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Title: NEW:Income from salary-Problems,theory and solutions


1
NEWIncome from salary-Problems,theory and
solutions
Study other topics Mergers and Acquisitions
under The same web.
If you study theory which are explained in the
slide show given earlier under the head income
tax (www.augustin.co.nr) It becomes easier for
you to do problems here.
B.Com BBM M.Com CA ICWA students
All corporate Employees please Make use Of
this site
  • By
  • Prof.Augustin Amaladas
  • M.Com., AICWA., PGDFM., B.Ed.

Tell about This web to others
It is absolutely free but you have to study
2
Solved problems Income from Salary-2008-09
assessment year
Read the concepts From salary slide
Education for all
  • By Prof. Mary Amala Shanthi Augustin
  • Jyoti Nivas College, Bangalore
  • M.Com.,M.Phil., MBA.,B.Ed.
  • Jyoti Nivas College, Bangalore
  • and
  • Prof. Augustin Amaladas M.Com., AICWA.,
    PGDFM.,B.Ed.
  • St. Josephs College of Commerce, Bangalore
  • aug_bang_at_yahoo.com 09845844319

3
Dedicated to
  • Prof.Dr. Victor Louis Anthuvan M.Com., Phd.
  • Prof. and Dean Loyola College of Business
    Administration
  • My Guru in St. Josephs College Trichy, Tamil
    Nadu.
  • I remember you always when ever I take class to
    my students.-You are ever great.

4
What do you mean by rest?
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If you are benefited, inform your friends in
other states So that Students community can be
benefited. Send SMS
5
Alternative work is rest
How to study salary?
6
www.augustin.co.nr
aug_bang_at_yahoo.com
Salary contains many types. Each type of salary
should Be studied independently. First
understand the Concepts which are explained in
the first set Under income tax head of my web.
By giving yourself up you will receive
7
Exercise-1
Mrs. Sneha (Age 49 yrs) is a part time lecturer
in a college Chennai University. The details of
her salary and other income for the previous year
2007-2008 are as follows Basic Salary

80,000 Dearness allowance (forming part of
salary) 3,600 Education
allowance for 2 children (exp being Rs. 900)
5,100 Hostel expenditure allowance for 1
child (expenditure being 8000)
7,200 HRA

10,400 Remuneration from
Bangalore University for Being as examiner

75,650 Allowance for research which is to be
completed during Dec-April 2008(actual exp being
up to March 31-08 Rs. 2000, during April 08
Rs. 4500 ) 8000
8
She contributes 10 of her salary to a statutory
provident fund to which the college also makes a
matching contribution. She gets reimbursed of Rs.
28000 being exp incurred on medical treatment of
her daughter in a private clinic. The bill for
which is paid by the employer. During the year
she spends Rs. 1000 on purchase of saree for his
wife (out of salary)for year 2007-08 he paid Rs.
8000 as insurance premium on his life policy for
Rs. 60,000 ( date payment 3 April 08) Compute
the total income and tax liability for the
assessment year 2008-09.
9

  • ANSWER-1
  • Computation of Salary
  • Basic Salary
    80,000
  • DA
    3,600
  • Education Allowance
    5,100
  • Exemption 100 x 2 x 12
    2,400 2,700
  • (Monthly fixed educational allowance given to
    employee is taxable except Rs.100 per child per
    month and only for two children. If allowance is
    not received from employer nothing is taxable.
    Whether assessee spends or not Rs.100 (only)
    allowed because, it is given not exclusively to
    do official duty)
  • Hostel Allowances
    7,200
  • 300 x 12
    3,600 3,600(see notes
    given in the next slide)
  • HRA received 10,400 4840
    5,560
  • Least of the following Major any four cities
    like Delhi, Mumbai etc. (50)
  • 50 of salary Basic DA
  • 83,600 x 50
    41800

10
  • 2) HRA received
    10,400
  • 3) Rent paid- 10 of salary
  • 13,200 8360
    4,840
  • (1100 x 12 )
  • Research Allowances 7000
  • Less Exp incurred 6500
    1,500
  • Medical Allowances 28000
  • Exemption 15000
    13,000
  • Income from salary
    1,09,960
  • Income from other sources
    75,650
  • Total Income
    1,85,610

Answer1. continues
See explanation after The answer in the
following slides
11
  • Exemption under sec 80c
  • 10 Provident fund 83600
    8,360
  • (Basic DA which comes for retirement benefit)
  • Taxable Income
    1,77,250
  • Tax liability
  • Taxable Income
    1,77,250
  • Less Exemption
    1,45,000

  • 32,250
  • Womans tax liability
  • 145000 150 000 5,000 x 10
    500
  • 150 000 250,000 27,250 x 20
    5450
  • Tax payable
    5950
  • Education cess 3 178.5
  • Total tax 6128.5

www.augustin.co.nr
12
Explanations to exercise-1
  • 1.Basic salary for the current financial
    year(previous year) is relevant and taxable.
  • 2. DA- Dearness allowance given mainly to
    compensate the inflation based on Index numbers
    fully taxable.
  • 3. For the meaning of salary for special
    computation such as HRA, Gratuity, Pension etc.,
    Dearness allowance(DA) is considered to the
    extent of comes for retirement benefit. The
    words forming part of salary means such portion
    comes for retirement benefit.

