tax exemption (superb).doc

7/27/2019 Tax Exemption (SUPERB).doc

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Tax Exemption

BasicYour basic salary is fully taxable

Dearness Allowance (DA)DA is fully taxable

House Rent Allowance (HRA)

HRA is given by an employer to an employee to compensate towards any rent he may be paying towards houseaccommodation. But this element is tax-free only if you are actually paying rent . To ensure this, the income taxlaws restrict the exemption that you can get on the HRA to the lowest of the three conditions:

Mumbai/Kolkata/ Delhi/Chennai Other cities

HRA actually received HRA actually received

Rent paid in excess of 10% of salary Rent paid in excess of 10% of salary

50% of salary 40% of salary

(Salary = basic + DA + commission if paid as a fixed percentage of sales)

How to calculate taxable amount

Step 1 - Take the figure of HRA received during the year

Step 2 - Calculate the lowest of the three amounts mentioned in the table above according to the city you are staying in

Step 3 - Deduct Step 2 from Step 1

The balance is taxable

Conveyance allowance

This is an allowance that an employer gives his employee to meet the expenses that he incurs to commute from hishome to the place of work. An amount of up to Rs 800 per month is exempt from tax. Any amount paid over and abovethis is taxable. In case the employee is orthopaedically handicapped, the tax-free limit on this allowance is Rs 1,600.

Children Education Allowance and Hostel expenditure allowance

The employer can pay an amount of Rs 100 per month per child for up to two children to his employee towardschildren\'s education. He can also pay Rs 300 per month per child for up to two children towards hostel expenditure.Both these would be tax-free.

Leave Travel Concession (LTA)

This is a concession that an employer may pay his employee as reimbursement towards any travel expenses withinIndia that the employee may incur while he is on leave. The travel expenses maybe incurred for the employee and hisfamily. The nature of taxation of this particular concession is slightly complicated.

While this concession or allowance can be paid to the employee every year, it is treated as tax-free only for two journeys in a block of four years. The 'block of four years' has been defined by the income tax laws. They are 1998-2001, 2002-2005, 2006-2009 and so on. These are calendar years.


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Let us explain with an example. Suppose your employer pays you Rs 10,000 every year as LTA. Suppose the 'block of four years' is 2002 to 2005. During this period of four years, you can make two journeys, which are tax-free. You canmake both journeys in any one of the four years or spread out the journeys over the four years. For any journeys inexcess of these two, any reimbursement or allowance paid will be taxed.

The reimbursement would be restricted to actual travel expenses. However, there is an overall ceiling on this, which is

restricted to:

Air travel Economy fare of national carrier (India Airlines or Air India)

Rail travel First class AC fare

Road Public transport - First class or deluxe classIf there is no recognizedtransport - Equivalent of first class AC fare

So what happens if the first time you are receiving LTA is in the year 2005? In order to claim it as tax-free, you mustmake the journey in the same year to get a tax exemption. You can make two journeys in the same year if you cannotexhaust your limit in one.

Medical re-imbursement

An employer can re-imburse the expenditure incurred by the employee on himself and his family. This amount would be tax-free to the extent of Rs 15,000 per annum.

Perquisites

What are perquisites?

Perquisites or perks as they are commonly referred to are benefits that an employer gives to his employee in addition tohis regular salary. These are usually in the form of kind such as accommodation or motorcar or even concessional loansand so on.

These are not part of the monthly salary of the employee, and hence cannot be taxed directly. But they are benefits thatthe employee receives instead of a cash salary and hence form a part of taxable income.

Which are the perquisites that are taxed?

The Income Tax laws have identified certain categories of assets or benefits that will be considered as part of incomeand therefore taxed. The main categories are:

Residential accommodation provided by the employer to the employee

Use of motor car Services such as that of a gardener, watchman, sweeper or any personal attendant that the employer provides

to his employee Provisions such as gas, electricity or water that the employee uses in his house but which is paid for by the

employer Any free education or concessional education provided to the employee or his family Interest free loans Reimbursement of holiday related travel or accommodation expenses Festival gifts or vouchers Individual club membership

How is tax on perquisite calculated?


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The tax on perquisite is calculated on the basis of a value attached to each item. The calculation of this value variesfrom category to category. Nevertheless, the thumb rule across all categories is that only those benefits that theemployee uses for his personal purpose will be considered as perquisites. Further, if the employee pays any amounttowards using these facilities, such amount would be reduced from the perquisite value before the tax is calculated. Thetotal of all perquisite values will be added to the salary income and tax will be calculated on the usual slabs.

