NEW :Income from salary-Problems,theory and solutions

Study other topics Mergers and Acquisitions under The same web. If you study theory which are explained in the slide show given earlier under the head income tax (www.augustin.co.nr) It becomes easier for you to do problems here. NEW:Income from salary-Problems,theory and solutions B.Com BBM M.Com CA ICWA students By Prof.Augustin Amaladas M.Com., AICWA., PGDFM., B.Ed. All corporate Employees please Make use Of this site Tell about This web to others It is absolutely free but you have to study

Solved problems Income from Salary-2008-09 assessment year Read the concepts From salary slide Education for all By Prof. Mary Amala Shanthi Augustin Jyoti Nivas College, Bangalore M.Com.,M.Phil., MBA.,B.Ed. Jyoti Nivas College, Bangalore and Prof. Augustin Amaladas M.Com., AICWA., PGDFM.,B.Ed. St. Joseph’s College of Commerce, Bangalore aug_bang@yahoo.com 09845844319

Dedicated to • Prof.Dr. Victor Louis Anthuvan M.Com., Phd. • Prof. and Dean Loyola College of Business Administration • My Guru in St. Joseph’s College Trichy, Tamil Nadu. • I remember you always when ever I take class to my students.-You are ever great.

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Alternative work is rest How to study salary?

www.augustin.co.nr aug_bang@yahoo.com Salary contains many types. Each type of salary should Be studied independently. First understand the Concepts which are explained in the first set Under income tax head of my web. By giving yourself up you will receive

Exercise-1 Mrs. Sneha (Age 49 yrs) is a part time lecturer in a college Chennai University. The details of her salary and other income for the previous year 2007-2008 are as follows: Basic Salary 80,000 Dearness allowance (forming part of salary) 3,600 Education allowance for 2 children (exp being Rs. 900) 5,100 Hostel expenditure allowance for 1 child (expenditure being 8000) 7,200 HRA 10,400 Remuneration from Bangalore University for Being as examiner 75,650 Allowance for research which is to be completed during Dec-April 2008(actual exp being : up to March 31-08 Rs. 2000, during April 08 Rs. 4500 ) 8000

She contributes 10% of her salary to a statutory provident fund to which the college also makes a matching contribution. She gets reimbursed of Rs. 28000 being exp incurred on medical treatment of her daughter in a private clinic. The bill for which is paid by the employer. During the year she spends Rs. 1000 on purchase of saree for his wife (out of salary)for year 2007-08 he paid Rs. 8000 as insurance premium on his life policy for Rs. 60,000 ( date payment – 3 April 08) Compute the total income and tax liability for the assessment year 2008-09.

ANSWER-1 • Computation of Salary • Basic Salary 80,000 • DA 3,600 • Education Allowance 5,100 • Exemption 100 x 2 x 12 2,400 2,700 • (Monthly fixed educational allowance given to employee is taxable except Rs.100 per child per month and only for two children. If allowance is not received from employer nothing is taxable. Whether assessee spends or not Rs.100 (only) allowed because, it is given not exclusively to do official duty) • Hostel Allowances 7,200 • 300 x 12 3,600 3,600(see notes given in the next slide) • HRA received 10,400 – 4840 5,560 • Least of the following: Major any four cities like Delhi, Mumbai etc. (50%) • 50% of salary Basic + DA • 83,600 x 50% 41800

Answer1. continues 2) HRA received 10,400 3) Rent paid- 10% of salary 13,200 – 8360 4,840 (1100 x 12 ) Research Allowances 7000 Less: Exp incurred 6500 1,500 Medical Allowances 28000 Exemption 15000 13,000 Income from salary 1,09,960 Income from other sources 75,650 Total Income 1,85,610 See explanation after The answer in the following slides

www.augustin.co.nr Exemption under sec 80c • 10% Provident fund 83600 8,360 • (Basic + DA which comes for retirement benefit) Taxable Income 1,77,250 Tax liability Taxable Income 1,77,250 Less: Exemption 1,45,000 32,250 • Woman’s tax liability : 145000 – 150 000 5,000 x 10% 500 150 000– 250,000 27,250 x 20% 5450 Tax payable 5950 Education cess 3% 178.5 Total tax 6128.5

Explanations to exercise-1 • 1.Basic salary for the current financial year(previous year) is relevant and taxable. • 2. DA- Dearness allowance given mainly to compensate the inflation based on Index numbers –fully taxable. • 3. For the meaning of salary for special computation such as HRA, Gratuity, Pension etc., Dearness allowance(DA) is considered to the extent of % comes for retirement benefit. The words ‘forming part of salary’ means such portion comes for retirement benefit.

