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Income from salaries is perhaps the most common form of income. Most people hold down jobs and earn monthly salaries. Salary income is by nature the most transparent and simple income sources, which therefore lends itself to very little tax planning possibilities. Very little, but not no tax planning – and that is where you come in as a financial advisor to your salaried clients. Go beyond simply recommending Sec 80C investments – help your clients structure their salary in a way that can save some tax. Here is a primer on taxation of salary income and avenues for tax planning with salary income. |
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Definitions ‘Gross salary’ means: basic salary or wages, bonus, gratuity (beyond exempted limit), leave salary or encashment, advance salary, arrears of salary, commission and fees, remuneration for extra work, ex-gratia and pension. It also includes various allowances like house rent allowance, city compensatory allowance, dearness allowance and any other special allowances. Perquisites like free accommodation, free gas, electricity, and domestic help. Club fees are also covered. Gross salary includes retrenchment compensation received. The following items are not included: family pension, gratuity on retirement, medical treatment reimbursement, sumptuary allowance, uniform expenses, leave travel concession, free meals at workplace and leave encashment on retirement. ‘Net salary’ refers to the income remaining after deducting exemptions under sec. 10 and deductions under sec.16 and professional tax paid. This is the income chargeable to tax. From this income other allowable deductions are reduced to arrive at the income actually liable for tax. Perquisites – Valuation and Taxability Perquisite are payments which may be defined as a casual emolument or benefit attached to an office or position. This is in addition to salary or wages. Under the Income tax, the following perquisites are taxable in all cases: concessional rent for house, rent free accommodation, free supply of gas, electricity, water, free or concessional education arrangements for employees’ children, payment of Professional tax and Income Tax on salary of servant employed by employee; motor car or any other conveyance for personal use of employee and reimbursement of medical expenditure. Free meals in excess of Rs. 50, club facilities, credit card fees, use of movable assets, interest free loans and tour expenses. The following perquisites are not taxed: use of laptops and computers, leave travel concession, free telephone, interest free loans (other than for medical purposes) not more than Rs. 20,000, free medical and recreational facilities. Some perquisites like employer owned car used for both personal and official purposes, free education of children, free gas electricity are taxable in the hands of specified persons only. Treatment of Retirement Benefits and Voluntary Retirement Scheme (VRS) The following are the benefits that one may expect to get on retirement. These are gratuity, commutation of pension, leave encashment, retrenchment compensation, compensation on voluntary retirement, Provident Fund, Superannuation Fund and the National Pension Scheme. Any gratuity paid to government employees including employees of local authorities is fully exempt. For other employees, these payments are taxed, though with some exemptions. Reliefs in other cases will be granted by the Central Board of Direct Taxes, after ascertaining the merits of each case. Deductions from Salary Currently the only deduction permitted under sec. 16 is the Entertainment Allowance with a limit of Rs. 5000. Profit in lieu of Salary Profit in lieu of salary is defined as: the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his/her employment or the modification in the terms and conditions relating to such. This includes amounts received from a provident fund or other funds to the extent to which it does not consist of contributions by the assessee or interest on such contribution. Any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus on such policy. Amount due to or received, whether in lump sum or otherwise, by any assessee from any person either before joining employment with that person, or after cessation of employment with that person. However gratuity, commuted value of pension and retrenchment compensation is excluded. Similarly, receipts from a statutory provident fund or a fund set up under the Provident Funds Act are fully exempt. Tax planning tips An important factoid about salaries is that owing to the transparent nature of compensation, the room for tax planning is limited. Nevertheless the following are some ways in which a handsome amount can be saved. Housing: Amount paid towards rent of a house is exempt, subject to certain limitations. Exemption on housing loan can be availed even when one is living in a rented accommodation, as well as house rent allowance. Leave travel: Leave travel allowance can be used to reduce tax outgo. This is available for travel within India. Two journeys in a block of four calendar years qualify for deduction. National Pension Scheme: Employer’s contribution to NPS of up to 10 per cent of basic plus DA is allowed for deduction under section 80CCD (2). This can be availed in addition to the Rs. 1.50 lakh limit under sec. 80C and the Rs. 50,000 limit under sec. 80CCD. Bonus: Bonus income is fully taxable. Yet an employee can use other provisions as above to reduce the TDS amount that an employer normally deducts. While this does not save tax as such, proper planning and disclosure of savings will help avert excess tax deductions from salary and hence the need for claiming refunds. Reimbursements: Opting for reimbursements like telecom expenses, books, fuel expenses, driver salary, food coupons, and dress expenses can reduce tax pay-out. Salary advance: Advances are taxed in the year in which they are received. Interest free loans other than for medical purposes are taxed as perquisites. ESOPs: Employee stock options are fully taxable. Esops are taxed on the basis of the price the employee pays for them and the fair market value on the date of opting for Esops. Usually the fair market value will be higher. Employees may use their discretion based on market conditions to maximise income and minimise taxation. source: wealthforum.com |
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