13
  • 4. If the words forming part of salary is
    missing or simply given DA with out mentioning
    the words forming part of salary then do not take
    it for the meaning of salary for special
    computation such as HRA, gratuity, Pension etc.
    But to compute salary entire DA to be taken.
  • 5. The word allowance means fixed monthly
    payment is made to employee either to do
    exclusively official duty or other than official
    duty. If such fixed monthly or annual allowance
    given to do official duty the expenditure
    incurred for such allowance is deducted from such
    allowance.(Uniform allowance, research allowance,
    conveyance allowance to do official travel etc.)
    Unused official allowance is taxable.

explanations
14
explanations
  • 6. If allowance given not exclusively for
    official duty then the allowance is fully taxable
    unless some exemption given under Income
    tax.(such as Educational allowance, Medical
    allowance, Hostel allowance).
  • 7. Educational allowance given per month to
    employee. It is given not exclusively to do
    official duty. Therefore how much spent by
    employee is not important. But Rs. 100 per month
    per child for two children allowed exemption.
  • 8. Hostel allowance for the children is allowed
    Rs. 300 per children for maximum two children
    only. Since only one child is given hostel
    allowance Rs. 300 per month is allowed for the
    period such allowance given.

15
  • 9. HRA- is an allowance given monthly based on
    basic and types of city. First calculate the
    meaning of salary for HRA allowance exemption.
    Salary basic DA which is part of salary Fixed
    of commission on sales( not on purchase or not
    of fixed monthly commission)
  • Read www.augustin.co.nr under
    incometax-salary-theory.
  • 10. Salary for the calculation of exemption on
    HRARs. 80,000(Full Basic) 3600(here full DA)
    0 (commission on sales) 83,600.

Explanations Read carefully. Other problems can
be worked out well unless you Understand the
explanations given above/next slides
16
  • 11. Research allowance given at a time to
    employee for official purpose. He is expected to
    spend and produce bills for such expenditure. It
    is not necessary that such expenditure to be
    spent during the previous year. If it is spent
    for the purpose given before filing of return in
    the assessment year all expenditure up to
    allowance given is exempted. Balance is taxable.
    If assessee spent more than what was given, the
    amount provided by employer is exempted.
  • 12. Medical allowance given monthly not
    exclusively to do official duty. Therefore the
    amount spent by assessee is not important. If
    such amount spent in private clinic Up to Rs.
    15,000 is allowed. Beyond it is taxable. If
    employer pays directly to recognised or approved
    hospital entire amount is exempted.(Bill should
    be produced otherwise it is fully taxable)

17
  • 13. Whenever the act says any one of the
    following is exempted it means that the actual
    amount received from employer is one of the item
    to be considered for exemption.
  • 14. Statutory Provident fund(State and Central
    government employees local authorities, railway,
    Bangalore other universities) can be statutory
    fully exempted.Since he is working in a college
    he comes under Recognised provident fund
    therefore such fund never exceeds 12 of salary
    and interest accrued should not exceed 9.5

While reading above you have to Read word by
word carefully to understand the meaning
18
  • 15. Valuation of answer scripts of Bangalore
    university comes under income from other sources
    as there is no employer and employee
    relationship.
  • 16. Employees contribution to Recognised
    provident fund is a personal saving which can be
    claimed u/s 80C.
  • 17. The savings such as statutory PF, Insurance,
    repayment of principal housing loan come under
    Section 80C. All savings should not go beyond
    Rs.1,00,000.
  • 18.Purchase of saree is a personal expenses which
    was not paid by employer and can not be deducted
    from taxable income.

19
  • Exercise-2
  • Mr.Ajith is an 36yrs an employee of a
    co-operative society in Gurgaon. His basic
    salary for the previous year 2007-08 is
    Rs.6750/month and he gets dearness allowance of
    Rs.500/month(30 of of it forms part of salary
    for computation of retirement benefit). Besides
    he also gets bonus of Rs.700/month and
    Rs.200/month as medical allowance. His employee
    contributes Rs.11286 to a recognized provident
    fund to which X also makes a matching
    contribution. X gets an interest free
    loan(repayable within 8yrs) of Rs.95000 from the
    employer for purchasing a house(SBI rate 10.75).
    Besides, he gets Rs.12,47,660 as interest on
    company deposits from a private sector
    undertaking. Determine taxable income and tax
    liability of X for the assessment year 2008-09
  • Solution next slide..

20
Working notes Exercise-2
www.augustin.co.nr
  • 1. Meaning of Salary for Recognised provident
    fund
  • Basic DA which comes for retirement benefit only
  • 6750 (30 x 500)Rs.6,900 per month
  • 6900 x 12 Rs.82,800 annual salary for RPF
    calculation
  • Employers contribution can not exceed 12 of
    salary12 x 828009936 per annum.
  • RPF by employer exceeds 12 of salary by
    Rs.135011286-9936
  • 2. Employees contribution to RPF is a saving
    therefore Rs. 11286 saved for future comes under
    Section 80C along with other savings.Total of all
    savings u/s 80C can not exceed Rs.1,00,000.
  • 2. Interest on interest free loan is taxable to
    the extent of SBI interest rate.

