TAXATION- Concept Book

139A/139A(5)(c)/(5A)/(5C) 14. 272BB - Fails to comply with provisions of Rs. 10,000 for each default section 203A (to obtain TAN or to quote TAN) - Quotes TAN which is false and he believes it to be false 1.3.7. Under Reporting and Misreporting of Income (270A) w.e.f. Assessment year 2020-21 the penalty for concealment of income etc. is applicable as follows: (A) If under reporting of income is due to misreporting 200% of tax payable on under reported income. (B) If under reporting of income is not due to misreporting 50% of tax payable on under reported income 1.3.8. Tax Refund When Right to Claim Refund Arises [Section 237] Where any person satisfies the Assessing Officer that the amount of tax paid by him or on his behalf for any Assessment Year exceeds the amount with which he is properly chargeable under this Act for that year, he is entitled to the refund of the excess amount paid. Who Can Claim Refund? [Section 238] Usually refund can be claimed by a person who has made excess payment of tax. If income of a person is included in the total income of another person u/s. 60 to 64, the refund can be claimed by the latter and not by the former. Where a person cannot claim any refund because of his death, incapacity, insolvency, liquidation or other cause, his legal representatives or the trustee or guardian or receiver, as the case may be, will be entitled to claim and receive such refund for the benefit of such person or his estate. Amendments made in the Finance Act, 2019 [Section 239] The Finance Act, 2019 has amended section 239 so as to provide that every claim for refund under chapter XIX of the Act shall be made by furnishing return in accordance with the provision of Section 139 of the Act. CFP Level 2 - Module 2 – Taxation - India Page 95

In other words refund can now be claimed only by filling the return of income. The return can be filled before the end of the relevant assessment year. Interest on Refund [Section 244A] Interest on Refund of Income Tax: Where refund of any amount becomes due to the assessee under the Income Tax Act, he shall be entitled to receive, in addition to the said amount, simple interest on the refund calculated in the following manner: (a) Where the refund is out of any tax deducted at source/ tax collected at source or advance tax paid or treated as paid u/s 199 during the financial year, interest will be paid at the rate of ½%, per month or part of a month from the period starting (i) From the 1st April of assessment year to the date on which refund is granted, if the return has been furnished on or before prescribed; or (ii) From the date of furnishing of return of income to the date on which the refund is granted, if return furnished after due date. (b) Where the refund is out of tax paid on self-assessment then interest will be @½% per month or part of month from date of furnishing of return of income or payment of tax whichever is later, to the date on which refund is granted. Set Off of Refunds against the Remaining Payable [Section 245] Where a refund is found to be due to any person, the tax authorities may, in lieu of payment of the refunds, set off the amount of refund against the sum payable under the Income-tax Act. Case Law: Prior intimation to assessee whether mandatory: While making set off of refunds against tax remaining payable, intimation is certainly not a jurisdictional requirement and absence thereof is merely an irregularity and, therefore, want of intimation would not vitiate the adjustment – Brij Bhushan Lal& Sons vs. Designated Authority 246 ITR 353. Refund due to assessee cannot be adjusted against demand raised, against a third party Archana Shukla vs. Joint CIT 244 ITR 829. Where refund arises as a result of any order passed in appeal or other proceedings under the Act, no formal application from the assessee is required. The Assessing Officer has to grant refund suomoto. CFP Level 2 - Module 2 – Taxation - India Page 96

Sub-Section–1.4: Residency Rules 1.4.1. Residential Status of an Individual – Section 6(1) An individual is said to be resident in India in any previous year, if he: (a) is in India in that year for 182 days or more; or (b) is in India for 60 days or more in that year & was in India for 365 days or more in the 4 years preceding that year. ANALYSIS 1. The term “stay in India” includes stay in the territorial waters of India (i.e. 12 nautical miles into the sea from the Indian coastline). Even the stay in a ship or boat moored in the territorial waters of India would be sufficient to make the individual resident in India. 2. It is not necessary that the period of stay must be continuous or active nor is it essential that the stay should be at the usual place of residence, business or employment of the individual. 3. For the purpose of counting the number of days stayed in India, both the date of departure as well as the date of arrival are considered to be in India. 4. The residence of an individual for income-tax purpose has nothing to do with citizenship, place of birth or domicile. An individual can, therefore, be resident in more countries than one even though he can have only one domicile. Exception to above Conditions In following two cases, an individual shall be resident in India only if he fulfils the condition of 182 days: (a) He is a citizen of India and leaves India during the relevant previous year as a member of the crew of an Indian ship, or for the purposes of employment outside India; (b) He is a citizen of India, or a person of Indian origin (a person is said to be of Indian origin if he or either of his parents or either of his grandparents were born in undivided India), who lives outside India & comes on a visit to India in relevant previous year. CFP Level 2 - Module 2 – Taxation - India Page 97

Resident & Ordinarily Resident (ROR) A resident individual said to be ROR for the relevant previous year when (a) He was resident in India for any 2 years (atleast) out of preceding 10 years, and (b) He was in India for 730 days or more in preceding 7 years. Otherwise he shall be Resident but not ordinarily resident in India (RNOR). Example 1: Mr. Amit is a citizen of India and working for Infosys Ltd. The company asked him for overseas visit to USA client for project completion. Mr. Amit leaves India on 10th Sep 2019 for 9 months and returned to India in May 2020.It was his first overseas visit. Here Mr. Amit leaves India on 10th Sep 2019 and remains there till 31st March 2020.The number of Days he was in India for PY 2019-20 was 163 days which was lower than 182 days. Mr. Amit is allowed the get the benefit of exception as he went to USA for the purpose of Employment. Thus he will be nonresident in India for the previous year 2019-20. Going abroad for the purpose of employment gets benefit of exception and the salary earned outside India Shall not be taxable in India. Example 2: Mr. X is citizen of Bangladesh and comes to India on 27th October 2019 for visit. He went back on 1st April 2020. His grandfather was born in Dhaka in 1935 before independence. It was his first visit. Mr. X grandfather was born in India before independence so Mr. is a person of Indian origin. For Person of Indian origin and citizen of India, 182 numbers of days of stay in India is compulsory to become Resident. In this case Mr. X stays in India for 157 days. Thus he will be Nonresident for previous year 2019-20. Example 3: Chris Gayle is West Indian cricketer visited India in previous year 2019-20 for 90 days. He used to come every year since 2009-10 for 100 days. Chris Gayle stays in India for 90 days in previous years, which satisfies the second option of 60 days or more in previous year. He also comes every year for last 10 years for 100 days. It means he qualify the second requirement of 365 days in 4 years. Thus he became resident for previous year 2019-20. Now we need to check whether he is ROR or RNOR. He is Resident but not ordinary resident as he used to come for only 100 days every year. Thus in 7 years the number of days he stays in India was 700. He is not able to satisfy the compulsory option of 730 days in CFP Level 2 - Module 2 – Taxation - India Page 98

preceding seven previous years. Here we don’t need to check 2 out of 10 years as resident option, because he failed to satisfy one option. Note: In the above example Chris Gayle is foreign citizen, so he will not get the benefit of exception of 182 days mandatory clause. Only citizen of India and person of Indian origin are allowed to get benefit of exception of 182 days or more to become resident. 1.4.2. Residential Status of Other Taxable Entities Hindu Undivided Family (HUF) – Section 6(2) A HUF shall be resident in India in any previous year except where during that year the control and management of its affairs is situated wholly outside India. Resident & Ordinarily Resident (ROR) A resident HUF said to be ROR for the relevant previous year when (a) His karta /manager was resident in India for any 2 years (atleast) out of preceding 10 years, and (b) His karta /manager was in India for 730 days or more in preceding 7 years. Otherwise it shall be Resident but not ordinarily resident in India (RNOR). Company – Section 6(3) A company shall be resident in India in any previous year, if - (i) it is an Indian company; or (ii) its place of effective management, in that year, is in India. Other Persons (i.e. Firm, AOP, BOI, Artificial Juridical Person) – Section 6(2)/(4) Any person shall be resident in India in any previous year except where during that year the control and management of its affairs is situated wholly outside India. Analysis In case of company & other persons, person shall be either resident or non-resident. There is no concept of ROR & RNOR 1.4.3. Indian Income and Foreign Income The taxability of a certain item as income would depend upon the method of accounting followed by the assessee. This is because under the cash system of accounting an income would be taxable only when it is received by the assessee himself or on his behalf. But under the mercantile system it would be taxable once the assessee gets the legal right to claim the amount. However, it has been specifically provided that in the case of income from salaries, the liability to tax arises immediately when the income is due to the assessee irrespective of the method of accounting followed. Likewise, in the case of dividends, the income would CFP Level 2 - Module 2 – Taxation - India Page 99

beincluded in total income of the shareholder under section 8 in the year in which the final dividend is declared and, in the case of interim dividend, in the year in which they are made unconditionally available to the shareholders. Meaning of “Income Received or Deemed to be Received” All assessees are liable to tax in respect of the income received or deemed to be received by them in India during the previous year irrespective of - (i) their residential status, and (ii) the place of its accrual. Income is to be included in the total income of the assessee immediately on its actual or deemed receipt. The receipt of income refers to only the first occasion when the recipient gets the money under his control. Therefore, when once an amount is received as income, remittance or transmission of that amount from one place or person to another does not constitute receipt of income in the hands of the subsequent recipient or at the place of subsequent receipt. Income Deemed to be Received Under section 7, the following shall be deemed to be received by the assessee during the previous year irrespective of whether he had actually received the same or not - (i) The annual accretion in the previous year to the balance to the credit of an employee participating in a recognised provident fund (RPF). Thus, the contribution of the employer in excess of 12% of salary or interest credited in excess of 9.5% p.a. is deemed to be received by the assessee. (ii) The taxable transferred balance from unrecognized to recognized provident fund (being the employer’s contribution and interest thereon). (iii) The contribution made by the Central Government or any other employer in the previous year to the account of an employee under a pension scheme referred to under section80CCD. (iv) Investments, expenditure, cash credits detected during the previous year which are unexplained and cash bullions, gold, jewellery or other valuable articles in respect of which the assessee offers no satisfactory explanation about the nature and source of its acquisition shall e treated as income deemed to be received (Section 68,69,69A,69B,69C) CFP Level 2 - Module 2 – Taxation - India Page 100

