Rise of American Accounts. "Hollywood. "
Direct Tax
7. Taxable Portion of annual accretion to RPF [ Section 17(1)(7) ]. The Rule 6 of Part A of Fourth Schedule defines taxable annual accretion as :
" That portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund as consists of :
(a) Contribution made by the employer in excess of 12% of the salary of the employee : and
(b) Interest credited on the balance to the credit of the employee in so far as it exceeds the amount allowed at a rate exceeding such rate as may be fixed by the Central Government in this behalf by notification in Official Gazette, shall be deemed to have been received by the employee in that previous year and shall be included in the total income for that previous year and shall be liable to income-tax.
The above-mentioned rule makes it clear that any contribution by employer to R. P. F. in excess of 12% of employee's salary is to be added in salary.
About interest the taxable portion will be excess of Interest credited to the balance of R. P. F. over a rate of interest to be announced by the Government from time to time.
To simplify the above discussion it can be put in the following manner :
(a) Excess of employer 's contribution to Recognised Provident Fund over 12% of employee's salary, and
(b) Excess of interest credited to R. P. F. over interest calculated at prescribed rate ( i.e.,9.5%) of the balance standing to the credit of employee [ Vide Notification No. S. O. 120(E)dated 27.3.86]
8. Transferred Balance [ Section 17(1)(7) ]
The balance of unrecognised provident fund, which is transferred to R. P. F. is called " Transferred Balance "
According to Schedule 4 , rule 11 (4), the amount of taxable portion will be calculated as under :
1. The fund will be treated as R. P. F. from the date fund was instituted.
2. The employer's contribution of URPF shall qualify for exemption upto 12% of salary and excess shall be taxable.
3. The interest credited to the accumulated balance shall be exempted if rate of interest was upto 9.5% . Excess if any, is taxable.
4. The taxable amount under point (2) and (3) above shall be deemed to be the income of the previous year in which fund gets recognition. The remainder of the transferred balance shall be ignored.
9. Refund from Provident Fund [ Section 17(3)(2) ]
a. If S. P. F. - Fully exempted u/s 10(11).
b. Amount withdrawn or refunded from Credit balance of Recognised Provident Fund :
Any lumpsum amount received or refund taken from accumulated credit balance of recognized provident fund shall be fully exempted subject to some conditions as mentioned in rule 8 of part A of the fourth schedule :
As per rule8, exemption is allowed in the following cases :
1. In case employee has not completed 5 years service but he is taking the refund as his service has been terminated due to ill-health, discontinuance of employer's business, the contract of service was for less than 5 years or any other case beyond the control of the employee. It simply means that the employee is leaving not of his own sweet will.
2. In case employee is taking the refund after putting up continuous service for a period of 5 years or more.
3. In case employee has got job with another employer and his provident fund account was transferred to such new employer and total service with both the employers is 5 years or more.
(c) if U. R. P. F. - Taxable portion is added in salary income.
Taxable portion is equal to employer's contribution i.e., interest on this part. Interest on own contribution to U. R. P. F. is taxable under the head " Income from other sources. "
10. New Pension System for Central Government and other Employees joining new jobs on or after 1-1-2004 [ NPS ]
Central Government of India introduced a New Pension System for its employees who would join the service on or after 1-1-2004 and now this scheme is also applicable in case of other employees.
Under this system, the employee is required to contribute 10% of his monthly salary towards notified pension account and it is mandatory for the employer also to contribute 10% of employee's salary towards this account.
Contribution made by employer in this pension scheme is fully included in the salary income of the employee and then he ( Employee) is allowed a deduction u/s 80CCD(2) out of gross total income but this deduction is allowed only upto 10% of employee 's salary.
Contribution made by employee shall be eligible for deduction out of gross total income u/s 80CCD(1) to the extent of 10% of his salary.
Thus, employee's contribution ( upto 10% of employee's salary) towards this pension account is deductible u/s 80CCD(1) and this amount is treated as part of an overall limit of Rs 1,50,000 u/s 80C, 80 CCC and 80CCD(1) .