4. If the words ‘forming part of salary’ is missing or simply given DA with out mentioning the words forming part of salary then do not take it for the meaning of salary for special computation such as HRA, gratuity, Pension etc. But to compute salary entire DA to be taken. • 5. The word allowance means fixed monthly payment is made to employee either to do exclusively official duty or other than official duty. If such fixed monthly or annual allowance given to do official duty the expenditure incurred for such allowance is deducted from such allowance.(Uniform allowance, research allowance, conveyance allowance to do official travel etc.) Unused official allowance is taxable. explanations

explanations • **6. If allowance given not exclusively for official duty then the allowance is fully taxable unless some exemption given under Income tax.(such as Educational allowance, Medical allowance, Hostel allowance). • 7. Educational allowance given per month to employee. It is given not exclusively to do official duty. Therefore how much spent by employee is not important. But Rs. 100 per month per child for two children allowed exemption. • 8. Hostel allowance for the children is allowed Rs. 300 per children for maximum two children only. Since only one child is given hostel allowance Rs. 300 per month is allowed for the period such allowance given.

9. HRA- is an allowance given monthly based on basic and types of city. First calculate the meaning of salary for HRA allowance exemption. Salary= basic + DA which is part of salary +Fixed % of commission on sales( not on purchase or not of fixed monthly commission) • Read: www.augustin.co.nr under incometax-salary-theory. • 10. Salary for the calculation of exemption on HRA=Rs. 80,000(Full Basic) + 3600(here full DA) +0 (commission on sales)= 83,600. Explanations Read carefully. Other problems can be worked out well unless you Understand the explanations given above/next slides

11. Research allowance given at a time to employee for official purpose. He is expected to spend and produce bills for such expenditure. It is not necessary that such expenditure to be spent during the previous year. If it is spent for the purpose given before filing of return in the assessment year all expenditure up to allowance given is exempted. Balance is taxable. If assessee spent more than what was given, the amount provided by employer is exempted. • 12. Medical allowance given monthly not exclusively to do official duty. Therefore the amount spent by assessee is not important. If such amount spent in private clinic Up to Rs. 15,000 is allowed. Beyond it is taxable. If employer pays directly to recognised or approved hospital entire amount is exempted.(Bill should be produced otherwise it is fully taxable)

13. Whenever the act says any one of the following is exempted it means that the actual amount received from employer is one of the item to be considered for exemption. • 14. Statutory Provident fund(State and Central government employees local authorities, railway, Bangalore other universities) can be statutory –fully exempted.Since he is working in a college he comes under Recognised provident fund therefore such fund never exceeds 12% of salary and interest accrued should not exceed 9.5% While reading above you have to Read word by word carefully to understand the meaning

15. Valuation of answer scripts of Bangalore university comes under income from other sources as there is no employer and employee relationship. • 16. Employee’s contribution to Recognised provident fund is a personal saving which can be claimed u/s 80C. • 17. The savings such as statutory PF, Insurance, repayment of principal housing loan come under Section 80C. All savings should not go beyond Rs.1,00,000. • 18.Purchase of saree is a personal expenses which was not paid by employer and can not be deducted from taxable income.

Exercise-2: • Mr.Ajith is an 36yrs an employee of a co-operative society in Gurgaon. His basic salary for the previous year 2007-08 is Rs.6750/month and he gets dearness allowance of Rs.500/month(30% of of it forms part of salary for computation of retirement benefit). Besides he also gets bonus of Rs.700/month and Rs.200/month as medical allowance. His employee contributes Rs.11286 to a recognized provident fund to which X also makes a matching contribution. X gets an interest free loan(repayable within 8yrs) of Rs.95000 from the employer for purchasing a house(SBI rate 10.75%). Besides, he gets Rs.12,47,660 as interest on company deposits from a private sector undertaking. Determine taxable income and tax liability of X for the assessment year 2008-09 • Solution next slide……..

www.augustin.co.nr Working notes –Exercise-2 • 1. Meaning of Salary for Recognised provident fund • Basic +DA which comes for retirement benefit only • 6750 +(30% x 500)=Rs.6,900 per month • 6900 x 12= Rs.82,800 annual salary for RPF calculation • Employer’s contribution can not exceed 12% of salary=12% x 82800=9936 per annum. • RPF by employer exceeds 12% of salary by Rs.1350[11286-9936] • 2. Employee’s contribution to RPF is a saving therefore Rs. 11286 saved for future comes under Section 80C along with other savings.Total of all savings u/s 80C can not exceed Rs.1,00,000. • 2. Interest on interest free loan is taxable to the extent of SBI interest rate.