21
  • Basic Salary (675012)
    81000
  • Dearness Allowance (50012)
    6000
  • Bonus (70012)
    8400
  • Medical Allowance
  • (Fixed) (20012)
    2400
  • Excess of contribution to provident fund by
  • Employer11286-(12 of 12(675030 of 500)
    1350
  • (see note in the previous slide)
  • Interest on interest free loan
  • (9500010.75)
    10213

  • NET SALARY
    109363
  • Add income from other sources
    1247660
  • TOTAL INCOME
    1357660
  • Deduction U/S 80C
    11,286
  • Taxable salary
    13,46,374
  • ROUNDED OFF
    13,46,370

22
  • Computation of Tax Liability
  • Net Taxable Income
    13,46,370
  • 1,10,000-1,50,000 4000010
    4000
  • 150,000-250,000 10000020
    20000
  • 250 above10,96,370 x 30
    328,911

  • 352,911
  • Add surcharge of 10
    35291

  • 388,202
  • Add 3 educational cess (on 3,88,202)
    11646

  • 3,99,848
  • Rounded off
    3,99,850
  • (nearest to 10 rupee)

23
Exercise-3
  • Mrs. X was born on July 1, 1940, She is Deputy
    Manager in a company in Mumbai. She is getting a
    monthly salary and dearness allowance of Rs.45000
    and Rs.12000 respectively. She also gets a house
    rent allowance of Rs.6000/month. She is a member
    of recognized provident fund wherein she
    contributes 15 of her salary and half dearness
    allowance. Her employer also contributes an
    equal amount.
  • She is living in the house of minor son in Mumbai
  • During the previous year 2007-08, her minor son
    has earned an income of Rs.30000(computed) as
    rent from a house property, which had been
    transferred to him by Mrs.X without consideration
    a few years back
  • During the pre-year 2007-08 she sold Government
    of India

24
  • Capital Indexed Bonds for Rs.150000 on Sep 30,
    2007, which she purchased on July 1, 2002 for
    Rs.80000
  • Her employer gave her an interest free loan of
    Rs.150000 on Oct 1, 2007 to one of her sons wife
    for the purchase of an Alto Maruthi Car. Nothing
    has been repaid to the company towards loan.
  • During the pre-year 2007-08 she paid Rs.15000 by
    cheque to GIC towards Medical Insurance Premium
    of her dependent mother.
  • Compute the taxable income and tax liability of
    Mrs..X for the assessment year 2008-09

25
  • Solution-3
  • Salary (4500012)
    540000
  • Dearness allowance (1200012)
    144000
  • House rent allowance(600012)
    72000
  • (fully taxable as she is not staying in a rented
    house)
  • Employers contribution to recognized PF in
  • excess of 12 of salary
  • (15-12 )of Rs.6,12,000
    18360
  • (45000121/2 of 1200012)-meaning of salary for
    RPF
  • Interest free loan8 if 150000 from Oct 1, 2007
  • to March 31, 2008
    6000
  • GROSS SALARY
    780360
  • Less standard deduction
    nil
  • Income from salary
    780360

26
Computation of total taxable income
solution-3-continues
  • 1.Income from salary
    780360
  • 2.Income from house property (deemed income of
    transferor if property was transferred to minor
    for inadequate consideration u/s 64)

    30000
  • 3.Long term capital gains150000-(80000555/447)
    index cost of acquisition to be used
    51387
  • Taxable income 8,61,747

27
  • GROSS TOTAL INCOME
    861747
  • Less deduction
  • Under section 80C
  • 1.Employees contribution to Recognised provident
    fund is saving. Therefore it comes under section
    80C
  • 15 of(45000121/2 of 1200012)
    91800
  • 2. Under section 80D (Medi claim insurance )
    15000
  • NET INCOME ROUNDED OFF
    754950
  • Tax on 51387_at_ 20
  • How ever tax liability cannot exceed
  • 10 of (150000-80000)
    7000
  • Tax on balance
    156569
  • TOTAL
    163569

28
  • Add surcharge
    nil
  • TOTAL
    163569
  • Add education cess2 of 163569
    3271
  • Add secondary and higher education cess
  • 1 of 163569
    1636
  • TOTAL TAX LIABILITY ROUNDED OFF
    168480
  • Note it is assumed that SBI lending rate for
    similar loan is 8

29
Special allowances10(14)
Not directly relate to Official duty (General)
  • For official duties (after
  • Reaching office)

1.Official travel/transfer Allowance to meet the
cost 2.Conveyance allowance to meet
customers 3.daily allowance on official Tour/journ
ey 4.Helper allowance to carry Official
documents 5. Research allowance 6. Uniform
allowance to do Official duty
To be Spent Fully Other Wise, amount
not Spent taxable
See in the Next slide
30
Not directly relate to Official duty (General)
1.Allowance for transport employees 2.Children education allowance 70 of allowance Or Rs. 6000 per month whichever is lower exempted Rs.100 per month per child max.two children.If in hostel Rs.300 extra per child for two children
3. Traveling allowance to commute from home to office 4. Other border area allowances Rs. 800 per month. If handicapped person Rs.1600 per month is exempted. Depends on altitude/Place
They are fixed. Whether spent Or
not.Excess Taxable as they Are not given For
official Duty
31
Perquisites
  • The term perquisites has been defined by section
    17(2) under different clauses as including the
    following items-
  • a.       Rent- free house section 17(2)(i)
  • b.      Concession in the matter of rent section
    17(2)(ii)
  • c.       Any benefit in the case of a specified
    employee section 17(2)(iii)
  • d.      Expenditure on meeting employees
    obligation section 17(2)(iv)
  • e.       Any sum to effect an assurance on the
    life of an employee section 17(2)(v)
  • f.        The value of any other fringe benefit
    or amenity as may be prescribed section
    17(2)(vi)

