NEW:Income from salary-Problems,theory and solutions

1
NEWIncome from salary-Problems,theory and
solutions
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2
Solved problems Income from Salary-2008-09
assessment year
Read the concepts From salary slide
Education for all

• 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. Josephs College of Commerce, Bangalore
• aug_bang_at_yahoo.com 09845844319

3
Dedicated to

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

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How to study salary?
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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
7
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)
7,200 HRA

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
8
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 premium 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.
9

• 
  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
  3,600 3,600(see notes
  given in the next slide)
• HRA received 10,400 4840
  5,560
• Least of the following Major any four cities
  like Delhi, Mumbai etc. (50)
• 50 of salary Basic DA
• 83,600 x 50
  41800

10

• 2) HRA received
  10,400
• 3) Rent paid- 10 of salary
• 13,200 8360
  4,840
• (1100 x 12 )
• Research Allowances 7000
• Less Exp incurred 6500
  1,500
• Medical Allowances 28000
• Exemption 15000
  13,000
• Income from salary
  1,09,960
• Income from other sources
  75,650
• Total Income
  1,85,610

Answer1. continues
See explanation after The answer in the
following slides
11

• Exemption under sec 80c
• 10 Provident fund 83600
  8,360
• (Basic DA which comes for retirement benefit)
• Taxable Income
  1,77,250
• Tax liability
• Taxable Income
  1,77,250
• Less Exemption
  1,45,000
• 
  32,250
• Womans tax liability
• 145000 150 000 5,000 x 10
  500
• 150 000 250,000 27,250 x 20
  5450
• Tax payable
  5950
• Education cess 3 178.5
• Total tax 6128.5

www.augustin.co.nr
12
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.

13

• 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
14
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.

15

• 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
  incometax-salary-theory.
• 10. Salary for the calculation of exemption on
  HRARs. 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
16

• 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)

17

• 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
18

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

19

• 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..

20
Working notes Exercise-2
www.augustin.co.nr

• 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
• Employers contribution can not exceed 12 of
  salary12 x 828009936 per annum.
• RPF by employer exceeds 12 of salary by
  Rs.135011286-9936
• 2. Employees 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.

21

• Basic Salary (675012)
  81000
• Dearness Allowance (50012)
  6000
• Bonus (70012)
  8400
• Medical Allowance
• (Fixed) (20012)
  2400
• Excess of contribution to provident fund by
• Employer11286-(12 of 12(675030 of 500)
  1350
• (see note in the previous slide)
• Interest on interest free loan
• (9500010.75)
  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

22

• Computation of Tax Liability
• Net Taxable Income
  13,46,370
• 1,10,000-1,50,000 4000010
  4000
• 150,000-250,000 10000020
  20000
• 250 above10,96,370 x 30
  328,911
• 
  352,911
• Add surcharge of 10
  35291
• 
  388,202
• Add 3 educational cess (on 3,88,202)
  11646
• 
  3,99,848
• Rounded off
  3,99,850
• (nearest to 10 rupee)

23
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

24

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

25

• Solution-3
• Salary (4500012)
  540000
• Dearness allowance (1200012)
  144000
• House rent allowance(600012)
  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
• (45000121/2 of 1200012)-meaning of salary for
  RPF
• Interest free loan8 if 150000 from Oct 1, 2007
• to March 31, 2008
  6000
• GROSS SALARY
  780360
• Less standard deduction
  nil
• Income from salary
  780360

26
Computation of total taxable income
solution-3-continues

• 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 gains150000-(80000555/447)
  index cost of acquisition to be used
  51387
  
• Taxable income 8,61,747

27

• GROSS TOTAL INCOME
  861747
• Less deduction
• Under section 80C
• 1.Employees contribution to Recognised provident
  fund is saving. Therefore it comes under section
  80C
• 15 of(45000121/2 of 1200012)
  91800
• 2. Under section 80D (Medi claim insurance )
  15000
• NET INCOME ROUNDED OFF
  754950
• Tax on 51387_at_ 20
• How ever tax liability cannot exceed
• 10 of (150000-80000)
  7000
• Tax on balance
  156569
• TOTAL
  163569

28

• Add surcharge
  nil
• TOTAL
  163569
• Add education cess2 of 163569
  3271
• Add secondary and higher education cess
• 1 of 163569
  1636
• TOTAL TAX LIABILITY ROUNDED OFF
  168480
• Note it is assumed that SBI lending rate for
  similar loan is 8

29
Special allowances10(14)
Not directly relate to Official duty (General)

• 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/journ
ey 4.Helper allowance to carry Official
documents 5. Research allowance 6. Uniform
allowance to do Official duty
To be Spent Fully Other Wise, amount
not Spent taxable
See in the Next slide
30
Not directly relate to Official duty (General)
1.Allowance for transport employees 2.Children education allowance 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
3. Traveling allowance to commute from home to office 4. Other border area allowances 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
31
Perquisites

• The term perquisites has been defined by section
  17(2) under different clauses as including the
  following items-
• a.       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 employees
  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)

32
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
Perquisites with respect to movable
assets-computation
Types of asset Rate of depreciation Method of deprecation
Electronic items/ computer 50 Reducing balance
Motor car 20 Reducing balance
Any other 10 Straight line
33
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
34
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

35
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-
• 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
• 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 membership is enjoyed by Mr. Deepak
• He has been given a gift voucher of Rs. 13,500
• He has been provided the of laptop used for
  office as well as personal purpose. The cost of
  the asset Rs.1,20000.
• In his office chamber , AC machine has been
  installed for 30,000
• Calculate gross salary of Mr. Deepak for the
  assessment year 2008-09

