INCOME FROM SALARIES

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A major number of assesses are from the salaried class. Salaries covers not only dues received in cash but also the receipts and value received in kind. Any remuneration paid by an employer to his employee in consideration of his services is called salary. It also includes the monetary value of those benefits and facilities provided by the employer that are taxable.

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Under Section 15 of the Act, the following incomes are taxable under the head salaries 1.the salary due from an employer or former employer to an assessee in the previous year whether paid or not. 2. the salary paid or allowed to him in the previous year by or on behalf on an employer or former employer though not due or before it becomes payable to him i.e. advance payment of salary. 3. any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or former employer if not charged to income tax for any previous year.

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Some important points regarding salaries There must be a relationship of employer and employee Professional income for services rendered is taxable under Income from Business or Profession. Receipts from persons other than employer is taxable under Income from other Sources.

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Payment made after cessation of employment is taxable under the head salaries. Pension (uncommuted) is also taxable as salaries. Deduction by employer is application of income Hence Gross amount is taxable. Family Pension received by the widow or legal heirs of a deceased employee is taxable under Income from other sources. In case of Government or semi Government employees salary becomes due on the first day of the subsequent month. In case of private sector employees salary becomes due on the last day of the same month.

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According to Section 17(1) salary includes Wages,bonus,fees and commission. Any annuity or pension Any gratuity Taxable allowances Value of perquisites Profit in lieu of salary Any advance of salary but not a loan for purchase of a house or vehicle. Any arrears of salary Employers contribution to a recognised provident fund account of an employee in excess of 12% of salary and interest credited during the year on provident fund in excess of 9.5%. The contribution made by the Central Government in the previous year to the account of an employee (who joins after 1/1/2004) under a pension scheme.

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Taxable Allowances 1. Dearness Allowances 2. Fixed medical allowance 3. Lunch allowance 4.Servant Allowance 5. Deputation Allowance 6. Leave travel Allowance 7. Overtime allowance 8. City Compensatory Allowance 9.Communication Allowance.

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Allowances exempt upto a specified limit House Rent Allowance ( Section 10 (13A)) Rule 2A of the Income Tax Rules 1962 states that the least of the following shall be exempt Actual HRA received by the assessee during the previous year Excess of rent paid by the assessee over 10% of salary due for the relevant period. of the salary due to the assessee if the accomodation is at Mumbai.Kolkata,Delhi or Chennai 2/5 of the salary due to the assessee if the accomodation is situated at any other place.

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For the purpose of this rule, salary includes dearness allowance and also commission paid on fixed percentage of turnover. The term relevant period the period during which the accomodation was occupied by the assessee.

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Entertainment Allowance This allowance received by an employee during a previous year is included in the salary income and thereafter a deduction is given In the case of a Government Employee the deduction is the least of the following The actual amount of entertainment allowance granted to the employee during the previous year Rs.5000 20% of basic salary

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For this purpose salary excludes any allowances. The actual amount expended towards entertainment is not taken into consideration. In the case of non government employees no deduction shall be admissible.

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Special allowance for meeting certain expenses Conveyance allowance granted to an employee is exempt upto Rs.800 per month. In the case of blind or orthopaedically handicapped employees it is exempt upto Rs.1600 per month.

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Childrens education allowance is exempt in the whole of India @ Rs.100 per month per child subject to a maximum of two children. Childrens hostel allowance is exempt is exempt upto Rs.300 per month per child subject to a maximum of two children

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Fully exempted allowances Foreign allowance paid to all citizens of India outside India for rendering services abroad. Sumptuary allowance paid to a judge of the Supreme Court or High Court.

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Allowances from the U.N.O. Perquisites The term perquisite means any benefit attached to an office or position in addition to salary or wages. It may be given in cash or kind. If given in kind it must be capable of being measured in terms of money and added to the employees salary to ascertain the tax liability.

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Perquisites are taxable under the head salary if and only if they are Allowed by an employer to an employee Allowance during the continuance of employment Directly dependent on the service Resulting in the nature of personal advantage to the employee.

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Perquisites received from a person other than an employer are taxable under the head profits and gains from business or profession or income from other sources.