From assessment year 2016-2017, an employee contributing in NPS is allowed to contribute an additional amount upto Rs 50,000 p. a. and the same shall be allowed as deduction u/s 80CCD(1B) and this deduction of Rs 50,000 shall be allowed in addition to above mentioned deduction of Rs 1,50,000 u/s 80C, 80 CCC, 80CCD(1) put to-gether.
Important points :
1. The total amount of deductions u/s 80C, 80CCC and 80CCD(1) (other than deduction in respect of employer's prescribed contribution) shall not exceed Rs 1,50,000 plus upto Rs 50,000 additional deduction in case employee contributes additional amount upto Rs 50,000 in NPS.
2. The deduction u/s 80CCD(2) in respect of employer's prescribed contribution shall be in addition to the above combined ceiling or Rs 1,50,000 [ w. e. f. A. Y. 2012-2013 ]
After retirement, the employee will get pension every month out of this pension account and the pension so received will be taxable in the hands of the recipient of pension.
Pension received out of this fund by employee or his nominee.
Any amount received out of this fund by employee or his nominee as pension shall be fully taxable in the year of receipt.
Lump sum received out of this fund by employee or his nominee on opting out of this scheme.
Such amount shall be fully taxable.
ALLOWANCES [ Section 17(3) ]
The term allowance has been derived from the word 'to allow '.As per Oxford Dictionary the word ' Allowance ' means " any amount or sum allowed regularly ". As such allowances are given in cash along with salary by the employer. These allowances are given to an employee to meet some specific type of loss or expenditure of the employee or to help him to meet certain type of expenses.
(A) Fully Exempted Allowances
1. Foreign allowance given by Govt. to its employees posted abroad is fully exempted.
2. House rent allowance given to Judges of High Court and Supreme Court is fully exempted.
3. Sumptuary allowance given to Judges of High Court and Supreme Court is fully exempted.
(B) Fully Taxable Allowances
1. Dearness Allowance / Additional Dearness Allowance / High cost of living allowance / Interim Relief. Employees having fixed income suffer the most due to rise in prices and to compensate their loss, they are paid such allowances. So D. A. is nothing but an additional salary and it is fully taxable.
Some times it is mentioned that :
1. D. A. enters into pay for service benefits : or
2. D. A. enters into pay for retirement benefits : or
3. D. A. is given under the terms of employment : or
4. Dearness pay.
It is treated as part of salary for calculation of all benefits such as provident fund, value of rent free house, house rent allowance, bonus, gratuity, leave encashment and all other retirement benefits.
In case any part of D. A. enters salary for calculation of only some of the retirement benefits ( not all) then that part of D. A. will not form part of salary for the calculation of any retirement benefit .
2. City / Capital compensatory Allowance. These are given to compensate for the high cost of living in a particular big city of India or any other capital city. These are also fully taxable.
3. Lunch / Tiffin / Marriage / Family / Deputation / Wardenship / Non- practising / Project / Overtime / Fixed Medical Allowance. These allowances are fully taxable.
4. Entertainment Allowance. This allowance is fully taxable irrespective of any expenditure incurred on entertainment of guests or customers. But in case any amount is reimbursed against any expenditure incurred by employee on entertainment of guests or customers it shall be fully exempted.
U/s 16(2) a deduction is allowed to those persons who receive the allowance. Till assessment year 2001-02 this deduction was admissible both to Government as well as private sector employees. But with effect from assessment year 2003-04 this deduction is admissible only to Government employees for an amount equal to least of followings :
(a) Statutory Limit Rs 5,000:
(b) 1/5th of basic salary only : or
(c) Actual entertainment allowance received during the previous year.
Important Note. The actual expenditure incurred by a government employee on entertainment of customers is not relevant for claiming deduction u/s 16(2) .
(C). Partially Taxable Allowances.
