Income can be charged under this head only if there is an employer-employee relationship between the payer and payee. Salary includes basic salary or wages, any annuity, gratuity, advance of salary, leave encashment, commission, perquisites in lieu of or in addition to salary and retirement benefits. The aggregate of the above incomes, after exemptions available, is known as Gross Salary and this is charged under the head income from salary.
An allowance is a fixed monetary amount paid by the employer to the employee for expenses related to office work. Allowances are generally included in the salary and taxed unless there are exemptions available. Some allowances are fully taxable such as dearness allowance, city compensatory allowance, overtime allowance, servant allowance and lunch allowance. Whereas specific exemptions are available for some allowances.
•Conveyance Allowance: Up to Rs 800 per month is exempt from tax.
•House Rent Allowance (HRA): This allowance is given by the employer to take care your rental or accommodation expenses. The employer can choose to offer you HRA in the salary package irrespective of whether you live in a rented accommodation or in your own house. It is important to understand how the income tax department treats HRA to use it efficiently. HRA exemption depends on a simple calculation and to arrive at HRA, salary is defined as sum total of basic, dearness allowance and a percentage of commissions of turnover achieved by employee.
Eligibility for HRA exemption
To be eligible for HRA exemption, you must first receive HRA in your salary and live in a rented accommodation for which you pay the rent. So if you live in a house of your own, you will not be eligible for HRA exemption.
To claim HRA exemption
•You should receive HRA from your employer in your salary
•You should live in a rented accommodation for which you pay the rent
•Your rent should be more than 10 per cent of your salary
Calculation of HRA exemption
The actual exempt HRA from tax is the lowest of the three possibilities:
•Actual HRA received from employer
•50 per cent of salary in case of metros or 40 per cent for of non-metros
•Actual rent paid minus 10 per cent of salary
Other considerations with HRA
If you stay in a house which belongs to your parents and you pay rent to them, then you can claim HRA. However, the income that your parents earn will need to be shown as salary in their income tax returns.
Ram Prasad’s basic monthly salary is Rs 6,000 and the dearness allowance is 80 per cent of the basic. He resides in Delhi and pays an actual rent of Rs 3,000 a month while his employers pay him a monthly HRA of Rs 2,500. His annual salary works to: (6,000 x12) + (0.80 x 6,000 x 12) = Rs 1,29,600.
HRA is calculated as
•Actual annual HRA received is Rs 30,000. Since Ram Prasad is based in Delhi, take 50 per cent of his salary, which works to Rs 64,800.
•The actual rent paid is Rs 36,000 and 10 per cent of his salary works to Rs 12,960; the difference being Rs 36,000 - 12, 960 = Rs 23,040
•The minimum of these is Rs 23,040. So, Rs 23,040 of HRA is exempt from tax, while the remaining Rs 6,960 is taxed.
•Leave Travel Allowance (LTA): LTA accounts for expenses for travel when you and your family go on leave. While this is paid to you, it is tax free twice in a block of four years and the travel to avail LTA is restricted within India.
•Medical Allowance: Medical expenses up to Rs 15,000 a year is tax free which can be incurred by the employee or his family members.
•Perquisites: Perquisites (or personal advantage) are benefits in addition to the normal salary to which an employee has a right by way of his employment. Examples of these are rent free accommodation or car loan. There are some perquisites that are taxable in the hands of all categories of employees, some which are taxable when the employee belongs to a specific group and some that are tax free.
•Any individual or group of Individuals or artificial bodies who or which have earned income during the previous years is required to pay income tax on it
•The IT Act recognises the earners of income under different categories
•Each category is called a status, which includes: Individuals, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of individuals (BOI), Firms and Companies, Local Authority
•When companies pay taxes under the Income tax Act it is called Corporate Tax
•No age is specified
•Income arising or accruing to minor is to be included in the total income of that parent whose total income (before such inclusion) is greater
•Income arising to the minor child as a result of some manual-work done by him or from such activity involving application of his skill, talent or specialised knowledge and experience is not to be included in the hands of the parents. For example, income of a child actor or singer derived from acting or singing is not covered by this clubbing provision
•Need a PAN (permanent account number) to file returns
•Need to have adequate income to file returns
•Condition of residency
•Hindu Undivided Families (HUF)