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CA V.K.Mahipal, vkmahipal@in.

com,924633 4840

Basic Concepts
Salary

Tax Planning
Formula for Zero Tax Cost To Company (CTC)
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

ASSESSEE PREVIOUS YEAR ASSESSMENT YEAR

GROSS TOTAL INCOME


TOTAL INCOME OR TAXABLE INCOME INCOME TAX SLAB RATES FOR INDIVIDUALS ( A.Y. 2011 12 )

CA V.K.Mahipal, vkmahipal@in.com,924633 4840

As per section 2 (7) of the Income Tax Act, 1961 assessee means a person responsible for payment of income tax or any other dues ( as interest or penalties ). It is therefore, not necessary that the person should have his own income to become an assessee. For example, in case of death of a person- the legal heirs are responsible for payment of tax; in case of a minor the parents are responsible.
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

As per Section 3 of the Income Tax Act, 1961 previous year is the year in which the income is earned. The financial year ending on 31st March is called Previous Year.

In case of a person becoming assessee for the first time, previous year would mean the period starting from the date of employment till the next 31st March. For Example, for a person who is employed on 4/6/2009, previous year would be from 4/6/2009 to 31/3/2010.
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

As per Section2 (9) of the Income Tax Act, 1961 Assessment year is the period of 12 months commencing from 1st April immediately after the previous year. Income earned in the previous year is assessed in the next year i.e. assessment year. For example, for financial year 2008 09, the assessment year would be 2009 10.
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Income under the Income Tax Act, 1961 is calculated under five heads. The sum total of taxable income of all five heads (sources) is called Gross Total Income. The five heads of income are; I. Income from Salaries II. Income from House Property III. Income from Business or Profession IV. Income from Capital gain V. Income from Other Sources
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

As per Section 2 (45) of the Income Tax Act, 1961, the Total Income the amount of income which is chargeable to tax, computed after deducting permissible deductions under Chapter VI A of the Income Tax Act, 1961
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Assessee Category

Total Income in Rs. 0 1,60,000 1,60,001 5,00,000 5,00,001 8,00,000 8,00,001 and above 0 1,90,000 1,90,001 5,00,000 5,00,001 8,00,000 8,00,001 and above 0 2,40,000 2,40,001 5,00,000 5,00,001 8,00,000 8,00,001 and above

Tax Rate Nil 10 % 20% 30% Nil 10 % 20% 30% Nil 10 % 20% 30%

For Men Below 65 yrs of Age

For Women Below 65 yrs of Age

For Senior Citizens (Above 65yrs)

CA V.K.Mahipal, vkmahipal@in.com,924633 4840

In addition to the basic Income Tax the individual assessee is also required to pay

Education Cess @ 3% on the Income Tax including surcharge if any is levied

CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Income under the head Salaries is charged on (i) Due basis when it is earned even if it is not received in the previous Year (ii) Receipt basis when it is received even if it is not earned in the previous year. (iii) Arrears of salary- which were not due/ received earlier are taxable when due or received, which ever is earlier.

CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Section 17 of the Act gives an inclusive definition of salary. Broadly, it includes: 1. Basic salary 2. Fees, Commission and Bonus 3. Taxable value of cash allowances 4. Taxable value of perquisites 5. Retirement Benefits Although, all the components of salary income are included in salary, there are certain incomes in each of these categories, which are either fully exempt or exempt up to a certain limit.
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

All employees are entitled to a basic salary which is fixed as per their respective terms of employment either as a fixed amount or at a graded system of salary. Under this graded system, apart from the basic salary at which the employee will start, annual increments to be given to the employee are pre fixed in the grade. For example, if a person is employed on 1st May, 2004 in the grade of 12000 300 15000, this means that he will start at a basic salary of Rs.12000 from 1st May, 2004. He will get an annual increment of Rs.300 w.e.f. 1st May, 2005 and onwards every year on the same date till his basic salary reaches Rs.15, 000. No further increment is given thereafter till he is promoted and placed in other grade.
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Mr. X joins service in the grade of Rs.12000 300 13800 400 16800 on 1st June,2002. Compute his basic salary for the previous year 2008-09.

CA V.K.Mahipal, vkmahipal@in.com,924633 4840

For the previous year 2008-09, basic salary of X will be calculated as follows: 1st June 2002 31st May 2003 = Rs.12000 p.m. 1st June 2003 31st May 2004 = Rs. 12300 p.m. 1st June 2004 31st May 2005 = Rs. 12600 p.m. 1st June 2005 31st May 2006 = Rs. 12900 p.m. 1st June 2006 31st May 2007 = Rs. 13200 p.m. 1st June 2007 31st May 2008 = Rs. 13500 p.m. 1st June 2008 31st May 2009 = Rs. 13800 p.m.

