum but in installment, the aggregate of the amount so
received will qualify for exemption upto the prescribe limit of Rs.5 lakhs.
Further ‘at the time of his voluntary retirements’ the word ‘on his
voluntary retirement’ have been substituted with effect from 1-4-2004
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Exemption of family
pension in case of death of member of the armed force [Section 10(19)]
Where the death of a member of the armed forces (including Para-military
forces) of the union has occurred in the course of operational duties, in
such circumstances and subject to such condition as may be prescribed, the
family pension received by widow or children or nominated heirs as the case
may be shall be exempt from tax.
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Amendment in valuation
of perquisites
Income Tax (seventh Amendment Rules) 2005 substantially amended Rule 3
(Notification no. SO 265(E), dated 28th February 2005) Consequently the
method of valuation of perquisites would change with effect form Assessment
Year 2006-07. Under the existing provision contained in sub-clause (vi) of
clause (2) of section, 17 ‘perquisite’ includes the value of any other
fringe benefit of amenity as may be prescribed
Sub Clause is amended so as to provide that the value of any other fringe
benefit or amenity which may be prescribed, shall be excluded those fringe
benefits which are chargeable to tax under chapter XII-H.
- Valuation of perquisites as applicable
for Assessment Year 2005-06
Valuation of perquisites under Rule 3, was amended by CBDT circular
no.6/24 dated 6-12-2004, which would be relevant for A.Y 2005-06, are
discussed hereunder in respect of different types of perquisites.
- Accommodation:
For purpose of valuation of the perquisite of unfurnished accommodation,
all employees are divided into two categories
- Government & State Government employees
and
- Others
| Employer |
Value of unfurnished accommodation |
| a) |
Government & State
Government |
License fees charged less rent actually
paid employee |
| b) |
Others |
a) |
Within cities with population exceeding
four lacs as per 1997, cencers |
10% |
| b) |
Other places |
7.50% |
The scope of term
‘accommodation’ is now widened to include house, flat, farmhouse, hotel
accommodation, motel, service apartments, guesthouse, a caravan, mobile home
shop etc.
The value of accommodation located in a remote area, for example
accommodation provided to an employee working at mining site, offshore site
etc. would not be treated as perquisite
For furnished accommodation the perquisite is value of unfurnished
accommodation is to be increased by the actual cost of hiring the furnishing
fittings and furniture, or 10% of original cost of such furnishing or
fittings and furniture per annum.
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Use of Motorcar
Motorcar exclusively for official purpose In case the motor car is owned
or hired by the employer or in case it is owned by employee who is getting
reimbursement of expenses, if the motor car is used wholly & exclusively in
performance of official duties, the perquisite value shall be Rs.nil
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Motorcar used
exclusively for private purpose
When the car is provided exclusively for private purposes, the
perquisite value would be equal to the amount of expenditure incurred on
running & maintaining of car including salary paid to chauffeur by the
employer and 10% of the actual cost of the car less amount charged (if any).
Car partly used for official purpose and partly for private purpose:
| Car owned/hired by |
Smaller car |
Large car |
If chauffeur is provided |
| |
(Up to 1.6 ltrs engine capacity) |
(Above 1.6 ltrs Engine capacity) |
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| Employer & expenses Are met & reimbursed |
Rs. 1200 p.m. |
Rs. 1600 p.m. |
Rs. 600 p.m. |
| By employee & expenses are met or
reimbursed |
Rs 400 p.m. |
Rs 600 p.m. |
Rs 600 p.m. |
Detail of complete journey
for official duty & personal purpose is required to be kept if it is claimed
that actual expenses are lower than the amount mentioned in above paragraph.
If second/additional car is provided then second/ additional car would be
deemed to be exclusively for personal use and value of perquisite shall be
computed accordingly.
