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    Income From Salary (Part 3)


    Section 17 (3) Profit in lieu of salary
    Profit in lieu of salary include:-
    1. Any compensation due to or received by the assesses from his employee or former employee in connection with the following:
    a)      Termination of the employment.
    b)      Modification of terms of employment.
    2. Any payment due to or received by the assesses from his employee or former employee: Any payment due to or received by the assesses from Provident fund or any other fund or any sum received under Key man insurance policy including the sum allocated by way of Bonus. Notes (Exempted payment were excluded from the purview)
    3. Any amount due to or received whether in lump sum or otherwise in connection with the following:
    a)      Before joining the employment with that person
    b)      After cessation of employment with that person

    Types of Provident fund and Its Treatment:
    Particulars
    SPF
    RPF
    URPF
    PPF
    1. Employee's/ assessee's contribution
    Deduction u/s 80C is available from gross total income subject to the limit specified therein
    Deduction u/s 80C is available from gross total income subject to the limit specified therein
    No deduction u/s 80C is available
    Deduction u/s 80C is available from gross total income subject to the limit specified therein
    2.Employer's contribution
    Fully exempt from tax
    Exempt up to 12% of salary. Amount in excess of 12% is included in gross salary.
    Not exempt but also not taxable every year. For taxability see point 4 below
    Not applicable as there is only assessee's own contribution
    3. Interest on Provident Fund
    Fully exempt from tax
    Exempt u/s 10 up to 9.5% p.a. Interest credited in excess of 9.5% p.a. is included in gross salary
    Not exempt but also not taxable every year. For taxability see point 4 below
    Fully exempt
    4.Repayment of lump sum amount on retirement/ resignation/ termination
    Fully exempt u/s 10(11)
    Exempt if the employee has rendered minimum 5 years of continuous service
    Accumulated employee's contribution is not taxable Accumulated employer's contribution + interest on employer's contribution (till date) is taxable as profit in lieu of salary. Interest on employees contribution (till date) is taxable as income from other sources
    Fully exempt. u/s 10(11)

    Transferred Balance: The balance of unrecognised fund which is transferred to recognised fund is called transferred balance. Points to remember:
    a.       The fund will be treated as RPF from the date fund was instituted
    b.      The employers contribution to URPF shall qualify for exemption upto 12% of salary and excess shall be taxable.
    c.       Interest upto 9.5% is exempted, excess taxable
    d.      Salary means: basic + DP + DA (Which enters) + Commission on turnover

    Leave Travel concession [ Sec. 10(5)]
    Any amount received by an employee for proceeding on leave anywhere in india is exempted upto the extent of amount of fair which is equl to the shortest route to the place of destination.

    Perquisite and allowance paid by government to its employee posted outside india [Sec. 10(7)]
    Fully exempted from tax

    Gratuity [Sec. 10(10)]
    Government employees and employee of a local authority
    Employees covered under  Gratuity Act
    Any other employee
    Fully exempt
    Minimum of the following 3 limits:
    Minimum of the following 3 limits:
    (1)          Actual gratuity received, or
    (1)          Actual gratuity received
    (2)          15 day's salary for every completed year, or part thereof exceeding six months (7 day's salary for each season for an employee in a seasonal establishment); or
    (2)          Half months average salary of each completed year of service.
    (3)          Rs. 10,00,000
    Meaning of Salary:
    (i)            Basic salary plus Dearness allowance.
    (ii)           Last drawn salary (average salary of preceding three months in case of piece rated employee)
    (iii)          No. of days in a month to be taken as 26
    (3)          Rs.10,00,000
    Meaning of Salary:
    (i)            Basic Salary plus D.A. to the extent the terms of employment so provide Commission, if fixed percentage of turnover.

    (ii)           Average salary of last 10 months preceding the month in which event occurs.

    (iii)          Only completed year of service is to be taken.

    Pension [Sec. 17(1) (ii)]:
    Uncommuted pension i.e. the periodical pension: It is fully taxable in the hands of all employees, whether government or non-government.

    Exemption of commuted pension u/s 10(10A)
    Govt. employees, employees of local authorities and employees of statutory corporations

    Any other employee
    Fully exempt
    (a)          If gratuity is not received: Commuted value of 1/2 of pension which he is normally entitled to receive is exempt.
    (b)          If gratuity is also received: Commuted value of 1/3rd of pension which he is normally entitled to receive is exempt.

    Leave encashment on retirement [sec. 10(10AA)]
    1. Leave encashed during service: fully taxable in which it is encashed
    2. Leave encashed at the time of retirement
    For govt. employee: fully exempted
    For other employees: exempted upto minimum of the following
    a.       Notified limit Rs. 300000
    b.      Average salary x 10 months
    c.       Actual amount received
    d.      Average salary x no. of months leave due
    Average salary = salary (Same as PF) for 10 months including the month of retirement / 10
    Leave due is to be calculated taking one month leave or actual entitlement whichever is less

    Retrenchment Compensation [Sec. 10(10B)]
    Any compensation received by a workman at the time of his retrenchment, under the Industrial Disputes Act, 1947 or under any other Act or award or contract or standing order shall be exempt to the extent of minimum of the following limits:
    a.       Actual amount received;
    b.      15 days' average pay for every completed year of service or part thereof in excess of 6 months;
    c.       Amount specified by the Central Government, i.e. Rs. 5, 00,000.

