PROVIDENT FUND

Govt has set up various kinds of Provident fund to encourage saving habits among people. Employers also contribute to this fund in addition to the employee’s contribution and are credited to the employees provident fund account.

Types of provident fund

1. Statutory provident fund
2. Recognized provident fund
3. Unrecognized provident fund
4. Public provident fund

1. Statutory provident Fund

SPF is set up under the provisions of the Provident fund act of 1925. this fund is maintained by Govt and semi government.

1. Employees contribution to this fund is unlimited and is forming a part of his salary and also getting a tax deduction up to a limit of Rs.100000/- according to section 80c to 80 u
2. Employers contribution not included in the employees salary so it is not taxable
3. Interest on the accumulated balance of the statutory provident fund is not included in salaries so it is also not taxable
4. lump sum received from SPF is fully exempt from tax as per S10(11)

2. Recognized provident fund

RPF is define as the name implies, it should be recognized by the commissioner of Income tax and should established under the scheme of Employees Provident Funds Act of 1952

1. Employees contribution to this fund is unlimited and is forming a part of his salary and also getting a tax deduction up to a limit of Rs.100000/- according to section 80c to 80 u
2. Employers contribution in excess of 12% of the employee’s salary is included employees salary for tax purpose
3. Interest on cumulated balance RPF in excess of 9.5% is included in his total income
4. Lump sum received is not taxable

3. Unrecognized Provident Fund

A provident fund which is neither SPF nor RPF is known as public provident fund but it should be recognized by the provident fund commissioner, mainly seen in private sector.

1. Employees contribution to this is included in his total income hence It is taxable ie here he won’t get any deduction under Sec. 80 C to 80 U
2. Employers contribution and interest on accumulate balance of the fund is not included in his salary income
3. Lump sum received from UPF, here income from the share of employers’ included in employees salary where as interest on his own contribution included as interest from other sources.

4. Public provident fund

Central Govt setup this provident fund under the public provident scheme of 1968 to the public whether a salaried person or not by opening an account at any branch of the SBI. The accumulated balance is payable after 15 years.

DEDUCTION FROM SALARY- SEC.16

1. Entertainment allowance – Sec 16(ii)

Entertainment allowance received by an employee is first included in the salary and a deduction is allowed under this section

I. Govt employees, exemption to the least of the following

· Rs 5000/- per annum
· 20% of basic salarys
· Actual amount received

II. Non Govt employees no deduction is allowable

· No deduction is allowable

2. Deduction for professional or employment tax – Sec.16 (iii)

PERQUSITES [SEC.17 (1)]

Perquisites are special benefits or amenities provided in kind by the employer at free of cost or at a concessional rate and it is added to the income of employees. There are various perquisites get exemption according to Specified employees or not. They are,

.
1. Educational facility

Employer provide educational facility in his own Institution, then specified employees and others enjoying exemption, otherwise it is taxable in specified employees only

2. Free gas, light, water

If those facilities supplied by the employer, taxable in the hands of specified employees. Otherwise if the facilities owned by the employees then it is taxable in the hands of both employees whether specified or not

3. Free servants

If the expense met by the employer, then it is taxable in the case of specified employees or if it met by the employees themselves then it is taxable in the hands of non specified employees also

4. Free meals

Exempted to both the employees whether specified or not

5. Gift in kind

Exempted to both the employees whether specified or not

6. Transfer of movable Asset

Taxable from both the hands

7. Use of movable Asset

Taxable from both the hands

8. Facility of club or heath club

Exempted from both the hands

9. Telephone

Exempted from both the hands

10. Motor car

.

If it is owned by the employer, exempted or if it is owned by the employee then taxable in the hands of both the employees

11. Interest free or Concessional loans→

If it provided by the employer to his employees, exempted up to Rs.20000/- same as it is for medical treatment for diseases like CANCER, AIDS etc also will get exemption.

.