Income Deemed to Accrue or Arise in India [Section 9] Certain types of income are deemed to accrue or arise in India even though they may actually accrue or arise outside India. The categories of income which are deemed to accrue or arisen India are: (i) Any income accruing or arising to an assessee in any place outside India whether directly or indirectly (a) through or from any business connection in India, (b) through or from any property in India, (c) through or from any asset or source of income in India or (d)through the transfer of a capital asset situated in India. The legislative intent of this clause is to cover incomes, which are accruing or arising, directly or indirectly from a source in India. The section codifies the source rule of taxation, which signifies that where a corporate structure is created to route funds, the actual gain or income arises only in consequence of the investment made in the activity to which such gains are attributable and not the mode through which such gains are realized. This principle which supports the source country’s right to tax the gains derived from offshore transactions where the value is attributable to the underlying assets, is recognized internationally by several countries. Accordingly, Explanation 4 clarifies that the expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”. Further, Explanation 5 clarifies that an asset or a capital asset being any share or interest in accompany or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value further also Exp. 687 substantially from the assets located in India. (ii) Income, which falls under the head “Salaries”, if it is earned in India. Any income under the head “Salaries” payable for rest period or leave period which is preceded and succeeded by services rendered in India, and forms part of the service contract of employment, shall be regarded as income earned in India. (iii) Income from ‘Salaries’ which is payable by the Government to a citizen of India for services rendered outside India (However, allowances and perquisites paid outside India by the Government is exempt). (iv) Dividend paid by a Indian company outside India. (v) Interest (discussed in para 5 below) (vi) Royalty (discussed in para 6 below) CFP Level 2 - Module 2 – Taxation - India Page 101

(vii) Fees for technical services (discussed in para 7 below) (1)(a) Income from Business Connection The expression “business connection” has-been explained in Explanation 2 to section 9(1)(i). (i) ‘Business connection’ shall include any business activity carried out through a person acting on behalf of the non-resident. (ii) He must have an authority which is habitually exercised to conclude contracts on behalf of the non-resident. However, if his activities are limited to the purchase of goods or merchandise for the non-resident, this provision will not apply. (iii) Where he has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident, a business connection is established. (iv) Business connection is also established where he habitually secures orders in India, mainly or wholly for the non-resident. Further, there may be situations when other non- residents control the above-mentioned non-resident. Secondly, this non-resident may also control other non-residents. Thirdly, all other non-residents may be subject to the same common control, as that of the non-resident. In all the three situations, business connection is established, where a person habitually secures orders in India, mainly or wholly for such non-residents. Exception: \"Business connection\", however, shall not be held to be established in cases where the non- resident carries on business through a broker, general commission agent or any other agent of an independent status, if such a person is acting in the ordinary course of his business. A broker, general commission agent or any other agent shall be deemed to have an independent status where he does not work mainly or wholly for the non-resident. He will however, not be considered to have an independent status in the three situations explained in(iv) above, where he is employed by such a non-resident. Where a business is carried on in India through a person referred to in (ii), (iii) or (iv) mentioned above, only so much of income as is attributable to the operations carried out India shall be deemed to accrue or arise in India. CFP Level 2 - Module 2 – Taxation - India Page 102

(1) (b) &(c) Income from Property, Asset or Source of Income Any income which arises from any property (movable, immovable, tangible and intangible property) would be deemed to accrue or arise in India eg. hire charges or rent paid outside India for the use of the machinery or buildings situated in India, deposits with an Indian company for which interest is received outside India etc. (1)(d) Income through the Transfer of a Capital Asset Situated in India Capital gains arising from the transfer of a capital asset situated in India would be deemed to accrue or arise in India in all cases irrespective of the fact whether (i) the capital asset is movable or immovable, tangible or intangible; (ii) the place of registration of the document of transfer etc., is in India or outside; and (iii) the place of payment of the consideration for the transfer is within India or outside. Explanation 1 to section 9(1)(i) lists out income which shall not be deemed to accrue or arisen India. They are given below: 1. In the case of a business, in respect of which all the operations are not carried out in India [Explanation 1(a) to section 9(1) (i)] :In the case of a business of which all the operations are not carried out in India, the income of the business deemed to accrue or arise in India shall be only such part of income as is reasonably attributable to the operations carried out in India. Therefore, it follows that such part of income which cannot be reasonably attributed to the operations in India, is not deemed to accrue or arise in India. 2. Purchase of goods in India for export [Explanation 1(b) to section 9(1) (i)]: In the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export. 3. Collection of news and views in India for transmission out of India [Explanation1(c) to section 9(1)(i)]: In the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India. 4. Shooting of cinematograph films in India [Explanation 1(d) to section 9(1)(i)]: In the case of a non-resident, no income shall be deemed to accrue or arise in India through or from operations which are confined to the shooting of any cinematograph film in India, if such non-resident is : CFP Level 2 - Module 2 – Taxation - India Page 103

(i) an individual, who is not a citizen of India or (ii) a firm which does not have any partner who is a citizen of India or who is resident in India ; or (iii) a company which does not have any shareholder who is a citizen of India or who is resident in India. (2) & (3) Income from Salaries: Under section 9(1)(ii) income which falls under the head ‘salaries’, would be deemed to accrue or arise in India, if it is in respect of services rendered in India. Exception under section 9(2): Pension payable outside India by the Government to its officials and judges who permanently reside outside India shall not be deemed to accrue or arise in India. It may however, be noted here that the salary of an employee in the United Nations Organisation (UNO) or in its constituent bodies is exempt under United Nations(Privilege and Immunity) Act. (4) Income from Dividends All dividends paid by an Indian company must be deemed to accrue or arise in India. Under section 10(34), income from dividends referred to in section115-O are exempt from tax in the hands of the shareholder. It may be noted that dividend distribution tax under section 115-O does not apply to deemed dividend under section2(22)(e), which is chargeable in the previous year in which such dividend is distributed or paid. (5) Interest Under section 9(1)(v), an interest is deemed to accrue or arise in India if it is payable by - (i) the Central Government or any State Government. (ii) a person resident in India (except where it is payable in respect of any money borrowed and used for the purposes of a business or profession carried on by him outside India or for the purposes of making or earning any income from any source outside India) (iii) a non-resident when it is payable in respect of any debt incurred or moneys borrowed and used for the purpose of a business or profession carried on in India by him. Interest on money borrowed by the non-resident for any purpose other than a business or profession, will not be deemed to accrue or arise in India. Thus, if a non-resident ‘A’ borrows money from a non-resident ‘B’ and invests the same in shares of an Indian company, interest payable by ‘A’ to ‘B’ will not be deemed to accrue or arise in India. CFP Level 2 - Module 2 – Taxation - India Page 104

(6) Royalty Royalty will be deemed to accrue or arise in India when it is payable by - (i) the Government; or (ii) a person who is a resident in India except in cases where it is payable for the transfer of any right or the use of any property or information or for the utilization of services for the purposes of a business or profession carried on by such person outside India or for of making or earning any income from any source outside India; or (iii) a non-resident only when the royalty is payable in respect of any right, property or information used or services utilised for purposes of a business or profession carried on in India or for the purposes of making or earning any income from any source in India. (iv) Interest payable by PE to the Head Office outside India or any PE or any other part of such non-resident outside India should be deemed to arise or accrue in India. Amendment made by the Finance (No.2) Act 2019 Deemed accrual of gift made to a non-resident [Section 9 (viii)}] Any sum of money referred to in section 2(24) (xviia), paid on or after 5 July 2019, by a person resident in India, to a non-resident, not being a company, or to a foreign company, shall be deemed to accrue or arise in India. However, the existing provision for exempting gifts as provided to section 54(2)(X)will continue to apply for such gifts deemed to accrue or arise in India. The exemptions are in respect of the sum of money or any property is received: 1. from any relatives 2. on the occasion of the marriage of the individual ;or 3. Under a will or by way of inheritance; or 4. in contemplation of death of the payer or donor,as the case may be;or 5. from any trust or institution registered under section 12AA; or 6. by the way of transaction not registered as transfer under clause (vi cb) or clause (vi d) or clause (vii) of section 47. In a treaty situation, the relevant article of applicable DTAA shall continue to apply for such gift as well. 1.4.4. Tax Incidence for Different Taxpayers ROR (Individual/HUF) RNOR NR CFP Level 2 - Module 2 – Taxation - India Page 105

