Benefits available to salaried employees in AY 2015-16

 Benefits available to salaried employees in AY 2015-16  Benefits available to salaried employees in AY 2015-16
Oct 182014
 

Benefits available to salaried employees in AY 2015-16

Amendment was in the tax slab.

Although there is no change in the existing tax rate yet new Government had increased the minimum limit from Rs. 2,00,000 to Rs. 2,50,000. There were no changes in the tax slab from last 2 years in tax slabs.

So definitely, this is one of the very important announcements in new finance bill. Following are the tax slabs of Assessment Year 2014-15 & 2015-16.

Table 1: Tax Slabs

Tax Slabs 2014-15 Tax Slabs 2015-16
Income Tax Rate Income Tax Rate
Upto Rs. 2 Lacs 0 Upto Rs. 2.5 Lacs 0
Rs. 2 Lacs to Rs. 5 Lacs 10% Rs. 2.5 Lacs to Rs. 5 Lacs 10%
Rs. 5 Lacs to Rs. 10 lacs 20% Rs. 5 Lacs to Rs. 10 lacs 20%
Above Rs. 10 Lacs 30% Above Rs. 10 Lacs 30%

For senior citizen with Age group of 60 years or above but less than 80 years than their minimum tax limit is Rs. 300,000 instead of Rs. 250,000.

 On the other hand, senior citizen with age of 80 years or more than they do not need to pay tax of initial income of Rs. 500,000.

 Amendment is under section 80C and 80CCC.

Earlier, the maximum qualifying investments for deduction from total income was Rs. 1, 00,000 (even more amount was investment in specified schemes) which was raised to Rs. 1, 50,000. 

 So if no loan is taken by the employee to construct or renovate the house & having total salary income Rs. 5 lacs  than his total taxable income will decline by Rs. 50,000 (after availing this deduction) which is 12.5 % of earlier base income.

 The above conclusion can be examined with below table:-

(A) Person Having Income Rs. 5 lacs with no house loan

Table 2 Before Budget 2014 ( NO House loan is there) Table 3 After Budget 2014 ( NO House loan is there)
Gross Salary Rs. 500000 Gross Salary Rs. 500000
less deduction U/S 80C +80CCC Rs. -100000 less deduction U/S 80 + 80CCC Rs.-150000
Taxable salary Rs. 400000 Taxable salary Rs. 350000
Loss from HP (due to interest on loan   taken for construction or renovation of house) 0 Loss from HP (due to interest on loan   taken for construction or renovation of house) 0
Net Taxable income Rs. 400000 Net Taxable income Rs. 350000

Now tax liability can be calculated as below:-

Table 4 Tax Liability before Budget 2014 ( NO House loan is there) Table 5 Tax Liability before Budget 2014 ( NO House loan is there)
Tax Rate Tax Tax Rate Tax
Upto 2 lacs 0 0 Upto 2.5 lacs 0 0
Next 2 Lacs 10% Rs. 20000 Next 1 Lac 10% Rs. 10000
Total Tax before surcharge   Rs. 20000 Total Tax before surcharge   Rs.10000
Surcharge 3% Rs. 600 Surcharge 3% Rs. 300
Total Tax Rs. 20600 Total Tax Rs.10300
Less: Rebate ** Rs. 2000
Net Tax Rs. 8300

  Table 6 Net change in Total tax Structure having gross income Rs. 5 lacs.

Total Tax liability before budget Rs. 20600
Total Tax liability after budget Rs.-10300
Net Benefit Rs. 10300

Rebate u/s 87A of Rs 2000 will also be admissible if the person income does not exceed Rs. 500000.

