FREQUENTLY ASKED QUESTIONS Payroll & Income Tax

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1 FREQUENTLY ASKED QUESTIONS Payroll & Income Tax These Frequently Asked Questions (FAQs) are general information based on the commonly sought responses and do not amount to advice on any particular matter. You are advised to seek relevant provisions of the appropriate statutes and Acts, along with the rules, circular and notifications issued from time to time, before acting on the basis of any information contained herein. We expressly disclaim all warranties of any kind, whether expressed or implied that the enclosed statements will meet your requirements, will be uninterrupted, timely, secure or error-free. In no event shall Intelenet Global services be liable for any direct, indirect, incidental, punitive or consequential damages of any kind whatsoever with respect to the service or material available through this site ( This website is designed for general information only. The information presented at this site should not be construed to be formal advice or the formation of an advisor/client relationship. Further, these FAQs must also be read along with your company specific HR/Compensation policy for clear understanding.

2 1) What does Salary Income Means? Salary normally includes Wages, annuity, and pension, gratuity, commission, perquisites etc., Any other payment received by an employee from the employer during the year. These are paid and tax deducted at source by your current employer. An annual statement of earning and deduction (Form 16) is given to each employee at end of each financial year (April-March) 2) What do allowance means? Allowances are fixed sums of money paid regularly in addition to salary. There are three types of allowance Taxable allowance Partially exempted allowance Fully exempted allowance. Tax treatment Most allowances are fully taxable some are partially taxable: Fully taxable allowance Dearness allowance Medical allowance Servant allowance Hill allowance Deputation allowance Over-time allowance Other allowance Partially exempted allow Entertainment allowance HRA Education allowance Children hostel allowance Transport Allowance 3) What is permanent account Number (PAN)? Permanent account number is a unique identification number by which the Assessing officer of the income tax department can identify any assesses. PAN consist of ten alpha numeric characters, and has to be taken by each employee of the company. This is a mandatory requirement before annual income statement can be submitted to the Income Tax Department Private & Confidential Page 2 of 9

3 4) What are the current Income Tax Slabs? For general Category From To Tax rate % Nil % % above 30% For working Women From To Tax rate % Nil % % above 30% For Senior Citizen (Age above 65 years) From To Tax rate % Nil % % above 30% Surcharge at 10% incase Taxable Income exceed Rs, 1,000,000. Education Cess at 3% of Total Tax payable including surcharge is payable. 5) Whether can I get working Women rebate? Working women rebate of 5000 has been removed from financial year To accommodate this benefit, separate income tax slab rate has been introduced as mentioned above. 6) What is form 16? Form 16 is certificate issued by the employer to its employees under section 203 of Income Tax Act for Tax deducted at Source from the income chargeable under the head Salaries This is issued yearly and original form 16 is required to file individual Tax Returns. Private & Confidential Page 3 of 9

4 7) How do I account my Salary from more than one employer? The employee is required to furnish detail of the income, under the head Salaries due or received form the former / or other employer. To the present or current employer and also Tax deducted at source, in writing and duly verified by him and by the former or other employer in form 12 B (copy of this form is available on The present or current employer will deduct Tax at source based on the aggregate amount salary (Including salary received from the former or current Employer), though it is not shown on the form 16 of the current employer. 8) How do I calculate my House rent allowance (HRA) and exemption thereon? From the House Rent Allowance (HRA) received as part of salary during the year, least of the following three amounts are exempt from tax (or not included in income): Amount equal to 50% of annual salary for persons staying in metros (Mumbai, Chennai, Calcutta or Delhi) and 40%, for other cities Actual amount of HRA received Amount of rent actually paid in excess of 10% of annual salary. For HRA exemption purposes, Salary is defined as basic salary, dearness allowance, and commission on fixed percentage, but not other allowances. Example: Salary for the entire year 500, 000/- (Basic + Dearness Allowance) Actual HRA received 1,02,000/- Rent paid for the entire year 84, 000/- (7000pm * 12 months) HRA exemption for this case is: a) Actual HRA received = 84,000/- b) Rent paid less 10% of salary = Rs 34,000 (84,000 minus 50,000(10% of 500,000)) c) 40% of salary (500,000)=Rs 200,000. Least of the above, 34,000, is exempt from tax 9) How is the exemption on Leave Travel allowance calculated? (Refer your Hr policy also along with this note. Enclosed is a best practice interpretation) Allowance to meet the cost of travel incurred by employee: Leave Travel Expenses exempt for 2 domestic journeys in a block of 4 years (Current block is , and next block is ) One un-availed journey for previous block can be availed in the 1st year of next block Assesses should be part of the travel throughout Boarding and lodging are not exempt Leave should be availed during the period of travel Private & Confidential Page 4 of 9

