Tax Liability of Retirement Benefits.

Retirement savings plan is an essential part of the employees future financial security. Every employee must know about the various retirement benefits that he would be getting from his employer and their tax implication as well. Employees should understand and monitor their retirement plans and benefits. Retirement benefits received by an employee are taxable under the head Salary.
Here are some of the retirement benefits-

Pension Income-
Pension is the income received by an employee after his retirement on account of his past service. Taxability of pension depends on whether it is periodic (monthly) or lump-sum. Pension received in periodic payment is called as uncommuted pension which is fully taxable in case of government and non-government employees.

When a lump-sum payment is made in lieu of a periodical pension, it is termed as commuted pension. It is exempted for government employees. In case of other employees, if that employee is also receiving gratuity, then 1/3rd of the commuted pension would be exempt from tax otherwise, half of the commuted pension will be exempt from tax. Family pension received by family members after the death of employee shall be chargeable in the hands of recipient under the head “other sources”. Deduction of Rs. 15,000 or 1/3rd of such pension, whichever is lower shall be allowed.

Gratuity is a lump-sum payment made by an employer for the appreciation of the services rendered by his employee. Gratuity received is exempt u/s 10(10) Gratuity received by a government employee is completely exempt from tax. For other employees, the least of the following is exempt from tax
Amount actually received as gratuity,
Half month’s average salary for each completed year of service, or
Maximum limit of Rs. 10,00,000

Leave Encashment-
Leave encashment is the payment for encashment of unused leave of an employee. Encashment of leave during the employment is fully taxable. At the time of retirement, leave encashment received by government employee is fully exempt from tax. When received by non-government employees, the least of the following is exempt:
Leave encashment actually received,
10 months average salary,
Earned leaves entitlement not exceeding 30 days for every completed year of service, or Maximum limit of Rs. 3,00,000

Voluntary Retirement Compensation-
Benefits derived by an employee by opting Voluntary Retirement Scheme (VRS) can also be considered as retirement benefit. VRS is availed by employees having age of 40 years & completing 10 years of service. The amount of exemption is the actual amount of compensation received or Rs. 5,00,000, whichever is lower. The exemption is available to an employee only once.

Retrenchment Compensation-
Any compensation received at the time of retrenchment is exempt from tax to the extent of minimum of the following
Amount actually received,
Amount calculated based on 15 days average pay for every completed year of service or part thereof in excess of six months, or
Maximum limit of Rs. 5,00,000


Salary Income – Common issues

A salary is a form of periodic payment from an employer to an employee, which may be 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. From the point of view of running a business, salary can also be viewed as the cost of acquiring and retaining human resources for running operations, and is then termed personnel expense or salary expense. In accounting, salaries are recorded in payroll accounts.

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, for example, monthly payments of one-twelfth of the annual salary.
Here we have Considered Some of the Frequently asked Question on Taxability of Salary Income under the Income tax Act,1961

What is considered as salary income?
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. E.g., Tiffin allowance, transport allowance, uniform allowance, etc.
There are generally three types of allowances for the purpose of Income-tax Act – 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 can 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.
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 losses under the head ‘Income from house property’ cannot be set-off while determining the TDS from 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. However, following receipts would be subject to tax:
1. Any sum received under sub-section (3) of section 80DD; or
2. Any sum received under Keyman insurance policy; or
3. Any sum received in respect of policies issued on or after April 1st, 2003, in respect of which the amount of premium paid on such policy in any financial year exceeds 20% (10% in respect of policy taken on or after 1st April, 2012) of the actual capital sum assured; or
4. Any sum received for insurance on life of *specified person (issued on or after April 1st 2013) in respect of which the amount of premium exceeds 15% of the actual capital sum assured.
* Any person who is –
i) A person with disability or severe disability specified under section 80U; or
ii) suffering from disease or ailment as specified in the rule made under section 80DDB.
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.

No tax on salary deducted if notice period not served

I-T Act says salary income is taxable on a due basis irrespective of whether it was paid or not.

If you have not served during the notice period and your employer has deducted salary for the same, then you don’t need to worry about paying tax on the deducted salary.

In its recent ruling, the Income Tax Appellate Tribunal (ITAT) that takes up disputes related to income tax issues has clarified that an employee was not required to pay tax on salary deducted by employer for not serving notice period, according to a report in The Times of India.

The report cited two companies that at the time of full and final settlement had deducted salary for the month during which employees did not serve the notice period.

