ICAI Notes- Unit 1: Heads of Income | Taxation for CA Intermediate PDF Download

 Page 1


    
 
1
 
 
LEARNING OUTCOMES 
   HEADS OF INCOME 
 
UNIT – 1 : SALARIES 
After studying this unit, you would be able to - 
? ascertain the point of time when salary income is chargeable to tax; 
? comprehend the meaning of salary, profits in lieu of salary, allowances, 
perquisite and various retirement benefits; 
? identify the allowances which are exempt and perquisites which are 
tax free under default tax regime under section 115BAC and under the 
optional tax regime (i.e., the normal provisions of the Act); 
? determine the taxable portion of retirement benefits, allowances and 
other benefits which form part of salary; 
? determine the value of perquisite chargeable to tax under the head 
“Salaries”; 
? identify the admissible deductions from salary under the default tax 
regime under section 115BAC; 
? identify the admissible deductions from salary under the optional tax 
regime (i.e., the normal provisions of the Act) 
? compute the income chargeable to tax under the head “Salaries” under 
both the default tax regime and the optional tax regime. 
CHAPTER 
© The Institute of Chartered Accountants of India
Page 2


    
 
1
 
 
LEARNING OUTCOMES 
   HEADS OF INCOME 
 
UNIT – 1 : SALARIES 
After studying this unit, you would be able to - 
? ascertain the point of time when salary income is chargeable to tax; 
? comprehend the meaning of salary, profits in lieu of salary, allowances, 
perquisite and various retirement benefits; 
? identify the allowances which are exempt and perquisites which are 
tax free under default tax regime under section 115BAC and under the 
optional tax regime (i.e., the normal provisions of the Act); 
? determine the taxable portion of retirement benefits, allowances and 
other benefits which form part of salary; 
? determine the value of perquisite chargeable to tax under the head 
“Salaries”; 
? identify the admissible deductions from salary under the default tax 
regime under section 115BAC; 
? identify the admissible deductions from salary under the optional tax 
regime (i.e., the normal provisions of the Act) 
? compute the income chargeable to tax under the head “Salaries” under 
both the default tax regime and the optional tax regime. 
CHAPTER 
© The Institute of Chartered Accountants of India
INCOME TAX LAW INCOME TAX LAW
 
 3.2
Proforma for computation of income under the head “Salaries” as per 
default tax regime under section 115BAC 
 Particulars Amt(`) 
(i) Basic Salary xxx 
(ii) Fees/Commission xxx 
(iii) Bonus xxx 
(iv) Allowances:  
 (a)  Dearness Allowance [Fully taxable]  xxx 
 (b)  House Rent Allowance (HRA) [Fully taxable] xxx 
(c) Children Education Allowance [Fully taxable] xxx
 (d)  Children Hostel Allowance [Fully taxable] xxx 
 (e)  Transport allowance  xxx  
  Less: ` 3,200 per month only in case of blind/ deaf 
and dumb/orthopedically handicapped employee  
 
 
xxx 
 
 
xxx 
 (f) Entertainment Allowance [Fully taxable]  xxx 
 (g) Travelling Allowance/Daily Allowance/ 
Conveyance Allowance 
xxx  
  Less: Exempt if the amount is fully utilised for the 
 purpose 
 
xxx 
 
xxx 
 (h)  Other Allowances including overtime allowance, city 
compensatory allowance etc. [Fully taxable] 
xxx 
(v) Taxable Perquisites  
 (a) Value of rent-free accommodation provided to the 
employee
*
 
xxx 
 (b) Value of any accommodation provided to the 
employee at a concessional rate* 
xxx 
  I) Where the accommodation is provided by the Govt. 
to its employees 
 
  License fee determined by the Govt. xxx  
  Less: Rent actually paid by the employer xxx  
*
In case of furnished accommodation, the value will be increased by 10% p.a. of the cost of furniture or 
hire charges, as the case may be, less amount recovered from the employees. 
© The Institute of Chartered Accountants of India
Page 3


    
 
1
 
 
LEARNING OUTCOMES 
   HEADS OF INCOME 
 
UNIT – 1 : SALARIES 
After studying this unit, you would be able to - 
? ascertain the point of time when salary income is chargeable to tax; 
? comprehend the meaning of salary, profits in lieu of salary, allowances, 
perquisite and various retirement benefits; 
? identify the allowances which are exempt and perquisites which are 
tax free under default tax regime under section 115BAC and under the 
optional tax regime (i.e., the normal provisions of the Act); 
? determine the taxable portion of retirement benefits, allowances and 
other benefits which form part of salary; 
? determine the value of perquisite chargeable to tax under the head 
“Salaries”; 
? identify the admissible deductions from salary under the default tax 
regime under section 115BAC; 
? identify the admissible deductions from salary under the optional tax 
regime (i.e., the normal provisions of the Act) 
? compute the income chargeable to tax under the head “Salaries” under 
both the default tax regime and the optional tax regime. 
CHAPTER 
© The Institute of Chartered Accountants of India
INCOME TAX LAW INCOME TAX LAW
 
