Commerce World of American Institute of Accountancy in Dibrugarh.9.09%

Rise of American Accounts. "Hollywood. "

Direct Tax

. PROFITS IN LIEU OF SALARY. [ 17(3) ]

Following types of receipts are treated as profits in lieu of salary :

1. The amount of any compensation due to or received by an employee from his employer or former employer at or in connection with the termination of his employment.

2. Any amount of compensation due to or received by an employee from his employer or former employer at or in connection with the modification of the terms and conditions of contract of employment.

3. Any amount of payment due to or received by an employee from his or her employer or former employer except the following types of payment to the extent these payments are exempt u/s 10.

(1) Amount of payment received as gratuity exempted u/s 10(10) .

(2) Amount of payment received as commuted pension exempted u/s 10(10A) .

(3) Amount of payment received as retirement compensation exempted u/s 10(10B).

(4) Amount of payment of house rent allowance received and exempted u/s 10(13A).

(5) Amount of payment received from an approved superannuation Fund u/s 10(13) .

(6) Amount of payment received from a recognized provident fund to the extent it is exempt u/s 10(12) .

(7) Amount of payment received from statutory provident fund or Public Provident Fund Section u/s 10(11).

4. Any amount of payment received by employee from unrecognised provident fund or any such other fund to the extent to which it does not consist of employee's own contribution and interest thereon.

5. Any amount of sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.

6. Any amount due or received whether in lumpsum or otherwise by any employee from any person.

(a) before his joining any employment with that person : or

(b) after cessation of his/her employment with that person.

.Payments Exempted U/s 10 .

Any payment received whether from present or past employer, is taxable as profit in lieu of salary. The following receipts, however, are exempted to the extent mentioned below :

1. Leave Travel Concession / Assistance [ Section 10(5) ]

Through this provision employees are encouraged to travel anywhere in India alongwith their families and to help the employee the travel expenses are given by employer which are exempt u/s 10(5). The other details of this exemption are as follows :

1. If journey is performed by air. Least of following two amounts shall be exempted -

(1) Economy class air fare of the national carrier by the shortest route.

(2) Actual amount spent by the employee on journey by air travel.

2. If journey is performed by rail. Least of following two amounts shall be exempted -

(1) Air - conditioned first class rail fare by the shortest route.

(2) Actual amount spent by the employee on journey by rail.

3. If place of origin of journey and place of destination is connected by rail. In case place of origin of journey and place of destination of journey of employee is connected with rail but the employee uses any other mode of transportation, the amount of exemption allowed shall be least of following 2 amounts -

(1) Air conditioned first class rail fare by the shortest route.

(2) Actual amount spent by the employee on that journey.

4. If place of origin of journey and place of destination is not connected by rail.

(a) If a recognised public transport system is operating. Least of following 2 amounts shall be exempted -

(1) First class or delux class fare by the shortest route.

(2) Actual amount spent by the employee on that journey.

(b) If a recognised public transport system does not exist . Least of following 2 amounts shall be exempted -

(1) Air conditioned first class rail fare by the shortest route.

(2) Actual amount spent by the employee on this journey.

2. Perquisites and Allowances paid by Government to its employees posted outside India [ Section 10(7) ]

Any perquisite or allowance given by Government to its employees who are working outside India is fully exempt from tax. As such Motor car provided to employee working outside India or house rent allowance or any other such benefit is fully exempted from tax.

3. Death - cum - retirement gratuity [ Section 10(10) ]

Gratuity refers to a lumpsum payment made by an employer to his employee at the time of leaving job in appreciation of his long and loyal services. Earlier it was a voluntary payment but now it has become a sort of compulsory payment for government employees, semi - government employees, and all other employees working in banks, universities, colleges, factories, etc.

1. At the time of leaving job. In this case, gratuity is received by employee on leaving job either due to voluntary retirement or due to statutory retirement on reaching the super annuation age. Gratuity so received by employee is taxable ' under the head salary ' after claiming exemption as provided under section 10(10).