Resident (Any Other (Only in Case of Individual/HUF) Assessee) income received in India income which accrues or arises or is deemed to be accrue or arise in India income which accrues or income which accrues or arises outside India --- arises outside India derived from a business controlled in or profession set up in India Illustration Particulars Amount (Rs.) Interest on UK Development Bonds, 50% of interest received in India 10,000 Income from a business in Chennai (50% is received in India) 20,000 Profits on sale of shares of an Indian company received in London 20,000 Dividend from British company received in London 5,000 Profits on sale of plant at Germany 50% of profits are received in India 40,000 Income earned from business in Germany which is controlled from 70,000 Delhi(Rs.40,000 is received in India) Profits from a business in Delhi but managed entirely from London 15,000 Income from house property in London deposited in a Indian Bank at London, 50,000 brought to India (Computed) Interest on debentures in an Indian company received in London. 12,000 Fees for technical services rendered in India but received in London 8,000 Profits from a business in Bombay managed from London 26,000 Pension for services rendered in India but received in Burma 4,000 Income from property situated in Pakistan received there 16,000 Past foreign untaxed income brought to India during the previous year 5,000 Income from agricultural land in Nepal received there and then brought to 18,000 India Income from profession in Kenya which was set up in India, received there but 5,000 spent in India CFP Level 2 - Module 2 – Taxation - India Page 106

Gift received on the occasion of his wedding 20,000 Interest on savings bank deposit in State Bank of India 12,000 Income from a business in Russia, controlled from Russia 20,000 Dividend from Reliance Petroleum Limited, an Indian Company 5,000 Agricultural income from a land in Rajasthan 15,000 Solution: Particulars ROR RNOR NR 10,000 5,000 5,000 Interest on UK Development Bonds, 50% of interest 20,000 20,000 20,000 received in India 20,000 20,000 20,000 Income from a business in Chennai (50% is received in 5,000 - - India) 40,000 20,000 20,000 70,000 70,000 40,000 Profits on sale of shares of an Indian company received in London (assuming that they are in the nature of short-term 15,000 15,000 15,000 capital gains) 50,000 - - 12,000 Dividend from British company received in London 8,000 12,000 12,000 26,000 8,000 8,000 Profits on sale of plant at Germany, 50% of profits are 4,000 26,000 26,000 received in India 4,000 4,000 Income earned from business in Germany which is controlled from Delhi, out of which Rs.40,000 is received in India Profits from a business in Delhi but managed entirely from London Income from property in London deposited in a Bank at London, later on remitted to India Interest on debentures in an Indian company received in London. Fees for technical services rendered in India but received in London Profits from a business in Bombay managed from London Pension for services rendered in India but received in Burma CFP Level 2 - Module 2 – Taxation - India Page 107

Income from property situated in Pakistan received there 16,000 - - Past foreign untaxed income brought to India during the - - - previous year Income from agricultural land in Nepal received there and 18,000 - - then brought to India Income from profession in Kenya which was set up in India, 5,000 5,000 - received there but spent in India Gift received on the occasion of his wedding [nontaxable] - - - Interest on savings bank deposit in State Bank of India 12,000 12,000 12,000 Income from a business in Russia, controlled from Russia 20,000 - - Dividend from Reliance Petroleum Limited, an Indian - - - Company [Exempt under section 10(34)] Agricultural income from a land in Rajasthan[Exempt under - - - section 10(1)] Gross Total Income 3,51,000 2,17,000 1,82,000 Less: Deduction under section 80TTA[Interest on savings 10,000 10,000 10,000 bank account subject to a maximum of Rs.10,000] Total Income 3,41,000 2,07,000 1,72,000 CFP Level 2 - Module 2 – Taxation - India Page 108

SECTION-II PERSONAL TAXATION AND BUSINESS TAXATION- COMPUTATION TAXEFFICIENCY SUB-SECTIONS 2.1 Salary Income 2.2 Income from House Property 2.3 Income from Business or Profession 2.4 Capital Gains in Transfer of Capital Assets 2.5 Income from Residency Sources and Tax Calculation Rules 2.6 Tax Characteristics of Business Forms CFP Level 2 - Module 2 – Taxation - India Page 109

CFP Level 2 - Module 2 – Taxation - India Page 110

Sub-Section–2.1: Income u/h Salaries Learning Objectives: After reading this unit, you will be able to understand:  when the salary income is chargeable to tax  the concept of profits in lieu of salary  the various retirement benefits which will be charged as salary  the concepts of allowances and perquisites  the admissible deductions from salary 2.1.0. General Employer-employee Relationship: Before an income can become chargeable u/h ‘salaries’, it is vital that there should exist between the payer and the payee, the relationship of an employer and an employee. (a) Commission received by a Director from a company is salary if the Director is an employee of the company. If, however, the Director is not an employee of the company, the said commission cannot be charged as salary but has to be charged either as income from business or as income from other sources depending upon the facts. (b) Salary paid to a partner by a firm is nothing but an appropriation of profits. Any salary, bonus, commission or remuneration by whatever name called due to or received by partner of a firm shall not be regarded as salary. The same is to be charged as income from profits and gains of business or profession. This is primarily because the relationship between the firm and its partners is not that of an employer and employee. Illustration-1 A lecturer is an employee of college and income from college is his Salary Income. But if he sets question paper for the university and receives remuneration for the same, then the income from setting of the question papers is not taxable under the head ‘Salary’ but under the head ‘Other Sources’. This is because he is not an employee of the university. Thus income from college is his Salary Income but income from university is his income from Other Sources. CFP Level 2 - Module 2 – Taxation - India Page 111

Illustration-2 A Member of Parliament is not a government employee and therefore remuneration received by him is not taxable under the head of ‘Salary’, rather it shall be taxed under the head ‘Other Sources’. Illustration-3 Salary income earned by the partner of a firm, from the firm shall not be treated as salary but as an income of business and profession. This is because partners do not have the relationship of employer-employee but have relationship of principal and agent amongst themselves. Full-time or Part-time Employment: It does not matter whether the employee is a fulltime employee or a part-time one. If an employee works with more than one employer, salaries received from all the employers shall be chargeable u/h Salaries. Foregoing of Salary: Once salary accrues, the subsequent waiver by the employee does not absolve him from liability to income-tax. Such waiver is only an application and hence, chargeable to tax. Illustration-4 Mr. A, an employee instructs his employer that he is not interested in receiving the salary for April and the same might be donated to a charitable institution. In this case, Mr. A cannot claim that he cannot be charged in respect of the salary for April. It is only due to his instruction that the donation was made to a charitable institution by his employer. It is only an application of income. Hence, the salary for the month of April will be taxable in the hands of Mr. A. He is however, entitled to claim a deduction u/s 80G for the amount donated to the institution. Surrender of Salary: However, if an employee surrenders his salary to the Central Government u/s 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered would be exempt while computing his taxable income. CFP Level 2 - Module 2 – Taxation - India Page 112

Salary Paid Tax-free: This, in other words, means that the employer bears the burden of the tax on the salary of the employee. In such a case, the income from salaries in the hands of the employee will consist of his salary income and also the tax on this salary paid by the employer. But taxes on non-monetary perquisites borne by the employer shall be exempt in the hands of employee. Further same is not allowed as an expense to the employer. (Section 10(10CC) & Section 36). 2.1.1. Gross Salary Income Basis of Charge – Section 15 Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier. However, where any salary, paid in advance, is assessed in the year of payment, it cannot be subsequently brought to tax in the year in which it becomes due. If the salary has already been assessed on due basis, the same cannot be taxed again when it is paid. Illustration-5 Mr. J is working in ABC Ltd. getting salary income of Rs..20,000 pm. For the month of March,he gets salary on 10th April. Now, for the AY, his total Salary income taxable shallbeRs.2,40,000 even though he has receivedRs.2,20,000. Salary of Rs..20,000 is not received but still it would be taxable on the due basis. Basic Pay/Basic Salary All employees are given Basic Salary which is paid to an employee for his/her basic qualities such as educational qualification, work experience, expertise in a particular field, nature of job, etc. Basic Salary is always given in the form of pay scale or grade and is fully taxable. Under the graded system, the annual increment is fixed well in advance in a grade and is paid at the completion of every year of service(from the date of joining). Illustration-6 Mr. P joins services of XYZ Ltd. on 1/6/2009 in grade of15,500-300-17,900-500-22,900.This means that he will getRs.15,500pm in the first year of the job, i.e., from 1/6/2009 to 31/5/2010. Then, he will get increment of Rs..300pa every year till his salary becomesRs.17,900pm. CFP Level 2 - Module 2 – Taxation - India Page 113