32
Valuation of perquisite in respect of movable
asset sold by an employer to its employer Rule-3
(7)(viii)If the sale price is less than the
written down value (calculated as per method and
rate mentioned below) then the differences would
be treated as perquisite and the taxable in the
hands of all employees.Rates and methods of
depreciation for the different types of assets
are as follows
Perquisites with respect to movable
assets-computation
Types of asset Rate of depreciation Method of deprecation
Electronic items/ computer 50 Reducing balance
Motor car 20 Reducing balance
Any other 10 Straight line
33
Eectronic items means data storage and
handling device like computer , digital diaries
and printer. They do not include house hold
appliances like washing machines, micro wave oven
, mixers, etc.
  • Mathematically taxable perquisites is as under

Original cost employer xxxxx
Less accumulated depreciation as per specified rate foe each completed during which such asset is used by the employer xxxxx
Written down value xxxxx
Less amount charged fro employee xxxxx
Value of perquisite is positive xxxxx
34
Exercise-1Allowances
  • Salary income and various allowances Compute the
    gross salary of Mr. Amal for the assessment year
    2008-09on the basis of the following information
  • 1. Basic pay Rs. 8,000 per month
  • 2. DA 40 of basic pay
  • 3. City compensatory allowance-10 of basic pay
  • 4.Medical allowance Rs.800 per month
  • 5. Children educational allowance- Rs. 200 per
    month for three children
  • 6. Hostel expenditure allowance-Rs. 400 per child
    per month for 2 children
  • 7. Tribal area allowance Rs. 500 per month in
    Bihar
  • 8. Traveling allowance Rs. 12000(However actual
    expenditure was only Rs. 8000 for official duties
  • 9. Conveyance allowance Rs. 500 per month(the
    whole amount spent for official duties)
  • 10. Transport allowance- Rs. 18,600
  • 11. Overtime allowance-Rs. 4000

35
Exercise-2(perquisites)
  • Mr. Deepak an employee in a company , gets a
    basis salary of Rs 10,000 per month is employer
    has provided him the following facilities-
  • He has been provided a credit card. Annual fee of
    such card is Rs 8,000 which is incurred by
    employer. The card is used for office as well as
    personal purpose
  • His employer is a corporate member of a club of
    which initial fees is Rs. 1,00,000 and annual
    expenditure of Rs. 30,000 paid by the employer.
    The membership is enjoyed by Mr. Deepak
  • He has been given a gift voucher of Rs. 13,500
  • He has been provided the of laptop used for
    office as well as personal purpose. The cost of
    the asset Rs.1,20000.
  • In his office chamber , AC machine has been
    installed for 30,000
  • Calculate gross salary of Mr. Deepak for the
    assessment year 2008-09

36
computation of gross salary of Mr. Deepak for the
assessment yr 2008-09
Solution-6
particulars employee Amount
Basic salary 1,20,000
Credit card(perquisites becomes fringe benefit if it falls under B category of perquisites-therefore taxable in the hands of company employer. If he is not a company employer, it is taxable I the hands of employee.) exempted Nil
Club membership fee(taxable to company employer) exempted Nil
Gift voucher is equal to cash gift (taxable to company employer) exempted Nil
Laptop facilities A.C machine facility Exempted Used for office purpose Nil
Gross Taxable salary 1,20,000
37
Exercise-9 Mrs. Sneha (Age 49 yrs) is a part time
lecturer in a college Madras University. The
details of her salary and other income for the
previous year 2007-2008 are as follows Basic
Salary
80,000 Dearness allowance
(forming part of salary)
3,600 Education allowance for 2 children (exp
being Rs. 900) 5,100 Hostel expenditure
allowance for 1 child (exp being 50000)

7,200 HRA

10,400 Remuneration from Bangalore University
for Being as examiner
75,650 Allowance
for research which is to be completed during
Dec-April 2008(actual exp being up to March
31-08 Rs. 2000, during April 08 Rs. 4500
8000
38
She contributes 10 of her salary to a statutory
provident fund to which the college also makes a
matching contribution. She gets reimbursed of Rs.
28000 being exp incurred on medical treatment of
her daughter in a private clinic. The bill for
which is paid by the employer. During the year
she spends Rs. 1000 on purchase of saree for wife
for year 2007-08 he paid Rs. 8000 as insurance
premium on his life policy for Rs. 60,000 ( date
payment 3 April 08) Compute the total income
and tax liability for the assessment year
2008-09.
39

  • ANSWER-9
  • Computation of Salary
  • Basic Salary
    80,000
  • DA
    3,600
  • Education Allowance
    5,100
  • Exemption 100 x 2 x 12
    2,400 2,700

  • 7,200
  • Hostel Allowances
  • 300 x 12
    3,600 3,600
  • HRA received 10,400 4840
    5,560
  • Least of the following
  • 50 of salary Basic DA
  • 83,600 x 50
    41800