2. In the event of death of employee. Gratuity can also be received by the legal heirs of an ex - employee in the event of death of such employee. In this case, gratuity received shall be taxable in the hands of legal heirs under the head " Income from other Sources ". In this case also, an exemption will be granted as provided under section 10(10).

(A) Government Employee. Any death - cum - retirement gratuity received by government employee is ' fully exempt '

Meaning of Government Employee. Government employees include :

(a) Employees of Central Government.

(b) Employees of State Government.

(d) Employees working in Defence.

(e) Employees of Statutory Corporations.

(B) Non - Government Employees.

B-1. Non - Government employees receiving gratuity under payment of Gratuity Act, 1972 [ POGA ]. Certain non-government employees have been covered under the payment of Gratuity Act, 1972 by the Central Government and thus these non-government employees are required to pay gratuity as per the provisions of Gratuity Act, 1972. An employee who works in such organisations can be called as " Covered employee " . Any gratuity received by such an employee shall be exempt to the extent of least of following 3 amounts :

(a) 15 days salary ( 7 days in case of employees working in seasonal factories) for each completed year of service or part thereof in excess of six months on the basis of monthly salary last drawn :

(b) Notified limit Rs 10,00,000 [ Rs 3,50,000 upto 24-5-2010 ]- Notification No. S. O. 1217(E) dated 24-5-2010.

Taxable Gratuity = ( Gratuity received) less ( Exempt)

B-2. Non - Government Employees receiving gratuity ( Not covered under payment of Gratuity Act). Least of the following 3 amounts shall be exempt :

(a) 1/2 month salary for every completed year of service on the basis of average salary drawn during 10 months immediately preceeding the month of retirement.

(b) Maximum notified limit, Rs 10,00,000 .

Taxable gratuity = Actually gratuity received, less, Exempt.

.PENSION [ MONTHLY and Commuted ]

(A) Tax Treatment of Uncommuted Pension. Uncommuted pension refers to the periodic / regular pension ( generally monthly) received by an employee from ex-employer after retirement and until such an employee dies.

Tax Treatment . Fully Taxable whether the employee is a government employee or non-government employee.

It is taxable as salary income of such an ex-employee.

(B) Tax Treatment of Commuted Pension. Commuted pension refers to lumpsum amount received by an employee from his employer in lieu of periodical pension. When an employee receives such lumpsum amount, it is called commutation of pension.

B(1) For all types of Government Employees. Fully exempt.

Meaning of a Government Employee. It includes :

(a) Employees of Central Government : or

(b) Employees of State Government : or

(d) Employees of a corporation set up under Central State or Provincial Act or under the Civil Pensions ( Commutation) rules of the Central Government : or

(e) Employees of public sector undertakings : or

(f) Judges of Supreme Court or High Courts of India.

.Disability Pension given to Armed Forces Personnels - It is fully exempted as per letter F. No. 200/51/99ITA-1 issued by CBDT dated 6-5-2000.

B(2). For Non - Government Employees. Any amount received on commutation of pension shall be exempt as per the provisions of section 10(10A) :

B(2)(a). If employer receives gratuity also. The exempted amount shall be commuted value of one - third ( 1/3 ) of pension which he is normally entitled to receive.

B(2)(b). If employee does not receive gratuity. The exempted amount shall be commuted value of one-half (1/2) of such pension.

4. Leave Encashment [ Section 10(10AA) ]

As per terms of employment, generally, an employee is granted certain period of leave (s) on yearly basis. Such leave (s) may be casual leaves, medical leaves and privileged leaves or earned leaves. Generally, an employee can accumulates his medical leaves and privileged leaves and can avail such leaves in subsequent years as per his necessity. However, in some cases, an employee can even encash his accumulated privileged / earned leaves and can get salary for the said period of leave. Such receipt of salary by an employee from his employer. in lieu of his accumulated leaves is called " Leave Encashment ".

Such encashment can be done by an employee either during the service or at the time of leaving job due to retirement or any other reason. However, in case of death of an employee, the salary for his/her accumulated leave is given to his/her legal heirs.