5 Only fare cost is exempt, which is restricted to Particulars Exempt Amount Journey performed by air ---- Economy fare by the shortest route or actual Amount spent, whichever is the least. Journey performed by rail ---- Air conditioned first class rail fare by the Shortest route or actual amount spent, Whichever is the least. Journey performed by any Air conditioned first class rail fare by the Other mode but the origin ---- shortest route or actual amount spent, And destination is covered whichever is the least. By Rail Journey performed by air ---- Economy fare by the shortest route or actual Amount spent, whichever is the least. Journey performed by rail ---- Air conditioned first class rail fare by the Shortest route or actual amount spent, Whichever is the least. Journey performed by any Air conditioned first class rail fare by the Other mode but the origin ---- shortest route or actual amount spent, And destination are covered whichever is the least. By Rail. Example: LTA received for the entire year= 40,000 Air tickets for the travel undertaken=35,000 35, 000 is exempt from tax 10) Transport allowance/conveyance Allowance Transport allowance for traveling from residence to office is exempt Up to Rs 800 per month, If provided as part of your compensation structure 11) Children Education Allowance Rs 100 per month per child up to a maximum of two children, If provided as part of your compensation structure Private & Confidential Page 5 of 9

6 12) What is Perquisite and how it is taxed? Perquisites are emoluments or benefits received from an employer, in addition to salary, bonus, allowances, gratuity, etc., They include rent-free accommodation, free electricity, and gas. Or water supply. Free domestic servant, etc., provided/paid for by the employer. These perquisites are added to the salary income for arriving at the tax liability as per the applicable slab. Examples of few perquisites are: (A) Rent Free (commonly called Company Lease) Accommodation The valuation of perquisite in respect of accommodation is as under: a) Where employer owns the accommodation provided to the employee 20% of salary in cities having population exceeding four lakh as per 2001 census 15% of salary for other places the perquisite value is.. b) Where accommodation provided is taken on lease/rent by the employer 20% of the salary or the actual amount of lease rental payable by the employer Whichever is lower As reduced by any amount of rent paid by the employee For furnished accommodation, the value of perquisite as determined by the above method will be increased by- 10% of the cost of furniture,appliances and equipments, or Where the furniture, appliances and equipments have been taken on hire, By the amount of actual hire charges payable as reduced by any charges paid by the employee himself. Salary for purposes of CLA All Taxable earnings (excluding perquisites) Less section 10 exemption if any. Example: Salary for the entire year is 500,000 CLA (Lease Rent) is 20,000 pm (taken on lease) Cost of Furniture is 40,000 Rent for the entire year ( 20,000*12 months) = 240,000 20% of salary (Rs 500,000*20%)= 100,000 Least of the above is 100,000 Add 10% of Furniture (Rs 40,000*10%) = 4,000/- Private & Confidential Page 6 of 9

