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Salary is the amount accrued and is payable to an individual periodically for the services rendered as per the express or implied contract between the employer and the employee. The existence of employer-employee relationship defines the taxability of the receipt under the head “Salaries”.
An amount received by a partner from partnership firm for carrying out business and profession will not be treated as salary and treated under the head Salaries. It will be considered as Profits from Business or Profession.
Also, Salary received from MP or MLA is taxable as Income from Other Sources not as Income from Salaries. However, there is an exception if a person receives a salary as Minister of State or Central Government it will treat as salary and considered under the head Income from Salaries.
Hope you have got a brief about what is salary, now let us move forward and learn more about salary in detail.
Section 17(2) of the Income Tax Act,1961 has given an inclusive and not exhaustive definition of salary which states that Salary includes:
Deductions under the head salaries as provided under Section 16 of the Income Tax Act,1961
Also, note that no standard deduction is available from 01/04/2006. i.e. from A.Y.2006-2007 onwards.
The term perquisite states extra benefit that employees will get in addition to the normal salary to the employees. These benefits are provided to the employees at free of cost or at concessional rates.
As per Section 17(2) of the Income Tax Act, 1961 “Perquisites” includes:
Let us now discuss perquisites in details regarding its taxability, valuation and exemptions
Perquisites are basically of two types:
Note: In case the monetary limits are specified in case of certain expenses then up to the monetary limit the perquisites will be exempt.
a. Exempted Perquisites for all employees:
As per the general rule, the perquisites are taxable in the hands of the employee which is, in turn, a cost to the employer. Rule 3 of the Income Tax Act defines the specific rules for valuation of perquisites:
If the Accommodation is owned by the employer the valuation is done as per the population of the place in which the accommodation is provided:
|Population in the place where the accommodation is provided||Value of perquisite taxable|
|Less than 10 lakhs||7.5% of Salary|
|10 to 25 lakhs||10% of Salary|
|More than 25 lakhs||15% of Salary|
Salary is to be calculated on the basis of the period for which the employee had occupied the accommodation during the previous year
However, in case the accommodation is taken on lease or rent the valuation of perquisite shall be done on the basis of
The above rules are with regard to unfurnished accommodation. If the employee is provided with furnished accommodation, then in such a case value of furniture would be added separately the calculation of which shall be done as follows:
In the case where accommodation is provided in a hotel:
The value of perquisite will be lower of Actual hotel charges paid or payable by the employer or 24% of salary.
The salary for the purpose of this calculation means Basic Salary + Dearness Allowance (if provided) + any bonus, commission or any other allowances
2. Valuation of Motor Car for personal use:
The valuation of motor car can be categorized on the basis of the situations:
Situation A: Employers Car and expenses are borne by the employer
Situation B: Employers Car and expenses are borne by the employer
Situation C: Employers Car and expenses are borne by the employee
Valuation of taxable perquisite will be done as follows:
|Scenario||Situation A||Situation B||Situation C|
|Usage of Motor Car for personal and official use||Actual Cost bore by the Employer Less: Rs 1800 per month if car is < than 1.6 c.c.Rs. 2400 per month if car > than 1.6 c.c.In addition to the above Rs.900 per month if the driver is provided to the employee will be reduced||The amount of the perquisite shall be fixed as flows: Rs 1800 per month if car is < than 1.6 c.c.Rs. 2400 per month if car > than 1.6 c.c.In addition to the above Rs.900 per month if the driver is provided to the employee will be added||The amount of the perquisite shall be fixed as flows: Rs 1800 per month if car is < than 1.6 c.c.Rs. 2400 per month if car > than 1.6 c.c.In addition to the above Rs.900 per month if the driver is provided to the employee will be added|
|Used fully for Personal use||The cost to the Employer||The cost to the Employer + 10% additional of the cost of the motor car for the routine wear and tear||The cost to the Employer + 10% additional of the cost of the motor car for the routine wear and tear|
3. Use of Gas, Electricity, and Water:
The value of the perquisite shall be determined on the basis of the ownership of the services
Also, note that any amount received from the employee shall be deducted from the amount payable.
4. Free or Concessional Education facility:
The value of perquisite shall be determined by the employer on the basis of:
5. Use of sweeper, gardener, watchman or personal attendant:
Value of perquisite shall be determined on the basis of actual amount borne by the employer reduced by any amount paid by the employee
6. Free or concessional traveling to the employee and its family:
Value of the perquisite shall be determined on the basis of benefit which is offered to general as reduced by the amount if any recovered from the employee.
7. Interest-free or Loan at concessional rates:
Value of perquisite shall be determined on the basis of an excess of interest payable at the prescribed rate over and above any interest is recovered from the employee.
In this case, prescribed rate would be the rates prescribed by State Bank of India on the 1st day of the relevant financial year in respect of the same type of loan in which it is provided to general public.
Note: Value of prerequisite is to be calculated on the maximum outstanding monthly balance method. Also, note that that loans up to Rs.20000/- for medical treatment specified in Rule 3Aare exempt provided same is not reimbursed under medical insurance.
8. Value of Free Meals:
The value of perquisite in case of a free meal and nonalcoholic beverages provided by the employer shall be the expenditure incurred by the employer less any amount recovered from the employees.
However free meal or non-alcoholic beverages will not be treated as prerequisite if they are provided during working hours and certain conditions are satisfied as per Rule 3(7)(iii).
9. Gift Voucher or Token:
The perquisite value shall be calculated in case of any gift voucher or token shall equal to the value of such gift, voucher or token. The gift can be received by the employee himself or any household member of his family from the employer.
Also, they are not liable to fringe benefits tax. However, no perquisite shall be taken into consideration if the same is provided for the official purpose and loss of certain conditions of Rule 3(7)(iii) are fulfilled.
10. Club membership provided by the employer:
The value of table perquisite shall be the amount paid by the employer as reduced by any expenses recovered from the employee. These perquisites are not liable to fringe benefits tax.
However, such expenses will be exempt if they are used for business purpose exclusively and also certain conditions of Rule3(7)(iii) are fulfilled.
11. Sweat equity shares or Specified Security:
In case of specified security or sweat equity shares the value of perquisite shall be calculated as follows:
It is pertinent to note that any facilities provided by the employer to the employee will be taxed as perquisites on the basis of arm’s length transactions reduced by any cost recovered from the employee
Here are some examples of perquisites which are exempt:
Allowances are defined as a fixed amount paid to an employee in addition to the salary as per the requirements of the employee. As a Rule, all expenses are included while calculating salary income unless specific exemptions are provided. Following Allowances are exempt as per the criteria defined:
Allowances are paid in cash as a fixed amount paid on a monthly basis to meet the particular requirements for performing the duties. The amount may or may not be borne by the employee. Allowance form part of your pay package
Perquisites, on the other hand, are the additional benefits provided to a specific employee in addition to its salary It may be in cash or kind. Perquisites may or may not be included in the employees pay package.
Calculating the income from salary and other taxable income of the employee is a difficult task which can be efficiently done with the help of a professional expert. We at Enterslice help with solution in file your Income Tax Return with availing maximum benefits. For more information visit www.enterslice.com