 3.2
Proforma for computation of income under the head “Salaries” as per 
default tax regime under section 115BAC 
 Particulars Amt(`) 
(i) Basic Salary xxx 
(ii) Fees/Commission xxx 
(iii) Bonus xxx 
(iv) Allowances:  
 (a)  Dearness Allowance [Fully taxable]  xxx 
 (b)  House Rent Allowance (HRA) [Fully taxable] xxx 
(c) Children Education Allowance [Fully taxable] xxx
 (d)  Children Hostel Allowance [Fully taxable] xxx 
 (e)  Transport allowance  xxx  
  Less: ` 3,200 per month only in case of blind/ deaf 
and dumb/orthopedically handicapped employee  
 
 
xxx 
 
 
xxx 
 (f) Entertainment Allowance [Fully taxable]  xxx 
 (g) Travelling Allowance/Daily Allowance/ 
Conveyance Allowance 
xxx  
  Less: Exempt if the amount is fully utilised for the 
 purpose 
 
xxx 
 
xxx 
 (h)  Other Allowances including overtime allowance, city 
compensatory allowance etc. [Fully taxable] 
xxx 
(v) Taxable Perquisites  
 (a) Value of rent-free accommodation provided to the 
employee
*
 
xxx 
 (b) Value of any accommodation provided to the 
employee at a concessional rate* 
xxx 
  I) Where the accommodation is provided by the Govt. 
to its employees 
 
  License fee determined by the Govt. xxx  
  Less: Rent actually paid by the employer xxx  
*
In case of furnished accommodation, the value will be increased by 10% p.a. of the cost of furniture or 
hire charges, as the case may be, less amount recovered from the employees. 
© The Institute of Chartered Accountants of India
  
SALARIES  
 
 3.3 
  II) Where the accommodation is provided by any 
other employer 
 
  If accommodation is owned by the employer  
(i)  Cities having population > 25 lakh as per 
2001 census 
15% of salary in respect of the period of 
occupation (–) rent recovered from employee 
 
 
xxx 
  (ii) Cities having population > 10 lakh = 25 
lakh as per 2001 census 
10% of salary in respect of the period of 
occupation (–) rent recovered from employee 
 
 
xxx 
 
(iii) In other cities
7.5% of salary in respect of the period of 
occupation (–) rent recovered from employee 
 
xxx 
  If accommodation is taken on lease/rent by the employer  
  Lower of lease rental paid or payable by the 
employer (or) 15% of salary 
xxx  
  Less: Rent recovered from the employee xxx  
 (c) Obligation of employee discharged by employer: For 
e.g., Professional tax paid by the employer 
xxx 
 (d) Any sum payable by the employer to effect an 
assurance on the life of the employee or to effect a 
contract for annuity: Actual expenditure incurred by the 
employer
xxx 
 (e) Amount or aggregate of amounts of any contribution made  
- in a recognised provident fund,  
- in NPS referred to in section 80CCD(1) 
- in an approved superannuation fund  
by the employer to the account of the assessee, to the 
extent it exceeds ` 7,50,000 in a P.Y. 
xxx 
 (f) Annual accretion by way of interest, dividend or any 
other amount of similar nature during the P.Y. to the 
balance at the credit of the recognized provident fund or 
NPS or approved superannuation fund to the extent it 
relates to the employer’s contribution which is included 
in total income in any P.Y. under section 17(2)(vii) 
xxx 
© The Institute of Chartered Accountants of India
Page 4


    
 
1
 
 
LEARNING OUTCOMES 
   HEADS OF INCOME 
 
UNIT – 1 : SALARIES 
After studying this unit, you would be able to - 
? ascertain the point of time when salary income is chargeable to tax; 
? comprehend the meaning of salary, profits in lieu of salary, allowances, 
perquisite and various retirement benefits; 
? identify the allowances which are exempt and perquisites which are 
tax free under default tax regime under section 115BAC and under the 
optional tax regime (i.e., the normal provisions of the Act); 
? determine the taxable portion of retirement benefits, allowances and 
other benefits which form part of salary; 
? determine the value of perquisite chargeable to tax under the head 
“Salaries”; 
? identify the admissible deductions from salary under the default tax 
regime under section 115BAC; 
? identify the admissible deductions from salary under the optional tax 
regime (i.e., the normal provisions of the Act) 
? compute the income chargeable to tax under the head “Salaries” under 
both the default tax regime and the optional tax regime. 
CHAPTER 
© The Institute of Chartered Accountants of India
INCOME TAX LAW INCOME TAX LAW
 