40
  • 2) HRA received
    10,400
  • 3) The excess of Rent paid 10
  • 1100 x 12 13,200 8360
    4,840
  • Research Allowances 7000
  • Less Exp incurred 6500
    1,500
  • Medical Allowances 28000
  • Exemption 15000
    13,000
  • Income from salary
    1,09,960
  • Income from other sources
    75,650
  • Total Income
    1,85,610

41
  • Exemption under sec 80C
  • 1) 10 Provident fund 83600
    8,360
  • Taxable Income
    1,77,250
  • Tax liability
  • Taxable Income
    1,77,250
  • Less Exemption
    1,45,000


  • 32,250
  • 145 150 5000 x 10
    500
  • 150 250 2,7250 x 20
    5450
  • Taxable income
    5950

42
Exercise-10
  • Mr. Manoj an employee in a HUF, gets a basic
    salary of Rs 10,000 per month.The employer has
    further provided him in following facilities
  • He has been provided a credit card. Annual fee of
    such card is Rs 8,000 which is incurred by
    employer. The card is used for office as well as
    personal purpose
  • his employer is a corporate member of a club of
    which initial fees is Rs. 1,00,000 and annual
    expenditure of Rs. 30,000 paid by the employer.
    The membership is enjoyed by Mr. Deepak
  • He has been given a gift voucher of Rs. 13,500
  • He has been provided the of laptop used for
    office as well as personal purpose. The cost of
    the asset Rs.1,20,000.
  • In his office chamber , AC machine has been
    installed for 30,000
  • Calculate gross salary of Mr. Deepak for the
    assessment year 2008-09

43
Solution-10computation of gross salary of Mr.
Deepak(Not a company employee) for the assessment
yr 2008-09
particulars Details Amount
Basic salary 1,20,000
Credit card(B category-perquisites)-taxable to employee) Taxable 8000
Club membership fee(taxable to employee) Taxable 30,000
Gift voucher taxed 13500
Laptop facilities A.C machine facility Exempted Used for office or private purpose Nil
Gross Taxable salary 1,71,500
44
Exercise-11
Value of rent free accommodation Sri Radheshyam
is sales manager of a private company and for
previous year 2007-08,he received the following
emoluments (amts in Rs) Basic Salary 248000
Bonus 16000 Dearness allowance(50
forming part of salary)
60000 Project allowance 15000 Commission on
sales 16000 City compensatory allowance
25000 Medical allowance
12000 Employer contribution to
recognized provision fund 20000 Salary
pertaining the year 2008-09 has been received in
advance
20000 He has been provided with a rent
free accommodation in Jaipur owned by the
employer. The population of Jaipur may be assumed
to be 15lakhs as per 2001 census Determine the
taxable value of the perquisite in respect of
rent free accommodation.
45
Solution 11 The valuation of rent free
accommodation shall be 10 of the salary i.e. 10
of (248000 160003000015000160002500012000)
Rs 36200 Note Salary shall be taken on basis
for the period for which accommodation has been
provided. Hence advance salary for 2008-09 shall
not be taken in account.
46
Exercise-12(Value of free rent accommodation )
Sri Mohan is purchase manager of a private
company and for previous year 2007-08 he received
the following emoluments- Basic Salary
120000 Bonus 16000 Dearness allowance(50
forming part of salary) 60000 Project
allowance 15000 Commission on
purchase 16000 City compensatory
allowance 25000 Medical allowance
12000 Employer contribution to recognized
provision fund
20000 Salary pertaining the year 2008-09 has been
received in advance 20000 He is
also in part employment with B ltd and is
receiving salary of Rs 80000 P.A. he has been
provided with a rent free accommodation in Jaipur
owned by the employer. The population of Jaipur
may be assumed to be 15 lakh as per 2001 census.
Determine taxable salary.
47
Solution-12 Computation of taxable salary of Sri
Mohan for assessment Year 2008-09
Basic Salary
120000 Bonus 16000 Dearness
allowance(50 forming part of salary)
60000 Project allowance 15000 Commission
on purchase 16000 City compensatory
allowance 25000 Medical allowance
12000 Employer contribution to RPF in excess of
12 of salary 2000 20000-
12 of (120000 50 of 60000) Salary from B
ltd 80000 Advance of salary
20000 Value of housing facility10 of
(1200001600030000 15000160002500012000800
00) 31400 Taxable Salary
397400