 By: Sensys Technologies

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PENSION – Legal Issues and Taxation

 PENSION – Legal Issues and Taxation  Pension
Oct 172014
 

PENSION – Legal Issues and Taxation

Fundamentals facts about pension:-

  • Pension is a “Defined Retirement Benefit” plan.
  • This is taxed as salary in the hands of the employee.
  • For employer, pension is just like other employee benefit plan and any expenses incurred shall be disclosed on face of “Profit and Loss Account” under “Employee Expenses”.
  • Any future liability shall be actuarially valued and disclosed on the face of balance sheet as separate line item under appropriate head.
  • Pension expenses are deductible on payment basis to the employee u/s 37 of income tax act.
  • While calculating TDS for payments made to employee, pension payments are consider on due basis.

Who is eligible for pension / family pension

Person himself, his/her spouse, children below 25 year of age, unmarried daughter.

What is the tax treatment for family pension received by the legal heirs of a deceased employee

It will be taxable under the head ‘income from other source’ .under section 57(iia).

A standard deduction shall be allowed to the legal heir @33.333% of such pension or Rs. 15,000, whichever is less.

Important point:

Divorced wife loses the status of a legally wedded wife and as such is not entitled to the award of family pension. However, the eligible child/children from a divorced wife shall be entitled to the share of family pension which the mother would have received at the time of death of her husband had she not been divorced.

 What are the document to be filled for family pension in case of death?

  • Certificate of income, required to be submitted by a claimant member of family (other than spouse) along with application form. (Form 14)
  • PPO and death certificate after the death of a pensioner/family pensioner
  • Department of Personnel, P.G. & Pensions(DOPPW), Government of India, New Delhi has issued the O.M. No. 1/16/2011-P&PW(E) dated 20.9.2012 regarding- Family pension, this O.M. is being uploaded on the ICAR web-site icar.org.in for information and further guidance.

What are the documents to be filled when the name of the claimant member is not available in the records?

The certificates prescribed at serial number 9(v) of Form 14 may be accepted. In addition to these certificates:-

  • PAN Card, Matriculation Certificate, Passport.
  • CGHS Card, Driving License
  • Voter’s ID card and Aadhar Number may also be accepted.

The Applicant has also to prove that no other surviving member in the family, who may have a prior entitlement for family pension, is eligible. For this purpose the above and/or any other document such as marriage/death/income certificate of the other member, which may be essential in a given situation may be used.

FOR DETAIL OF OTHER FORMS PLEASE REFER WEBSITE www.pensionersportal.gov.in

TAX TREATMENTS

  • Tax is deductible under section 192 of income tax act on payment.
  • Family pension received by the dependence of the employee is taxable under the head income from other source.
  • TDS is not deductible on family pension as it is not covered under section 192 of the Income tax act
  • Exemption under section 10 (18) if any income by way of pension / family pension shall be exempt if such individual has been in the service of central government/ state government and has been awarded Paramvir Chakra or Mahavir Chakra, or Vir Chakra or such other Gallantry awards as may be notified.

Exemption of family pension received by the family members of armed forces (including paramilitary forces) personnel killed in action in certain circumstances 10 (19).

By: SensysTechnologies

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Common Issues in Computing Salary

 Common Issues in Computing Salary  Common Issues in computing salary
Oct 162014
 

Common Issues in Computing Salary

What is consider in salary income?

A salary is a form of periodic payment from an employer to an employee. It is specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis.

Salary is a fixed amount of money or compensation paid to an employee by an employer in return for work performed. Salary is commonly paid in fixed intervals

What is considered as salary income?

Section 17(1)​ of the Income-tax Act defines the term ‘salary’. However, not going into the technical definition, generally whatever is received by an employee from an employer in cash, kind or as a facility is considered as salary.​

What are allowances? Are all allowances taxable?

​ Allowances are fixed periodic amounts, apart from salary, which are paid by an employer for the purpose of meeting some particular requirements of the employee. There are generally three types of allowances for the purpose of Income-tax – taxable allowances, fully exempted allowances and partially exempted allowances.

​My employer reimburses to me all my expenses on grocery and children’s education. Would these be considered as my income?

​Yes, these are in the nature of perquisites and should be valued as per the rules prescribed in this behalf.​​

During the year I had worked with three different employers and none of them deducted any tax from salary paid to me. If all these amounts are clubbed together, my income will exceed the basic exemption limit. Do I have to pay taxes on my own?