7 Total perquisite on Rent Free Accommodation with furniture is 104,000 (B) Motor Car Car perquisite has been removed from FY (C) Gas, Electricity and Water Value of perquisite is the amount paid by the employer to the agency supplying the amenity (free supply of gas, electricity and water) for household consumption. Any amount paid by the employee for such facilities or services shall be reduced from the above amount. (D) Interest free or concessional loans Value of perquisite is the excess of interest payable at prescribed interest rate over interest actually paid by the employee, or any member of his household. The prescribed interest rate is the rate charged by the State Bank of India as on the 1st day of the relevant financial year. The aggregate of loan amounts (from Personal, Vehicle& Housing) should be more than 20,000/- for this perquisite to apply. (E) Use of Movable assets If the employee uses an asset owned by the employer, perquisite is charged at the rate of 10% of the original cost of the asset, as reduced by any charges recovered from the employee for such use. These include household furniture, white goods, through computers and laptops are not covered under this perquisite. 13) What amount gets deducted under section 16? (a) Standard Deduction Standard deduction has been abolished from Financial Year (b) Tax on Employment/Professional Tax Professional tax or tax on employment levied by the state is allowed as a deduction. 14) How do I account for my loss on House Property? For Self - Occupied property House that is constructed or acquired after April1999 by using borrowed capital, interest On such borrowed capital up to an amount of 150,000 can be claimed as deduction. In case, the house was acquired/constructed prior to April 1999, the amount of deduction Private & Confidential Page 7 of 9

8 is 30,000 For Let Out property Rent received for let out property less Interest on borrowed capital 3-% of the net annual value for repair and maintenance is taken as loss/profit. For both the above, assessee has to provide a certificate from the lender specifying the interest payable towards the capital borrowed for construction or acquisition of a house. Only interest paid post completion of house is entitled/eligible for deduction and Pre EMI interest is amortized over a period of 5 years. Example: 1 Interest payable on housing loan (Loan taken after ):160,000 2 Pre EMI paid is 30,000 3 Annual Value of the property (in case of Let Out Property) 250,000 4 Rent received (in case of Let Out Property) Rs 60000/- pa For Self Occupied property Interest on housing loan (loan post 1/4/99) is 160,000 Pre EMI at 20% on 30,000/-(Amortized over 5 years) is 6,000/- Total loss is 166,000 though maximum allowed is restricted to 150,000/- For Let out Property: Interest on borrowed capital is 160,000/- Pre EMI at 20%(Amortized over 5 years) is 6,000/- 30% of annual value (250,000)is 75,000(for repairs and maintenance) Total of 241,000 is reduced by 60,000 (rent received)=181,000 Total loss eligible for deduction is 181,000 15) What are the various deductions allowed under Chapter VI A? a) 80D- Medical Insurance Deduction up to 15,000 for general category and 20,000 in case of Senior citizen b) 80DD- Medical treatment for Handicapped Dependant Deduction on medical treatment and maintenance of handicapped dependant up to 50,000 for disability below 80% and 1,00,000 for disability above 80% c) 80DDB- Medical treatment for Specified Illness/Diseases Deduction on medical treatment of specified illness/diseases is up to 40,000 for general category and 60,000 in case of senior citizen Private & Confidential Page 8 of 9

9 d) 80E- Interest on Education Loan Repayment of interest paid in the current year on loan taken for higher education is eligible for deduction, if the loan availed was for pursuing employee s own higher education. There is no limit on the deduction. e) 80U- Permanent Physical Disability Assessee certified by the medical authority to be a person with permanent physical disability is allowed a deduction of a sum of 50,000 and in case the assessee is certified as one with (severe) permanent physical disability, deduction is 75,000 f) 80L- Interest for Securities Deduction under this section has been removed from financial year g) 80G- Donations For deduction in respect of donations to certain funds, charitable institutions etc, the employee can claim the deduction while filing individual returns. 16) What are the various deductions allowed under 80C? Under 80C, an employee is entitled to deductions for the amounts paid or deposited in the current financial year in the following schemes, subject to a limit of 100,000/- 1. Life Insurance Premium 2. Contributions to recognized Provident Fund/VPF/PPF 3. Contributions to approved Superannuation Fund 4. Cumulative Time Deposit A/c with P O 5. Contribution to U L I P, 1971 of Unit Trust of India 6. Contribution to U L I P of LIC Mutual Funds 7. Annuity with Insurance Company 8. Subscriptions to Mutual Fund 9. Subscription to NSC & Interest accrued on NSC subscription 10. Repayment of Housing Loan principal 11. Infrastructure Bonds 12. Children tuition fees (education) 13. Term Deposits- Scheduled Bank (5 years and more) 14. Investments of up to 100,000 under erstwhile section 80CCC Private & Confidential Page 9 of 9