48
Exercise-13
Value of concessional accommodation Mr.Tim is
purchase manager of a private company and for the
previous 2007-08 he received the following
emoluments- Basic Salary
240000 Bonus 32000 Dearness
allowance(50 forming part of salary)
120000 Project allowance
30000 Commission on purchase 32000 City
compensatory allowance 50000 Medical
allowance
24000 Employer contribution to recognized
provision fund
40000 2 months salary for year 2008-09
has been received in advance
20000 What would be the value of
accommodation if the employer charges rent of Rs
2000 p.m. in the following independent cases The
accommodation is provided in Mumbai where popln
as per 2001 census exceeds 25 lakh The
accommodation is provided in Alwar where popln as
per 2001 census exceeds 18 lakh The accommodation
is provided at Chomu (popln less than 10 lakh).
49
Solution 13 The valuation of accommodation
provided at concessional rent shall be as under-
Place of accommodation Value of perquisite
Mumbai 15 of salary less rent recovered Rs 70200-24000Rs46200
Alwar 10 of salary less rent recovered Rs 46800-24000Rs22800
Chomu 7.5 of salary less rent recovered Rs 35100-24000Rs11100
50
PRACTICAL QUESTIONS-concept based questions. Some
basic questions. 1. In the return for the
assessment year 2008-09. B claimed deduction from
his income from salary of a sum paid by him to
his ex-wife by way of alimony to her and
maintenance expenses to their minor son. On 7th
January,2004 by agreement with his employers, B
had agreed to creation of a first charge on his
salary in favour of his ex-wife for the payment
of monthly sum. What is the effect of this charge
and the alimony payment on the taxable income in
the hands of B? ANS Taxable in the hands of
assessee as the income is applied.Personal
commitment (as per the law) it is taxable in the
hands of B only.
51
How do deal with the following situation ? 2.
Basu, M.D of a company is entitled to commission
on sales as per the service agreement entered
into. A part of the commission is converted into
a purchasing a single premium deferred annuity
policy from LIC of India. Basu claims that the
commission diverted to secure the deferred
annuity cant be taxed in his personal
assessment. Answer- It is an application of
income. Any income received by employee from
employer is treated as salary. The diversion of
salary to meet personal. 3. Sham is a whole time
employee as a development officer in LIC of
India. He receives incentives bonus based on
quantum of business procured in the year. He
claims that incentives bonus cant be wholly
included as his income and he should be allowed
deduction for expenses incurred in procuring the
business. Answer- Latest change in the
meaning of salary is that any amount received
(whatever name used ) by employee from employer
is taxable as salary. Therefore it comes under
salary
52
3. Dearness allowance _at_ 60 of basic pay (
50of which forms part of salary for retirement
benefits ) .Answer- Full DA fully taxable. But
meaning of salary for HRA, RFA, Pension- 50 of
DA is considered.4. He was allowed (basic pay
DA) for 4 months in march 2008 in
advance.Answer- Four months salary taxable.
Even advance salary received is taxable in the
year of receipt.Salary is defined as receipt or
due whichever is earlier is taxable. Therefore it
is taxable in the assessment year 2008-09.5.
Bonus Rs.5,000 p.m. Answer- Fully taxable
because salary includes bonus and received from
employer by employee.6. Research allowance
Rs.10,000 p.m. amount expended for research
Rs.7,500 p.m.Answer- Research allowance given
to meet exclusively for official purposes.The
amount not spent is taxable.There fore Rs. 2,500
is taxable.
53
  • 7. Residential accommodation at Jaipur (
    population exceeding 10 lakhs but not exceeding
    25 lakhs ).
  • AnswerIf Residential accomodation owned by
    employer- Maximum 10 of salary- amount
    collected by employer from employee is taxable.
  • (Meaning of salary is that all cash salary
    belongs to current previous year and all taxable
    allowances and DA which comes for retirement
    purposes. It excludes all perquisites and all
    allowances not received in cash.)
  • 8.The company had a gas-manufacturing unit.
    Rahul was provided 10 gas cylinders during the
    year free of cost. The cost per cylinder to the
    company was Rs.165.Answer
  • The cost to the employer is taxable to the
    specified employee.Here 165 x 10 1650 is taxable

54
9) He was allowed free use of 1 laptop ( actual
cost Rs. 40,000 ), 1 motorcar ( actual cost Rs.4
lakhs ) and 1 digital video camera ( actual cost
Rs.60,000 ). The motorcar was acquired by the
company on 01-01-2005 and was sold to Mr. Rahul
on 16 - 12 - 2007 at Rs.2,00,000. AnswerLap
top is not taxable perquisites. Car use
Rs.1200(Car)600(Driver) taxable in the hands of
company employer as Frindge benefit. Other than
company employer employee is taxed as
perquisites.Digital camera is for
entertainment. Therefore 10 of the value is
perquisites to employees.Motor car sold 20
depreciation for each completed years to be
provided on WDV ie 2 years fully completed.WDV
value1,28,000. If sold less than this value it
is a perquisites to employees.Note car, food
per meal exceeds Rs.50, club , credit
card,company tour, stay in a hotel or resorts- If
company employer they are treated as Fringe
benefits . Therefore they are taxable to company
employer.
55
  • 10) He was given club facility for which employer
    incurred a cost of Rs.75,000 during the
    year.AnswerIf he is a company employee it
    is not taxable to employee. It is taxable to
    employer as Fringe Benefit .Other than company
    employee it is taxable in the hands of employee
    as perquisites.11) He was given gifts worth
    Rs.10,000 on the occasion of diwali.Gifts
    given in kind exceeds annually Rs. 5000 taxabe
    not to company employee. But taxable to employer
    as fringe benefits. Other than company employee
    it is taxable in the hands of employee as
    perquisites.

56
  • 12) He was allowed free use of mobile phone for
    which employer incurred Rs. 50,000 during the
    year.Answer
  • Mobil phone and lap top expenditure met by
    employer are exempted to employee and also to
    employer. However they can be treated as company
    expenditure while calculating income from
    business.
  • 13) The employer contributed Rs 25,000 to an
    approved superannuation fund.
  • AnswerSpecial fund is taxable to employer as
    Fringe benefit.