​Yes, you will have to pay self-assessment tax and file the return of income.​​

Even if no taxes have been deducted from salary, is there any need for my employer to issue Form-16 to me?

​Form-16 is a certificate of TDS. In your case it will not apply. However, your employer must issue a salary statement.​​

Is pension income taxed as salary income?

​Yes. However, pension received from the United Nations Organisation is exempt.​

​Is Family pension taxed as salary income?

​No, it is taxable as income from other sources.​

If I receive my pension through a bank who will issue Form-16 or pension statement to me- the bank or my former employer?

​The bank.​​

Are retirement benefits like PF and Gratuity taxable?

​In the hands of a Government employee Gratuity and PF receipts on retirement are exempt from tax.

In the hands of non-Government employee, gratuity is exempt subject to the limits prescribed in this regard and PF receipts are exempt from tax, if the same are received from a recognised PF after rendering continuous service of not less than 5 years.​​

Are arrears of salary taxable?

​Yes. However, the benefit of spread over of income to the years to which it relates to can be availed for lower incidence of tax. This is called as relief u/s 89 of the Income-tax Act.​​

Can my employer consider relief u/s 89 for the purposes of calculating the TDS from salary?

​ Yes, if you are a Government employee or an employee of a PSU or company or co-operative society or local authority or university or institution or association or body. In such a case you need to furnish Form No. 10E to your employer. ​​

My income from let out house property is negative. Can I ask my employer to consider this loss against my salary income while computing the TDS on my salary?

​Yes, however, losses other than house property loss cannot be considered while determining the TDS from salary.​

​Is leave encashment taxable as salary?

​ It is taxable if received while in service. Leave encashment received at the time of retirement is exempt in the hands of the Government employee. In the hands of non-Government employee leave encashment will be exempt subject to the limit prescribed in this behalf under the Income-tax Law.​

​Are receipts from life insurance policies on maturity along with bonus taxable?​

​​​As per section 10(10D), any amount received under a life insurance policy, including bonus is exempt from tax. Following points should be noted in this regard:

  • Exemption is available only in respect of amount received from life insurance policy.
  • Exemption under section 10(10D)​ is unconditionally available in respect of sum received for a policy which is issued on or before March 31, 2003.

However, in respect of policies issued on or after April 1st, 2003, the exemption is available only if the amount of premium paid on such policy in any financial year does not exceed 20% (10% in respect of policy taken on or after 1st April, 2012) of the actual capital sum assured.

Amount received on the death of the person will continue to be exempt without any condition.

Entertainment Allowance

 Entertainment Allowance  Entertainment Allowance
Oct 132014
 

Entertainment Allowance


Introduction to Entertainment Allowance:

  1. Employer pays monthly allowance to the employee to meet his expenses for entertainment for motivation. Such allowance is called as entertainment allowance.

Statutory Provision

Entertainment allowance is taxable. However deduction from taxable salary is allowed to some extent u/s 16(ii) as given below:

If assessee is a government employee (only), the least of the following three is exempted from tax u/s 16(ii).

  • The maximum limit amount of Rs.5000/- is considered.
  • 20% of value of Basic Pay which is computed under entertainment allowance.
  • The actual entertainment allowance which is provided by the employer to the employee
  1. If assessee is a private employee including employees of statutory corporation and local authority, the entire entertainment allowance is taxable i.e allowances is not deductible, and are completely chargeable to tax.
  1. Section 10(14) provides that in computing the total income of a person, any special allowance or benefit, not being in the nature of entertainment allowance or other perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, to the extent to which such expenses are actually incurred for that purpose, shall not be included.

Case Study:

  1. Mr. M is an employee of Gujarat government gets Rs. 1,20,000/- as basic pay. He is also getting the entertainment allowance for Rs.15,000/-, Rs. 10,000/- as DA and Rs. 15,000/- as house rent allowance.