Basic Salary (6750*12) 81000 • Dearness Allowance (500*12) 6000 • Bonus (700*12) 8400 • Medical Allowance (Fixed) (200*12) 2400 • Excess of contribution to provident fund by Employer[11286-(12% of 12*(6750+30% of 500)] 1350 • (see note in the previous slide) • Interest on interest free loan (95000*10.75%) 10213 NET SALARY 109363 Add: income from other sources 1247660 TOTAL INCOME 1357660 Deduction U/S 80C: 11,286 Taxable salary 13,46,374 ROUNDED OFF 13,46,370

Computation of Tax Liability • Net Taxable Income 13,46,370 1,10,000-1,50,000= 40000*10%= 4000 150,000-250,000= 100000*20%= 20000 250 & above=10,96,370 x 30%= 328,911 352,911 Add: surcharge of 10% 35291 388,202 Add: 3% educational cess (on 3,88,202) 11646 3,99,848 Rounded off 3,99,850 (nearest to 10 rupee)

Exercise-3 Mrs. X was born on July 1, 1940, She is Deputy Manager in a company in Mumbai. She is getting a monthly salary and dearness allowance of Rs.45000 and Rs.12000 respectively. She also gets a house rent allowance of Rs.6000/month. She is a member of recognized provident fund wherein she contributes 15% of her salary and half dearness allowance. Her employer also contributes an equal amount. She is living in the house of minor son in Mumbai During the previous year 2007-08, her minor son has earned an income of Rs.30000(computed) as rent from a house property, which had been transferred to him by Mrs.X without consideration a few years back During the pre-year 2007-08 she sold Government of India

Capital Indexed Bonds for Rs.150000 on Sep 30, 2007, which she purchased on July 1, 2002 for Rs.80000 Her employer gave her an interest free loan of Rs.150000 on Oct 1, 2007 to one of her sons’ wife for the purchase of an Alto Maruthi Car. Nothing has been repaid to the company towards loan. During the pre-year 2007-08 she paid Rs.15000 by cheque to GIC towards Medical Insurance Premium of her dependent mother. Compute the taxable income and tax liability of Mrs..X for the assessment year 2008-09

Solution-3 • Salary (45000*12) 540000 • Dearness allowance (12000*12) 144000 • House rent allowance(6000*12) 72000 (fully taxable as she is not staying in a rented house) • Employers contribution to recognized PF in excess of 12% of salary [(15%-12% )of Rs.6,12,000] 18360 (45000*12+1/2 of 12000*12)-meaning of salary for RPF • Interest free loan[8% if 150000 from Oct 1, 2007 to March 31, 2008] 6000 GROSS SALARY 780360 Less: standard deduction nil Income from salary 780360

solution-3-continues Computation of total taxable income 1.Income from salary 780360 2.Income from house property (deemed income of transferor if property was transferred to minor for inadequate consideration u/s 64) 30000 3.Long term capital gains[150000-(80000*555/447)] index cost of acquisition to be used 51387 • Taxable income 8,61,747

GROSS TOTAL INCOME 861747 Less: deduction • Under section 80C: • 1.Employee’s contribution to Recognised provident fund is saving. Therefore it comes under section 80C [15% of(45000*12+1/2 of 12000*12)] 91800 • 2. Under section 80D (Medi claim insurance ) 15000 NET INCOME ROUNDED OFF 754950 Tax on 51387@ 20% How ever tax liability cannot exceed 10% of (150000-80000) 7000 Tax on balance 156569 TOTAL 163569

Add: surcharge nil TOTAL 163569 Add: education cess[2% of 163569] 3271 Add: secondary and higher education cess [1 % of 163569] 1636 TOTAL TAX LIABILITY ROUNDED OFF 168480 Note: it is assumed that SBI lending rate for similar loan is 8%

Special allowances[10(14)] Not directly relate to Official duty (General) For official duties (after Reaching office) 1.Official travel/transfer Allowance to meet the cost 2.Conveyance allowance to meet customers 3.daily allowance on official Tour/journey 4.Helper allowance to carry Official documents 5. Research allowance 6. Uniform allowance to do Official duty To be Spent Fully Other Wise, amount not Spent taxable See in the Next slide

Not directly relate to Official duty (General) They are fixed. Whether spent Or not.Excess Taxable as they Are not given For official Duty