 3.2
Proforma for computation of income under the head “Salaries” as per 
default tax regime under section 115BAC 
 Particulars Amt(`) 
(i) Basic Salary xxx 
(ii) Fees/Commission xxx 
(iii) Bonus xxx 
(iv) Allowances:  
 (a)  Dearness Allowance [Fully taxable]  xxx 
 (b)  House Rent Allowance (HRA) [Fully taxable] xxx 
(c) Children Education Allowance [Fully taxable] xxx
 (d)  Children Hostel Allowance [Fully taxable] xxx 
 (e)  Transport allowance  xxx  
  Less: ` 3,200 per month only in case of blind/ deaf 
and dumb/orthopedically handicapped employee  
 
 
xxx 
 
 
xxx 
 (f) Entertainment Allowance [Fully taxable]  xxx 
 (g) Travelling Allowance/Daily Allowance/ 
Conveyance Allowance 
xxx  
  Less: Exempt if the amount is fully utilised for the 
 purpose 
 
xxx 
 
xxx 
 (h)  Other Allowances including overtime allowance, city 
compensatory allowance etc. [Fully taxable] 
xxx 
(v) Taxable Perquisites  
 (a) Value of rent-free accommodation provided to the 
employee
*
 
xxx 
 (b) Value of any accommodation provided to the 
employee at a concessional rate* 
xxx 
  I) Where the accommodation is provided by the Govt. 
to its employees 
 
  License fee determined by the Govt. xxx  
  Less: Rent actually paid by the employer xxx  
*
In case of furnished accommodation, the value will be increased by 10% p.a. of the cost of furniture or 
hire charges, as the case may be, less amount recovered from the employees. 
© The Institute of Chartered Accountants of India
  
SALARIES  
 
 3.3 
  II) Where the accommodation is provided by any 
other employer 
 
  If accommodation is owned by the employer  
(i)  Cities having population > 25 lakh as per 
2001 census 
15% of salary in respect of the period of 
occupation (–) rent recovered from employee 
 
 
xxx 
  (ii) Cities having population > 10 lakh = 25 
lakh as per 2001 census 
10% of salary in respect of the period of 
occupation (–) rent recovered from employee 
 
 
xxx 
 
(iii) In other cities
7.5% of salary in respect of the period of 
occupation (–) rent recovered from employee 
 
xxx 
  If accommodation is taken on lease/rent by the employer  
  Lower of lease rental paid or payable by the 
employer (or) 15% of salary 
xxx  
  Less: Rent recovered from the employee xxx  
 (c) Obligation of employee discharged by employer: For 
e.g., Professional tax paid by the employer 
xxx 
 (d) Any sum payable by the employer to effect an 
assurance on the life of the employee or to effect a 
contract for annuity: Actual expenditure incurred by the 
employer
xxx 
 (e) Amount or aggregate of amounts of any contribution made  
- in a recognised provident fund,  
- in NPS referred to in section 80CCD(1) 
- in an approved superannuation fund  
by the employer to the account of the assessee, to the 
extent it exceeds ` 7,50,000 in a P.Y. 
xxx 
 (f) Annual accretion by way of interest, dividend or any 
other amount of similar nature during the P.Y. to the 
balance at the credit of the recognized provident fund or 
NPS or approved superannuation fund to the extent it 
relates to the employer’s contribution which is included 
in total income in any P.Y. under section 17(2)(vii) 
xxx 
© The Institute of Chartered Accountants of India
INCOME TAX LAW INCOME TAX LAW
 
 3.4
 (g) Value of use of motor car [Refer Table below] xxx 
 (h) Any other perquisite: For example, xxx 
  (1) Provision of services of a sweeper, gardener, 
watchman or personal attendant: Actual cost to 
employer by way of salary paid or payable for such 
services (-) amount paid by the employee 
 
  (2) Gas, electricity, or water supplied by employer for 
household consumption of the employee: Amount 
paid on that account by the employer to the agency 
supplying gas etc. (-) amount paid by the employee 
 
  (3) Provision of free or concessional education facilities 
for any member of employee’s household: Sum equal 
to the expenditure incurred by the employer (-) amount 
paid or recovered from the employee 
Where educational institution is maintained and 
owned by employer: Cost of such education in 
similar institution in or near the locality (-) amount 
paid or recovered from employee [However, there 
would be no perquisite if the value of benefit per 
child does not exceed ` 1,000 p.m.] 
 