Gross salary would be: Rs. 1,60,000 (1,20,000+15,000+10,000+15,000).

Basic pay is only considered for computing salary for entertainment allowance. Rs. 1,20,000/- is the basic pay which is to be considered for entertainment allowance.

On computing the entertainment allowance the least of the following three is exempted from tax.

  • The maximum limit of 5,000/- is considered for computation of entertainment allowance.
  • The 20% of salary i.e.20%*1,20,000 = 24,000 is considered for computation of entertainment allowance.
  • The actual entertainment allowance of Rs.15000 is considered for computation of entertainment allowance.

The exempted EA u/s 16(ii) is Rs. 5000/- which is to be deducted from gross salary that includes entertainment allowance also. Hence, taxable salary will be Rs. 1,55,000/-. (Rs. 1,60,000-Rs. 5,000/-).

  1. Mr.N is an employee of X ltd., gets Rs. 1,80,000/- as basic pay. He is getting the entertainment allowance for Rs. 25,000/-, Rs. 20,000/- as DA and Rs. 5000/- as High cost of living allowance.

Gross salary would be: Rs. 2,30,000 (1,80,000+25,000+20,000+5,000).

As X is a private employee, the entire entertainment allowance Rs. 20,000/- is taxable. Nothing is exempted from tax. Hence, taxable salary will be Rs. 2,30,000/-.

By: Sensys Technologies

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Medical Allowance v. Medical Reimbursement

 Medical Allowance v. Medical Reimbursement  MEDICAL ALLOWANCE v. MEDICAL REIMBURSEMENT, Salary Computation
Oct 082014
 

Medical Allowance v. Medical Reimbursement

In most of time name does make a difference. But our income tax act is an exception of this. Here nomenclature can make a big difference. Whether you are receiving Medical allowance or Medical reimbursement, will make a lot of difference to your tax bill.

How does name makes a difference?

Payment under head Amount Technically meaning Impact on tax bill
Medical Reimbursement Payment to employee depends on actual expenses incurred by employee.In no case payment can not exceed expenses subject to any ceiling limit, if any, fixed as per policy of the company. Employee has no scope of benefit. What he gets from employer is actual expenses incurred as supported by original bills submitted with claim report. Whatever employee gets under Medical reimbursement is not taxable up to Rs. 15,000. It’s a tax free receipt.
Medical Allowance Payment to employee is fixed as per policy of the company.It does not have relation with the actual expense incurred by him. Payment involved and timing of payment is always certain. Fully taxable.

Practical issues and their solutions:-

Issue:- Is there any restriction on expenses availing benefit?

Yes, all expenses incurred on self and dependable relative shall be consider on availing the exemption benefit. Relative of medical reimbursement shall include spouse, children, parent, brother and sister. Expenses incurred on any other person shall not be consider.

Issue:- What if employees does not submit the bills?

In such case payment shall be consider as medical allowance and entire payment shall be taxable. It is only after due verification of bills employer reimburses employee, subject to pre decided limits, medical reimbursement up to Rs. 15,000 is exempted.

Issue – What are departmental controls over employer to ensure that correct reimbursement is provided to employee?

It is the employer’s responsibility to pay medical reimbursement only against authentic bills. Any incorrect payment will make employer liable for following:-

  • This will lead to short deduction of TDS
  • Short deduction of TDS will make him assessee in default and all consequences will follow accordingly
  • Disallowance of expenses for non deduction and non deposit of TDS

As employers are open to audit and scrutiny by both tax auditors and I-T department and thus they can be catch easily.

By: Sensys Technologies

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House Rent Allowance (HRA) Vs. Rent Free Accommodations (RFA)

 House Rent Allowance (HRA) Vs. Rent Free Accommodations (RFA)  House Rent Allowance (HRA) Vs. Rent Free Accommodations (RFA)
Sep 292014
 

House Rent Allowance (HRA) Vs. Rent Free Accommodations (RFA)

House Rent Allowance (H.R.A.) results in tax savings because accounting under Income tax act is direct exemption based. However, accounting of Rent Free accommodation is valuation based taxation and added to total income of employee presumptive basis.