    Voluntary Retirement Compensation [Sec.10 (10C)]
    Any compensation received or receivable from certain employers by the employee on voluntary retirement as per the guidelines of the Government is exempt to the extent minimum of the following limits:
    a.       Actual amount received
    b.      Rs. 5, 00,000 whichever is less.

    Exemption shall be available, subject to the following conditions:
    The compensation is received only at the time of voluntary retirement or termination of his services in accordance with any scheme or schemes of voluntary retirement or in the case of public sector Company, a scheme of voluntary separation. Even if the compensation is received in installments, the exemption shall be allowed.
    The amount receivable on account of voluntary retirement or voluntary separation of the employee does not exceed:the amount equivalent to 3 months salary for each completed year of service; or Salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation.

    Approved super Annuation Fund [sec. 10 (13)]
    The tax treatment as regards the contribution to and payment from the fund is as under:
    Employee's contribution: Deduction is available under section 80C from gross total income.
    Employer's contribution: Contribution by the employer to the approved superannuation fund is exempt upto Rs. 1,00,000 per year per employee. If the contribution exceeds Rs. 1,00,000 the balance shall be taxable in the hands of the employee.
    Interest on accumulated balance: It is exempt from tax.
    Any payment from an approved superannuation fund is exempt from tax if it is made on the following situations
    a.       on the death of a beneficiary to an employee
    b.      in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming in capacitated prior to such retirement
    c.       By way of refund of contribution on the death of beneficiary


    Deduction under Section 80C - Individual /HUF only
    Any sums paid or deposited in the previous year by the assessee towards any or all of the following is allowed as a deduction under section 80C:
    1. Life Insurance premiums for self, spouse and any child in case of individual and any member, in case of HUF.

    2. Payment towards a deferred annuity contract on life of self, spouse and any child in case of individual.

    3. Contributions towards Statutory Provident Fund or Recognized Provident Funds or Approved Superannuation funds;

    4. Contributions to Public Provident Fund scheme, 1968, in the name of self, spouse and any child in case of individual and any member in case of HUF.

    5. Any sum deposited in a 10 year or 15 year account under the Post Office Savings Bank (CTD) Rules, 1959,
    6. Subscription to the NSC (VIII issue).

    7. Subscription to any units of any Mutual Fund referred u/s. 10(23D) (Equity Linked Saving Schemes).

    8. Contribution by an individual to any pension fund set up by any Mutual Fund referred u/s 10(23D).

    9. Subscription to any such deposit scheme of National Housing Bank (NHB), or as a contribution to any such pension fund set up by NHB as notified by Central Government.

    10. Subscription to notified deposit schemes of (a) Public sector companyproviding long-term finance for purchase/construction of residential houses in India or (b) Any authority constituted in India for the purposes of housing or planning, development or improvement of cities, towns and villages.

    11. Tuition fees (excluding any payment towards any development fees or donation or payment of similar nature), to any university, college, school or other educational institution situated within India for the purpose of full-time education of any two children of individual.

    12. Towards the cost of purchase or construction of a residential house property (including the repayment of loans taken from Government, bank, LIC, NHB, specified assessee’s employer etc., and also the stamp duty, registration fees and other expenses for transfer of such house property to the assessee). The income from such house property should be chargeable to Tax under the head “Income from house property”.

    13. Subscription to equity shares or debentures forming part of any eligible issue of capital of public company or any public financial institution approved by Board.

    14. Term Deposit (Fixed Deposit) for 5 years or more with Scheduled Bank in accordance with a scheme framed and notified by the Central Government.

    15. Subscription to any notified bonds of National Bank for Agriculture and Rural Development (NABARD) (applicable from the assessment year 2008-09).
    16. Account under the Senior Citizen Savings Schemes Rules, 2004.

    17. Five year term deposit in an account under the Post Office Time deposit Rules, 1981.

    No deduction shall be allowed to assessee in the previous year of happening of following events (referred henceforth as “such previous year”) and the aggregate amount of deductions of income so allowed in respect of the previous years preceding such previous year shall be deemed to be the income of the assessee of such previous year and shall be liable to Tax in the assessment year relevant to such previous year; i.e., If the assessee:—

    (a) Terminates the contract of life insurance, by notice to that effect or if the contract ceases to be in force by reason of failure to pay any premium, by not reviving the contract of insurance, in case of any single premium policy, within 2 years or in any other case before the premiums have been paid for 2 years.

    (b) Terminates the participation in any ULIP plan by notice to that effect or ceases to participate by reason of failure to pay any contribution, by not reviving his participation, before contributions in respect of such participation has been paid for 5 years.

    (c) Transfers his house property before the expiry of 5 years from the end of the financial year in which possession of such property is obtained or receives back, whether by way of refund or otherwise any sum specified in that clause.

    (d) Sales or transfers any equity shares or debentures to any person at any time within a period of 3 years from the date of their acquisition (i.e., date on which assessee’s name is entered in the register of members or debenture holders).

    (e) Withdraw any amount from the bank deposit or the Post Office deposits before the expiry of the period of five years from the date of deposit

    Maximum Deduction: Any sum paid or deposited as above need not be out of current year’s income but should not exceed the total income of the relevant previous year. 100% of the amount invested or Rs. 1,00,000/- whichever is less. However, as per Section 80CCE, the total deduction the assessee can claim u/ss. 80C, 80CCC and 80CCD shall be restricted in aggregate to Rs. 1,00,000/-.

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