Afterwards, he will get increment of Rs..500pa till he gets the salary of Rs..22,900pm. After that, either he will be promoted to next grade or his salary will stop atRs.22,900 pm. Dearness Allowance Employees are given, along with the Basic Salary, an additional amount which is called Dearness Allowance (DA). This is given to an employee to compensate him for the increased cost of living. It is linked with the Consumer Price Index, which is revised on half yearly basis. DA is paid to employee on the basis of certain percentage of the Basic Salary and is always fully taxable just like Basic Salary. Bonus This is a statutory payment made by the employer to the employee on the basis of profits or on the basis of production/productivity and for matters connected therewith. This amount is fully chargeable to tax on receipt basis. Commission Any extra payment made to the employee for the extra work done by him is called commission/fees, which are also fully chargeable to tax. Allowances Employees are given various allowances during the year. Some of them are given for the official work and some for personal purposes. These Allowances are either fully exempt /taxable or fully taxable, or partially taxable depending upon the nature of allowance. Perquisites Employees are provided with various facilities during the year. Some of them are given for the official work and some for the personal purposes. For all such facilities, a money value of such facilities has to be calculated which shall be known as perquisite value (PV). These perquisites are either fully exempt or fully taxable or partially taxable depending upon the nature of perquisites. CFP Level 2 - Module 2 – Taxation - India Page 114

Retirement Payments When employee gets retired from the job, then he is given various payments such as Provident Fund, Gratuity, Leave Encashment and Pension. Aggregate of all the above mentioned Incomes after exemptions would be known as ‘Gross Salary’. From the Gross Salary, we will give the deductions of Section 16 to get ‘Income under head Salaries’ which is also known as ‘Taxable Salary’ or ‘Income from salary’. Loan or Advance against Salary Loan is different from salary. When an employee takes a loan from his employer, which is repayable in certain specified instalments, the loan amount cannot be brought to tax as salary of the employee. Similarly, advance against salary is different from advance salary. It is an advance taken by the employee from his employer. This advance is generally adjusted with his salary over a specified time period. It cannot be taxed as salary. Arrears of Salary Normally speaking, salary arrears must be charged on due basis. However, there are circumstances when it may not be possible to bring the same to charge on due basis. For example if the Pay Commission is appointed by the Central Government and it recommends revision of salaries of employees, the arrears received in that connection will be charged on receipt basis. Here, relief u/s 89(1) is available. 2.1.2. Allowances Fully Taxable Partly Taxable CFP Level 2 - Module 2 – Taxation - India Page 115

(i) Entertainment Allowance (i) House Rent Allowance [u/s 10(13A)] (ii) Dearness Allowance (ii) Special Allowances [u/s 10(14)] (iii) Overtime Allowance (iv) Fixed Medical Allowance (v) City Compensatory Allowance (vi) Interim Allowance (to meet increased cost of living in cities) (vii) Servant Allowance (viii) Project Allowance (ix) Tiffin/Lunch/Dinner Allowance (x) Any other cash allowance (xi) Warden Allowance (xii) Non-practicing Allowance City Compensatory Allowance City Compensatory Allowance is provided to compensate the employees for the higher cost of living in cities. Entertainment Allowance: This allowance is given to employees to meet the expenses towards hospitality in receiving customers etc. The Act gives a deduction towards entertainment allowance only to a Government employee. House Rent Allowance – Section 10(13A) HRA granted to an employee is exempt to the extent of least of the following: Metro Cities (i.e. Delhi, Kolkata, Mumbai, Other Cities Chennai) 1) HRA actually received. 1) HRA actually received 2) Rent paid - 10% of salary for the relevant 2) Rent paid - 10% of salary for the relevant period period CFP Level 2 - Module 2 – Taxation - India Page 116

3) 50% of salary for the relevant period 3) 40% of salary for the relevant period Notes: 1. Exemption is not available to an assessee who lives in his own house, or in a house for which he has not incurred the expenditure of rent. 2. Salary for this purpose means basic salary, dearness allowance, if provided in terms of employment and commission as a fixed percentage of turnover. 3. Relevant period means the period for which the calculations are being made. 4. In case any of the factor changes on which calculations are dependent, then separate calculations shall be made for the period before and after such change. Illustration-7 Mr. S. Khan received the following during PY from the employer Basic Salary Rs.10,000pm DA (70% forming part of retirement benefits) Rs.2,000pm Commission Rs.5,000pa HRA Rs.1,200pm Calculate the taxable part of HRA assuming he paidRs.1900pm as rent in Chandigarh. Solution: Taxable HRA = (14400 – 9120) = 5280 (a) 14,400 (b) (1,900 x 12) – [10% of (10,000 x 12 + 2,000 x 70% x 12)] = 9,120 [Least] (c) 40% of (10,000 x 12 + 2,000 x 70% x 12) = 54,720 Illustration-8 Re-compute taxable part of HRA in question above assuming that till 31st October he stayed in his own residence in Mumbai and thereafter taken house on rent in Chandigarh @ 1900pm. Solution: Taxable HRA = (14400 – 3800) = 10600 First 7 months – fully taxable CFP Level 2 - Module 2 – Taxation - India Page 117

Next 5 months – 9,120 x 5 /12 = 3,800 [Exempt] Illustration-9 Mr. A. Khan received the following during PY from the employer Apr-Dec Jan-Mar Basic Salary 5,000pm 6,000pm DA (100% forming part of retirement benefits) 20% of basic salary Commission (based upon fixed percentage of turnover) - 3,000 for 3months HRA 1,100pm 1,100pm He paid rent @ 800pm in Delhi throughout the year. Determine the taxable HRA. Solution: Taxable HRA = (13200 – 1800) = 11400 First 9 months (a) 9,900 (b) 800 x 9 – 10% of (5,000 x 9 + 1,000 x 9) = 1,800 [Exempt] (c) 50% of (5,000 x 9 + 1,000 x 9) = 27,000 Next 3 months (a) 3,300 (b) 800 x 3 – 10% of (6,000 x 3 + 1,200 x 3 + 3,000) = -60 = Nil [Exempt] (c) 50% of (6,000 x 3 + 1,200 x 3 + 3,000) = 12,300 Special Allowances – Section 10(14A) Following allowances shall be exempt to the extent amount utilised by the employee: Name of Allowance Purpose of Allowance (a) Travelling allowance granted to meet the cost of travel on tour/transfer (b) Daily allowance granted on tour/transfer, to meet the ordinary daily charges (c) Conveyance granted to meet the expenditure incurred on conveyance in allowance performance of duties of an office (d) Helper allowance granted to meet the expenditure incurred on a helper engaged for the performance of the duties of an office CFP Level 2 - Module 2 – Taxation - India Page 118

(e) Academic/Research granted for encouraging the academic, research and training allowance pursuits in educational and research institutions (f) Uniform allowance granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office Following allowances shall be exempt to the limit specified below. Actual amount spent is irrelevant. Name of Allowance Extent to Which Allowance is Exempt (a) Any allowance granted to an employee working in any Lower of 70% of such transport system to meet his personal expenditure during allowance orRs.10,000pm his duty performed in the course of running of such transport from one place to another place (b) Children Education Allowance Rs.100pm/child up to a maximum of 2 children. (c) Hostel Expenditure Allowance Rs.300pm/child up to a maximum of 2 children. (d) Transport allowance to meet his expenditure for the Rs.1600 per month. purpose of commuting between the place of his residence and the place of his duty (e) Transport allowance granted to an employee, who is Rs.3200 per month. blind or handicapped, to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty (f) Underground Allowance: Such an Allowance is paid to the Rs.800 per month employee working in mines or any other uncongenial unnatural climate conditions which are underground (g) Tribal Area Allowance: This Allowance is given to Rs.200 per month employee to meet the additional cost that he will have to incur while he is posted to any tribal area. This Allowance is given in States of Madhya Pradesh, Uttar Pradesh, Tamil Nadu, Karnataka, Tripura, Assam, West Bengal, Orissa, and Bihar. (h) Border Area Allowance: This Allowance is given to the depends upon the area of CFP Level 2 - Module 2 – Taxation - India Page 119

men of armed forces who have been posted to the posting border areas (i) Counter Insurgency Allowance: This Allowance is granted Rs.3,900 per month to the members of armed forces operating in any areaway from the permanent locations for a period of more than 30 days. If this Allowance is received by employee, then he shall not be entitled to Border Area Allowance. (j) Hill Compensatory Allowance: This Allowance is exempt up toRs.300 per month provided the place is located at a height of 1,000 meters or more above the sea level. However, in certain specified areas, the exempt amount isRs.800 per month (depending upon the height of the area from the sea level) and in the Siachen area of Jammu and Kashmir amount exempt isRs.7,000 per month. Note: Names of allowances are for reference only. Taxability will purely depend on nature of allowance. Note: Amendments made by the Finance Act, 2019 under section 16( ia) Standard Deduction from gross salary Under Section 16 (ia) The standard deduction of Rs.40000 introduced in Finance Act 2018 has been raised to Rs.50000.Thus the deduction from Gross salary shall be Rs.50000 or the amount of the salary, whichever s less. From FY 2018-19, a standard deduction of Rs 40,000 in lieu of travel, medical expense reimbursement and other allowances has been proposed for salaried employees and pensioners. To claim this standard deduction, there is no need to submit medical bills to your employer. As per this new proposal, irrespective of amount of taxable salary the assessee will be entitled to get a deduction of Rs.50,000 or taxable salary, whichever is less. Thus suppose if a person has worked for few days (or) months and his salary was just Rs 50,000 for a previous year, then he will be entitled to deduction equal to salary being the same amount. If his salary is less, say Rs 40,000 the deduction shall be restricted to Rs 40,000. If salary exceeds amount of Rs 50,000, the deduction shall be restricted to Rs 50,000. CFP Level 2 - Module 2 – Taxation - India Page 120