The principles of valuations are explained below:-

House Rental allowance
(Section 10(13A) of Income tax act, 1961 &Rule 2A of Income Tax rules, 1962)

Rent Free accommodation
(Rule 3(1) of Income Tax rules, 1962
Components of salary:

  • Basis Salary.
  • Dearness Allowance (Only the DA which forms part of the salary).
  • Percentage bases commission.


Extent of taxation:-

Exemption based:- HRA is taxable if received more than least of the following :

  • H.R.A received
  • 50% of salary
  • Rent Paid – 10% of salary

Examples:-

  • If the rent paid is zero,exemption will be zero and whole HRA received will become taxable.

Conclusion:-

Taxability under this is dependent upon the following factors:

  • H.R.A received
  • Rent Paid by the employee for hiring the accommodation out of HRA received.
  • Salary Computed for this purpose.
 Components of salary:

  • Basis Salary.
  • Dearness Allowance (Only the DA which forms part of the salary).
  • All allowance to the extent taxable.
  • Leave salary received during employment.
  • Bonus (on receipt basis)
  • Commission (both Percentage based as well as fixed commission)

Extent of taxation:-

No separate exemption under this,

Least of the following is taxable

(In case accommodation is hired by the employer) :

  • Hire chargesOR
  • 15% of Salary

Conclusion:-

Taxability under this is dependent upon the following factors:

  • Hire charges paid for the accommodation by the employer.
  • Salary computed for this purpose.

Now, above factors may help a good tax planning tool for the employees and CTC planning for employer. In the following examples we shall explain this. Total outflow of the employer assumed to be Rs. 100/-

House Rental Allowances

Rent Free Accommodation
Basis salary = Rs. 50/-
HRA = Rs. 25/-
Other allowances = Rs 25/-Computation of Taxable HRA

HRA received = Rs. 25/-

Deduction will be least of the following:

  • 50% of salary i.e. Rs. 25/-
  • HRA received i.e. Rs.  25/-
  • Rent Paid – 10% of salary i.e.

Rs. 25 – Rs. 5 = Rs. 20/-

The taxable HRA comes out to be Rs. 5/-

Income under the head salary = Rs. 80/-

 Basis salary  = Rs. 50/-
RFA(Hire charges paid) = Rs. 25/-
Other allowances = Rs. 25/-Computation of Taxable RFA

No tangible receipts to employee.

Least of the following will be taxable:

  • 15% of salary i.e. Rs. 11.25/-

OR

  • Hire charges i.e. Rs.  25/-

The taxable RFA comes out to be Rs. 11.25/-

Income under the head salary = Rs. 86.25/-

Analysis and fund planning:-

Total CTC of the employee (or outflow of employer) in both the cases will be Rs. 100/-

House Rental Allowances

Rent Free accommodation
Income taxable under the head salary :Rs. 80/-.

  • Extra income that can be avoided from being taxed: Rs. 6.25/-.
  • So it’s a tax advantageous.
 Income taxable under the head salary : Rs. 86.25/-.

  • Extra income that is taxed: Rs. 6.25/-.
  • So the taxes disadvantage.


By: Sensys Technologies

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GRATUITY – Taxation Issues

 GRATUITY – Taxation Issues  GRATUITY -Taxation Issues
Sep 182014
 

GRATUITY – Taxation Issues

Income tax assumes gratuity as capital receipts and exempts gratuity receipts up to Rs 10,00,000. This means that you need not to pay tax, subject to some conditions,  for gratuity receipts up to Rs 10 Lakhs. Gratuity beyond this limit is paid by employee under ex-gratia head and always taxable.