For valuation of perquisites

Valuation of perquisites

Residential accommodation provided by the employer to the employee

a) Where the accommodation is owned by the employer

In such a case, the perquisite is valued at 10% of the employer's salary in cities where the population is more than 4lakh. In all other cities, the value will be 7.5% of salary.

However, as per CBDT Notification No. 68, come April 2005, employees will pay double the tax that they currentlyare paying on company accommodation. So the 10% now stands raised to 20% and the 7.5% will be 15%.

b) Where the employer pays the rent or lease towards the accommodation

In this case, the actual rent that the employer pays or 10% of salary, whichever is lower is considered as perquisite.

In addition, in both the above cases, if the house is furnished, the perquisite value will increase by another 10% of costof furniture and appliances. If the employer has hired the furniture and appliances, then actual cost of hire will be takenas perquisite value.

Use of company owned motor car a) Where the car is used for official purposes Zero perquisite value

b) Where the car is used completely for personal purposes Actual expenses for running and maintaining the car

c) Where the car is used partly for official and partly for personal purpose

Engine < 1.6 CC Engine > 1.6 CC

All expenses are reimbursedRs 1,200 per

monthRs 1,600 per

month

Only official expenses arereimbursements Rs 400 per month Rs 600 per month

In all cases, Rs 600 extra will be added every month to the value of perquisite if a driver is provided.

In cases where the employee owns a car and the employer reimburses expenses, then actual expenses will be consideredas perquisite if they are not for official purposes.

Services such as that of a gardener, watchman, sweeper or any personal attendant that the employer provides to hisemployee

Actual expenses

Provisions such as gas, electricity or water that the employee uses in his house but which is paid for by theemployer

Actual expensesAny free education or concessional education provided to the employee or his family

In case of free education, the actual value of the education fee and in case of the concession, the difference between thefee paid by the employee and amount reimbursed by the employer


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Interest free loans or concessional loans

If an employer gives loans at zero interest or at an interest rate lower than the market rate, it is considered as a perquisite. The perquisite value will be the difference between the market rate and the concessional rate, or if it is aninterest free loan, then market interest rate will be the value of the perquisite. For the purpose of market rate, theincome tax rules have prescribed the rates of State Bank of India (SBI) as the benchmark rates.

Reimbursement of holiday related travel or accommodation expenses Actual ExpensesFestival gifts or vouchers

Value of the gift or voucher will be considered. But where the value is less than Rs 5,000, there will be no tax.

Individual club membership

Actual club membership fee

In addition to these main heads of perquisites, there are others such as credit card fees, entertainment expenses etc. Allthese are valued at actual cost to the employer.


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Case studies

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V Swaminathan is the Vice President of a private limited company in Mumbai. His salary package is as follows

Basic Salary Rs 10 lakh

Special allowance Rs 5 lakh

Medical allowance Rs 50,000

Total Rs 15.5 lakh

In addition to this, the company has provided him with the following perquisites.

Company owned unfurnished accommodation

Ford Ikon, which is used for personal and official use, along with driver

Interest free education loan of Rs 4 lakh for Swaminathan's son repayable in 60 months

Membership in Country Club - Annual fees Rs 1 lakh

We present below the computation of perquisite value:

1. Company owned unfurnished accommodation

10% of basic salary plus taxable allowances

Basic salary Rs 10 lakh

Special allowance Rs 5 lakh

Medical allowance Rs 35,000, since up to Rs 15,000 is tax free

Total Rs 15.35 lakh

10% of Rs 15.35 lakh is Rs 1.53 lakh.

2. Ford Ikon, which is used for personal and official use, along with driver

Since the engine capacity is more than 1.6 CC, the taxable perquisite value will be Rs 2,200 per month, which is Rs26,400.

3. Interest free education loan

If the prevailing interest rate of SBI's education loan is 12%, then, interest perquisite will be calculated at that rate. 12%of loan amount is Rs 44,658 for the first year.

4. Membership in Country Club as per actuals Rs 1 lakh

Total Perquisite value, which will be added to salary Rs 3,24,058

II

When Priya Trivedi, a marketing manager in a fast moving consumer goods company, changed her job, she confided toher friend that the new salary package was fabulous. She giggled about the 50 per cent plus hike that she had garnered


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from her new employers. But her happiness was rather short-lived. The first month's salary itself gave her the shock of her life. The take home portion had gone up by barely 10 per cent.

She immediately went back to the 'salary break-up' part in her appointment letter. And unable to understand it, took itto her chartered accountant who explained that most of the packet had been designed to give her perks for performanceand other bulk payments.

For instance, an amount Rs 3 lakh was assigned under leave travel allowance (LTA). She went and wagged the letter infront of the company's human resource, which calmly said that she should have taken a look at the salary break-up properly before signing. She is still fuming from this experience.