.Tax Treatment of Leave Encashment.

(A) Leave Encashment during service. Any encashment of leaves by an employee during continuance of service is " fully taxable " for all employees whether government employees or non-government employees. Such encashment may either be of current year leaves or of past accumulated leaves. It is taxable as salary income of the employee for the previous year in which amount is received by employee.

(B) Leave Encashment on leaving job / retirement

(B1) For Government employees. Any payment received as leave encashment at the time of retirement or on leaving job otherwise shall be " fully exempt " u/s 10(10AA)(1)

Meaning of Government Employee. Government employee includes :

(a) Employees of Central Government

(b) Employees of state Government

Note. Employees of local authority, statutory corporation and public sector undertakings are not regarded as government employees for this purpose.

(B2) For Non-Government employees. Any payment received as leave encashment at the time of retirement or on leaving job otherwise shall be exempt upto the least of following amounts u/s 10(10AA)(2)

(1) Maximum 10 months salary on the basis of average salary drawn during 10 months immediately preceeding his retirement / leaving job otherwise.

(2) Salary for approved period of leave standing to his credit at the time of retirement / leaving job otherwise.

(3) Maximum notified limit Rs 3,00,000 ( As specified by the central government)

(4) Actual amount received as leave encashment and balance shall be taxable.

Taxable amount of leave encashment = [ Amount of leave encashment received ] less [ Exempt i.e., least of 4 limits ]

5. Any amount received as compensation on termination of employment [ Section 10B ]

Such compensation is tax-free upto the limits given below provided he gets compensation under the provisions of the Industrial Disputes Act :

(1) An amount calculated in accordance with the provisions of clause (b) of Section 25F of the Industrial Disputes Act :

(2) Notified Limit. The monetary ceiling has been removed with effect from assessment year 1989 - 90. The limit shall be prescribed by the Central Govt. from time to time in Official Gazette. This limit will not be less than Rs 5,00,000.

(3) Actual compensation received, whichever is less.

Under Industrial Disputes Act, a workman is allowed retrenchment Compensation equal to 15 day's average pay for each completed year of service or any part thereof in excess of six months.

The limits of sec 10 (10B) shall not apply in cases where the Compensation is paid under any scheme approved by Central Govt.

6. Any amount received on voluntary retirement [ Section 10(10C) ]

Under Section 10(10C), any payment received by an employee at the time of his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in the case of public sector company, a scheme of voluntary separation, is exempted being least of 4 amounts as mentioned below. This exemption shall be allowed if the employee voluntary retires from following bodies :

(a) A public sector company :

(b) Any other company :

(d) A Local Authority :

(e) A Co-operative Society :

(f) A university established or incorporated under a Central, State or Provincial Act, or, an Institution declared to be a University under Section 3 of the University Grants Commission Act, 1956 :

(g) Any Indian Institute of Technology within the meaning of Clause (g) of Section 3 of the Institute of Technology Act, 1961 :

(h) Such Institute of Management as the Central Government may by notification in the Official Gazette, specify in this behalf.

(I) Any State Government : or

(j) The Central Government.

It may also be noted that where this exemption has been allowed to any employee for any assessment year, it shall not be allowed to him for any other assessment year. The exemption of amount received under VRS has been extended to employees of the Central Government w. e. f. Assessment year 2002 - 03 and State Government employees w. e. f. Assessment year 2001 - 02.

It shall be exempted up to least of following :

(a) Statutory Limit Rs. 5,00,000.

(b). Three months salary for every completed year of service.

(c) Salary for number of months remaining service [i.e., number of months to be counted from the month of voluntary retirement to the month of actual retirement ]

(d) Actual amount received.

Salary for this purpose shall have the same meaning as for provident fund for the month of retirement.

7. Income by way of tax on perks [ Section 10(10CC)]

In case employer pays, at its option, tax on value of perks given by it to an employee ( Not provided by way of monetary payment) it shall be fully exempted in the hands of employee.