Exempt Allowances  Allowances and Perquisites provided by the Government (Central Government or State Government) to its employees who are citizens of India for rendering service outside India are not taxable – Section 10(7)  All Allowances received by Judges of High Court/Supreme Court.  Allowances received by employees of UNO.  Daily and Constituency Allowance received by MPs and MLAs u/s 10(17) a) Daily Allowance received by MPs or MLAs is fully exempt from Tax. b) Any Allowance received by MPs is fully exempt from Tax. c) All other Allowances up toRs.2,000 per month received by MLAs are exempt from Tax.  [Section 10(45)] Exemption to Chairmen and members of UPSC: Specific Perquisites and Allowances notified by the Central Government, received by both serving and retired Chairmen and members of UPSC,will befully exempt from Income Tax. 2.1.3. Perquisites – Section 17(2) (1) General 1. Perquisite shall be taxable in the hands of employee if provided to employee or to any member of household. 2. “Member of household” shall include - (a) spouse, (b) children and their spouses, (c) parents, and (d) servants and dependants; (2) Rent Free Accommodation or Concessional Accommodation Government Employees– License fee determined by the Government Non-government Employees Nature of Accommodation Value of Perquisite Owned by employer Population of the city Value of perquisite ≤ 10 lacs 7.5% of salary > 10 lacs ≤ 25 lacs 10% of salary > 25 lacs 15% of salary CFP Level 2 - Module 2 – Taxation - India Page 121

Taken on rent by the Lower of: Actual rent & 15% of salary employer Lower of: Actual hotel charges & 24% of salary Accommodation in hotel Note: Nothing taxable if accommodation provided for ≤ 15 days on transfer of employee from one place to another Salary for this purpose shall be of the period for which accommodation is being provided to employee and shall include: (a) Basic salary (b) DA, if provided in terms of employment (c) Taxable portion of all allowances (d) Bonus & commission (e) Any other monetary payment except any perquisite but does not include:  PF contribution made by employer  Perquisites, whether monetary or non-monetary  Arrears of salary Salary from all employers shall be taken into consideration in respect of the period during which an accommodation is provided. Arrears /Advance of salary not related to such period not be included. Furnished Accommodation In case furnishings are also provided by the employer along with accommodation, then first compute value as above, and then add 10%pa of actual cost of furnishing if owned by the employer or add actual hire charges, if taken on rent by the employer. Concessional Accommodation If anything is charged from employee in respect of accommodation, then subtract the same from value computed as above. Same provision shall be applicable for valuation of all perquisites provided to employees. More than One Accommodation If the employer has provided accommodation at two or more places because of the transfer of the employee from one place to another place, then in that case for the period of first 90 days only that accommodation will be taxed which has lower perquisite value and for the period exceeding 90 days all shall be taxed. CFP Level 2 - Module 2 – Taxation - India Page 122

Illustration-10 Mr. Resy has provided you with following information for AY 20-21. Basic Salary Rs.60,000pm DA (20% is for retirement benefits) Rs.8,000pm Lunch Allowance Rs.300pm Children Education allowance (1 child) Rs.150pm (i) Compute the value of rent free accommodation provided to him in a city with population 6,00,000 (accommodation provided from Nov 2019 to Mar 2020). (ii) What will be the answer in caseRs.1,200pm is recovered from him by the employer in this regard? (iii) What will be the answer in case accommodation is taken on rent by the employer @Rs.5,000pm and Mr. Resy was required to payRs.1,000pm as rent to the employer? (iv) What will be the answer if alongwith accommodation, Air conditioner costingRs.18,000 and television (taken on rent of Rs..800pm) are provided to the Mr. Resy? Solution: (i) 7.5% of [60,000 x 5 + 8,000 x 20% x 5 + 300 x 5 + (150 – 100) x 5] = 23,231 (ii) 23,231 – 1,200 x 5 = 17,231 (iii) 15% of salary = 46,463 or 5,000 x 5 = 25,000, whichever is less i.e. 25,000 – 1,000 x 5 = 20,000 (iv) 23,231 + 18,000 x 10% x 5/12 + 800 x 5 = 27,981 (3) Motor Car Facility Owned by employer or taken on rent by employer Owned by employer or taken on rent by employer Used exclusively for personal Used partly official & partly for personal purposes purposes Aggregate of: Running & maintenance expenditure incurred by CFP Level 2 - Module 2 – Taxation - India Page 123

 Actual running & Employer Employee Rs.600pm for car maintenance Rs.1,800pm for car ≤ 1.6ltrs. cc  Remuneration of ≤ 1.6ltrs.cc Rs.900pm for car | chauffer Rs.2,400pm for car > > 1.6ltrs. cc  10%pa of actual cost of 1.6ltrs. cc car or actual hire charges Add:Rs.900pm for chauffer provided by employer Owned by employee and expenses met by employer Used exclusively for Used partly official & partly personal purposes for personal purposes Aggregate of: Actual expenditure incurred  Actual running & by the employer maintenance Less: 1,800pm/2,400pm  Remuneration of 900pm for chauffer chauffer Notes:  If car is used exclusively for official purposes, then nothing shall be taxable in the hands of employee, provided specified documents are being maintained. Specified documents: A Logbook, which contains complete details of journey undertaken for the official purpose, which may include date of journey, destination, mileage and the amount of expenditure incurred thereon. The employer gives a certificate that the expenditure was incurred wholly and exclusively for the official purposes.  If the employer has provided more than one car for partly official and partly personal purposes, then, in such a case, any one car will be taxed as per the rules of partly official and partly personal use and remaining car(s) will be taxed as per the rules of personal use. (4) Free or Concessional Education Facilities CFP Level 2 - Module 2 – Taxation - India Page 124

 Educational institution is owned by the employer, or Any other case  Free educational facilities are allowed in educational Value = actual cost institution by reason of his being in employment of incurred by the that employer employer Value = cost of education in similar institution No exemption of Exempt =Rs.1,000pm/child, not for any other member of Rs.1,000 in this case. household (5) Interest Free or Concessional Loan Value = interest computed at the rate charged per annum by the State Bank of India as on the 1st day of the relevant previous year in respect of loans for the same purpose advanced by it on the maximum outstanding monthly balance. Notes: (a) “maximum outstanding monthly balance” means the aggregate outstanding balance for each loan as on the last day of each month. (b) Nothing shall be taxable in case loans are made available for medical treatment of specified diseases (like cancer, tuberculosis, etc.). But, if, some amount is reimbursed under any medical insurance scheme, interest on such amount shall be taxable from the month in which it is reimbursed. (c) Nothing shall be taxable if aggregate of loans do not exceedRs.20,000. Illustration-11 Interest free loan taken for construction of houseRs.2,00,000 on 01/05/2019. Loan further taken of Rs..3,00,000 on 17/07/2019. Repayment made of Rs..1,00,000 on 30/12/2019. Interest charged by SBI for similar loan equals to 12%pa as on 01.04.2019 and 13%pa as on 01/05/2019 and 14%pa as on 01.04.2020. Compute value of interest free loan for AY 2020-21 and AY 2021- 22 assuming 4%pa recovered from employee as interest. Solution: AY 2020-21 = (2,00,000 x 2 + 5,00,000 x 5 + 4,00,000 x 4) x (12% - 4%) x 1/12 = 30,000 AY 2021-22 = 4,00,000 x (14% - 4%) = 40,000 CFP Level 2 - Module 2 – Taxation - India Page 125

Illustration-12 Interest free loan for treatment of specified disease of employee’s daughterRs.5,00,000 on 01/04/2019. ReceivedRs.2,00,000 from insurance company on this account on 01/07/2019. RepaidRs.50,000 on 01/08/2019 to employer. No other repayment was made during the PY 2019-20. Rate of SBI 9%pa. Solution: (2,00,000 x 1 + 1,50,000 x 8) x 9% x 1/12 = 10,500 (6) Use of Movable Assets Nature of asset Value of perquisite Laptops & computers Nil Other 10%pa of actual cost or actual hire charges Illustration-13 Mr. Jalmahal was provided with video camera for his personal use w.e.f. 01/08/2018. Same was purchased by employer in year 1987 forRs.18,000. WDV in the books of employer as on 01/04/2018 wasRs.2,000 and FMV on that date wasRs.1,200. Calculate the taxable value of perquisite for AY 2019-20& AY 2021-21 assuming he is still in possession of the same. Solution: AY 2019-20 = 18,000 x 10% x 8/12 = 1,200 AY 2020-21 = 18,000 x 10% = 1,800 (7) Transfer of Movable Assets Nature of Asset Value of Perquisite Computers & Depreciated value @ 50% WDV for each completed year of usage electronic items Motor car Depreciated value @ 20% WDV for each completed year of usage Any other asset Depreciated value @ 10% SLM for each completed year of usage CFP Level 2 - Module 2 – Taxation - India Page 126