Calculation of tax empmption:

Categorization of employees for exemption Under Section 10(10) Are:-

  • Government employee and employee of local authorities.
  • Employee covered under the Payment of Gratuity Act, 1972
  • Other employees not covered under the Payment of Gratuity Act, 1972. (Gratuity payments under this category is hardly seen and hence not discuss in this paper)

 Exempted amount should be Minimum of the Following:

i) Actual gratuity received
ii) 15 days Basic and DA for each completed year of service or part thereof in excess of six months considering 26 days in a month
iii) Rs 10 Lakhs

How Are Gratuity Accounted for Government Company and Non-Government Company?

Government Company Non- Government Company
TaxExemption

 

 The Entire Amount You Get is Exempted (under Section 10(10)(i) 

 

 

 Amount should be Minimum of the Following:i) Actual gratuity received
ii) 15 days Basic and DA for each completed year of service or part thereof in excess of six months.
iii) Rs 10 Lakhs

(Under Act 1972)

Issues :-

-> Whether TDS is to be deducted by employer on payment of Gratuity to Employees?

Only where the Gratuity amount exceeds the Exemption Amount as calculated under section10(10) of Income tax Act, TDS shall be deducted otherwise no.

-> Whether Insurance / earmarked investment is mandatory for Gratuity Fund?

Not Mandatory, The Act does not force you to make any provision or any gratuity fund. You are to make the payment of gratuity to the eligible employee as and when is due to be paid.

-> If we show the Gratuity as Part of salary How we Manage and do Accounting?

It cannot be stated as part of salary.

-> If an employee whose gratuity is withheld pending completion of the proceedings is he entitled to interest on gratuity ?

The employee is entitled to interest also from the date of Gratuity till the payment of gratuity. Case law:- Supreme Court ruled in Y.K. Singla v. Punjab National Bank.

Practical application:-

Mr. X receives following amount in previous year:

1)       Gratuity receive 3,00,000
2)       Year of service 30 years 7 months( excess of 6 month should be taken as full year)
3)       Average salary 20000

Calculation:

1)        3,00,000
2)       (31 * 20,000 * 15/26) = 357692.31
3)       10,00,000

Therefore3,00,000 shall be  exempted .

Case Study:- 

Employer has resigned after working for more than 5 years. Employer signed the full and final settlement letter stating he has no dues pending from company. Full and final settlement letter does not mention anything about gratuity, Now after 3 months employee has submitted a letter claiming for gratuity. Is Employer liable to pay gratuity to employee?

Employer is liable to pay gratuity to the employee even after full and final payment, mere by signing that he/she receive all payment does not effect his /her right to claim gratuity.

For any further information or query you can be reached to experts of our panel at contact@sensysindia.com

GRATUITY – DEFINED BENEFIT RETIREMENT PLAN

 GRATUITY – DEFINED BENEFIT RETIREMENT PLAN  Gratuity
Sep 172014
 

GRATUITY – DEFINED BENEFIT RETIREMENT PLAN

Job-hopping can increase your pay, but good old loyalty also has its perks. Stay on with your employer for five years or more, and you are entitled to gratuity when you resign, retire or are retrenched. If your thinking for your retirement plan GRATUITY is also one of important tool.

 Gratuity means:-

  • For employee:- Gratuity is a reward for long and meritorious service.
  • For legal dept / labour laws / labour unions:-In 1972 the government passed the Payment of Gratuity Act that made it mandatory for All employers with more than 10 employees to pay gratuity.
  • For employer:- Gratuity shall be payable to an “employee” on the termination of his employment after he has rendered continuous service for five years or more.
  • For accountant:- A defined benefit plan to be accounted as per GAAP given in IAS 19.

Here we are discussing GRATUITY from employee and employer point of view.

Who Are The Establishment Covered Under Gratuity Act

  • Every factory, mine, oil field, plantation
  • port, railways, shop & Establishments  OR
  • educational institution

 Employing 10 or more persons on any day of the preceding 12 months.

 In short provisions of gratuity act applicable to all commercial establishment having 10 employees in any time in its life. Once Gratuity act applies to an establishment, it shall continue to apply irrespective of change in performance, size and no of employees.

