Tax

INCOME FROM SALARY AND TAX PLANNING

INCOME FROM SALARY AND TAX PLANNING

The total ITR(income tax returns) filed for the AY 2021-22 is 3.03 crores, out of which 58.98%, which is roughly about 1.78 crores are filed under ITR-1. ITR-1 are filed by people who are having income under the head salary and other sources of income. Hence, it is quite evident that the Salary head of income is one of the cornerstones in understanding the entire Income Tax Act.

Income under the head salary is chargeable if there is an employer- employee relationship.

The basic statement of salary has been provided below:-

Particulars	Rs
Basic Salary	xxx
Dearness Allowance	xxx
Gratuity, Pension, Leave Salary	xxx
Provident Fund	xxx
Perquisites	xxx
GROSS SALARY	XXX
Less: Deduction u/s 16:
Professional Tax	xxx
Standard Deduction	xxx
NET SALARY	XXX

 

Now, let us discuss some of the important provisions under the head salary.

1. Allowance

One of the basic exemptions available to a salaried employee are the allowances which are recognised under the law and are exempt from tax. These can be summed up in a simple chart

 

S#	Allowance	Exempt U/s (14)
1	Children Education Allowance	Max. Rs 100 p.m. per child(Max. 2 Children)
2	Children Hostel Allowance	Max. Rs 300 p.m. per child(Max. 2 Children)
3	Uniform Allowance	Exempt amount=Amount spent
4	Research Allowance/Academy Allowance	Exempt amount=Amount spent

 

 

2. HRA-House Rent Allowance

House rent allowances have been exempt u/s 10(13A)

            The exemption available is lower of:-

1. 40%/50%* of salary[Basic+DA+commission]
2. Actual amount received
3. Rent paid-10% of salary[Basic+DA+commission]

* 50% if metro cities (Mumbai/Delhi/Chennai/Kolkata), 40% for other cities

 

            All other allowances are fully taxable.

 

      3.   Some of the perquisites extended by the employer to the employees are also not taxable in the hands of the employees. However, first let us understand the difference between allowance and perquisites

1. Allowances- It means monthly fixed amount received by the employee from the employer whether actual expenditure is incurred or not. It is part of salary, e.g. HRA.
2. Perquisites- It means benefits or facilities provided by the employer. It is received when actual expenditure is incurred e.g. Medical facility, car facility, etc.

 

            A few of the important perquisites have been discussed hereunder:-

 

i) Medical Facility- if treatment is done in India- medical facility provided by an employer in a government hospital or approved hospital or a private hospital, is not chargeable to tax. However, if the treatment is done outside India, the exemption is available upto the limit prescribed by the RBI

ii)”Loan” given by employer to employee at concessional rate of interest or no rate of interest. Taxable amount= loan amount * (SBI Interest rate- Actual Interest rate)

iii) Gift in cash= Taxable; Gift in kind= if FMV of gift is less than Rs 5000 p.a then it is fully exempt, otherwise fully taxable.

iv) Lunch Facility- it is exempt upto Rs. 50 per meal, if lunch is provided in office premises or paid through voucher. Note: - Tea coffee or breakfast is not taxable.

                        v)Gift or gift voucher- Gift in kind upto Rs 5,000 is exempt from tax

 

One of the best ways to save up your tax liability under the head salary is to plan your taxes and investments accordingly. Tax planning is one of the means of reducing the tax liability by keeping within the boundaries of law. Hence, it is different from tax avoidance or tax evasion. With the help of a proper Income Tax Expert, an assessee may end up saving quite a lot of his tax burden at the same time increasing his investment portfolio by taking advantage of the deduction under chapter VI A.

 

Let us take an illustration to understand the above discussed concept better.

Let’s consider Mr. X, resident of Kolkata, having an Annual Gross salary of Rs 10,00,000 for the relevant assessment year.

 

Particulars	Amount (Rs.) If the employee does not own a house	Amount(Rs.) If the employee purchase a new house
Basic salary	10,00,000	12,00,000
Less: Allowances:-
HRA (Note 1)	80,000	0
Uniform Allowance	20,000	20,000
Academic, research and other academic pursuit	60,000	60,000
Leave Travel Allowance	35,000	35,000
Gross Salary	8,05,000	10,90,000
Deduction u/s 16:-
i) Professional Tax	2,400	2,400
ii) Standard Deduction	50,000	50,000
Net Salary/Gross Total Income	7,52,600	10,37,600
Less:- Deduction under Chapter VI A
Interest on House property u/s 24b		2,00,000
80C (Note 2)	1,50,000	1,50,000
80CCD(1B)(Note 3)	50,000	50,000
80D(Note 4)	50,000	50,000
80E (Note 5)	24,000	24,000
80EEB (Note 6)	60,000	60000
Net Taxable Income	4,18,600	4,98,600

 

Computation of Tax Liability of Mr. X

 

Tax as per Normal Provision:-

 

Particulars	Rate	Tax Amount	Tax Amount
Upto 2,50,000	NIL	0	0
>2,50,000 upto 4,18,600/4,98,600	5%	8,430	12,430
Less: Relief u/s 87 A – Lower of
i) Tax amount or 12,500		8,430	12,430
		NIL	NIL
Add: Health and Education Cess	4%	NIL	NIL
Net Tax Payable		NIL	NIL

 

Note 1:- HRA

Let the p.a rent be Rs 1,80,000, actual HRA received is 95,000 .Therefore his HRA shall be

The exemption available is lower of:-

4. 50%* of 10,00,000
5. 95,000
6. 1,80,000-10% of 10,00,000

 

Note 2:- 80C

Let us assume that the amount deposited in PPF be 1,40,000 and investment made in LIC be Rs. 60,000. However, it has been restricted to Rs. 1,50,000 u/s 80CCE.

 

Note 3:- 80CCD (1B)

Let the amount contributed to New Pension scheme be Rs. 50,000

Note 4:- 80D

Deduction w.r.t medical insurance premium of Self, spouse, dependent children. Maximum deduction allowed is Rs. 50,000

 

Note 5:- 80E

Deduction in respect of interest on loan for higher education in India or abroad. Let us assume that the loan taken by Mr. X is Rs 3,00,000 and the interest rate is 8%. Therefore, interest for the year comes to be Rs 24,000

 

Note 6:- 80EEB

Deduction w.r.t. Interest on electric vehicle loan. Maximum deduction allowed is Rs. 1,50,000. The assessee has claimed Rs 60,000 under this provision.