Electronic items shall include data storage and handling devices like digital diaries, printers, etc. but shall not include household appliances like washing machine, mixers, hot plates, ovens, etc. The amounts motioned above shall be reduced by the amount, if any, paid or recovered from the employee as consideration for such transfer. Illustration-14 Compute the taxable value of perquisite for AY 2020-21 on the basis of following information: Asset Date of Purchase Cost Date of Sale Sale Price Computer June 15, 2017 40,000 August 3, 2019 4,000 Car Nov. 10, 2015 4,00,000 Sept. 14, 2019 55,000 Washing Machine Jan. 13, 2017 15,000 Feb 14, 2020 8,000 Solution: Computer = 40,000 – 50% WDV – 50% WDV = 10,000 – 4,000 = 6,000 Car = 4,00,000 – 20% WDV – 20% WDV – 20% WDV – 20% WDV = 1,63,840 – 55,000 = 1,08,840 Washing Machine = 15,000 – 10% SLM – 10% SLM = 12,000 – 8,000 = 4,000 (8) Medical Facilities in India Fully exempt Partially exempt  Any medical treatment in following hospitals: Aggregate of (a) Hospital maintained by employer, Government or reimbursement by local authority employer of medical (b) Hospital approved by Government for its employees treatment expenses (c) Hospital approved by CCIT for specified diseases incurred by employee shall be exempt upto  Health/medical insurance premium paid by employer Rs.15,000pa. Balance shall (under an approved scheme) be taxable.  Reimbursement of health/medical insurance premium paid by employee CFP Level 2 - Module 2 – Taxation - India Page 127

Notes: Above said exemption shall be applicable only if medical treatment is of employee himself or of his family member (spouse, children, dependent parents, dependent brothers & dependent sisters). In case of medical treatment of any other relative, full amount shall be taxable in the hands of employee. (9) Medical Facilities Outside India Expenditure done by employer on the treatment of employee or any of his family members or reimbursement of expenditure done by employee shall be exempt as per the following: 1) Expenses on the medical treatment of employee or any member of his family shall be exempt to the extent permitted by RBI. 2) Expenses on stay abroad of the employee or any member of his family with one attendant who has gone outside India for medical treatment are exempt to the extent permitted by RBI. 3) Travelling expenses of patient and one attendant who accompanies the patient in connection with such treatment shall be exempt from Tax if Gross Total Income (before including such travel expenses) is equal to or is less than Rs.2,00,000. (10) Leave Travel Concession – Section 10(5) U/s 10(5), travelling expenses borne by employer shall be exempt to the extent of the following limits: Travel by air Travelling by any other mode Fare of economy class of Air  Fare of first class A/c coach of rail India  Fare of first class or deluxe class of public transport system  Fare of first class A/c coach for similar distance Notes: (a) Travelling should be in India only (b) Exemption available for travelling of employee himself & of family members (spouse, children, dependent parents, dependent brothers & dependent sisters). For travelling of other relatives, full amount shall be taxable in the hands of employee. CFP Level 2 - Module 2 – Taxation - India Page 128

(c) Exemption for children shall be for all children born before 01/10/1998 plus 2 eldest children born on or after 01/10/1998. (d) Exemption available in respect of 2 journeys performed in a block of 4 calendar years i.e. 2010-2014, 2014-2017, etc. (e) One such unavailed journey can be carried forward to the calendar year immediately succeeding the end of relevant block. (f) Traveling not covered above; and expenses of touring & accommodation shall be fully taxable in the hands of employee. (11) Other Perquisites Nature of perquisite Value of perquisite 1. Provision of domestic  sweeper, a gardener, a watchman or a personal attendant actual cost to the employer servants  Resources owned by the employer – manufacturing cost Otherwise, actual cost to the employer 2. Supply of gas, electric  Actual cost to the employer Following shall be exempt: energy or water   Meal value uptoRs.50/meal during office hours at 3. Free food and non-  business premises or through non-transferable vouchers alcoholic beverages   Tea & snacks during office hours without any limit Actual cost to employer 4. Gift in kind or voucher  Exempt if uptoRs.5,000 Membership fees & annual fees incurred by employer  Actual cost to the employer (including annual or periodical 5. Credit Card for  fees) personal purposes Following shall be exempt  Corporate membership charges 6. Club/sports/health   Nothing taxable if club facilities are uniformly provided to facilities all employees  Actual cost to the employer 7. Life Insurance  Nothing taxable Premium Nothing taxable 8. Premium of accident  policies 9. Telephone facility at  residence CFP Level 2 - Module 2 – Taxation - India Page 129

10. Sweat equity shares  Value = FMV of such shares on the date of exercising the option.  But perquisite shall be taxable in the year in which such shares are actually allotted to the employee.  Further CoA of such shares shall be FMV as considered above and POH shall start from the date of allotment. FMV  Listed equities: average of opening and closing price of shares listed on stock exchange on date of exercise of option  Unlisted equities: determined by the Category-I Merchant Banker on the date of exercise of option or any earlier date, not being earlier than 180 days than the date of exercising (12) Specified Employee (i) Director employee (ii) An employee who has substantial interest in the company (iii) An employee whose income u/h ‘salaries’ (excluding non-monetary benefits) exceedsRs.50,000. Impact Thereof Perquisites mentioned below shall be taxable for specified employees only. In other words, for specified employees, all perquisites shall be taxable. For employees, other than specified employees, following perquisites shall be exempt: 1. Provision of motor car by employer 2. Provision of domestic servants (sweeper, a gardener, a watchman or a personal attendant) by employer 3. Provision of supply of gas, electric energy or water by employer 4. Provision of education facilities by employer It may be noted that above said perquisites shall be exempt for employees, other than specified employees, only if such perquisite is provided by employer. In case employee himself avails the facility and then gets the reimbursement from the employer, then it shall be taxable for all employees (without considering nature of employee). CFP Level 2 - Module 2 – Taxation - India Page 130

2.1.4. Retirement Benefits (1) Pension – Section 10(10A) Uncommuted Pension: Uncommuted pension refers to pension received periodically. It is fully taxable in the hands of both government and non-government employees. Commuted Pension: Commuted pension means lump sum amount taken by commuting the whole or part of the pension. Its treatment: (a) Government Employees - Fully exempt. (b) Non-Government Employee: Following shall be exempt If the employee is in receipt of gratuity, Exemption=1/3 of the amount of pension which he would have received had he commuted the whole of the pension. =  1  commuted pension received  100%  3 commutation % If the employee does not receive any gratuity Exemption=1/2 of the amount of pension which he would have received had he commuted the whole of the pension. =  1  commuted pension received  100%  2 commutation % Family Pension Pension received or receivable by family members after the death of the employee is known as Family Pension and it is taxable under the head of ‘Other Sources’ as per Section 56 for such family member. But deduction under Section 57 is allowed which is lower of: (a) 1/3 of such Family Pension (b) Rs.15,000 Illustration-15 Compute taxable pension in the hands of Mr. X in the following cases: CFP Level 2 - Module 2 – Taxation - India Page 131

(i) He receives pension @ 1,500pm from ABC Ltd. during PY 2019-20. (ii) He receives pension @ 900pm from CG during PY 2019-20. (iii) He left job of M/s ABC & associates on May 31, 2019 and thereafter received pension @ 1,000pm. (iv) He left job of Rajasthan Govt. on June 30, 2019. He was entitled to pension @2,000pm. On 01/01/2018 he got 40% of pension commuted forRs.50,000. (v) He left job of XYZ Co. on July 31, 2019 and was entitled to pension @ 3,000pm. On 01/12/2019 he got 70% of pension commuted forRs.35,000. Assume that he received Gratuity at the time of retirement. Solution: (i) Rs.1,500 x 12 =Rs.18,000 (ii) Rs.900 x 12 =Rs.10,800 (iii) Rs.1,000 x 10 =Rs.10,000 (iv) Uncommuted pension =Rs.2,000 x 6 +Rs.1,200 x 3 =Rs.15,600 Commuted pension = fully exempt (v) Uncommuted pension = 3,000 x 4 + 900 x 4 = 15,600 Commuted pension =Rs.35,000 – [1/3 x 35,000 x 100/70] =Rs.18,333 (2) Gratuity – Section 10(10) Government Employees– fully exempt Non-government employees covered by the Payment of Gratuity Act, 1972 Least of the following shall be exempt: (i) Rs.10,00,000 (ii) Gratuity actually received (iii) 15 days’ salary based on last drawn salary for each completed year of service or part thereof in excess of 6 months Note: Salary for this purpose means basic salary and dearness allowance (whether forming part of retirement benefits or not). No. of days in a month for this purpose, shall be taken as 26. Non-government employees not covered by the Payment of Gratuity Act, 1972 Least of the following shall be exempt: (i) Rs.10,00,000 (ii) Gratuity actually received CFP Level 2 - Module 2 – Taxation - India Page 132

(iii) Half month’s salary (based on last 10 months’ average salary immediately preceding the month of retirement or death) for each completed year of service (fraction to be ignored) Note: Salary for this purpose means basic salary and dearness allowance, if provided in the terms of employment for retirement benefits, forming part of salary and commission which is expressed as a fixed percentage of turnover. Notes: (1) Gratuity received during the period of service is fully taxable. (2) The exemption in respect of gratuities would be available even if the gratuity is received by the widow, children or dependents of a deceased employee, but all calculations shall be u/h IOS. (3) Monthly contributions by Employer shall have no tax treatment in the hands of employee in the year of contribution. Illustration-16 Mrs. J retired on 11/10/2019 after serving for a period of 25yrs. 9 months & received gratuity of Rs..7,50,000. Calculate taxable gratuity on the basis of following information as on date of retirement: Basic salary : Rs.5,000pm (received increment of Rs..500 w.e.f. 01/04/19) DA : Rs.2,000pm (70% forming part of retirement benefits) Bonus : Rs.15,000 Solution: (i) Govt. employee – fully exempt (ii) Private sector employee covered by the Payment of Gratuity Act, 1972 (a) 10,00,000 (b) 7,50,000 (c) 15/26 x (5,000 + 2,000) x 26 = 1,05,000 [Exempt] (iii) Private sector employee not exempt covered by the Payment of Gratuity Act, 1972 (a) 10,00,000 (b) 7,50,000 (c) 1/2 x 6,200 x 25 = 77,500 CFP Level 2 - Module 2 – Taxation - India Page 133