36
computation of gross salary of Mr. Deepak for the
assessment yr 2008-09
Solution-6
particulars employee Amount
Basic salary 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 membership 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
37
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)

7,200 HRA

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
38
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
premium 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.
39

• 
  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 3,600
• HRA received 10,400 4840
  5,560
• Least of the following
• 50 of salary Basic DA
• 83,600 x 50
  41800

40

• 2) HRA received
  10,400
• 3) The excess of Rent paid 10
• 1100 x 12 13,200 8360
  4,840
• Research Allowances 7000
• Less Exp incurred 6500
  1,500
• Medical Allowances 28000
• Exemption 15000
  13,000
• Income from salary
  1,09,960
• Income from other sources
  75,650
• Total Income
  1,85,610

41

• Exemption under sec 80C
• 1) 10 Provident fund 83600
  8,360
• Taxable Income
  1,77,250
• Tax liability
• Taxable Income
  1,77,250
• Less Exemption
  1,45,000
• 
  
  32,250
• 145 150 5000 x 10
  500
• 150 250 2,7250 x 20
  5450
• Taxable income
  5950

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

43
Solution-10computation 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 to employee) Taxable 8000
Club membership fee(taxable to employee) Taxable 30,000
Gift voucher taxed 13500
Laptop facilities A.C machine facility Exempted Used for office or private purpose Nil
Gross Taxable salary 1,71,500
44
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
rent free accommodation.
45
Solution 11 The valuation of rent free
accommodation shall be 10 of the salary i.e. 10
of (248000 160003000015000160002500012000)
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 account.
46
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 emoluments- Basic 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.
47
Solution-12 Computation of taxable salary of Sri
Mohan for assessment Year 2008-09
Basic 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 RPF in excess of
12 of salary 2000 20000-
12 of (120000 50 of 60000) Salary from B
ltd 80000 Advance of salary
20000 Value of housing facility10 of
(1200001600030000 15000160002500012000800
00) 31400 Taxable Salary
397400


48
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
emoluments- Basic 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).
49
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 70200-24000Rs46200
Alwar 10 of salary less rent recovered Rs 46800-24000Rs22800
Chomu 7.5 of salary less rent recovered Rs 35100-24000Rs11100
50
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.
51
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 premium deferred annuity
policy from LIC of India. Basu claims that the
commission diverted to secure the deferred
annuity cant 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 cant 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
salary
52
3. Dearness allowance _at_ 60 of basic pay (
50of 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.
53

• 7. Residential accommodation at Jaipur (
  population exceeding 10 lakhs but not exceeding
  25 lakhs ).
• AnswerIf 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

54
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. AnswerLap
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
value1,28,000. 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.
55

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

56

• 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.
• AnswerSpecial fund is taxable to employer as
  Fringe benefit.

57

• 14) A contribution of 14 of salary was made to
  recognized provident fund by the employer and
  employee both. Interest of Rs. 20,000 _at_ 10 was
  credited to the fund.
• Interest excess over 9.5 is taxed to
  employee20000 x.05/101000.
• Employers contribution over 12 of salary is
  taxed to employee
• Employees 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.

58

• 16) On Mr. Rahuls eldest son getting first rank
  in the school, the employer gave scholarship of
  Rs.2500 p.m. to Rahuls eldest son-Answer 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.

aug_bang_at_yahoo.com
59
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 _at_ 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 SBIs rate is
calculated and taxed in the hands of all
employees.
60

• 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 _at_ 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.
  Rahulfor assessment year 2008 20009, given
  that M/S Ram Ltd. Is an employer liable to pay
  Fringe Benefit Tax.

61
Discuss profits in lieu of salary
Help others in studies. Help those who are in
need including Your knowledge.
62
Problem 4

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

63
Exercise-

• During 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 purpose16,000) 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
• The valuation of the perquisite in respect of
  rent free house.
• Finding out how much entertainment allowance is
  deductible if he is paid entertainment allowance.
• Determinig exemption in respect of house rent
  allowance if it is paid to him.
• Calculating exemption in respect of gratuity paid
  to him under the payment of gratuity Act 1972 if
  he retires on 31-3-2008.

64
answer-1
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.

• 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

65
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

66
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.

67
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

68
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.

69
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 joined 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

70
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.

71

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Work hard and sincere to you whatever you do.
72

• ExerciseFirst 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 _at_ 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
• .
•  

73

• Solution
• Basic salary (i.e., Rs. 12300 3 Rs. 12700
  9)
  151200
• House rent allowance (i.e., 30of Rs 151200)
  45360
• Less exempt
  31488
  13872
• Dearness allowance (i.e., Rs 1630 12)
  
  19560
• Conveyance allowance (i.e., Rs 500 12)
  
  6000
• Employers contribution to statutory provident
  fund
  nil
• Sale of movable asset (Rs 22470 Rs 7500)
  
  14970
• 
  
  _____
• Gross salary
  
  205602
• Less deduction
  
  nil
• 
  
  ______
• Net salary
  
  205602
• Income from other sources
  
  65698
• 
  
  ______
• Gross total income
  
  271300
• Less deduction under section 80C
  
  25344
• 
  
  ______
• Net income round off
  
  245960

74

• 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

75

• 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
•  
• 
  Up
  to June from July
• 
  30,
  2007 1, 2007
• Salary for computation (i.e., basic salary 71
  of
• Dearness allowance) (per month)
  13457
  13857
• 
  
  _______ _______
• 50 of salary
  6729
  6929
• House rent allowance
  3690
  3810
• Excess of rent paid (Rs 4000) over 10 of salary
  2654
  2614
• 
  ______
  _______
• Amount exempt from tax (being the least)
  2654 2614

76
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