Basic Salary for April and May 2008 (Rs.13500 x 2)= 27,000 Basic Salary for June 2008 March 2009 (Rs.13800 x 10) = 1,38,000 Basic Salary for previous year 2008-09 =Rs.1,65,000
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Any fees or commission paid or payable to an employee is fully taxable and is included in salary. Commission payable may be at a fixed amount or a fixed percentage of turnovers. In both the cases, it is taxable as salary only when it is paid or payable by the employer to the employee.
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Allowance is a fixed monetary amount paid by the employer to the employee (over and above basic salary) for meeting certain expenses, whether personal or for the performance of his duties. These allowances are generally taxable and are to be included in gross salary unless specific exemption is provided in respect of such allowance. For the purpose of tax treatment, we divide these allowances into 3 categories: I. Fully taxable allowances II. Partially exempt allowances III. Fully exempt allowances
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

The main allowances under this category are enumerated below: (i) Dearness Allowance - this allowance is paid to compensate the employee against the rise in price level in the economy. (i) City Compensatory Allowance - this allowance is paid to employees who are posted in big cities. The purpose is to compensate the high cost of living in cities like Delhi, Mumbai etc. (iii) Tiffin / Lunch Allowance this allowance is given for lunch to the employees. (iv) Non practicing Allowance this allowance is normally given to those professionals (like medical doctors, chartered accountants etc.) who are in government service and are banned from doing private practice. It is to compensate them for this ban. (v) Warden Allowance this allowance is given in educational institutions for working as a Warden of the hostel.
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

(vi) Deputation Allowance - When an employee is sent from his permanent place of service to some place or institute on deputation for a temporary period, he is given this allowance. (vii) Overtime Allowance - When an employee works for extra hours over and above his normal hours of duty, he is given overtime allowance as extra wages. (viii) Fixed Medical Allowance this allowance is given to meet the medical expenses of the employee and his family. (ix) Servant Allowance this allowance is given to servants at home by the employees. maintain

(x) Other allowances - There may be several other allowances like family allowance, project allowance, marriage allowance, education allowance, and holiday allowance etc. which are not covered under specifically exempt category, so are fully taxable.
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

This category includes allowances which are exempt upto certain limit. For certain allowances, exemption is dependent on amount of allowance spent for the purpose for which it was received and for other allowances, there is a fixed limit of exemption.

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii)

The main allowances under this category are enumerated below:

House Rent Allowance (HRA) Leave Travel Concession Reimbursement of Medical Expenses Special Allowances including Uniform Allowance ,Tour Allowance, Helper Allowance. Transport Allowance Tribal Area Allowance Children Education Allowance Hostel Expenditure Allowance
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

An allowance granted to a person by his employer to meet expenditure incurred on payment of rent in respect of residential accommodation occupied by him is exempt from tax to the extent of least of the following three amounts: a) House Rent Allowance actually received by the assessee b) Excess of rent paid over 10% of salary c) An amount equal to 50% of salary due to assessee (If accommodation is situated in metro cities) Or an amount equal to 40% of salary (if accommodation is situated in any other place). Salary for this purpose includes Basic Salary, Dearness Allowance (if it forms part of salary for the purpose of retirement benefits), Commission based on fixed percentage of turnover achieved by the employee. If an employee is living in his own house and receiving HRA, it will be fully taxable.
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Mr. X is employed in A Ltd. getting the following Basic pay of Rs.20, 000 per month and Dearness allowance of Rs.7, 000 per month (half of the dearness allowance forms part of salary for the purpose of retirement benefits). The employer has paid bonus @Rs.500 p.m., Commission @1% on the sales turnover of Rs.20lakhs, and HRA of Rs.6, 000 per month. X has paid rent of Rs.7,000 per month and was posted at Agra.