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Perquisites taxable in the case of all employees The value of residential accomodation provided by the employer to the assessee. Central and state government employees The value of the perquisite is equal to the licence fee which would have been determined by the Government in accordance with the rules framed by the Government for allotment of houses to its employees.

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Employees in the private sector A. accomodation owned by the employer (1) provided in cities having population exceeding 25 lakh as per 2001 census. The value taxable shall be 15% of the employees salary.

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10% of salary in cities having population exceeding ten lakh but not exceeding 25 lakh as per the 2001 census. Provided in other cities the value taxable shall be 7.5% of the salary in respect of the period during which the accomodation was occupied by the employee during the previous year.

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If the accomodation is taken on lease or on rent by the employer actual amount of lease rent paid or payable by the employer or 15% of salary whichever is lower will be the value of the perquisite that is taxable.

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In case the accomodation is furnished by the employer 10 per cent of the cost of the furniture will be added to the above value.

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For the purpose of the valuation of the perquisite salary means and includes Basic salary Dearness allowance Bonus Commission Fees All other taxable allowances Any monetary payment that is chargeable to tax.

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Profits in lieu of salary Section 17(3) This includes the following The amount of any compensation received by an employee or due to an employee from his employer or former employer in connection with the termination of his employment or modifications of the terms and conditions of his employment.

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Any amount received by or due to an employee from his employer or former employer except receipts in the form of gifts. Any payment made from an unrecognised provident fund or other fund will be included only to the extent of the employers contributions and interest due thereon. Interest on employees own contribution is also taxable but under the head income from other sources.

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Any payment received from a keymans insurance policy including the amount of bonus.

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Exceptions Death cum retirement gratuity (Section 10(10)) In case of a Government employee the full amount of gratuity is exempt from tax

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In the case of a non government employee covered by the Payment of Gratuity Act, 1972, the least of the following is exempt Actual gratuity received Rs.3,50,000 15 days salary for each year of completed service based on the salary last drawn.

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Salary for this purpose includes dearness allowance but excludes all other allowance 15 days salary is calculated by dividing the salary last drawn by 26 days.

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In case of any other employee not covered under the Payment of Gratuity Act, the least of the following Actual gratuity received Rs.3,50,000 Half months salary for each year of completed service or part thereof in excess of 6 months.

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Commuted Value of Pension (Sec 10(10A) It is a lumpsum amount in lieu of a periodical payment Commuted value of pension drawn by Government employees is fully exempt

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Commuted value of non government employees A.Who is in receipt of gratuity Exemption is equal to 1/3 of the commuted value of pension. B.Who is not in receipt of gratuity Exemption is equal to of the commuted value of pension.

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Encashment of leave salary Sec 10(10AA) Tax treatment is as follws Leave encashment during the continuity of employment is taxable in all cases Leave encashment at the time of retirement/leaving the job by the employee is tax free in the hands of a government employee.

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In the case of a non government employee the tax treatment is as follows Lea Tve encashment actually received Rs.300000 Ten months average salary Salary on the basis of average salary for approved period for which earned leave has not been availed of The least of the above.

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Retrenchment compensation Section 10(10B) Lowest of the following Amount received Rs.500000 Amount calculated as per Industrial Disputes Act 1947 A workman is entiltled to compensation equal to 15 days average pay for every completed year of service or part thereof exceeding 6 months.

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Voluntary retirement/separation scheme (read with rule 2BA) Sec 10(10C) Eligible employees Any amount received by an employee of Public sector company or any other company An authority established by a Centre or State Act

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A local authority Cooperative society University IIT Any state government Central Government Any institute that the Central Government may specify in this regard

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Quantum of exemption Least of the following Actual amount received Rs.5,00,000 Last drawn salaryx3xcompleted years of service or last drawn salary x remaining months of service whichever is lower

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Statutory Provident Fund Section 10(11) Any payment from a statutory provident fund or public provident fund set up by the Central Government and notified is exempt from tax.

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While the contributions to these funds qualify for exemption under section 80C the entire interest earned under this section is exempt from tax.

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Recognised Provident Fund Sec 10(12) The accumulated balance due and becoming payable to an employee participating in a recognised provident fund shall be exempt in the following cases (Rule 8 of Part A of Fourth Schedule)

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In the case of an employee who has rendered service continuously for 5 years or more In the case of an employee whose service has been terminated by reasons beyond his control.

