Income From Salary Problems Theory And Solutions New 200809 Assessment Year 1222393780092207 8 6u5c2s

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Solved problems Income from Salary-2008-09 assessment year Read the concepts Education for all From salary slide 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. Joseph’s College of Commerce, Bangalore [email protected] 09845844319 2

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

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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

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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) HRA

7,200 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 )

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8000

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 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.

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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 given in the next slide)

3,600

HRA received 10,400 – 4840

3,600(see notes 5,560

Least of the following: Major any four cities like Delhi, Mumbai etc. (50%) 1) 50% of salary Basic + DA 83,600 x 50%

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41800

2) HRA received 3) Rent paid- 10% of salary 13,200 – 8360 (1100 x 12 ) Research Allowances 7000 Less: Exp incurred 6500

1,500

Medical Allowances Exemption

13,000

28000 15000

Income from salary Income from other sources Total Income

10,400 4,840

Answer1. continues

1,09,960 75,650 1,85,610

See explanation after The answer in the following slides

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Exemption under sec 80c 1) 2)

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10% Provident fund 83600 8,360 (Basic + DA which comes for retirement benefit) Taxable Income 1,77,250

Tax liability Taxable Income Less: Exemption • Woman‟s tax liability : 145000 – 150 000 5,000 x 10% 150 000– 250,000 27,250 x 20% Tax payable Education cess 3% Total tax

1,77,250 1,45,000 32,250 500 5450 5950 178.5 6128.5

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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.

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• 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 13

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. 14

• 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 incometaxsalary-theory. • 10. Salary for the calculation of exemption on HRA=Rs. 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 15

• 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) 16

• 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 17

• 15. Valuation of answer scripts of Bangalore university comes under income from other sources as there is no employer and employee relationship. • 16. Employee’s 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. 18

• 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……..

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Working notes –Exercise-2 • • • • •

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 Employer‟s contribution can not exceed 12% of salary=12% x 82800=9936 per annum. • RPF by employer exceeds 12% of salary by Rs.1350[11286-9936] • 2. Employee‟s 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. 20

• • • •

Basic Salary (6750*12) 81000 Dearness Allowance (500*12) 6000 Bonus (700*12) 8400 Medical Allowance (Fixed) (200*12) 2400 • Excess of contribution to provident fund by Employer[11286-(12% of 12*(6750+30% of 500)] 1350 • (see note in the previous slide) • Interest on interest free loan (95000*10.75%) 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

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Computation of Tax Liability • Net Taxable Income 1,10,000-1,50,000= 40000*10%= 150,000-250,000= 100000*20%= 250 & above=10,96,370 x 30%= Add: surcharge of 10% Add: 3% educational cess (on 3,88,202) Rounded off (nearest to 10 rupee)

13,46,370 4000 20000 328,911 352,911 35291 388,202 11646 3,99,848 3,99,850 22

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 23

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 of her dependent mother. Compute the taxable income and tax liability of Mrs..X for the assessment year 2008-09

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Solution-3 • Salary (45000*12) 540000 • Dearness allowance (12000*12) 144000 • House rent allowance(6000*12) 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 (45000*12+1/2 of 12000*12)-meaning of salary for RPF • Interest free loan[8% if 150000 from Oct 1, 2007 to March 31, 2008] 6000 GROSS SALARY 780360 Less: standard deduction nil Income from salary 780360 25

solution-3-continues

Computation of total taxable income 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 gains[150000-(80000*555/447)] index cost of acquisition to be used 51387 • Taxable income

8,61,747 26

GROSS TOTAL INCOME 861747 Less: deduction • Under section 80C: • 1.Employee’s contribution to Recognised provident fund is saving. Therefore it comes under section 80C [15% of(45000*12+1/2 of 12000*12)] 91800 • 2. Under section 80D (Medi claim insurance ) 15000 NET INCOME ROUNDED OFF 754950 Tax on 51387@ 20% How ever tax liability cannot exceed 10% of (150000-80000) Tax on balance TOTAL