57
  • 14) A contribution of 14 of salary was made to
    recognized provident fund by the employer and
    employee both. Interest of Rs. 20,000 _at_ 10 was
    credited to the fund.
  • Interest excess over 9.5 is taxed to
    employee20000 x.05/101000.
  • Employers contribution over 12 of salary is
    taxed to employee
  • Employees contribution comes under section 80C
  • 15) The employer paid Rs.1,000 professional tax
    and Rs.10,000
  • Professional tax paid by employer is added to
    salary in order to compute actual salary.But
    later professional tax is deducted from salary.

58
  • 16) On Mr. Rahuls eldest son getting first rank
    in the school, the employer gave scholarship of
    Rs.2500 p.m. to Rahuls eldest son-Answer Not
    taxable as it is given not in the capacity of
    employer and employee relationship but as a
    meritorious student.The scholarship is available
    to any one who gets first rank.

aug_bang_at_yahoo.com
59
17. Rs.2,50,000 on 01 - 09 - 2007 for medical
treatment Of his father for disease specified in
Rule 3A. The employer charged interest _at_ 5 (
interest rate of SBI is 12.75 ). He was
reimbursed Rs.2,50,000 on 01 - 12 - 2007 by an
Insurance company under a medical insurance
scheme and he repaid Rs.1,50,000 out of this to
the employer on 28 - 01 - 2008. 18) Rs.20,000
interest - free for purchase of a digital
investor on 01 - 05 - 2007 ( SBI
rate12.75).This loan was paid back on 15 08 -
2007.Answer- Loan upto Rs. 20,000 from employer
the interest is not taxed in the hands of
employee. If loan is taken on specified deceases
more than Rs. 20,000 the interest on such loan
also exempted. 19. Rs.10,00,000 interest
free loan on 01 - 04 - 2007 for MBA course of his
spouse in UK ( SBI rate 9.25 ).The first
installment of Rs.1,00,000 in respect of this
loan was paid on 01 - 01 - 2008.Answer-
Interest free loan interest as per SBIs rate is
calculated and taxed in the hands of all
employees.
60
  • 20) Spend Rs.2,500 for traveling from Jaipur to
    Shimla by train ( 1st class ). Expenses incurred.
    he is also allowed free food worth Rs.3,000.
  • Answer-Since he travels for official duty all
    expenses are allowed including food. If he goes
    on leave travel allowance travel allowance is not
    taxable. But food expenses met by employer is
    taxable in the hands of employees.
  • 21) He took a loan of Rs.40,000 _at_ 12 from RPF
    for purchase of a bike ( SBI rate is 12.75
    ).Answer-The difference of 0.75 is taxable
    in the hands of employee as this perquisites
    comes under A category.You are required to
    compute income under the head Salaries of Mr.
    Rahulfor assessment year 2008 20009, given
    that M/S Ram Ltd. Is an employer liable to pay
    Fringe Benefit Tax.

61
Discuss profits in lieu of salary
Help others in studies. Help those who are in
need including Your knowledge.
62
Problem 4
  • State giving reasons whether the following are
    true or false
  • Profits in lieu of salary is taxable under the
    head Income from other sources.
  • Compensation payable to an employee on
    termination of service is capital receipt. It is,
    therefore, not chargeable to tax.
  • Compensation for voluntary retirement to the
    extent it is not exempt under section 10(10C) is
    treated as profits in lieu of salary.
  • Employers contribution to unrecognized provident
    fund is taxable as profits in lieu of salary in
    the year in which contribution is made by the
    employer.
  • Bonds received on Keyman insurance policy taken
    by the employer and assigned in favour of the
    employee is taxable under the head income from
    other sources.
  • Overtime allowance is taxable as profits in
    lieu of salary

63
Exercise-
  • During the previous year 2007-08, X is paid Rs.
    60,000 as basic salary Rs. 12,000 as dearness
    allowance (17 of which is part of salary for
    computing retirement benefits) Rs. 6,000 as
    commission(i.e Rs. 500 per month) Rs. 24,000 as
    bonus of 2002-03 Rs. 6,600 as education
    allowance for one child Rs. 14,000 as uniform
    allowance (amount utilised for purchasing uniform
    for official purpose16,000) Rs. 10,000 as
    medical allowance and Rs. 18,000 as conveyance
    allowance (Rs. 6,000 for official purpose and
    Rs.12,000 for personal purpose).
  • What will be the amount of salary for the
    purpose of
  • The valuation of the perquisite in respect of
    rent free house.
  • Finding out how much entertainment allowance is
    deductible if he is paid entertainment allowance.
  • Determinig exemption in respect of house rent
    allowance if it is paid to him.
  • Calculating exemption in respect of gratuity paid
    to him under the payment of gratuity Act 1972 if
    he retires on 31-3-2008.