Perquisites The term perquisites has been defined by section 17(2) under different clauses as including the following items- a. Rent- free house [section 17(2)(i)] b. Concession in the matter of rent [section 17(2)(ii)] c. Any benefit in the case of a specified employee [section 17(2)(iii)] d. Expenditure on meeting employee’s obligation [section 17(2)(iv)] e. Any sum to effect an assurance on the life of an employee [section 17(2)(v)] f. The value of any other fringe benefit or amenity as may be prescribed[ section 17(2)(vi)]

Perquisites with respect to movable assets-computation Valuation of perquisite in respect of movable asset sold by an employer to its employer [Rule-3 (7)(viii)]If the sale price is less than the written down value (calculated as per method and rate mentioned below) then the differences would be treated as perquisite and the taxable in the hands of all employees.Rates and methods of depreciation for the different types of assets are as follows:

# Eectronic items means: data storage and handling device like computer , digital diaries and printer. They do not include house hold appliances like washing machines, micro wave oven , mixers, etc. • Mathematically taxable perquisites is as under:

Exercise-1Allowances • Salary income and various allowances: Compute the gross salary of Mr. Amal for the assessment year 2008-09on the basis of the following information: • 1. Basic pay Rs. 8,000 per month • 2. DA –40% of basic pay • 3. City compensatory allowance-10% of basic pay • 4.Medical allowance –Rs.800 per month • 5. Children educational allowance- Rs. 200 per month for three children • 6. Hostel expenditure allowance-Rs. 400 per child per month for 2 children • 7. Tribal area allowance – Rs. 500 per month in Bihar • 8. Traveling allowance – Rs. 12000(However actual expenditure was only Rs. 8000 for official duties • 9. Conveyance allowance –Rs. 500 per month(the whole amount spent for official duties) • 10. Transport allowance- Rs. 18,600 • 11. Overtime allowance-Rs. 4000

Exercise-2(perquisites) • Mr. Deepak an employee in a company , gets a basis salary of Rs 10,000 per month is employer has provided him the following facilities:- • He has been provided a credit card. Annual fee of such card is Rs 8,000 which is incurred by employer. The card is used for office as well as personal purpose • His employer is a corporate member of a club of which initial fees is Rs. 1,00,000 and annual expenditure of Rs. 30,000 paid by the employer. The membership is enjoyed by Mr. Deepak • He has been given a gift voucher of Rs. 13,500 • He has been provided the of laptop used for office as well as personal purpose. The cost of the asset Rs.1,20000. • In his office chamber , AC machine has been installed for 30,000 • Calculate gross salary of Mr. Deepak for the assessment year 2008-09

computation of gross salary of Mr. Deepak for the assessment yr 2008-09 Solution-6

Exercise-9 Mrs. Sneha (Age 49 yrs) is a part time lecturer in a college Madras University. The details of her salary and other income for the previous year 2007-2008 are as follows: Basic Salary 80,000 Dearness allowance (forming part of salary) 3,600 Education allowance for 2 children (exp being Rs. 900) 5,100 Hostel expenditure allowance for 1 child (exp being 50000) 7,200 HRA 10,400 Remuneration from Bangalore University for Being as examiner 75,650 Allowance for research which is to be completed during Dec-April 2008(actual exp being : up to March 31-08 Rs. 2000, during April 08 Rs. 4500 8000

She contributes 10% of her salary to a statutory provident fund to which the college also makes a matching contribution. She gets reimbursed of Rs. 28000 being exp incurred on medical treatment of her daughter in a private clinic. The bill for which is paid by the employer. During the year she spends Rs. 1000 on purchase of saree for wife for year 2007-08 he paid Rs. 8000 as insurance premium on his life policy for Rs. 60,000 ( date payment – 3 April 08) Compute the total income and tax liability for the assessment year 2008-09.

ANSWER-9 • Computation of Salary • Basic Salary 80,000 • DA 3,600 • Education Allowance 5,100 • Exemption 100 x 2 x 12 2,400 2,700 • 7,200 • Hostel Allowances • 300 x 12 3,600 3,600 • HRA received 10,400 – 4840 5,560 • Least of the following • 50% of salary Basic + DA • 83,600 x 50% 41800

2) HRA received 10,400 3) The excess of Rent paid 10% 1100 x 12 = 13,200 – 8360 4,840 Research Allowances 7000 Less: Exp incurred 6500 1,500 Medical Allowances 28000 Exemption 15000 13,000 Income from salary 1,09,960 Income from other sources 75,650 Total Income 1,85,610

Exemption under sec 80C 1) 10% Provident fund 83600 8,360 Taxable Income 1,77,250 Tax liability Taxable Income 1,77,250 Less: Exemption 1,45,000 32,250 145 – 150 5000 x 10% 500 150 – 250 2,7250 x 20% 5450 Taxable income 5950