7000 156569 163569 27

Add: surcharge TOTAL Add: education cess[2% of 163569] Add: secondary and higher education cess [1 % of 163569] TOTAL TAX LIABILITY ROUNDED OFF

nil 163569 3271

1636 168480

Note: it is assumed that SBI lending rate for similar loan is 8%

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Special allowances[10(14)] 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/journey 4.Helper allowance to carry Official documents 5. Research allowance 6. Uniform allowance to do Official duty

Not directly relate to Official duty (General) To be Spent Fully Other Wise, amount not Spent taxable

See in the Next slide 29

Not directly relate to Official duty (General) 1.Allowance for transport employees 2.Children education allowance

3. Traveling allowance to commute from home to office 4. Other border area allowances

&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

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 30

Perquisites The term perquisites has been defined by section 17(2) under different clauses as including the following itemsa. 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 employee‟s 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)] 31

Perquisites with respect to movable assets-computation 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:

Types of asset # Electronic items/ computer Motor car Any other

Rate of depreciation 50% 20% 10%

Method of deprecation Reducing balance Reducing balance Straight line 32

# 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 33

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 34

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:a. 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 b. 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 hip is enjoyed by Mr. Deepak

c. He has been given a gift voucher of Rs. 13,500 d. He has been provided the of laptop used for office as well as personal purpose. The cost of the asset Rs.1,20000. e. In his office chamber , AC machine has been installed for 30,000 f. Calculate gross salary of Mr. Deepak for the assessment year 2008-09

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computation of gross salary of Mr. Deepak for the assessment yr 2008-09 particulars

employee

Basic salary

Solution-6 Amount 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 hip 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

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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) HRA

7,200 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

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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 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.

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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

HRA received 10,400 – 4840

3,600 5,560

Least of the following 1) 50% of salary Basic + DA 83,600 x 50%

41800

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2) HRA received 3) The excess of Rent paid 10% 1100 x 12 = 13,200 – 8360

10,400 4,840

Research Allowances Less: Exp incurred

7000 6500

1,500

Medical Allowances Exemption

28000 15000

13,000

Income from salary

1,09,960

Income from other sources

75,650

Total Income

1,85,610

40

Exemption under sec 80C 1) 10% Provident fund 83600

8,360

Taxable Income

1,77,250

Tax liability Taxable Income Less: Exemption

145 – 150 150 – 250 Taxable income

1,77,250 1,45,000 32,250 5000 x 10% 2,7250 x 20%

500 5450 5950 41

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 a. 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 b. 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 hip is enjoyed by Mr. Deepak

c. He has been given a gift voucher of Rs. 13,500 d. He has been provided the of laptop used for office as well as personal purpose. The cost of the asset Rs.1,20,000. e. In his office chamber , AC machine has been installed for 30,000 f. Calculate gross salary of Mr. Deepak for the assessment year 2008-09 42

Solution-10 computation 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 taxable to employee)

8000

Club hip fee(taxable to employee)

Taxable

30,000

Gift voucher

taxed

13500

Laptop facilities A.C machine facility

Exempted Nil Used for office or private purpose Gross Taxable salary

1,71,500

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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 rent44free accommodation.

Solution: 11 The valuation of rent free accommodation shall be 10% of the salary i.e. 10% of (248000+ 16000+30000+15000+16000+25000+12000)=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 .

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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 emolumentsBasic 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.

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Solution-12 Computation of taxable salary of Sri Mohan for assessment Year 2008-09

Basic Salary Bonus Dearness allowance(50% forming part of salary) Project allowance Commission on purchase City compensatory allowance Medical allowance Employer contribution to RPF in excess of 12% of salary [20000- 12% of (120000+ 50% of 60000)] Salary from B ltd Advance of salary Value of housing facility[10% of (120000+16000+30000+ 15000+16000+25000+12000+80000)]

Taxable Salary

120000 16000 60000 15000 16000 25000 12000 2000 80000 20000 31400 47 397400

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 emolumentsBasic 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). 48

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 70200-24000=Rs46200

Alwar

10% of salary less rent recovered = Rs 46800-24000=Rs22800

Chomu

7.5% of salary less rent recovered =Rs 35100-24000=Rs11100

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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.