But this is not a uncommon experience. In fact, this happens even in case of salary hikes after appraisals. Though youmay have been given a good hike (say 20 per cent), the actual take-home salary would increase by less than 10 per cent.

While 'cost to company' is what the organisation is worried about, your take-home pay is what matters to you. Besidesimmediate liquidity, it also impacts your loan eligibility to a great extent. That is, when you go for a home loan, your loan eligibility is a function of your take-home salary and not the gross number. So we do need to know a bit moreabout this all important 'salary structure'. As we all know your salary consists of basic pay, dearness allowances (DA)and other allowances. Some allowances are taxable under the head salary, while the others are either fully or partiallyexempt. Further, there are retirement benefit contributions like provident fund in which both employee and employer contribute and the superannuation fund. Earlier, this contribution was taxable as fringe benefit tax (FBT), but now acontribution up to Rs 1 lakh into a superannuation fund is not taxable under FBT.

In the Union Budget 2007-08, the finance minister has raised the basic exemption limit from Rs 1 to Rs 1.1 lakh. Butthe salaried taxpayers with high income are at a disadvantage as the education cess has been hiked by one percentage

point to 3 per cent. Further, for income above Rs 10 lakh there is a further surcharge of 10 per cent on income tax.

Let us take four salary slabs and how one can increase the tax benefits. But before that, let us take a simple example of take-home salary calculation. For this, from the gross package one has to deduct professional tax, income tax,mediclaim premium, investment in tax saving instruments and provident fund contribution from the total salary (SeeTax Burden).

Here we assume that for investment under section 80C, the employee will take into account his provident fundcontribution. He will invest in tax saving instruments over and above this contribution, if necessary. Therefore, in thecase of salaries over Rs 15 lakh (scenarios III and IV), the employee does not have to make any other investment. Theemployee has contributed more than 1 lakh in provident fund, so for calculation of take-home pay, we deduct thiscontribution which is in excess of Rs 1 lakh.

Rs 5-10 lakh bracket

You can make the following changes:

Ask for telephone reimbursement instead of telephone allowance. The former is fully tax exempt, the latter fullytaxable.

Send your children to employer-owned educational institution as you can get a tax benefit of Rs 1000 per monthinstead of Rs 100 that you would get otherwise.

Go for paid vouchers or coupons instead of a lunch allowance as it is fully taxable. The former is-tax free up to anamount of Rs 50 per day.

Opting to provide bills of travel from home to office and vice versa, which are completely tax exempt instead of going for transport allowance which limits your tax exemption to Rs 800 per month.

Rs 15 lakh

Besides the above, you can also add:A free car facility over conveyance allowanceServant allowance, if being used for official purposes

Rs 20 lakh

Besides the above, you can add:Free bungalow/apartment (taxed only at 10 per cent of fair rent paid for such accommodation)


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These are a few measures that you can take to increase your take- home salary.

Another article on Tax Exemption

Take home moreThat housing loan you took is a potent tax-saving tool. Max the benefit.

Haresh M. Kataria

For a section that contributes the most to the countrys tax revenue, the salaried class has sadly few options when itcomes to tax savings. The employer determines, deducts and pays the tax on behalf of the employee. Which, like theposter says, leaves you with a take-home pay that hardly gets you there.

But all need not be lost to the taxman. Theres scope for saving if you structure your allowances, deductions, rebatesand perquisites smartly

But can you? Given the demand for human capital today, every aspect of the remuneration package assumesimportance as a retention and job-satisfaction tool, and so companies are bending over backward to ensure that theremuneration package is either tax-friendly or customisable. Heres a quick look at some of the tax-savers availablein a standard salary package.

Exemptions . In the current financial year, individuals whose taxable incomes do not exceed Rs 1 lakh are not liableto pay tax. But they have to continue to file returns since the benefit is available to them only in the form of a rebateequal to the amount of tax (the liability to file returns is linked to the exemption limit and not to the liability to pay) andalso since the tax exemption ceiling hasnt been raised. The Finance Act 2004 offers further relief, making taxableincomes up to Rs 1.11 lakh tax-exempt so that those earning marginally more than Rs 1 lakh are not made to pay.

Whats more, in assessment year 2004-05, a salaried employee drawing a gross salary of Rs 1.5 lakh will not beliable to pay tax if he gets a conveyance allowance of Rs 9,600 as part of his salary package.

House rent and loans. Where the company provides the house, you, the employee, have some tax leeway and youare free to decide whether you should take the house as a perquisite or draw house rent allowance and claimexemption on it.