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Approved Superannuation Fund Section 10(13) Any payment made from an approved superannuation fund is exempt in the hands of the receipient.

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Deductions Section 16 The income chargeable under the head salaries shall be computed after making deductions as follows from the gross salary 1. deduction for entertainment allowance 2. deduction for profession tax

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Valuation of Motor Car Rule 3(2) Employee owns the car and employer meets the expenses for official uses Value of perquisite is nil Where the car expenses are met entirely by the employer for personal uses the actual expenses incurred are the valuation of the perquisite

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If the employee uses the car partly for personal purposes the value of the perquisite shall be as under The actual expenditure incurred as reduced by Rs.1200 p.m. in case of a car of upto 1.6 litres cubic capacity and Rs.1600 p.m. in the case of a car greater than 1.6 litres capacity. If there is a driver Rs.600 p.m. is added

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If the employer owns the car and the employee meets the expenses for entirely personal purposes the wear and tear/hire charges and drivers salary shall be the valuation. If partly for personal purposes Rs.400 p.m. for a car upto 1.6 litres capacity and Rs.600 p.m. for a car of over 1.6. litres of cubic capacity. Drivers salary Rs.600 p.m.

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Interest free or concessional loan The value of any benefit to the employee on account of interest free or concessional loan for any purpose made available to him or any member of his household shall be determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India on the first day of the relevant previous year in respect of the loans for the same purpose advanced by it. The rates of various loans advanced by SBI for Assessment Year 2009200910 are as follows

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Housing loan upto 20L Loan above 20L Car loan upto 7.5 L Car above 7.5L Education Personal

0 to 5 years 10% 5 to 15 years 10.25% 15 to 25 years 10.50% 0 to 5 years 10.25% 5 to 15 years 10.50% 15 to 25 years 11.00% 0 to 3 years 11.75% 3 to 5 years 11.75% 0 to 3 years 11.50% 12.25% upto 4 lakhs 13.25% for others 0 to 3 years 11.25% 3 to 6 years 11.75%

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The interest calculation shall be on the maximum outstanding monthly balance which means the aggregate outstanding balance for each loan as on the last day of each month. No value shall be attached in respect of a loan for medical treatment in respect of diseases specified in rule 3A or where the amount of the loans in the aggregate does not exceed Rs.20,000.
Financial Ratios
Sr. No Ratio Formula 1 Debt to Equity Ratio = Total Debt/Total Equity Debt to total Assests ratio = Total Debts/ Total 2 Assests 3 Interest Coverage Ratio = EBIT/Interest Paid 4 Operating Profit = EBIT/ Net Sales 5 Pretax Profit Ratio=EBT/Net Sales 6 Net Profit Ratio = EAT/Net Sales Computation 27042.34/102.6 Value 263.5705653

27042.34/31856.99

0.848866764

18849232000/15902700000 1.185285014 18849232000/27875600000 0.676191078 2946532000/27875600000 0.105702909 1887800000/27875600000 0.067722309

Return on Assest = (EAT+(Interest-Tax advantage 27875600000/31856990500 7 on Interest))/Average total assests 0 0.087502302 Return on equity funds= (EAT-Pref. Div.)/Avg. 8 Ordinary Shareholder Equity

(1887800000-0)/102927692 1.834104749

EPS = Net profit available to equity 9 shareholders(EAT-Dp)/No. of outstanding shares 1887800000/102927692 DPS= div paid to ordinary shareholders/no of 10 ordinary shares 11 Earning yield= EPS/market price 12 Dividend Yield = DPS/ Market Price 13 Dividend Payment = DPS/EPS 14 Price-Earning Ratio = Market Price/EPS Current Ratio = (Current Assets/Current 15 Liabilities)

18.3410311

205200000/102927692 18.34/154.88 1.9936/154.88 1.9936/18.34 154.88/18.34

1.993632578 0.118414256 0.012871901 0.10870229 8.444929117

2282.25/27042.34

0.084395433

16 Acid-Test Ratio= (Quick Assest/Current Liabilities)

6.57