By Eashaan Agrawal
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In the previous part we discussed some of the basic terms related to tax filing, we also discussed the requirements an individual needs to meet in order to file income tax returns under ITR-1 or the Sahaj form. In this part we will try to understand the salary/pension part of ITR-1, we will also look at the deductions that can be made under Section 16 and some allowances exempt from tax under Section 10 of the Income Tax Act.
Section 15 of the Income Tax Act
The
Income Tax Act defines ‘Salary’ u/s 15. Section 15 specifies what constitutes
‘Salary’ for the purpose of Income Tax:
1.
The salary which is due to the
individual filing the return from either his employer or former employer, this
includes both paid and unpaid dues
2.
The salary which is paid in the
previous year though not due to him or paid before it became due
3.
Arrears of the salary is also
included under the head of ‘Salary’ if
it was not charged to income tax for any earlier previous year.
4.
Any bonus, payment, or remuneration
due to a partner from a firm is not
Salary u/s 15.
5.
Further, if the salary paid in
advance is included in total income for filing of any previous year it is not
to be included again in the total income when the salary paid becomes due.
Example:
A gets 5000 rupees in January 2019 as an advance salary for the month of May
2019. If he has included that amount in the filing for Income Tax for the
previous year 2019-2020 it will not be included again for the income tax filing
in 2020-21 when it will actually become due.
Salary
The form
mentions the way gross salary is to be calculated. It includes three elements:
1.
The salary specified u/s 17(1)
2.
Value of Perquisites u/s 17(2)
3.
Profits in lieu of salary u/s
17(3)
After the
gross salary is calculated, the allowances exempt u/s 10 of the Income Tax Act
will be subtracted. This amount left is the net salary. Finally, from the net
salary, the deductions specified u/s 16 will be made and this will give us the
Salary which will be taxed. It must be noted that the allowances specified u/s
10 have to be included in the salary income as well.
Section 17(1)
Section
17(1) describes the term ‘Salary’. According to the section, the following are
included as the salary:
1.
Wages
2.
Gratuity, Annuity, Pension
3.
Advance of Salary
4.
Leave Encashment
5.
The amount that has been
transferred from unrecognized to the recognized provident fund.
6.
Amount contributed by the
employer in excess of the limit prescribed
7.
The contribution made by
Central Government to account of the employee under provident fund
8.
Compensation as a result of
variation in contracts etc.
9.
Commissions, fees or
perquisites in lieu of or in addition to any salary/wages
Any
income made under the following heads is thereby to be included in the salary
as per the part 1(i)(a) of the ITR-1.
Section 17(2)
This
section defines what are the components of perquisites. In common parlance,
perquisites mean the benefits and privileges associated with the job one has.
The prerequisite according to section 17(2) include-
1.
Value of rent-free accommodation
provided to the individual by the employer
2.
Value of concession provided on
rent of accommodation provided by the employer
3.
Value of any benefit granted or
provided at a concessional rate or for free by-
i.
Company to the individual who
is a director
ii.
Company to the individual who
has a substantial interest in the company
iii.
Employer to the employee whose
salary exceeds 50,000 rupees. This salary is exclusive of the benefits or
amenities not in the form of monetary payment.
4.
Payment by an employer of any
obligation for which the employee would be liable
5.
Sum payable by the employer for
life insurance or annuity. This excludes the payment made under
i.
Recognized Mutual Funds
ii.
Approved superannuation fund
iii.
Deposit-linked Insurance Funds were
established under the Coal Mines Provident Fund and Miscellaneous Provisions
Act or Employees’ Provident Funds and Miscellaneous Provisions Act.
6.
Value of specified security,
shares allotted tor transferred by the employer (directly or indirectly) to the
employer at concessional rate or free of cost
7.
A payment made in excess of 7
lakhs and 50 thousand by the employer to
i.
Recognized provident fund
ii.
Pension scheme u/s 80CDD
subsection (1)
iii.
Approved superannuation fund
8.
Annual accretion in the form of
interest or dividend or something of similar nature derived from the above
contributions is to be computed in such manner as may be prescribed.
9.
Any other benefit as may be
prescribed
All of
these perquisites are to be taken as part of gross income and thus will be
taxed. The value of these perquisites is
calculated as per the rules of the Income Tax Department.[1]
Furthermore, Section 17(2) also provides that the value of perquisite does not
include expenditure on health services.
Section 17(3)
This
section includes the profits which are in lieu of salary and include:
1.
Compensation for termination of
employment or modification in the service contract
2.
Payment received in a lump sum
either before joining employment or after cessation of employment
3.
Payment received by the employer
to provident or other funds, with the conditions that the fund does not have
any contribution by the assessee or any interest on such contributions
or any sum received under a Keyman insurance policy including the sum allocated
by way of bonus on such policy
All of these forms the gross salary of an individual.
After calculating the gross salary (inclusive of the allowance) the allowances
which have been exempted u/s 10 will be reduced from the gross salary.
Section 10 specifies a long list of exemptions available
to an individual and those interested can check the link attached as the
footnote.[2]
Section 16
This section provides for a standard deduction Rs.
50,000 or the amount salary whoever is lower, an entertainment allowance (For
Government Employees) actual or 1/5th of salary up to Rs. 5000 and
finally an Employment tax.
After these deductions are made from the net income,
the amount that is left is the income that will be actually taxed.
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Eashaan is a 2nd year law student at National Law University Delhi. A voracious reader, he loves to travel to new places and experience the culture of different places. His interests include Constitutional Law, Contracts and Law of Crimes.
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