 Pre – Conditions for claiming gratuity:-

  • Gratuity is payable only if you have been with the employer for five years or more.
  • But this rule is waived if an employee dies or is disabled, superannuation, retirement or resignation.
  • In such cases, gratuity is paid to the nominees or to the employee, even if the tenure is less than 5 years.

Caution:- Here employees are defined as those hired on the company’s payroll. Trainees and interns are not eligible for this compensation. However, training period of permanent employees are covered under the act.

Further, in case of contractual employment, primary liability for payment of gratuity is of contractor. However, in case contractual employer is not able to pay gratuity,liability rest on employer in whose premises employee in working.

 Payment of Gratuity:-

  • Gratuity is normally payable to the employee himself.
  • In the case of death of the employee it shall be paid to his nominee & nomination has been made to his heirs.
  • In case the nominee is a minor; share of the minor shall be deposited with the controlling authority who shall invest the same for benefit of the minor, until he/she attains majority.

Formula For Gratuity:-

i) Actual gratuity received
ii) 15 days Basic and DA for each completed year of service or part thereof in excess of six months taking 26 days in a month.
iii) Rs 10 Lakhs

 Consequences of non-payment:-

It is the duty of the employer to determine the amount of gratuity as soon as it becomes payable and to give notice of the same to the person to whom gratuity is payable and also to the Controlling Authority. The employer shall also provide to pay the amount of gratuity to the person to whom it is payable. Failure to do so shall render him liable to pay the interest at the prevailing rate from time taken. In case the employee is not paid the due amount of gratuity he should apply, ordinarily within thirty days, in Form-I to the employer. Is an employer fails to pay due gratuity even after the receipt of notice in Form-1, the claimant employee or his nominee or legal heir, may within ninety days of the occurrence of the case for the application, should apply in Form-IV, to the Controlling Authority for issuing direction to the employer. After conducting the enquiry as prescribed, the Controlling Authority will determine the amount payable and direct the employer to make the payment. If the employer fails to comply with the direction the Controlling Authority can direct the Collector to recover the amount due and pay to the applicant.

The Act provides that whoever makes false statement for the purpose of avoiding any payment shall be punishable with imprisonment for a term which may extend to six months or with fine which may extend to ten thousand rupees or with both. An employer who contravenes any provisions of the Act shall be liable for imprisonment for a term of not less than three months but which may extend to one year or with fine which shall not be less than ten thousand rupees but which may extend to twenty thousand rupees or with both. Where the offence relates to non-payment of gratuity the employer can be punished with imprisonment for a term which is not less than six months.

For any further information or query you can be reached to experts of our panel at contact@sensysindia.com

HOUSE RENT ALLOWANCE – How to compute Exemption

 HOUSE RENT ALLOWANCE – How to compute Exemption  HOUSE RENT ALLOWANCE – How to compute exemption
Sep 162014
 

HOUSE RENT ALLOWANCE – How to compute exemption

What is House Rent Allowance?

–  Employees generally receive a house rent allowance (HRA) from their employers.
– This is a part of the salary package, in accordance with the terms and conditions of employment.
– HRA is given to meet the cost of a rented house taken by the employee for his stay.
– Now a days HRA is given to all employees irrespective of actual rent factor. In most of the cases it is 40% to 50% of basic pay of or 28% (approx.) of CTC and so is the major tax planning factor.
– The exemption on HRA is covered under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules.

How is HRA accounted for in the case of a salaried individual and a self-employed professional?

Basis  Salaried individual Self-employed professional
Tax accounting Under Section 10 (13A) of Income Tax Act, 1961, in accordance with rule 2A of Income Tax Rules. Under section 80GG, which resembles section to 10(13A) but is subject to certain conditions.

What is the formula for calculating HRA exemption?

Minimum of the following three options:

  1. Actual house rent allowance received from your employer
  2. Actual house rent paid by you minus 10% of your basic salary
  3. 50% of your basic salary if you live in a metro or 40% of your basic salary if you live in a non-metro

This minimum of above is  allowed as income tax exemption on house rent allowance.