8. Any payment received from a Statutory Provident Fund or Public Provident Fund [ Section 10(11) ]

Fully exempted from tax.

9. Payment received from Recognised Provident Fund [ Section 10(12) ]

It is tax-free in following cases only :

(a) The employee has rendered 5 years ' continuous service.

(b) Though he has not rendered 5 years' continuous service but the service has come to an end because of reasons beyond his control.

The Finance Act, 1974 has added a clarification to this exemption. If the accumulated balance standing in the name of employee is transferred from one recognised provident fund to another similar type of fund, such balance will not be added in the total income of the assessee. The period of five years will be counted by adding the period for which the fund remained with previous employer to the period for which the fund remains with the present employer from whom he is getting refund.

In case employee leaves service of his own accord before the expiry of 5 years, the amount on which tax has not been paid earlier is taxable under the head salary. As such taxable amount will be :

(a) Employer's contribution to RPF - upto 12% of employee's salary : and

(b) Interest credited on RPF balance - upto 9.5% p. a.

10. Any payment from superannuation fund [ Section 10(13) ]

Any payment from an approved superannuation fund made :

(1) on the death of a beneficiary : or

(2) on retirement or on becoming incapacitated : or

(3) by way of refund of contribution on the death of a beneficiary : or

(4) any refund of contributions of employee earlier than his retirement or on his becoming incapacitated to the extent of his own contribution made prior to the commencement of this Act and interest thereon, shall be fully exempted.

11. House Rent Allowance [ Section 10(13A) ]

Explained earlier in allowances.

12. Any special allowance [ Section 10(14) ]

If any allowance is given by employer to employee to meet certain expenditure wholly and exclusively incurred in the performance of duties it is tax-free upto the extent it is incurred for such purposes such as out of pocket allowance or outfit allowance received by N. C. C officers.

This section does not grant any exemption for any allowance given to meet the expenses at a place where the employee ordinarily resides and performs duties, e. g., City Compensatory Allowance which is fully taxable.

.DEDUCTIONS OUT OF GROSS SALARY [ SECTTION 16 ]

1.Entertainment Allowance to Government Employees u/s 16(2)

Some employees are required to incur expenditure on the entertainment ( tea etc.) of customers, clients etc. who come to meet them in connection with their official or business work. In case employee is given a fixed amount every month to meet this type of expenditure then it is fully added in salary and out of Gross Total Salary, a deduction u/s 16(2) shall be allowed only to govt. employees. This means that in case this allowance is given to employees working in private sector, it is fully taxable.

But in case any amount is reimbursed against any expenditure incurred by employee, it shall be fully exempted.

Deduction u/s 16(2) admissible to govt. employees shall be an amount equal to least of following :

(a) Statutory Limit of Rs 5,000 ( maximum).

(b) 1/5 th of Basic Salary .

.Important Note. The actual expenditure incurred by a government employee on entertainment of customers is not relevant for claiming deduction u/s 16(2) .

2. Tax on Employment u/s 16(3)

In case any amount of professional tax is paid by the employee or by his employer on his behalf it is fully allowed as deduction .

.DEDUCTION U/S 80C OUT OF GROSS TOTAL INCOME.

Savings play a vital role in the fast economic development of any country. To encourage savings, an incentive in the form of a deduction out of one's taxable income has been allowed. To channelise those savings, various schemes have been framed and if the assesses deposits those savings in these approved savings scheme, a deduction shall be allowed.

Deduction u/s 80C shall be allowed only to following assessee :

(1) An Individual

(2) A Hindu Undivided Family (HUF)

.Rate of Deduction

Total amount deposited in various approved savings scheme or Rs 1,50,000 p. a. w. e. is less shall be allowed as deduction. This limit of Rs 1,50,000 also includes the amount of deduction allowable to the assessee u/s 80CCC and 80CCD.

.Qualifying Amount (Q. A.) for Deduction u/s 80C

Amount saved and deposited by the employee or assessee in following savings schemes shall qualify for deduction u/s 80C.