- Other perquisites at a glance:
| Amenity or benefit in nature of
Perquisite |
Perquisite Value |
| Personal attendants (a sweeper gardener
or a watchman) Gas electricity & water |
Cost to the employer (Earlier it was
valued at Rs. 120 p.m.) Cost to the employer (Including in case where it
is supplied from its own source or where it is partly used for official
purpose) |
| Free or concessional Education
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Cost to the employer (In all cases
except where educational institution i owned by employer or the employee
is working in same educational institution) |
| Free or concessional Journeys
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Cost to the employer (except employees
of airlines or the railways. Leave travel tour and tansfr exempt u/s
10(5) & 10 (14) is excluded |
| Interest free or concessional loans
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Small loans up to Rs. 20000 in aggregate
and loan for medical treatment are exempted. In other cases, excess of
interest payable at prescribed rate (Rate charged by State Bank of India
on 1st day of relevant financial year for similar type of loan) over
interest paid. For this purpose maximum monthly balances method would be
adopted |
| Traveling touring accommodation
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Cost incurred by the employer excluding
leave other holiday exp: travel as per section 10(5) & enjoyment of
holiday home facility available to all employees. |
| Free meals: |
The provision of free food &
non-alcoholic beverages would be exempted up to Rs. 50. Tea and non
alcoholic beverages & snacks provided During working hours are not
charged as Perquisite |
| Credit cards & club expenses |
At cost to the employer |
| Use of assets |
At 10 % of cost of original assets For
use of assets owned by employer (Computers & laptops are exempted) |
| Transfer of movable assets |
At no cost or at concessional rate shall
be the difference between original cost & amount paid by employee [if
the assets is already put in earlier year then the Original cost shall
be reduced based on number of year used and nature of assets like
electronics gadgets, car & other assets] |
| Employee Stock Option Plan |
If the Option is as per guidelines, it
would be taxed as capital gains, In other cases it would be taxed at two
Stages on granting & on transfer In cases where perquisite has been
taxed earlier at the time of exercise of option, the cost of shares
shall be fair market value at the time of exercise for calculating the
capital gains. |
Residential value
Conveyance from residence to place of work &
office
Telephone expenses including mobile
would not be taken into account for calculating perquisite value |
Any benefit or amenity not included
above shall be Valued at cost on arms length basis.
Rs. NilRs. Nil |
The benefits provided by the employer to
the employee or his families towards medical treatment or reimbursement of
medical exp continue to exempt under provision (ii) of section 17(2)
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Relief u/s 89 in respect
of VRS receipts
Interestingly, Madras High Court in case of CIT vs. M. Raman (245 17R
856) held that relief u/s 89 would be allowable in respect of amount
received by an employee at the time of voluntary retirement from services.
Even compensation received on resignation was also considered eligible for
relief under section 89 in case of CIT vs. J. Vishalakshi (206 ITR 531), by
Madras High Court.
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No set off of loss
against salary income
The provision of section 71(2A) was amended by Finance (no.2) Act, 2004
to provide that the loss computed under head of Profits & Gains of Business
or Profession shall not be allowed to be set off against income under the
head salary. Hence from assessment year 2005-2006 onwards business loss
cannot be set off against salary income
- Scheme for filing of returns by
salaried employees through employer, 2004.
An employee who is
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Resident in India, and
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His total income before
allowing standard deduction does not exceed one lakh fifty thousand, and
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His total income does not
include income chargeable under the head ‘business and profession, or
‘Capital gain’ or ‘Agricultural income’, and
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he is not in receipt of
any income from which tax has been deducted at source during the previous
year by any person other than the employer is eligible for the scheme
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Returns how to be
furnished
On receipt of the certificate of Tax deducted at source from the income
chargeable under the head ‘Salaries’ in Form No 16AA from the employer,
shall furnish the same after being signed and verified in sub-section (1) of
section 139 of Income tax Act, 1961. On receipt of duly signed and verified
Form No 16AA from an eligible employee the employer can furnish the return
of income of such employee to the Assessing officer and obtain an
acknowledgement before due date.
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Income from house
property
There are no new amendments to the provisions relating to taxability of
income form House property effective form Assessment year 2005-06. However
readers may look at the principles governing annual value, the requirement
to file a certificate regarding interest claim etc. Useful reference may be
made to earlier issue of IT review.
Some interesting Court decisions:
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Kolkotta High Court held
that where period of lease is more than twelve years, lessee is deemed to
be owner of property for the purpose of assessment under Income Tax Act.
Sub-leasing such leased property would assess the Rent Received from
tenant by Sub-leasing such leased property as income from house property
and not income from other sources, [Yagyawati Jayaswal Family Trust vs.
ITO (2004) 89 ITD 199(Kol.)]
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Section 22 applies not
only to dwelling house but also to building used for other purposes. CIT
bs. Chennai Properties & Investments Ltd.(2004)
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Income from Property let
out to the employees of the sister concern by the assessee was treated as
income from house property and can not be assessed as income from
business. Depreciation was not allowed on such property. CIT vs. T. V.
Sundaram Iyengar & Sons Ltd. (2004)
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