1. House Rent Allowance
(a) Employees living in hired ( rented) houses. Sometimes the employer does not provide rent - free accommodation but instead makes a provision to pay some amount in cash, so that the employee may be compensated to some extent as far as rent is concerned. The amount of cash paid is known as House Rent Allowance. Out of the total H. R. A. received an amount equal to the minimum of the following three items is exempted from tax u/s 10(13A) read with Rule 2A and balance, if any, will be added in the salary of the employee for tax purpose. The three items are :
1. 50% of salary in case of Bombay, Calcutta, Delhi and Madras, and 40% of salary in case of all other cities , or
2. Actual House Rent Allowance received : or
3. The amount by which the actual rent paid by the employee exceeds 10% of his salary.
. Taxable HRA = Actual HRA received less Exempted amount.
.Important Notes
(1) Meaning of Salary
Salary = Basic Add DA( Enters) /DP Add Commission on turnover .
In Gestener Duplicators (P) Ltd Vs CIT (1979) (S. C.), it was held that in case a commission is given to an employee and it is a fixed % of turnover achieved by such employee, such commission shall also be treated as part of the salary for House Rent Allowance
(2) Salary to be taken. For HRA exemption ,salary is to be taken on due basis in suspect of the period during which rented accommodation is occupied by the employee during the previous year.
(3) Cases when HRA is fully taxable. HRA is fully taxable in any of the following cases :
(a) If employee is living in his own house, or
(b) If employee is living in a house for which he is not paying any rent, or
(c) If rent paid does not exceed 10% of salary.
(4) H. R. A fully Exempted. In case HRA is received by judges of High Court under High Court Judges ( condition of service ) Act 1954 and Supreme Court Judges under Supreme Court Judges ( condition of Service) Act, 1958 shall be exempted.
(5) The Exemption of HRA u/s 10 (13A) read with rule 2A shall be available even if employee is living in a rented houses at a place other than the place of his employment.
2. Entertainment Allowance.
3. Allowances covered u/s 10(14)(1) Official allowances .
These allowances are given to meet employee's expenses incurred in performance of his official work or duties and in case any part of these allowances is saved, then the same shall be taxable in the hands of employee.
Following are the prescribed allowances for the purpose of section 10(14)(1) :
1. Helper Allowance. It is exempted upto actual amount spent on engaging a helper required to perform the official duties
2. Uniform Allowance. It is also exempted upto actual expenditure incurred on acquiring or maintaining of the official uniform. Excess, if any, will be taxable .
3. Academic Research Allowance. It is exempted upto actual expenditure incurred for research. Excess, if any, is taxable .
4. Conveyance Allowance. It is exempted upto actual expenditure incurred in performance of official duties. In case amount received is more than actual expenditure, excess, if any, will be taxable.
5.Travelling or Transfer Allowance. It is exempted upto actual expenditure incurred for the purposes of employment. Excess, if any, will be taxable.
Any allowance ( by whatever name it may be called) granted to meet the cost of travel on tour or on transfer shall be exempted.
6. Daily Allowance : Any allowance whether granted to employee ( while on tour or for the period of journey in connection with transfer) to meet the ordinary daily charges incurred by such employee on account of absence from his normal place of employment shall also be exempted.
Such allowance shall include any sum paid in connection with transfer, packing and transportation of personal effects on such transfer.
Allowances mentioned in point (1) to (5) are exempt upto the amount spent by the employee for the purpose for which these allowance are given to the employee.
So, exemption shall be the least of following two amounts -
(a) The amount of the allowance received.
(b) The amount actually spent by the employee for the purpose for which the allowance is given.
4. Allowances covered u/s 10(14)(2), i.e.,Personal Allowances.
Following are the prescribed allowances for the purposes of Section 10(14)(2) alongwith prescribed amount of exemption :
1. Any special allowance in the nature of Composite Hill Compensation Allowance / High Altitude Allowance / Uncongenial Climate Allowance / Snow Bound Area Allowance / Avalanche Allowance :
Exemption allowed upto Rs 300 p. m. to Rs 7,000 p. m
2. Any special Compensatory Allowance in the nature of Border Area Allowance / Remote Area Allowance / Difficult Area Allowance / Distributed Area Allowance.