Salary here means basic salary which  includes dearness allowance if the terms of employment provide for it, and commission based on a fixed percentage of turnover achieved by the employee. All the components shall be taken on due basis. Caution: salary is taxable on due or receipt whichever is earlier (sec 15) but for calculating HRA exemption all components shall be taken only on due basis.  

Caution: The deduction will be available only for the period during which the rented house is occupied by the employee and not for any period after that.

Examples for calculation of exemption/deduction of HRA

X has received following amount during the previous year.

  1. Basic Salary – Rs. (5000*12) – Rs. 60,000/-
  2. Dearness Allowance (D.A) – Rs. (1000*12) – Rs. 12000/-
  3. House Rent Allowance (H.R.A.) – Rs. (2000*12) – Rs. 24000/-
  4. Actual Rent Paid – Rs.(2000*12) – Rs. 24000/-

Calculation

The minimum of the following amount shall be exempt

  • Actual HRA received (2000*12) – Rs. 24000/-
  • Rent Paid in excess of 10% of salary ( 24000-7200) – Rs. 16800
  • 40% of Salary – Rs. 28800/-

Therefore, Rs. 16800 shall be exempt and the balance Rs. 7200 shall be included in gross salary.

HOUSE RENT ALLOWANCE – Departmental Control

 HOUSE RENT ALLOWANCE – Departmental Control  HOUSE RENT ALLOWANCE
Sep 162014
 

HOUSE RENT ALLOWANCE – Departmental Control

What are the dependent factors in calculating HRA exemption for the salaried individual?

Keep four aspects in mind:-

  1. HRA received,
  2. The actual rent paid and
  3. Where you reside, i.e., if it is a metro or non-metro. * caution – place of residence is significant and not place of employment.
  4. The place of residence is significant in HRA calculation.

Imp:- The above factors shall be calculated on monthly basis.

What are the conditions for availing exemption of HRA?

– He must stays in a rented house.

– He is in receipt of HRA from his employer.

– Employee must actually pay rent for the house which he occupies.

Caution – The rented premises must not be owned by him. In case one stays in an own house, nothing is deductible and the entire amount of HRA received is subject to tax.

Can I pay rent to my parents or spouse to avail HRA benefits?

Relationship parents spouse Children Other relatives
As per tax rule No restriction No restriction No restriction No restriction
Tax impact on recipient To account for the same under ‘Income from other sources’. [Sec 56] To account for the same under ‘Income from other sources’. [Sec 56] To account for the same under ‘Income from other sources’. [Sec 56] To account for the same under ‘Income from other sources’. [Sec 56]
Practical view Practically possible In view of the relationship when you take up residence together, you are expected to do so and hence such a transaction does not bear merit under tax laws. Sham transactions can only spell trouble under scrutiny, so steer clear of these. Practically possible Practically possible

What are proof for HRA claim?

– Proof of rent paid through rent receipts, for which only two need to be submitted, one for the beginning of the year and one towards the end of the financial year.

– It should have a one rupee revenue stamp affixed with the signature of the person who has received the rent, along with other details such as the rented residence address, rent paid, name of the person who rents it etc.

– PAN No of house owner in case rent paid by employee is more than ₹ 100,000. [Circlular No. 08/2013 F.No. 275/192/2013-IT(B) dated 10.10.2013]

Can I simultaneously avail tax benefits on my home loan and HRA and also show rental income in my tax return?
No restriction in case you have proper justification for the same.

Special attention:-

Practical cases seen:-
There are cases where employees pay their rent in cash and landlord refuses to provide any rent receipts.

What employees do-
Employees prepare rent receipts themselves and do forge signatures. Also there might be cases where employees actually do not pay any rent but still prepares rent receipts.

Legal consequences:-
These all are covered under forgery cases and offences under giving false evidence and fabricating false evidence of IPC (Section 191 & 192).

What employer should do if such cases are identified in his company:-
Sack the employee.

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