A recent report by a popular HR firm had revealed that a majority of the salaried class, is not completely aware of the various aspects of the compensation received. While it is important to take home a fat cheque, it is also equally necessary that one ensures he or she is in the know of all things related to the income received. Here is a detailed analysis of the same, with respect to the Income Tax Act.
Let us start off with the basics, by defining the most important term of salary. Income is defined as remuneration received by an individual for services rendered by him or her, to undertake a contract whether it is expressed or implied. It is these remunerations that are taxable, provided they fulfil certain conditions.
One, when the due amount from the former employer or present employer in the previous year, is paid or not. When paid or allowed in the previous year, by or on behalf of a former employer or present employer, though not due or before it becomes due.
When arrears of salary is paid in the previous year by or on behalf of a former employer or present employer, if not charged to tax in the period to which it relates.
The Head of Salary, as per Section 17 of the Income Tax Act, 1961, has the following incomes under it. Salary (including advance salary), wages, fees, commissions, pensions, annuity, perquisite, gratuity, annual bonus, income from provident fund, leave encashment, allowance and awards.
While most of these are common terms, there are few that needs a brief explanation. For instance, leave encashment is the salary received by an individual for leave period.
Under section 10(10AA) (i) there is also a provision of exemption in case of leave encashment depending upon whether he or she is a government employee or otherwise.
Moving forward, annuity is the annual income received by the employee from his or her employer. Under section 56, Income Tax Act, 1961 other annuities come under a will or granted by a life insurance company or accruing as a result of contract which comes as income under from other sources.
Similarly, gratuity is the salary received by an individual paid by the employeer at the time of his or her retirement, or by the legal heir in the case of death of the employee.
The most popular term in the above list is allowance, but it also the most misunderstood. It is the amount received by an individual paid by his/her employer in addition to salary. Under Section 15 of the Income Tax Act, 1961 these allowance are taxable excluding few conditions where they are entitled of deduction/ exemptions.
The House Rent Allowance (HRA) is a taxable income. There is no exemption in tax if he or she is living in his own house or house for which they are not paying rent.
Next, apart from entertainment allowance, other special allowances include children’s education allowance, tribal area allowance, hostel expenditure allowance, remote area allowance, compensatory field area allowance, counter insurgency allowance, border area allowance, hilly area allowance and the like.
In the allowance category, there are few which are exempt from income tax, these are if the employee is a high court judge, or a supreme court judge or if he or she is a government employee who renders services abroad, or if the employee works for the UNO.
Finally, perquisite is the amount paid for the rent-free accommodation provided to the assessee by his employer. The perquisites that are tax free include medical facility, medical reimbursement, refreshments, subsidised lunch/ dinner provided by employer, facilities for recreation, telephone bills, products at concessional rate to employee sold by his/ her employer, transportation, training and more.
Courtesy: www.managemytax.in