Salary: [(Basic - 5,000 x 6 + 4,500 x 4) + (DA – 2,000 x 70% x 10)]/10 = 6,200 Illustration-17 Mr. Shah, an Accounts Manager, has retired from JK Ltd. on 15-01-2020 after rendering services for 30 years 7 months. His salary isRs.25,000/- p.m. upto 30-09-19 andRs.27,000/- thereafter. He also getsRs.2,000/- p.m. as dearness allowance (55% of it is part of salary for computing retirement benefits). He is not covered by the Payment of Gratuity Act, 1972. He has receivedRs.8 Lacs as gratuity from the employer company. Solution: Computation of gratuity taxable in the hands of Mr. Shah for the AY 2020-21 Least of the following shall be exempt Rs. (i) Gratuity received 8,00,000 (ii) Half-month’s salary for every year of completed service 4,00,500 (15/30 x 30 x {25,000 x 7 + 27,000 x 3 + 2,000 x 10 x 55%}/10) 10,00,000 (iii) Monetary limit Therefore,Rs.4,05,000 shall be exempt and balance of Rs..3,95,000 (Rs.8,00,000 less Rs.4,05,000) shall be taxable. (3) Leave Salary – Section 10(10AA) Government employees– fully exempt Non-government employees: Least of the following shall be exempt: (i) Rs.3,00,000 (ii) Leave salary actually received (iii) 10 months’ salary (on the basis of average salary of last 10 months) (iv) Cash equivalent of leave (based on last 10 months’ average salary immediately preceding the date of retirement) to the credit of the employee at the time of retirement. Earned leave entitlement cannot exceed 30 days for every year of actual service rendered. Notes: 1. Leave salary received during the period of service is fully taxable for all employees. CFP Level 2 - Module 2 – Taxation - India Page 134

2. “Salary” for this purpose means basic salary and dearness allowance, if provided in the terms of employment for retirement benefits and commission which is expressed as a fixed percentage of turnover. 3. The leave salary paid to the legal heirs of the deceased employee is not taxable. Illustration-18 Mr. K left job after working for 9 years. He was entitled to 45 days leave every year. Calculate taxable part of leave encashment of Rs..70,000 assuming he used actually 22 days leaves every year. Basic salary wasRs.5,000pm. Solution: Taxable = [7,00,000 – 12,000] = 58,000 (a) 3,00,000 (b) 70,000 (c) 10 x 5,000 = 50,000 (d) 72/30 x 5,000 = 12,000 [Exempt] Unavailed leaves: (30-22) x 9 = 72 days Salary: (5,000 x 10)/10 = 5,000 Illustration-19 Mr. K left job after working for 9 years& 7 months on November 15, 2019. He was entitled to 44 days leave every year. Calculate taxable part of leave encashment of Rs.70,000 assuming he used actually 20 days leaves every year. Salary information as on date of retirement: Basic salary wasRs.5,000pm (received increment of Rs..400 w.e.f. May 1, 2019), DA 30% of basic salary (40% forming part of retirement benefits), commission 2% of turnover (TurnoverRs.9,00,000 for PY 2019-20 andRs.6,00,000 for PY 2018-19). Solution: Taxable LS = [70,000 – 20,455] = 49,545 (a) 3,00,000 (b) 70,000 (c) 10 x 6,818.20 = 68,182 (d) 90/30 x 6,818.20 = 20,454.60 [Exempt] Unavailed leaves: (30-20) x 9 = 90 days CFP Level 2 - Module 2 – Taxation - India Page 135

Salary: 68,182/10 = 6,818.20 Basic – 5,000 x 6.5 + 4,600 x 3.5 = 48,600 DA – 48,600 x 30% x 40% = 5,832 Commission – 9,00,000 x 2% x 7.5/12 + 6,00,000 x 2% x 2.5/12 = 13,750 Illustration-20 What shall be your answer in case he was allowed 28 leaves every year? Solution: (a) 3,00,000 (b) 70,000 (c) 10 x 6,818.20 = 68,182 (d) 72/30 x 6,818.20 = 16,363.68 [Exempt] Unavailed leaves: (28-20) x 9 = 72 days Salary:68,182/10 = 6,818.20 Basic – 5,000 x 6.5 + 4,600 x 3.5 = 48,600 DA – 48,600 x 30% x 40% = 5,832 Commission – 9,00,000 x 2% x 7.5/12 + 6,00,000 x 2% x 2.5/12 = 13,750 (4) Compensation Received on Voluntary Retirement – Section 10(10C) Least of the following shall be exempt: (i) Rs.5,00,000 (ii) Amount actually received (iii) 3 months’ salary based on last drawn salary for each completed year of service (iv) Remaining period’s (remaining period of his service) salary based on last drawn salary Notes: 1. Salary for this purpose means basic salary and dearness allowance. 2. It applies to the employees who have completed 40 years of age or have completed 10 years of service. This condition is, however, not applicable for employee of Public Sector Companies. 3. It should apply to all categories of the employees of the organization except to Directors of the company. 4. This scheme has been drawn to achieve overall reduction in the existing strength of the employees. CFP Level 2 - Module 2 – Taxation - India Page 136

5. The vacancy caused by the voluntary retirement is not to be filled up. 6. The retiring employees of the company shall not be absorbed in another company of the same management. 7. Once in lifetime option. Illustration-21 Mr. Dutta received voluntary retirement compensation of Rs..7,00,000 after 30 years 4 months of service. He still has 6 years of service left. At the time of voluntary retirement, he was drawing basic salaryRs.20,000 p.m.; Dearness allowance (which forms part of pay)Rs.5,000 p.m. Compute his taxable voluntary retirement compensation. Solution: Taxable VRS = [7,00,000 – 5,00,000] = 2,00,000 (a) 5,00,000 [Exempt] (b) 7,00,000 (c) 3 x (20,000 + 5,000) x 30 = 22,50,000 (d) 6 x 12 x (20,000 + 5,000) = 18,00,000 (5) Provident Fund Particulars Recognized PF Unrecognized Statutory PF Public PF PF Employer’s Amount in excess Fully exempt N.A. Contribution of 12% of salary is Not taxable yearly Eligible for Eligible for Employee’s taxable deduction u/s deduction u/s Contribution Not eligible for Eligible for deduction 80C 80C deduction u/s 80C Fully exempt Fully exempt Not taxable Interest Credited Amount in excess yearly Fully exempt Fully exempt of 9.5% p.a. is u/s 10(11) u/s 10(11) See Note (2) taxable u/h salaries Amount received See Note (1) on retirement, etc. CFP Level 2 - Module 2 – Taxation - India Page 137

Notes: (1) Amount received on the maturity of RPF is fully exempt in case of an employee who has rendered continuous service for a period of 5 years or more; or termination of the service is due to ill health or discontinuance of business of employer or other causes which are beyond control of the employee; or on termination of the employment, an employee obtains employment elsewhere and the balance from the RPF account maintained by old employer is transferred to RPF account maintained by such new employer; or on death of the employee. (2) Employee’s contribution is not taxable but interest thereon is taxable u/h ‘Income from Other Sources’. Employer’s contribution and interest thereon is taxed as Salary. (3) Salary for this purpose means basic salary and dearness allowance - if provided in the terms of employment for retirement benefits and commission as a percentage of turnover. Salary shall be taken on due basis i.e. shall be for the period for which calculations is being made. Illustration-22 Compute income u/h salaries from the following information for PY 2019-20: Basic salary 5,000pm (6,000pm w.e.f. 01/09/19) DA (60% forming part of retirement benefits) 70% of basic salary Employer’s & own contribution towards RPF 13,000 each Interest credited to RPF @ 14% 3,500 Solution: Particulars Rs. Basic Salary (5,000 x 5 + 6,000 x 7) 67,000 DA (70% of 67,000) 46,900 Employer’s contribution to RPF 13,000 Less: Exempt [(67,000 + 60% of 46,900) x 12%] 11,417 1,583 Interest credited to RPF 3,500 Less: Exempt (3,500 x 9.5% / 14%) 2,375 1,125 1,16,608 Less Standard Deduction Section 16(ia) 50000 66,608 CFP Level 2 - Module 2 – Taxation - India Page 138