Exercise-10 • Mr. Manoj an employee in a HUF, gets a basic salary of Rs 10,000 per month.The employer has further provided him in following facilities • He has been provided a credit card. Annual fee of such card is Rs 8,000 which is incurred by employer. The card is used for office as well as personal purpose • his employer is a corporate member of a club of which initial fees is Rs. 1,00,000 and annual expenditure of Rs. 30,000 paid by the employer. The membership is enjoyed by Mr. Deepak • He has been given a gift voucher of Rs. 13,500 • He has been provided the of laptop used for office as well as personal purpose. The cost of the asset Rs.1,20,000. • In his office chamber , AC machine has been installed for 30,000 • Calculate gross salary of Mr. Deepak for the assessment year 2008-09

Solution-10computation of gross salary of Mr. Deepak(Not a company employee) for the assessment yr 2008-09

Exercise-11 Value of rent free accommodation : Sri Radheshyam is sales manager of a private company and for previous year 2007-08,he received the following emoluments (amts in Rs) Basic Salary 248000 Bonus 16000 Dearness allowance(50% forming part of salary) 60000 Project allowance 15000 Commission on sales 16000 City compensatory allowance 25000 Medical allowance 12000 Employer contribution to recognized provision fund 20000 Salary pertaining the year 2008-09 has been received in advance 20000 He has been provided with a rent free accommodation in Jaipur owned by the employer. The population of Jaipur may be assumed to be 15lakhs as per 2001 census Determine the taxable value of the perquisite in respect of rent freeaccommodation.

Solution: 11 The valuation of rent free accommodation shall be 10% of the salary i.e. 10% of (248000+ 16000+30000+15000+16000+25000+12000)=Rs 36200 Note: Salary shall be taken on basis for the period for which accommodation has been provided. Hence advance salary for 2008-09 shall not be taken in account.

Exercise-12(Value of free rent accommodation ) Sri Mohan is purchase manager of a private company and for previous year 2007-08 he received the following emoluments- Basic Salary 120000 Bonus 16000 Dearness allowance(50% forming part of salary) 60000 Project allowance 15000 Commission on purchase 16000 City compensatory allowance 25000 Medical allowance 12000 Employer contribution to recognized provision fund 20000 Salary pertaining the year 2008-09 has been received in advance 20000 He is also in part employment with B ltd and is receiving salary of Rs 80000 P.A. he has been provided with a rent free accommodation in Jaipur owned by the employer. The population of Jaipur may be assumed to be 15 lakh as per 2001 census. Determine taxable salary.

Solution-12 Computation of taxable salary of Sri Mohan for assessment Year 2008-09 Basic Salary 120000 Bonus 16000 Dearness allowance(50% forming part of salary) 60000 Project allowance 15000 Commission on purchase 16000 City compensatory allowance 25000 Medical allowance 12000 Employer contribution to RPF in excess of 12% of salary 2000 [20000- 12% of (120000+ 50% of 60000)] Salary from B ltd 80000 Advance of salary 20000 Value of housing facility[10% of (120000+16000+30000+ 15000+16000+25000+12000+80000)] 31400 Taxable Salary 397400

Exercise-13 Value of concessional accommodation: Mr.Tim is purchase manager of a private company and for the previous 2007-08 he received the following emoluments- Basic Salary 240000 Bonus 32000 Dearness allowance(50% forming part of salary) 120000 Project allowance 30000 Commission on purchase 32000 City compensatory allowance 50000 Medical allowance 24000 Employer contribution to recognized provision fund 40000 2 months salary for year 2008-09 has been received in advance 20000 What would be the value of accommodation if the employer charges rent of Rs 2000 p.m. in the following independent cases: The accommodation is provided in Mumbai where popln as per 2001 census exceeds 25 lakh The accommodation is provided in Alwar where popln as per 2001 census exceeds 18 lakh The accommodation is provided at Chomu (popln less than 10 lakh).

Solution: 13 The valuation of accommodation provided at concessional rent shall be as under-

PRACTICAL QUESTIONS-concept based questions. Some basic questions. 1. In the return for the assessment year 2008-09. B claimed deduction from his income from salary of a sum paid by him to his ex-wife by way of alimony to her and maintenance expenses to their minor son. On 7th January,2004 by agreement with his employers, B had agreed to creation of a first charge on his salary in favour of his ex-wife for the payment of monthly sum. What is the effect of this charge and the alimony payment on the taxable income in the hands of B? ANS: Taxable in the hands of assessee as the income is applied.Personal commitment (as per the law) it is taxable in the hands of B only.

NEW :Income from salary-Problems,theory and solutions