.
**Perquisites value of Rent free Accommodation**

For calculating perquisites value of rent free residential accommodation, salary include,

Salary = Basic pay+ DA+ Bonus+Commission+fees+ Taxable allowances, Besides, employees can be classified in to two categories for this purpose. They are,

.
1. Accommodation is provided by Union or State government.

Here the license fee determined by the Union or State Govt less the actual rent paid by the employees, where the accommodation is unfurnished.

.

2. Accommodation is provided by any other employer other than Govt employer (other sector employees)

.

a) Where the accommodation owned by the employer (unfurnished accommodation)

.

1).7.5% of salary (Population 10 lacs and below)
2) 10% of salary (Population in between 10 lacs and 25 lacs)
3)15% of salary (Population more than 25 lacs)
From the calculated amount deduct the rent paid by the employees

.

b)Accommodation taken on lease or on rent by the employer

.

1. Actual amount of lease or rent paid or payable by the employer or
2. 15% of salary, which ever is less

.

Accommodation furnished → where the rent free accommodation is a furnished one then 10% per annum of the cost of the furniture adding with the perquisites value of rent free accommodation.

ALLOWANCES

Allowances is the fixed amount of money given periodically in addition to the salary for the purpose of meeting some specific requirements connected with the service rendered by the employees

.

1. Taxable allowances.

.

1. Dearness allowance for meeting the increased cost of living given by the employer to the employee

2. Other Taxable allowance

· Medical allowance

· Tiffin allowance

· Servant allowance

· Non practicing allowance

· Deputation allowance

· Over-time allowance

. City compensatory allowances

.

2. Partially exempted allowances.

1. House rent allowance (HRA)

HRA allowable in respect of the rent of the residential house occupied by the employee but it will not allowable to those who have own house. House rent allowance exempt u/s 10(13.A), Rule 2.A, accordingly exempted the least of the following,

· Actual HRA received

· Excess of rent paid over 10% of salary

· 50% of salary in metro cities likes Mumbai kolkatta Delhi or Chennai

· 40% of salary, if the accommodation situated at any other place.

***Here Salary= Basic pay + DA

.

2. Entertainment allowance

It is fully exempted in the hands of Govt employees where as it is taxable in the hands of Non-Govt employees. Said earlier

.

3. Other exempted allowance

.

a) Special allowance Sec.10 (14)

Any Special Allowance by Central Govt in connection with the performance of office duties exempt from Tax up to the actual amount so incurred. They are,

*Traveling allowance
*Daily or Conveyance allowance
*Helper Allowance
*Academic Research allowance
*Uniform Allowance

.

b) Special allowance to meet personal expenses U/s10 (14)

*Any special compensatory allowance exempted to Rs.300/- to Rs.7000/-
eg: snow bound area allowance

* Any special compensatory allowance in respect of Boarder are allowance, exemption up to Rs.200/- to Rs.1300/-

* Tribal area allowance exemption up to Rs.200/- (Oriissa. MP, Assam etc)

* Employees working in Transport System, exemption up to Rs6000/- per month or 70% of such allowances

* Children Education Allowance, exemption up to Rs.100/-per month maximum for 2 children

* Children Hostel allowance, exemption up to Rs.300/- per month maximum for 2 children

*Special allowance to armed force

*Transport allowance exemption up to Rs.800/-

*Under ground allowance, exemption up to Rs.800/-

EXEMPTION FOR SALARY INCOME

1. Gratuity Sec.10 (1)

Gratuity is a payment in return of service and is taxable on contractual salary based on the length of service.

*Exemption from Tax

.

I. Govt and local authority employees- fully exempted from tax

.

II. Non govt. Employees under the payment of gratuity act of 1972, Exempt the least one from the following….

.