1. Deposits made in Provident Funds

(1) Deposits in Statutory Provident Fund (S. P. F.) Amount deposited by the employee in this fund during the previous year qualifies for deduction.

(2) Deposits in Recognised Provident Fund (R. P. F.). Amount deposited during the previous year fully qualifies for deduction.

(3) Deposits made by the employee in the Unrecognised Provident Fund ( U. R. P. F.). Since this fund is not recognised by the Commissioner of Income-tax, so any amount saved and deposited by the employee in this fund will not qualify for any deduction.

(4) Deposits made in Public Provident Fund. This Provident Fund account can be opened in the name of the employee (assessee), spouse or children and amount deposited by the assessee during the previous year in any of these accounts shall qualify up to a maximum of Rs 1,50,000 .

2. Payment of Life Insurance Premium. Actual amount of premium deposited by the employee or on his behalf by his employer or 20% of capital sum assured w. e. is less shall qualify for deduction. Life insurance policies can be obtained in the name of the assessee, spouse and children and in case of HUF in the name of any or all the co-parceners of the HUF.

The children means all the sons and daughters of the assesseee whether minor or major, whether dependent upon assessee or are independent or may be married or unmarried. It also includes step or adopted children.

Capital sum assured shall not include bonus or any premium assured to be returned. Any premium or other payment made on an insurance policy other than a contract for deferred annuity issued on or after 1-4-2012 shall be eligible for deduction upto 10% of actual capital sum assured.

Note. For persons suffering from disability ( as referred to in Section 80U) or disease ( as specified in the rules made u/s 80DDB, the deduction u/s 80C shall be available if the premium for the policy does not exceed 15% of capital sum assured for policies issued on or after 1-4-2013.

3. Amount deposited in the Sukanya Samridhi Account . Amount deposited in Sukanya Samridhi Account shall qualify for this deduction subject to overall limit prescribed u/s 80C.

4. Amount deducted out of Govt. employee's salary towards deferred annuity. In case any amount has been deducted out of salary of Government employee for securing a deferred annuity for him or making a provision for his spouse or children. The amount so deducted but not exceeding 20% of his salary will qualify for this deduction.

5. Payment made towards Group Insurance. Any amount deducted and deposited by employer towards employee's group insurance shall fully qualify for deduction.

6. Deposits made in approved Superannuation Fund . Amount deposited during the previous year shall fully qualify for deduction.

7. Payment for a deferred annuity. Any payment made to effect or to keep in force a contract for deferred annuity fully qualifies for deduction u/s 80C.

8. Deposits made in Unit Linked Insurance Plan (ULIP). Any amount deposited by the assessee in Unit Linked Insurance Plan of UTI or LIC mutual fund shall fully qualify for deduction. Amount can be deposited in the name of assessee, spouse and children.

9. Amount invested in National Savings Certificates - 8 Issue or 9 issue. Amount invested in National Savings Certificates - 8 or 9 issue full qualifies for deduction u/s 80C. Interest accrued on these certificates purchased earlier is deemed to be re-invested, hence such interest also fully qualifies for deduction every year.

10. Amount invested in National Saving Scheme (NSS) 1992. Any amount invested in NSS-1992 fully qualifies for deduction.

11. Amount paid to LIC under Jeevan Dhara, Jeevan Akshay Policies. Any amount paid to LIC under Jeevan Dhara, New Jeevan Dhara 1 or New Jeevan Akshay, New Jeevan Akshay 1,New Jeevan Akshay 2 plans fully qualify for this deduction. Investment in these plans can be made in name of assessee and in case of HUF, in the name of any of its members.

12. Amount invested in notified Pension Funds set up by Mutual Funds or UTI. Any amount invested by an individual in notified funds set up by Mutual Funds or UTI shall qualify for deduction u/s 80C.

13. Amount deposited with National Housing Bank. Any amount deposited as subscription to Home Loan Account Scheme of the National Housing Bank or contribution to any notified pension fund set up by the National Housing Bank will qualify for deduction u/s 80C.