Exemption allowed upto Rs 200 p. m to Rs 1,300 p. m.
3. Compensatory Field Area Allowance.
Exemption allowed upto Rs 2,600 p. m.
4.Compensatory Modified Field Area Allowance.
Exemption allowed upto Rs 1000 p. m.
5. Counter Insurgency Allowance / Compensatory Field Area Allowance.
Exemption allowed upto Rs 3,900 p. m.
6. Highly Active Field Area Allowance.
Exemption allowed upto Rs 4,200 p. m.
7. Underground Allowance given to coal mine workers.
Exemption allowed upto Rs 800 p. m.
8. Island Duty Allowance given to Armed Forces posted in Andaman & Nicobar and Lakshdweep group of islands.
Exemption allowed upto Rs 3,250 p. m.
9. Allowance given to retired Chairman and members of UPSC.
An allowance given for getting the service of an orderly and for getting services of secretarial assistance on contract basis or Rs 14,000 p. m., whichever is less, is exempt.
10. Transport Allowance. As per the recommendations of 5th pay Commission, the Central Government has allowed transport allowance to its employees. As per orders any allowance given with effect from 1-8-1997 under the name of Transport Allowance to any employee whether govt. or private shall be exempted upto Rs 1,600 p. m. Excess, if any, shall be taxable. But in case of handicapped with disability of lower extremities or a blind employee it shall be exempted upto Rs 3,200 p. m.
11. Tribal Area Allowance. This allowance is exempted upto Rs 200 p. m. in the States of Madhya Pradesh, Tamil Nadu, Uttar Pradesh, Karnataka, Tripura, Assam, West Bengal, Bihar and Orissa.
12. Any Running Flight Allowance. granted to an employee of transport system to meet his personal expenditure during the duty performed in the course of running of such transport from one place to another place provided that such employee is not in receipt of daily allowance..., it is exempted upto 70% of such allowance or Rs 10.000 p. m. whichever is less.
13. High Altitude Allowance. This type of allowance is given to armed forces operating in high altitude areas.
14. Childrean Education Allowance. If any amount is given by employer to employee as education allowance for the education of own children in India, it shall be exempted upto Rs 100 p. m. per child for two children only.
.Important Notes :
1. Exemption is allowed for any two children of the employee. The term 'child' includes all the legal children including a step child and a legally adopted child but does not include grand children.
2. Child include both major or minor child.
3. Exemption shall be allowed irrespective of the actual expenditure incurred by the employee on the education of the children.
4. In case employee is getting both education as well as hostel allowance : he is allowed separate exemption for education and hostel allowance but for only two children.
15. Hostel Expenditure Allowance. Any allowance granted by employer to meet the hostel expenditure of employee's children it shall be exempted upto Rs 300 p. m. for per child maximum for two children only.
16. Any special Allowance. In the nature of counter insurgency allowance given to the members of the armed forces operating in areas away from their permanent location for a period of more than 30 days shall be exempted upto Rs 3,900 p. m.
.PERQUISITES [ Section 17(2) ]
U/s 17(1) ' Salary ' includes the value of any perquisite allowed or amenity provided by employer to employee. The word ' perquisite ' has not been defined under Income-tax Act 1961. Perquisite simply means any casual emoulument attached to an office. Oxford English Dictionary also defines perquisite as " any casual emoulument, fee or profit attached to an office or position, in addition to salary or wages ". Perquisites may be given in a variety of forms. If the perquisite does not accrue to the employee it will not be taxable. [ Barclays Bank Ltd. v. Naylor 39 (T. C.) 256 ]. They may be received in cash or in kind. For income-tax purposes it is immaterial whether the perquisites are paid voluntarily or under a contractual obligation.
Value of perquisites is chargeable to tax under the head salary only if these perks are received by an employee from his or her employer may be a present, past or prospective one. In case any perk has been received from a person other than employer, then also the value of perk is taxable but either under the head ' Business or Profession ' or ' Income from other Sources ' .