  Note: Above perquisites in (g) and (h) are taxable only in 
case of specified employees. 
 
  (4) Interest-free or concessional loan exceeding  
` 20,000: Interest computed at the rate charged by SBI 
as on 1
st
 day of relevant P.Y.  in respect of loans for similar 
purposes on the maximum outstanding monthly balance 
(-) interest actually paid by employee 
 
  (5) Free food and non-alcoholic beverages through 
paid vouchers 
 
  (6) Value of gift, voucher: Sum equal to the amount of 
such gift [If value of gift, voucher is below  
` 5,000, there would be no perquisite] 
 
  (7) Use of moveable assets [Refer table at page 3.88]  
  (7) Transfer of moveable assets: Actual cost of asset to 
employer – cost of normal wear and tear – Amount paid or 
recovered from employee [Refer table at page 3.89] 
 
(vi) Leave travel concession [Fully taxable] xxx 
© The Institute of Chartered Accountants of India
Page 5


    
 
1
 
 
LEARNING OUTCOMES 
   HEADS OF INCOME 
 
UNIT – 1 : SALARIES 
After studying this unit, you would be able to - 
? ascertain the point of time when salary income is chargeable to tax; 
? comprehend the meaning of salary, profits in lieu of salary, allowances, 
perquisite and various retirement benefits; 
? identify the allowances which are exempt and perquisites which are 
tax free under default tax regime under section 115BAC and under the 
optional tax regime (i.e., the normal provisions of the Act); 
? determine the taxable portion of retirement benefits, allowances and 
other benefits which form part of salary; 
? determine the value of perquisite chargeable to tax under the head 
“Salaries”; 
? identify the admissible deductions from salary under the default tax 
regime under section 115BAC; 
? identify the admissible deductions from salary under the optional tax 
regime (i.e., the normal provisions of the Act) 
? compute the income chargeable to tax under the head “Salaries” under 
both the default tax regime and the optional tax regime. 
CHAPTER 
© The Institute of Chartered Accountants of India
INCOME TAX LAW INCOME TAX LAW
 
 3.2
Proforma for computation of income under the head “Salaries” as per 
default tax regime under section 115BAC 
 Particulars Amt(`) 
(i) Basic Salary xxx 
(ii) Fees/Commission xxx 
(iii) Bonus xxx 
(iv) Allowances:  
 (a)  Dearness Allowance [Fully taxable]  xxx 
 (b)  House Rent Allowance (HRA) [Fully taxable] xxx 
(c) Children Education Allowance [Fully taxable] xxx
 (d)  Children Hostel Allowance [Fully taxable] xxx 
 (e)  Transport allowance  xxx  
  Less: ` 3,200 per month only in case of blind/ deaf 
and dumb/orthopedically handicapped employee  
 
 
xxx 
 
 
xxx 
 (f) Entertainment Allowance [Fully taxable]  xxx 
 (g) Travelling Allowance/Daily Allowance/ 
Conveyance Allowance 
xxx  
  Less: Exempt if the amount is fully utilised for the 
 purpose 
 
xxx 
 
xxx 
 (h)  Other Allowances including overtime allowance, city 
compensatory allowance etc. [Fully taxable] 
xxx 
(v) Taxable Perquisites  
 (a) Value of rent-free accommodation provided to the 
employee
*
 
xxx 
 (b) Value of any accommodation provided to the 
employee at a concessional rate* 
xxx 
  I) Where the accommodation is provided by the Govt. 
to its employees 
 
  License fee determined by the Govt. xxx  
  Less: Rent actually paid by the employer xxx  
*
In case of furnished accommodation, the value will be increased by 10% p.a. of the cost of furniture or 
hire charges, as the case may be, less amount recovered from the employees. 
© The Institute of Chartered Accountants of India
  
SALARIES  
 
 3.3 
  II) Where the accommodation is provided by any 
other employer 
 
  If accommodation is owned by the employer  
(i)  Cities having population > 25 lakh as per 
2001 census 
15% of salary in respect of the period of 
occupation (–) rent recovered from employee 
 
 
xxx 
  (ii) Cities having population > 10 lakh = 25 
lakh as per 2001 census 
10% of salary in respect of the period of 
occupation (–) rent recovered from employee 
 
 
xxx 
 
(iii) In other cities
7.5% of salary in respect of the period of 
occupation (–) rent recovered from employee 
 