If the house is taken as a perk, 10 per cent of the salary is considered the perquisite value. The HRA that can beclaimed as exempt from tax is the least of the following: HRA received, rent paid in excess of 10 per cent of thesalary, or 50 per cent of the salary. Usually, the HRA option works out more efficient where the owner of the house is

the employees father, mother or relative other than spouse.

Another big tax-saver is interest paid on a housing loan. Interest up to Rs 1.5 lakh in respect of loans taken after 1 April 1999, and Rs 30,000 in respect of loans taken before that can claimed as deduction under the head incomefrom house property. The loss arising under this head can be set off against the income under the head salaries,altogether resulting in substantial tax savings. To max the tax advantage, taxpayers should claim the benefit of bothinterest on housing loan as well as exemption of HRA, of course, after fulfilling the prescribed conditions.

Perquisites . If a house is one of the perks offered, see if the company will also reimburse you for the maintenance;reimbursement to the extent of the expenditure you incur on the maintenance of the house is not treated asperquisite.

In the case of a vehicle, it makes sense to take the car from the employer since the taxable perquisite value of thecar will always be less than what you spend if you yourself own and maintain the vehicle. After a few years, thecompany can sell you the car at a nominal cost, resulting in tax advantage to both you and the company. Theperquisite value: Rs 1,600 a month if the cubic capacity of the engine exceeds 1.6 litres and Rs 1,200 if it doesnt. If the company gives a chauffeur, the perquisite value goes up by Rs 600 a month.

Another important perquisite is in respect of computers and other assets. If the employer gives you a laptop or computer, its perquisite value is not taxable. However, if you use any other movable asset belonging to the employer,its perquisite value is determined at 10 per cent per annum of the cost of such asset or the amount of rent/hirecharges paid by the employer.

When your employer sells you the movable assets at a nominal price, the perquisite value is determined at the costto the employer as reduced by the cost of normal wear and tear at the prescribed rates for each year during whichsuch asset was put to use by the employer as reduced by the amount you pay for purchasing such asset from theemployer. The prescribed rates of wear and tear: 50 per cent for electronics, 20 per cent for cars and 10 per cent for


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other assets.

Remember, gifts of movable assets by the employer used for ten years or more is not taxable in your hands.

Allowances . Conveyance allowance for the purpose of commuting between your residence and place of duty up toRs 800 per month is exempt. The perquisite value of a free residential telephone is not taxable. Then there is an

exemption benefit for medical expenses incurred by you for yourself and any member of your familyexpenses up toRs 15,000 a year are exempt.

Then, theres the leave travel allowance: LTA for you and your family (for travel to any place in India) is tax exempt tothe extent of expenditure incurred for the purpose of travel. This exemption is available for two journeys in a block of four years and applies only for the fare on the shortest possible route.

You can also claim reimbursement of expenses incurred on entertaining business associates at home or elsewhere. Another tax-efficient element of a remuneration package is overseas educational courses and training programmes.

Deductions . You can claim deduction on the following, subject to certain conditions: Mediclaim up to Rs 10,000;pension premium (Rs 10,000); bank/NSC interest (Rs 12,000); treatment of handicapped dependant (Rs 50,000);expenditure on specified diseases (Rs 40,000); donation (50 per cent of the donation amount, with the maximumdonation restricted to 10 per cent of the income).

Rebates . If you are an individual taxpayer, you can reduce your taxable income by claiming a rebate on investments

in various instruments specified under Section 88 of the IT Act. You get a rebate of 20 per cent if your gross totalincome is less than Rs 1.5 lakh and 15 per cent if the gross income is higher than Rs 1.5 lakh but less than Rs 5 lakh.The eligible instruments and the maximum that can be invested in them: Rs 70,000 in life insurance premiums,NSCs, provident fund, PPF among others, and Rs 30,000 in infrastructure bonds.

Also, with effect from the year ended 31 March 2004, you are eligible for a rebate on amounts up to Rs 24,000 paidto schools, colleges, universities or other educational institutions for the full-time education of two children. This is awelcome measure as it allows you to save tax without having to invest. Also important is the fact that femaleemployees are eligible for an additional rebate of Rs 5,000.

Miscellaneous . There are other allowances, perquisite deductions and rebates that can be claimed on a case-to-case basis by salaried taxpayers. These are mediclaim paid by the employer (up to Rs 15,000 a year); gift vouchers(Rs 5,000); free meals (non-encashable vouchers for up to Rs 15,000 that is, Rs 50 x 25 working days x 12months); free or concessional education (up to Rs 24,000 for two children in a year); childrens education allowance(Rs 2,400). These amounts are on a tentative basis.

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