Any benefit derived by an employee from his employer whether received in lump-sum or is being received every month and if such benefit comes out of employment agreement and it is providing a personal benefit to the emplooyee or his family members, value of such a benefit is chargeable to tax under the head salary.
.Under section 17(2) perquisites are of the following types.
(1) the value of rent - free accommodation provided to the assessee by his employer [ Sec. 17(2)(1) ]
(2) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer [ Sec. 17 (2)(2) ]
(3) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases :
(a) by a company to an employee who is a director thereof :
(b) by a company to an employee being a person who has a substantial interest in the company.
(c) by an employer ( including a company to an employee to whom the provisions of section 17(2)(3)(a) and (b) do not apply and whose income under the head " Salaries " , exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds Rs50,000 [ Sec. 17(2)(3) ]
(4). any sum paid by the employer in respect of any obligation which, but for such payment would have been payable by the employee [ Employee's electricity bill paid by the employer ] [ Sec. 17(2)(4) ] :
(5). any sum payable by the employer, whether directly through a fund, other than a recognised provident fund or an approved superannuation fund to effect an assurance on the life of the assessee or to effect a contract for an annuity [ Sec 17(2)(5) ] :
(6). The value of any specified security or sweat equity shares allotted or transferred directly or indirectly, by the employer or former employer, free of cost or at concessional rate to the assessee. [ Section 17(2)(6) ]
(7) the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds Rs 1,00,000 : and [ Section 17(2)(7) ]
(8) the value of any other fringe benefit or amenity as may be prescribed. [ Section 17(2)(8) ].
'Provided' that nothing in his clause shall apply to :
(1) the value of any medical treatment provided to an employee or any member of his family in any hospital maintained by the employer :
(2) any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or of any member of his family :
(a) in any hospital maintained by the Government or any local authority or any other hospital approved by the Government for the purposes of medical treatment of its employees :
(b) in respect of the prescribed diseases or ailments, in any hospital approved by the Chief Commissioner having regard to the prescribed guidelines :
Provided that, in a case falling in sub - clause (b), the employee shall attach with his Return Of income a certificate from the hospital specifying the disease or ailment for which medical treatment was required and the receipt for the amount paid to the hospital
(3) any portion of the premium paid by an employer in relation to an employee, to effect or to keep in force an insurance on the health of such employee under any scheme approved by the Central Government or the Insurance Regulatory and Development Authority (IRDA) for the purposes of clause (1b) of sub-section (1) of section 36 :
(4) any sum paid by the employer in respect of any premium paid by the employee to effect or to keep in force an insurance on his health or the health of any member of his family under any scheme approved by the Central Government or the Insurance Regulatory and Development Authority (IRDA) for the purposes of section 80D:
(5) any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment of any member of his family [ other than the treatment referred to in clause (1) and (2) ] so, however, that such sum does not exceed fifteen thousand rupees, in the previous year.
(6) any expenditure incurred by the employer on :
(1) medical treatment of the employee, or any member of the family of such employee, outside India :
(2) travel or stay abroad of the employee or any member of the family of such employee for medical treatment :
(3) travel and stay abroad of one attendant who accompanies the patient in connection with such treatment.
subject to the condition that the expenditure on travel referred to in sub-clause (2) and (3) of this clause shall be excluded from perquisite only in the case of an employee whose gross total income, as computed before including therein the said expenditure, does not exceed Rs Two Lakhs.
(7). any sum paid by the employer in respect of any expenditure actually incurred by the employee for any of the purposes specified (6) subject to the conditions specified in or under that clause :
Explanation : For the purposes of clause (2)
(1) " hospital " includes a dispensary or a clinic : or a nursing home :
(2) " family " , in relation to an individual, shall have the same meaning as in clause (5) of section 10 : and
(3) " gross total income " shall have the same meaning as in clause (5) of section 80B :
The value of all perquisites is included in the total income of an employee under the head ' Salary '.