64
answer-1
Cash salary Belong to Current Previous Year And
cash Allowances Which are Taxable
are Considered. No perquisites No non-cash
Salary which Are deposited Directly to
third Party.
  • 1 .Meaning of salary for Rent Free
    Accommodation(RFA)-
  • Basic(annual) 60000
  • DA(17)(retirement benefit-cash) 2040
  • Commission(Cash) 6000
  • Bonus(2003-04) cash received but not
  • belong to the current previous year
    ------
  • Educational allowance(Cash but taxable)
  • (Rs.100 per month exempted)(Rs.6600-1200)
    5,400
  • Uniform allowance to do official work(spent
    fully) -------
  • Medical allowance(Monthly fixed)(cash)
    18,000
  • Conveyance allowance( Personal-cash)
    12,000
  • -Total (meaning of salary for RFA)
    1,03,440

65
RFA important questions to calculate the meaning
of salary
  • Four questions
  • Step 1 Does such salary belong to current
    previous year?
  • If yes go to step 2
  • Step 2 Is it received in cash? (go to step-3)
  • Step-3 Is such cash allowance received by
    employee himself (not directly deposited by
    employer to some funds) belong to current
    previous year taxable?
  • Step 4 How much DA will come for retirement
    benefit?
  • Step 3 value step 4 meaning of salary for RFA

66
Question No.2
  • Entertainment allowance received by all employees
    taxable under the head salary first. Later for
    government employees, the amount received or Rs.
    5000 whichever is less deducted u/s 16.

67
Question no.3.
  • For HRA the meaning of salary
  • Basic which will come for retirement fixed
    of commission for those months HRA allowance
    given
  • Basic 60,000
  • DA(Retirement benefit) 2,040
  • Commission Nil
  • Meaning of salary for HRA 62,040

68
Question-4
  • Meaning of salary for Gratuity under the payment
    of gratuity act
  • Salary last drawn equal to meaning of salary
    given in question no.3
  • Meaning of salary 62,040.

69
Problem - self practice
  • X resigns from his service on April 30, 2007 to
    start a business and receives Rs. 86,000 being
    accumulated balance of recognized provident fund
    which represents Rs. 38,000 as contribution of
    employer, Rs. 3,000 as interest thereon, Rs.
    40,000 as his own contribution and Rs. 5,000 as
    interest thereon. Discuss whether Rs. 86,000 is
    taxable if he had joined the employer on
  • 1-4-2004.
  • 1-4-1997
  • 1-4-2004 but not resign on 30-4-2007 on
    completion of special assignment for which he was
    appointed

70
Answer
  • Nothing is taxable for RPF.Dates are not
    important too.
  • The dates may be relevant only for New pension
    fund created on 1-4-2004.

71
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72
  • ExerciseFirst work out by your self and check
    the answer later
  • Mrs. X (age 51 years) is a part time lecturer in
    a private college Delhi owned by A ltd. During
    the year 2007-2008, she gets basic salary of Rs.
    12300 up to June 30, 2007 and Rs 12700
    afterwards. Besides, she gets 30 percent of basic
    salary as house rent allowance, Rs. 1630 per
    month as dearness allowance ( 71 of it forms
    part of salary for computation of retirement
    benefits) and Rs. 500 per month as conveyance
    allowance which is entirely used for personal
    purposes. On July 10, 2007, the employer
    transfers a music system to Mrs. X on her
    completing 10 years of service (cost of music
    system purchased on September 1, 2006 Rs 22470)
    for Rs 7500. She is member of statutory provident
    fund to which both employer and employee
    contribute _at_ 12 of basic salary. Apart from the
    maintaining contribution, she makes an additional
    contribution of Rs 600 per month to the provident
    fund. During the previous year 2007-08, Rs 65698
    is paid to her for checking answer sheets of
    different universities. Determine the taxable
    income and tax liability of Mrs. X for the
    assessment year 2008-09 on the assumption that
    she pays rent of Rs. 4000
  • .
  •  

73
  • Solution
  • Basic salary (i.e., Rs. 12300 3 Rs. 12700
    9)
    151200
  • House rent allowance (i.e., 30of Rs 151200)
    45360
  • Less exempt
    31488
    13872
  • Dearness allowance (i.e., Rs 1630 12)

    19560
  • Conveyance allowance (i.e., Rs 500 12)

    6000
  • Employers contribution to statutory provident
    fund
    nil
  • Sale of movable asset (Rs 22470 Rs 7500)

    14970


  • _____
  • Gross salary

    205602
  • Less deduction

    nil


  • ______
  • Net salary

    205602
  • Income from other sources

    65698


  • ______
  • Gross total income

    271300
  • Less deduction under section 80C

    25344


  • ______
  • Net income round off

    245960

74
  • Notes
  • Conveyance allowance utilized for personal
    purposes is not exempt from tax.
  • Deduction under section 80C is computed as under
  • Minimum contribution to provident fund
  • (12 of Rs 151200)
    18144
  • Add additional contribution (600 12)
    7200
  • Total
    25344

75
  • Tax on net income

    19692
  • Add surcharge

    nil
  • Tax and surcharge

    19692
  • Add education cess 2 of tax and surcharge
    394
  • Add secondary and higher education cess 1
    197
  • Tax payable (rounded off)

    20280Notes
  • It is assumed that the salary falls due on the
    last day of each month.
  • Exemption in respect of house rent allowance is
    determined as follows
  •  

  • Up
    to June from July

  • 30,
    2007 1, 2007
  • Salary for computation (i.e., basic salary 71
    of
  • Dearness allowance) (per month)
    13457
    13857


  • _______ _______
  • 50 of salary
    6729
    6929
  • House rent allowance
    3690
    3810
  • Excess of rent paid (Rs 4000) over 10 of salary
    2654
    2614

  • ______
    _______
  • Amount exempt from tax (being the least)
    2654 2614

76
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