1.15days salary for each completed year of service
2.Maximum limit Rs.350000/-
3. Gratuity actually received

**(15 days salary means 15/26 based on the last drawn on last month payment)
**More than 6 month’s service taken as 1 year service
**Here salary means Basic pay +DA+ percentage of Commission on Turn over
.
III. Non.govt employees not covered under gratuity act of 1972, Exempt the least one from the following….

1.Half months salary for each completed year of service
2.Maximum allowable limit Rs.350000/-
3.Gratuity actually received

**Half months salary = average salary of 10 months preceding retirement
**Here salary means Basic pay + DA+ % of Commission on turn over

.
2. Commuted Pension Sec.10 (10a)

Commuted pension is the lump-sum payment in lieu of pension

*Exemptions from tax

.

I. Govt. Employees- fully exempted from Tax

.
II. Non-Govt employees

1.Commuted value of 1/3rd of pension if he receives gratuity pension
2. 50% of commuted value of pension if he doesn’t receive gratuity

III Commuted value of pension from LIC of India fully exempted (1.08.96)

*Uncommutted portion of pension is fully taxable

.
3. Leave salary or encashment of earned leave Sec 10(10aa)

It means,
1. Encashment during service is fully taxable
2. Encashment after retirement or superannuation or otherwise

*Exemptions from tax

1) Govt. employees- fully exempted from tax

2) Non-Govt. employees, exempt the least of the following

1.Actual amount received
2. Maximum limit Rs.300000/-
3.Average salary for 10 months
4.Salary for approved period

**Here Salary = Basic pay + DA + Commission (% on turnover)

.

4. Compensation for retrenchment Sec 10 (10.b)

Any compensation received under the Industrial dispute Act of 1947 at the time of retrenchment is exempt to the extent of the following...

1. 15days average salary
2.Maximum limit Rs.500000/-
3. Actual amount received

**Here Average salary = if monthly salary then last 3 calendar months salary
*Weekly salary then last four completed weeks
*Daily wages then last 12 full working days

.
5. Compensation on voluntary retirement (sec.10 (10 c)

Here exemption to the least of the following... (3 months salary for each completed year of service )

1.Salary at the time of retirement multiplied by the balance months of service
2.Actual amount received
3.Here salary = basic pay + DA + commission (% on Turn over)

.

INCOME FROM SALARY (SEC15 - SEC17)

Salary is the remuneration received by or accruing periodically to an individual for service rendered as a result of expressed or implied contract. In other words, salary includes wages, dearness allowance, bonus, gratuity, annuity or pension, advance salary, fees, commission perquisites, profits received from employer in addition to salary,, leave encashment while in service, employer’s contribution to provident fund in excess of 12% of salary of employee, Salary taxable only on individual.

.

According to Sec.15, we can reason out the term salary as,

a) Amount of salary due in this year from the present or former employer
b) Amount of advance salary received from the current or former employer in this year
c) Arrears of salary received in respect of the previous year from the current or former employer during this year during the present and former

.

Principles of Salary (Characteristics)

1. There must be an employer employee relationship
2. Salary from former employer eg: pension
3. Advance salary received
4. Tax free salary eg: salary (tax deducted at source)
5. Forgoing salary (surrender of salary to the central govt. so liable for tax deduction)
6 Accrual bases (taxable receipt and earned which ever is earlier)
7. Payment made after termination


SALARY= BASIC PAY+ ALLOWANCES+PERQUSITES+PROFITS IN LIEU OF SALARY - (ENTERTAIMENT ALLOWANCE +PROFESSIONAL TAX)

.

Scope of salary

· Basic salary or wages
· Advance pay
· Arrears of salary
· Dearness pay (to meet cost of living)
· Annuity (payment for a contractual period)
· pension

.

Form of salary

· Death cum retirement gratuity
· Pension and commuted value of pension
· Leave salary
· Compensation for retrenchment(compulsory retirement)
· Fees and commissions
· Bonus
· Receipts on voluntary retirement
· Annuity
· Salary and pension from UNO and Foreign national