Salary:
SALARY AND ITS COMPONENTS
· Income from Salary Model: Benefits received from Employer
· No Deductions are allowed.
Employment Relation
“Employee” means any individual engaged in employment. “Employer” means any person who engages and remunerates an employee. “Employment” includes:
• a directorship or any other office involved in the management of a company.
• a position entitling the holder to a fixed or ascertainable remuneration; or
• the holding or acting in any public office.
Definition and scope of salary
Definition
Salary refers to a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is fixed compensation paid regularly for the rendering of professional services or as a return for labor performed. Salary is commonly paid in fixed intervals, for example, monthly payments of one-twelfth of the annual salary.
Scope of Salary
Components:
Basic Salary: The core of the salary, often a substantial portion of the total compensation.
Allowances: Various allowances provided like housing, travel, meals, and others.
Bonuses: Additional amounts given for meeting or exceeding performance targets.
Benefits: Non-cash advantages like health insurance, retirement plan contributions, etc.
Salary Structures:
Fixed Salary: Regular, unchanging payments made each period.
Variable Salary: Compensation that varies, such as bonuses or commissions.
Hybrid Salary: A combination of fixed and variable salary components.
Taxation: Deductions made from the salary for taxes.
Taxable on receipt basis
Salary is subject to taxation based on the receipt principle, meaning any salary obtained by an employee within a fiscal year is subject to tax imposition. A person is considered to have received a particular amount, benefit, or perquisite in instances where it is:
(i) Directly received by the individual,
(ii) Utilized on the individual’s behalf, whether instructed by them or pursuant to any legal requirement,
(iii) Made accessible to the individual.
Exception to the Receipt Basis
In case of receipt of amount under salary which is paid in arrears and is expected to be charged at rate higher than the rate which would have been charged if the amount was received in its relevant tax year, the employee may by a notice to the Commissioner elect for tax rate applicable in the tax year in which such salary was earned.
Allowances
Any benefit provided by employer to the employee in fixed amount and in cash.
Example of allowances
Cost of Living Allowance
House Rent Allowance
Medical Allowance (Medical allowance – 10% of basic salary).
Utilities’ Allowance
Educational Allowance
Conveyance Allowance
Traveling Allowance
Dearness Allowance
Valuation of perquisites
The term ‘perquisites’ may be defined as the casual emolument, fee or profit attached to an office or position in addition to salary or wages. Perquisite may be cash (such as utility) or in kind (such as accommodation or motor vehicle provided by the employer to an employee)..
Example of Perquisites:
· Motor Vehicle
· Accommodation
· Interest Free Loan
· Transfer of Assets
· Utilities
· Services of Housekeeper etc.
· Medical Facility Settlement of Debt
Perquisites [Totally Taxable for Private Purposes]
e.g
Loan
➢ Taken from employer.
➢ Less than benchmark rate (10%) or Interest free
➢ The Gap b/w Interest rate & Benchmark rate is taxed under the head income from salary.
➢ (10%- A%) * Loan Amount = Add in Salary *A% less than benchmark rate
Exceptions:
❑ Loan < Rs. 1,000,000
❑ Loan taken by waving off his interest [P.fund]
4) Medical Facility
Under the Contract
• Exempt
Not Under the Contract
• Totally Taxable
Case when both are available
Then there are 2 cases
Case # 01
When medical facility is under the contracts then medical allowance is fully taxable
Case # 02
When medical facility is not under the contract then medical facility is fully taxable and medical allowance is taxable under general rule (Medical allowance – 10% of basic salary).
Assets Transfers/Given
For Use
1-Dep
2-Rent
Transfer = FMV – Payment
(Taxed under the Salary)
Profit in lieu of Salary
a) Consideration for employee’s agreement
Enter into Agreement
Restrictive Covenant
Any Condition
b) Golden handshake
c) Provident fund
b) Golden handshake
is a substantial financial package or settlement offered to an employee, typically as an incentive for early retirement or voluntary resignation. Often, it’s extended to top executives or long-term employees as part of their departure from a company.
1) Add in Salary
2) Separate Block of Income
Taxed at average rate
Average rate = (𝐿𝑎𝑠𝑡 3 𝑌𝑒𝑎𝑟𝑠 𝑇𝑎𝑥 𝑙𝑎𝑖𝑏𝑖𝑙𝑡𝑦/𝐿𝑎𝑠𝑡 3 𝑦𝑒𝑎𝑟𝑠 𝑇𝑎𝑥 𝐼𝑛𝑐𝑜𝑚𝑒)
Provident Fund
Recognized
Annual Treatment
Un-Recognized
On Withdrawal
(Total Balance – Employee’s Contribution) = Add in Salary
Provident Fund (Recognized)
Terminal Benefits
A) Pension
B) Gratuity
C) Super-annuation fund
Pension
Normally exempt
Exception to this rule:
➢ Re-Employment to same employer or his associate
➢ More than 1 Pension. [Higher Pension will be exempt]
Not Valid for a person aging more than 60 years.
B) Gratuity
EMPLOYEE SHARE SCHEME
Definition
An Employee Share Scheme refers to a contractual arrangement whereby a company has the discretion to allot shares to:
(i) A worker within the company,
(ii) A worker within a company that is associated with it, or
(iii) A trustee, who, in accordance with the trust deed, possesses the authority to reassign the shares to a worker of the company or a worker of its associated company.
Taxability at grant /Issuance of right or option
In instances where an employee is afforded the option or right to acquire shares through an employee share scheme, no taxable amount is imposed. This is because the mere provision of an option does not translate to a tangible benefit being accrued by the employees.
Upon the issuance of shares to an employee, stemming from the exercise of an option within an employee share scheme, the amount to be taxed to the employee, categorized under the ‘salary’ heading, will be calculated as follows:
(i) Determine the fair market value of the shares,
(ii) Account for the consideration paid for the right or option to acquire the shares,
(iii) Include the consideration paid for the acquisition of the shares.