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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 deferred annuity policy from LIC of India. Basu claims that the commission diverted to secure the deferred annuity can’t 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 can’t 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 51 salary

3. Dearness allowance @ 60% of basic pay ( 50%of 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.

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• 7. Residential accommodation at Jaipur ( population exceeding 10 lakhs but not exceeding 25 lakhs ). • Answer: If 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 53

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. Answer: Lap 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 value=1,28,000. 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. 54

• 10) He was given club facility for which employer incurred a cost of Rs.75,000 during the year. Answer: ***If 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.

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• 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. • Answer: Special fund is taxable to employer as Fringe benefit.

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• 14) A contribution of 14% of salary was made to recognized provident fund by the employer and employee both. Interest of Rs. 20,000 @ 10% was credited to the fund. • Interest excess over 9.5% is taxed to employee=20000 x.05/10=1000. • Employer’s contribution over 12 % of salary is taxed to employee • Employee’s 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.

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• 16) On Mr. Rahul’s eldest son getting first rank in the school, the employer gave scholarship of Rs.2500 p.m. to Rahul’s eldest sonAnswer: 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.

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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 @ 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 SBI‟s rate is calculated and taxed in the hands of all employees. 59

• 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 @ 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. Rahul for assessment year 2008 – 20009, given that M/S Ram Ltd. Is 60 an employer liable to pay Fringe Benefit Tax.

Discuss “profits in lieu of salary”

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Problem 4 State giving reasons whether the following are true or false: 1. “Profits in lieu of salary” is taxable under the head “Income from other sources”. 2. Compensation payable to an employee on termination of service is capital receipt. It is, therefore, not chargeable to tax. 3. Compensation for voluntary retirement [to the extent it is not exempt under section 10(10C)] is treated as “profits in lieu of salary”. 4. 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. 5. 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”. 6. “Overtime allowance” is taxable as “profits in lieu of salary” 62

***ExerciseDuring 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 purpose:16,000); 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 1. The valuation of the perquisite in respect of rent free house. 2. Finding out how much entertainment allowance is deductible if he is paid entertainment allowance. 3. Determinig exemption in respect of house rent allowance if it is paid to him. 4. Calculating exemption in respect of gratuity paid to him under the payment of gratuity Act 1972 if he retires on 31-3-2008. 63

answer-1 • 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

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. 64

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

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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.

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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 67

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.

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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 ed 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

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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.

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• Exercise:First 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 @ 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 • . • 72

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Solution: Basic salary (i.e., [Rs. 12300 * 3] + [Rs. 12700 * 9]) House rent allowance (i.e., 30%of Rs 151200) Less: exempt Dearness allowance (i.e., Rs 1630* 12) Conveyance allowance (i.e., Rs 500 * 12) Employers contribution to statutory provident fund Sale of movable asset (Rs 22470 – Rs 7500) Gross salary Less: deduction Net salary Income from other sources Gross total income Less: deduction under section 80C Net income round off

151200 45360 31488

13872 19560 6000 nil 14970 _____ 205602 nil ______ 205602 65698 ______ 271300 25344 ______ 245960 ______ 73

• 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

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• • • • • • •

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:

• •

Salary for computation (i.e., basic salary + 71% of Dearness allowance) (per month) 50% of salary House rent allowance Excess of rent paid (Rs 4000) over 10% of salary

Amount exempt from tax (being the least)

Up to June 30, 2007

from July 1, 2007

13457 _______ 6729 3690 2654

13857 _______ 6929 3810 2614

______ 2654

_______ 2614 75

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