Compute his gross salary for the assessment year 2006-07

CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Solution: Basic Salary (Rs.20,000 x 12) = 2,40,000 Dearness Allowance (Rs.7,000 x 12) = 84,000 Bonus (Rs.500 x 12) = 6,000 Commission (1% of Rs.20,00,000) = 20,000 House Rent Allowance (Rs.6,000 x 12 Amount exempt Rs.53,800) = 18,200 Income From Salary = 3,68,200

Amount of HRA exempt is least of 3 amounts: 1. 40% of Salary (Rs.2,40,000 + Rs.42,000 + Rs.20,000) = Rs.3,02,000 2. Actual HRA received (Rs.6, 000 x 12) = Rs. 72,000 3. Rent paid (Rs.7, 000 x 12 10% of salary Rs.30, 200) = Rs. 53,800 Amount of HRA exempt is = Rs. 53,800

CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Max. Rs. 15,000 per annum for reimbursement of expenses on medical treatment (expense incurred during the current financial year April to March). Medical expenses bills/ receipts are required to be presented to the employer for claiming this exemption.

CA V.K.Mahipal, vkmahipal@in.com,924633 4840

The Actual amount spent in connection with proceeding on leave to any place in India is covered under leave travel concession. The exemption is available only for 2 journeys in a block of 4 years from 1-1-2006 to 31-12-2010. (Section 10(5) of the Income Tax Act). Names of persons traveled & Travel ticket is required to be presented to the employer for claiming this exemption.

CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Special Allowances for meeting official expenditure Certain allowances are given to the employees to meet expenses incurred exclusively in performance of official duties and hence are exempt to the extent actually incurred for the purpose for which it is given. These include (i) Traveling allowance, (ii) Tour allowance, (iii) Helper allowance, and (iv) Uniform allowance.

CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Special Allowances to meet personal expenses - certain allowances given to the employees for specific personal purposes and the amount of exemption is fixed i.e. not dependent on actual expenditure incurred in this regard. These allowances include:
a)

Children Education Allowance - This allowance is exempt to the extent of Rs.100 per month per child for maximum of 2 children (grand children are not considered). Children Hostel Allowance - Any allowance granted to an employee to meet the hostel expenditure on his child is exempt to the extent of Rs.300 per month per child for maximum of 2 children. Transport Allowance -This allowance is generally given to government employees to compensate the cost incurred in commuting between place of residence and place of work. An amount upto Rs.800 per month paid is exempt. However, in case of blind and orthopaedically handicapped persons, it is exempt up to Rs.1600 p.m. Out of station allowance - An allowance granted to an employee working in a transport system to meet his personal expenses in performance of his duty in the course of running of such transport from one place to another is exempt upto 70% of such allowance or Rs.6000 per month, whichever is less.
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

b)

c)

d)

The main allowances under this category are enumerated below: (i) Foreign allowance - this allowance is usually paid by the government to its employees being Indian citizen posted out of India for rendering services abroad. It is fully exempt from tax. (ii) Allowance to High Court and Supreme Court Judges of whatever nature are exempt from tax. (iii) Allowances from UNO organization to its employees are fully exempt from tax.
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Under Section 80C Aggregate of amount paid/incurred/invested towards any of the following:a) Premium paid towards Life Insurance Policy not exceeding 20% of the total Sum Assured. b) Any annuity or Deferred Annuity Plan. c) Contribution towards approved Provident Fund including PPF. d) Subscription towards National Saving Certificate. e) Contribution to UTIs Retirement Benefit Plan. f) Investment in UTIs Unit Linked Insurance Plan. g) Approved Mutual Fund Investment. h) Repayment of Housing Loan Principal towards Self-occupied Residential Property. i) Payment of Tuition fees towards any two children of the assessee. j) Investment in Equity Linked Savings Scheme / approved Infrastructure Bonds. k) Investment in Pension Fund / Deposit Scheme of National Housing Bank Under Home Loan Account Scheme. l) Fixed Deposit of any Scheduled Bank /Housing Finance Co. for not less than 5 years. m) Investment in Equity Shares Debentures of approved Public Finance Instn. or Company.
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Under Section 80 CCCPremium paid towards IRDA approved Pension Fund. Up to Rs.1, 00,000 (sum of claim under 80 C and 80 CCC shall not exceed Rs. 1, 00,000). Under Section 80 CCD Amount paid/deposited in an approved Pension Scheme of Central Government & matching contribution made by the Employer to the Pension A/c of individual. Up to10% of Salary. Under Section 80 CCE Aggregate of deduction u/s 80C, 80CCC & 80CCD shall not exceed Rs.1 lakh. Under Section 80D Medical Insurance Premium paid by any mode other than cash.Up to Rs. 15,000.b. For Senior Citizens Up to Rs. 20,000.

CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Under Section 80DD. Any expenditure for Medical, Nursing & Rehabilitation incurred on dependent relative suffering from permanent Physical Disability, Autism, Cerebral Palsy and Multiple disabilities.Up to Rs.50, 000 if disability is over 40% & Rs.75, 000 if disability is over 80%.b. Deposits under LIC, UTIs Scheme & other IRDA approved Insurers for the benefit of Physically Handicapped dependent.