(6) Approved Superannuation Fund – Section 10(13) (i) Employer’s contribution is exempt from tax in the hands of employee (upto Rs.1,50,000 per employee per annum). Contribution exceedingRs.1,50,000 is taxable in the hands of the respective employee; (ii) Employee’s contribution qualifies for deduction u/s 80C; (iii) Interest on accumulated balance is exempt from tax. (iv) Payment from the fund is not chargeable to tax. 2.1.5. Profit in Lieu of Salary – Section 17(3) Profits in lieu of salary include: 1) The amount of compensation received by the employee in connection with (a) termination of the employment (b) modification of the terms and conditions of employment. 2) Any payment due or received by employee from his employer under Keyman Insurance Policy including any bonus on such policy [Section 10(10D)] 3) Any sum due or received, whether in lump sum or otherwise, by any person whether before joining or after cessation of his employment. 4) Mr. J is marketing director of Pepsi India Ltd. and retired from the company on 31/3/2018. Apart from other payments, company gives himRs.25 lakhs under a contract that Mr. J will not join Coca Cola Ltd. for period of ten years. ThisRs.25 lakhs received by Mr. J is known as profit in lieu of salary and shall be taxable under the head of Salary. 5) Mr. J Joins the service of ABC Ltd. Apart from his salary, company gives him Rs.25 lakhs under the agreement that he will not leave the company for five years. This amount of Rs..25 lakhs will be taxable as profit in lieu ofsalary. 6) Mr. J is an employee of XYZ Ltd. and he is head of North India Division. The company appointed him as a head of North India for ten years. However, after four years, he was transferred to South India and the company paid him cash of Rs..3,00,000 as a compensation. ThisRs.3,00,000 will be known as profit in lieu of salary and it will be taxable under head of Salary. 7) SONY TV has a hit program running on its channel called KBC. Sony TV takes a Keyman insurance policy on the life of Amitabh Bachan. On maturity of the policy, company gives compensation to Sony TV. This amount shall be taxable under the chapter of income from business and profession for Sony TV. But if insurance company gives money to Amitabh Bachan, then it shall be taxable for Amitabh Bachan as profit in lieu of salary u/s 17(3) if Amitabh Bachan and Sony TV have employer–employee relationship. CFP Level 2 - Module 2 – Taxation - India Page 139

However, if they do not have employer – employee relationship, then it will be taxable for Amitabh Bachan as Income from OtherSources u/s 56. 2.1.6. Deductions from Salaries – Section 16 Entertainment Allowance 1. Entertainment Allowance is given to an employee to meet out the expenditure done for entertaining guests of the employer for business purposes. In other words, Entertainment Allowance is given to the employee for meeting expenses of hospitality of business customers and business clients. 2. Entertainment allowance received is fully taxable for all employees and is first to be included in the salary. 3. However deduction in respect of entertainment allowance is available in case of Government employees. The amount of deduction will be lower of: (i) One-fifth of his basic salary or (ii) Rs.5,000 or (iii) Entertainment allowance received. 4. Amount actually spent by the employee towards entertainment out of the entertainment allowance received by him is not a relevant consideration at all. Illustration-23 Mr. J is an employee of Haryana Government and gets salary of Rs..8,000 pm. He receives Entertainment Allowance of Rs..2,000 pm and DA of 100% of Basic Salary. Haryana Government has imposed Professional Tax upon him of Rs..100 pm. On 15/3/2020, he has paid this amount for current year as well as for the next year in advance. Calculate his taxable salary for the AY 2020-2021, i.e., PY 2019-2020. Solution: Calculation of Taxable Salary for the AY 2020-2021, i.e., PY 2019-2020 Particulars Rs. Basic Salary (8,000 x 12) 96,000 Entertainment Allowance (2,000 x 12) 24,000 DA (100% of Basic Salary) 96,000 CFP Level 2 - Module 2 – Taxation - India Page 140

Gross Salary 2,16,000 Less: 16 (ii) Entertainment Allowance (Working Note) 5,000 Less: 16 (iii) Professional Tax paid (100 x 12 x 2) 2,400 Less Standard Deduction 16(ia) 50000 Taxable Salary 1,58,600 Calculation of deduction of Entertainment Allowance Rs. Particulars 24,000 Deduction is least of 19,200 Actual amount received 20% of salary , i.e., 20% of Rs.96,000 5,000 Maximum limit of Professional Tax [Section 16(iii)] 1. Professional tax is a State Levy. 2. Deduction is allowed on actual payment basis. 3. If professional tax is reimbursed or directly paid by the employer on behalf of the employee, the amount so paid is first included as salary income and then allowed as a deduction u/s 16. 4. Local Government or State Government cannot charge more than Rs.2500 per person per year. Relief when Salary, etc., is Paid in Arrears – Section 89 Step 1: Calculate tax payable for the PY in which arrears of salary are received on the following amounts: (a) Total income inclusive of additional salary (b) Total income exclusive of additional salary Difference between (a) & (b) is tax on additional salary Step 2: Calculate tax payable for every PY to which the additional salary relates on the following amounts: (a) Total income inclusive of additional salary of that particular year CFP Level 2 - Module 2 – Taxation - India Page 141

(b) Total income exclusive of additional salary Aggregate the difference between (a) & (b) for all such Previous Years Step 3: Step 1 less Step 2 shall be the relief admissible u/s 89 for previous year in which arrears are received. In case step 1 is less than step 2, assesse need not apply for relief. In the case of Mr. Hari, aged 63 years, you are informed that the salary (after SD) for the previous year 2019-20 isRs.10,20,000 and arrears of salary received isRs.3,45,000. Further, you are given the following details relating to the earlier years to which the arrears of salary received is attributable to: Previous Year Taxable Salary Arrears Now Received (Rs.) 2010 – 2011 7,10,000 1,03,000 2011 – 2012 8,25,000 1,17,000 2012 – 2013 9,50,000 1,25,000 Compute the relief available u/s 89 and the tax payable for the A.Y. 2020-21. Assessment Slab Rates of Income-Tax Year For resident individuals of the age of For other resident individuals 60 years or more at any time during the previous year Slabs Rate Slabs Rate 2011-12 UptoRs.2,40,000 Nil UptoRs.1,60,000 Nil Rs.2,40,000 -Rs.5,00,000 10% Rs.1,60,000 -Rs.5,00,000 10% Rs.5,00,000 -Rs.8,00,000 20% Rs.5,00,000 -Rs.8,00,000 20% AboveRs.8,00,000 30% AboveRs.8,00,000 30% 2012-13 UptoRs.2,50,000 Nil UptoRs.1,80,000 Nil Rs.2,50,000 -Rs.5,00,000 10% Rs.1,80,000 -Rs.5,00,000 10% Rs.5,00,000 -Rs.8,00,000 20% Rs.5,00,000 -Rs.8,00,000 20% AboveRs.8,00,000 30% AboveRs.8,00,000 30% CFP Level 2 - Module 2 – Taxation - India Page 142

2013-14 UptoRs.2,50,000 Nil UptoRs.2,00,000 Nil Rs.2,50,000 -Rs.5,00,000 10% Rs.2,00,000 -Rs.5,00,000 10% Rs.5,00,000 -Rs.10,00,000 20% Rs.5,00,000 -Rs.10,00,000 20% AboveRs.10,00,000 30% AboveRs.10,00,000 30% Note: Education cess@2% and secondary and higher education cess@1% is attracted on the income-tax for all the year. Answer: Computation of tax payable by Mr. Hari for the A.Y 2020-21 Particulars Incl. Arrears of Salary Excl. Arrears of Salary 10,20,000 Current year salary 10,20,000 – 10,20,000 Add: Arrears of salary 3,45,000 1,16,000 4,640 Taxable Salary 13,65,000 1,20,640 Income-tax thereon 2,19,500 Add: H & EC @ 4% 8,780 Total Payable 2,28,280 Computation of tax payable on arrears of salary if charged to tax in the respective assessment years. Particulars AY 2011-12 AY 2012-13 AY 2013-14 Incl. arrears Excl. arrears Incl. arrears Excl. arrears Incl. arrears Excl. arrears Taxable salary 7,10,000 7,10,000 8,25,000 8,25,000 9,50,000 9,50,000 Add: Arrears 1,03,000 — 1,17,000 — 1,25,000 — of salary Taxable salary 8,13,000 7,10,000 9,42,000 8,25,000 10,75,000 9,50,000 Tax on the 97,900 76,000 1,34,600 99,500 1,47,500 1,15,000 above Add: Cess @ 2,937 2,280 4,038 2,985 4,425 3,450 3% CFP Level 2 - Module 2 – Taxation - India Page 143

Tax payable 1,00,837 78,280 1,38,638 1,02,485 1,51,925 1,18,450 Computation of relief u/s 89 Particulars Rs. Rs. Tax payable in A.Y. 2020-21 on arrears: Tax on income including arrears 2,28,280 Less: Tax on income excluding arrears 1,20,640 1,07,640 Tax payable in respective years on arrears: Tax on income including arrears (Rs.1,00,837 + Rs.1,38,638 +Rs.1,51,925) 3,91,400 Less: Tax on income excluding arrears (Rs.78,280 + Rs.1,02,485 +Rs.1,18,450) 2,99,215 92,185 Relief u/s 89 - difference between tax on arrears in A.Y 2018-19 and 15,455 tax on arrears in the respective years Tax payable for A.Y 2018-19 after relief u/s 89 Particulars Rs. Income-tax payable on total income including arrears of salary 2,26,085 Less: Relief u/s 89 as computed above Tax payable after claiming relief 14,420 2,11,665 CFP Level 2 - Module 2 – Taxation - India Page 144