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INCOME TAX NOTES
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  Rahul AgrawalSALARY  Chapter 4 Income from salaries [Sec.15 to 17] Important concepts Employer & employee relationship ã For the income to be taxable under this head, relation of employer andemployee must exit between the payer and payee. ã Any payment received by an individual from a person other than hisemployer cannot `be termed as salary. ã Examples:  Remuneration received by a lecture from his college is salarybut remuneration received from another university is not salary.Hence it will be taxable under the head “Income from othersources”, not under the head “salaries”. (E.g. remuneration forsetting question paper of another university).  If director is working in a company in the capacity of employee,then commission or director’s sitting fee or any other amountreceived by him from that company should be taxable as a“Salary income”, otherwise as a “Income from other sources ”, Salary income must be real and not fictitious  There should be an intention to pay and receive salary. Likewise, thereshould be intention to render services.Surrender of salary ã Salaries are taxable on due basis and once accrued to an employee,its subsequent waiver by the employee does not relieve him from taxliability. ã But if an employee surrenders his salary to Central Government u/s 2of Voluntary Surrender of Salaries Act, 1961, the salary so surrenderwill be excluded while computing his taxable income. Tax- free salary Amount of tax paid by the employer on behalf pf the employee shall beincluded in the taxable income of the employee. Arrear of salary Arrear will be taxed in the previous year in which these are paid or allowed toemployee (i.e. receipts basis). 11.MLAs or MPs are not treated as an employee of the Government; thereforeremuneration received by these people is not taxable under the head“Salaries”, but taxable under the head “Income from other sources”,2.Salary received by a partner from a partnership firm is taxable under thehead “Business and profession”.  Rahul AgrawalSALARY  Salary due or received in foreign currency If the salary is earned in foreign currency, it will be converted into rupees. ã Conversion rate -T.T. buying rate on specifieddate. ã Specified date-Last date of the month immediatelyPreceding the month in which thesalary isDue /paid in advance /paid in arrears. How to compute salary in the grade systemExample If any employee joins the service on 1-5-97 and is placed in the grade of Rs.32,500 – 500 – 38,000 – 800 – 44,400. This means that – ã He will get a basic salary of Rs. 32,500 w.e.f. 1-5-97 ã He will get annual increment of Rs. 500 w.e.f. 1-5-98 and on wardstill his salary reaches Rs. 38,000. ã Thereafter, he will get on annual incremental of Rs. 800 till hissalary reaches 44,400. ã No further increment will be given thereafter till he is placed inother grade. Basis of charge (Sec.15) Salary is chargeable either on ã Due basis ; or ã Receipt basis(Whichever is earlier)1.If salary is due at the end of the month - in this case, salary fromApril toMarch is taxable 2. If salary is due on 1 st day of the next - In the case, salary frommarch to feb.Month is taxable. Note – in case of Government employee, the salary become due onthe 1 st  day of the next month whereas in case of none – Government employee (including bank employees.), the salary become due on the last day of the same month. Method of accounting Method of accounting is irrelevant. It cannot very the basis of charge fixedby sec.15. Salary earned & received outside India. Since salary earned and received outside India is not taxable in the handsof NOR & NR. Therefore perquisites received outside India for renderingservices outside India is not chargeable to tax. 2  Rahul AgrawalSALARY  Meaning of salary [Sec. 17(1)] Salary includes: -1.Wages2.Any annuity or pension;3.Any gratuity;4.Any fees, commission or perquisites or profit in lieu of or inaddition to any salary /wages;5.Any advance of salary;6.Leave encashment; 7. Employer contribution to Recognized provident fund (RPF).8.Interest credited in RPF A/c9.Transferred balance from URPF to RPF 10.  The contribution made by the Central Government to theaccount of an employee under Pension Scheme referred to inSec 80CCD.   Performa of computing taxable income Basic salaryDearness allowanceBonusCommissionPensionEmployer’s contribution in excess of 12% to RPF.Interest in excess of 9.5 % on RPF Taxable allowance Taxable perquisites (after proper valuation) Taxable part of gratuity Taxable part of computation of pensionLump sum received from URPF to the extant employer’scontribution and interest thereon Taxable part of compensation receivedGross salaryLess : Deduction u/s 16 (i)Entertainment allowance(ii)Employment tax Taxable salary /net salary  Rs. xxxxxx Rs. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxx 3  Rahul AgrawalSALARY  Meaning of Government employees for different purposeS.No.PurposeGovernment employees 1.Leave encashment/entertainment allowanceRent free House.Central & State Govt.2.Gratuity Central & State Govt. & Localauthorities.3.PensionCentral & State Govt. & Localauthorities & Statutorycorporation & Judges of H.C./S.C. Meaning of salary for ComputationS.No.Purpose of computationSalary includes 1.Entertainment allowance Basic salary2.Gratuity [if gratuity Act,1972 is applicable]  Basic salary + DA (whether forming part of retirement benefit or not)  3.Leave encashment / HRA /RPF / Gratuity [it Act not applicable] Basic salary + DA (whether forming part of retirement benefit or not)+ fixedcommission on turnover.4.Retirement compensation Basic+ All allowance + Value of all benefit [excluding Bonus,Gratuity, Employer’scontribution to any retirement benefits scheme.] 5.Rent free accommodationor accommodation atconfessional rate.Basic + Allowance +Bonus +Commission + DA (If forming part of retirement benefit)+ Anymoney payment ( which inchargeable to tax)But does not include –1.Employer’s contribution toP.F. A/c.2.Value of perquisitespecified in sec. 17(2) 4
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