xxx 
  If accommodation is taken on lease/rent by the employer  
  Lower of lease rental paid or payable by the 
employer (or) 15% of salary 
xxx  
  Less: Rent recovered from the employee xxx  
 (c) Obligation of employee discharged by employer: For 
e.g., Professional tax paid by the employer 
xxx 
 (d) Any sum payable by the employer to effect an 
assurance on the life of the employee or to effect a 
contract for annuity: Actual expenditure incurred by the 
employer
xxx 
 (e) Amount or aggregate of amounts of any contribution made  
- in a recognised provident fund,  
- in NPS referred to in section 80CCD(1) 
- in an approved superannuation fund  
by the employer to the account of the assessee, to the 
extent it exceeds ` 7,50,000 in a P.Y. 
xxx 
 (f) Annual accretion by way of interest, dividend or any 
other amount of similar nature during the P.Y. to the 
balance at the credit of the recognized provident fund or 
NPS or approved superannuation fund to the extent it 
relates to the employer’s contribution which is included 
in total income in any P.Y. under section 17(2)(vii) 
xxx 
© The Institute of Chartered Accountants of India
INCOME TAX LAW INCOME TAX LAW
 
 3.4
 (g) Value of use of motor car [Refer Table below] xxx 
 (h) Any other perquisite: For example, xxx 
  (1) Provision of services of a sweeper, gardener, 
watchman or personal attendant: Actual cost to 
employer by way of salary paid or payable for such 
services (-) amount paid by the employee 
 
  (2) Gas, electricity, or water supplied by employer for 
household consumption of the employee: Amount 
paid on that account by the employer to the agency 
supplying gas etc. (-) amount paid by the employee 
 
  (3) Provision of free or concessional education facilities 
for any member of employee’s household: Sum equal 
to the expenditure incurred by the employer (-) amount 
paid or recovered from the employee 
Where educational institution is maintained and 
owned by employer: Cost of such education in 
similar institution in or near the locality (-) amount 
paid or recovered from employee [However, there 
would be no perquisite if the value of benefit per 
child does not exceed ` 1,000 p.m.] 
 
  Note: Above perquisites in (g) and (h) are taxable only in 
case of specified employees. 
 
  (4) Interest-free or concessional loan exceeding  
` 20,000: Interest computed at the rate charged by SBI 
as on 1
st
 day of relevant P.Y.  in respect of loans for similar 
purposes on the maximum outstanding monthly balance 
(-) interest actually paid by employee 
 
  (5) Free food and non-alcoholic beverages through 
paid vouchers 
 
  (6) Value of gift, voucher: Sum equal to the amount of 
such gift [If value of gift, voucher is below  
` 5,000, there would be no perquisite] 
 
  (7) Use of moveable assets [Refer table at page 3.88]  
  (7) Transfer of moveable assets: Actual cost of asset to 
employer – cost of normal wear and tear – Amount paid or 
recovered from employee [Refer table at page 3.89] 
 
(vi) Leave travel concession [Fully taxable] xxx 
© The Institute of Chartered Accountants of India
  
SALARIES  
 
 3.5 
(vii) Gratuity  
 (a) Received during the tenure of employment (fully taxable) xxx  
 (b) Received at the time of retirement or otherwise xxx  
 Less: Exempt u/s 10(10) [Refer fig at Page 3.32] xxx xxx 
(viii) Uncommuted pension (fully taxable) xxx
(ix) Commuted pension xxx  
 Less: Exempt u/s 10(10A) [Refer fig at Page 3.29] xxx xxx 
(x) Leave encashment  
 (a) Received during the employment (fully taxable) xxx  
 (b)  Received at the time of retirement or otherwise xxx  
 Less: Exempt u/s 10(10AA) [Refer fig at Page 3.36] xxx xxx 
(xi) Voluntary retirement compensation xxx  
 Less: Exempt u/s 10(10C) - Least of the following: xxx xxx 
 (a) Compensation received/receivable on 
voluntary retirement 
xxx   
 (b) ` 5,00,000 xxx   
 (c) 3 months’ salary x completed years of 
service 
xxx   
 (d) Last drawn salary x remaining months of 
service left 
 
xxx 
  
(xii) Retrenchment compensation etc. xxx  
 Less: Exempt u/s 10(10B)] – Least of the following: xxx xxx 
 (a) Compensation actually received xxx   
 (b)  ` 5,00,000 xxx   
 (c) 15 days average pay x completed years of 
service and part thereof in excess of 6 
months 
 
xxx 
  
Gross Salary xxx 
Less: Deduction under section 16  
 Standard deduction u/s 16(ia) -amount of salary or  
` 50,000, whichever is less 
xxx 
Income under the head “Salaries” xxx 
 
© The Institute of Chartered Accountants of India