14. Amount deposited with an authority engaged in Housing Development or Town or Rural Development. There are approved authorities which are engaged in the field of Housing, Town, Cities and Rural development and any amount deposited with these authorities shall fully qualify for deduction u/s 80C.

Under this following subscription will qualify - Any sum paid as subscription to any scheme of :

(a) a public sector company engaged in providing long term finance for purchase, or construction of residential houses in India.

(b) any authority like housing board constituted in India for the purposes of planning development or improvement of cities / towns and villages.

15. Any subscription in deposit scheme of Central Govt. Any subscription to any such security of the Central Government or any such deposit schemes as Central Government may notify in Official Gazette, specify in this behalf will qualify for deduction u/s 80C.

16. Term Deposits with Banks. Term deposits with certain scheduled banks of not less than 5 years duration as per scheme framed by Central Government shall also qualify for deduction u/s 80 C.

17. Amount deposited or invested in Equity Linked Saving Scheme (ELSS). Amount invested in Equity linked Savings Scheme fully qualify for this deduction.

18. Repayment of house building loan. Any amount repaid under house building loan taken from Govt., LIC, Bank, HDFC, HUDCO or other housing finance institutions or employer [ Not from friends or relatives ]

Amount repaid as full price or installment of price of a house purchased from Govt . or an approved agency up to actual amount repaid shall fully qualify for deduction u/s 80C.

The amount repaid must not include interest on loan or ground rent but shall include stamp duty and registration charges.

19. Payment of Tuition fees. Any amount paid as tuition fees ( excluding any payment towards any development fees or donation or payment of similar nature whether) at the time of admission or thereafter to

(a) any school, college or university or other educational institution situated in India,

(b) for the purpose of full time education of any two children of the individual.

The amount, which shall qualify under this section, shall not exceed actual amount paid as tuition fee for two children only.

20. Amount paid as subscription to equity shares or debentures. Amount paid as subscription to equity shares or debentures of a public company or a public financial institution forming part of eligible issue of capital. In case such issue is notified by CBDT, the amount invested shall qualify for deduction u/s 80C. The amount so invested in on which deduction is claimed shall not qualify for exemption of capital gain u/s 54EA or u/s 54EB or u/s 54EC.

21. Amount paid as subscription to units of a mutual fund. Amount paid as subscription to any units of any mutual fund. In case such unit scheme of mutual funds is notified by CBDT, the amount so invested shall qualify for deduction u/s 80C. The amount so invested in on which deduction is claimed shall not qualify for exemption of capital gain u/s 54EA or u/s 54EB or u/s 54EC.

The shares, debentures or units acquired under (19) and (20) above cannot be converted into money for three years. In case such units or shares are converted into money before the expiry of three years the amount of rebate claimed shall become as tax payable of the year in which these are sold or otherwise transferred.

22. Investment in Notified bonds issued by NABARD. Investment made by the assessee in notified bonds issued by National Bank for Agriculture and Rural Development will qualify for deduction. [ u/s 80C ]

23. Deposit in Post Office Time Deposit and Senior Citizens Savings Scheme.

1. Five year time deposit in an account under Post Office Time Deposit Rules 1981.

2. Deposit in an account under the Senior Citizens Savings Scheme Rules 2004.

These deposits are for 5 years and if withdrawn before the expiry of the period of 5 years, the amount so withdrawn shall be deemed to be income of the assessee of the year in which withdrawn. Not taxable if withdrawn by legal heirers.

.Other Points.

1. Deduction u/s 80C shall be allowed even if investment is made in these savings scheme out of assessee's savings of past previous year or out of any other income which is otherwise exempt under Income-tax Act.

2. Deduction u/s 80C shall be allowed out of assessee's Gross Total Income. This deduction is not allowed out of assessee's income of Long Term Capital Gain and income from gambling etc.

3. Deduction u/s 80C shall be allowed only if amount has been actually deposited or paid in these savings schemes up to 31st March. So any amount due but not paid up to 31st March shall not qualify for this deduction.

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