Under Section 80DDB. Actual expenditure incurred on medical treatment of self, or dependent relative suffering from terminal diseases like Cancer, AIDS, Renal failure etc.Up to Rs.40, 000.b. For Senior Citizens.Up to Rs.60, 000.
Under Section 80E Interest on repayment of Loan taken from charitable / financial institution for Self, Spouse, Children Higher Education for a maximum of 8 years.Any amount of interest.

CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Under Section 80G. Donation paid to P.M. Relief fund, National Defence Fund, Funds of Universities or Educational Institution of National Fame, National Trust for welfare of persons with Autism, Cerebral Palsy, Mental retardation and multiple disabilities.(b). Donations to National Children fund, Jawaharlal Lal Nehru memorial fund, P.Ms Drought Relief Fund, Any Charitable / Religious Institutions, Corporation established for promoting interest of the members of a minor community.100% of donation/50% of Donation. In some cases, donation is restricted to 10% of total income. Under Section 80GG Deduction in respect of rents paid provided no house is owned by self, spouse or minor child in the place of work and is residing in any of the specified cities.25% of income or rent paid in excess of 10% of income or maximum of 24,000 p.a whichever is less. Under Section 80U Persons suffering from permanent physical Disability and includes Autism, Cerebral Palsy, Multiple Disability, Person with Disability and Severe Disability.Rs.50, 000 if disability is over 40% and Rs.75, 000 if disability is over 80%.
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

S.No Description 1 2 3 4 5 6 Gross Total Income Deduction Interest on Housing Loan Mediclaim Premium U/s 80D Investment U/s 80C Taxable Income Tax Payable

Male 4,25,000 1,50,000 15,000 1,00,000 1,60,000 NIL

Female 4,55,000 1,50,000 15,000 1,00,000 1,90,000 NIL

Senior Citizen 5,05,000 1,50,000 15,000 1,00,000 2,40,000 NIL

CA V.K.Mahipal, vkmahipal@in.com,924633 4840

The phrase "Cost to Company" or CTC, as it is commonly known, means different figures to different people. For the Company, Cost to company is a term which essentially implies the amount of expenses the company will spend on an employee in a particular year. What may be an expense for the company need not necessarily be salary for the employee.

For employees, Cost to company is an amount projected by the company as salary but is never what is actually received by the employee in cash.
For the Finance Manager it is the total cost incurred to hire, maintain, retain the employees and may also include a part of overhead cost allocation. And for most others it is plain confusion!

CA V.K.Mahipal, vkmahipal@in.com,924633 4840

CTC would generally include the following cash, non cash and perquisite-based components: Components of the salary like Basic, DA, HRA, Allowances Perquisites and Reimbursements given to employees (i.e.) - bonus, incentives, reimbursement of conveyance/ medical / telephone/, benefits extended through various schemes like housing/vehicle/furniture/ Air-conditioners etc. Contributions that the company makes for the employees like PF, Gratuity, Medical Insurance, etc. Reasonable estimates of Leave Encashment, Stock Option Plans and Non cash concessions Fringe Benefit Tax on Stock Option plans only. And would not include Gifts and Promotional items Overhead costs of the company
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Here are some tips to Structure the CTC of your employees:-

The breakup of the CTC needs to be clearly mentioned in the appointment letter to the employee.
Frequency of payment (Monthly, Quarterly, Annual.), Variability and calculation logic is to be explained in the appointment letter and/or the policies of the company. Base pay needs to be differentiated from performance and variable pay Cash, Non-cash components and perquisites have to clearly identified If the employer is offering a Flexible benefit plan the rules for availing the Plan have to be clearly mentioned.

CA V.K.Mahipal, vkmahipal@in.com,924633 4840

Include reasonable and actual cost to the company for Non cash benefits like Canteen Facility, Recreation and Entertainment facilities, Gratuity and benefits. Check for the wage rates as per The Minimum Wages Rules of the State.

Compare the tax benefits of House Rent Allowance vis--vis Company leased accommodation. Finally it helps to keep the CTC Structure simple
De-mystifying the concept of CTC and allowing employees to plan their own structures through Flexible Benefit Plans that minimize the tax impact should be the one of the foremost points that an HR manager should be aware of to both attract and retain talent.
CA V.K.Mahipal, vkmahipal@in.com,924633 4840

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