“Under the income tax act, salary income is taxable on a due basis, regardless of whether it has been actually paid to an employee or not,” the report said. After an employee puts in their papers and fails to serve contractual notice period, the employer cuts salary for the said month.

Likewise, tax authorities do not calculate such salaries for assessment of income tax. “The ITAT has recognized the concept of real income, which is well accepted under I-T laws,”

By : The asian age / Apr 21, 2017

Tips collected by hotel from customers and paid to employees couldn’t be taxable as salary

“Whether tips collected by a hotel from customers and paid to employees could be chargeable as salary in hands of employees?”

The Supreme Court held as under-
(1) Section 15 of the Income-tax Act which talks about salaries provides that there should be a vested right in an employee to claim any salary from an employer. (2) Tips being purely voluntary amounts that may or may not be paid by customers for services rendered to them would not fall under Section 15 as there is no vested right in the employee to claim any amount of tip from his employer. (3) Further, the said section provides that salary paid or allowed must have reference to contract of employment, i.e., an amount paid under contract of employment could only be treated as salary. (4) In the instant case, the amount of tip paid by the employer to the employees had no reference to the contract of employment at all. Tips were received by the employer in a fiduciary capacity as trustee for payments that were received from customers which it disburse to its employees for service rendered to the customer. (5) Hence, tips so disbursed to employees couldn’t be chargeable to tax as salary.

Is the benefit of deduction available on HRA and Home loan ?

There is a difference and a thin line between tax planning and tax evasion. Some individuals cross that line and end up on the wrong side of law. One such instance is taxpayers claiming deduction onHouse rent allowance (HRA) as well as interest paid on home loan while living in their own house.

Claiming deduction on both HRA and home loan principal/interest payments is not prohibited per se, as there are situations where you may be living in a rented accommodation despite owning a house. But some people claim both while living in their own house. This is how they do it. The house where they live is in the name of their wife or parents. So, they show that they are paying ‘rent’ to wife/parents and claim full HRA deduction.

In the worst case, they live in own house and still claim (partial) HRA deduction and full deduction on home loan interest and principal payments. They can get away with this as there is no need to furnish permanent account number, or PAN, of the landlord if the rent paid is less than Rs 1 lakh a year.
This, however, may come back to haunt them if the case comes under the scrutiny of the Income tax department.
House Rent allowance (HRA) is one of the components of salary package, which is normally offered to employees by their employers to meet the higher cost of renting a home. Tax exemption under Income Tax Act for HRA is allowed to salaried persons who are occupying a rented accommodation. It is being regulated by 2A of Income Tax Rules, 1962 and section 10(13A) of the Income Tax Act, 1961. Accordingly, least of the following three options will be exempt from tax

• [a.) 50% of the basic salary and DA, where the residential house is situated at Mumbai, Kolkata, Delhi or Chennai and an amount equal to 40% of above salary where residential house is situated in any other place.
• [b.] HRA actually received by the employee in respect of the perziod during which rented accommodation is occupied by the employee during the financial year

• [c.] the excess of rent paid over 10% of the salary.

Some times, salaried persons who avail home loan for acquisition or construction of residential house properties but could not stay in such properties owing to employment or other reasons and they stay in rented houses. In such circumstance, when they are receiving a HRA – allowance from their employer, a question often arises

whether they can get exemption of HRA under section 10(13A) of the Act?, based on the rent actually paid by them as well as the interest payable on the housing loan taken by them towards acquisition or construction of a property ?

To avail HRA benefit,
• salaried employee who is in receipt of HRA from his employer
• should be actually paying house rent for the rented premises which he has occupied
• And such rented premises must not owned by him.

It is evident from the above section the exemption of HRA is available to an assessee so long as he occupies the rented premises which is not owned by him. At the same time, the assessee is not barred from claiming exemption under section 10(13A) read with rule 2A, because he be the owner of any other house property, which was acquired through housing loan. It is to be noted that provisions of deduction of interest on borrowed capital for the acquisition or construction of house property and exemption of house rent allowance are two different issues under the Act, as one would not influence other. The benefits accrue on account of availing home loan are interest payments which is exempted under section 24(b) and the principal repayment is exempted under section 80C of the Income Tax Act. Conversely, HRA benefit can also be availed by the assessee on fulfillment of certain circumstances depicted above.

Let us discuss situations where you can lawfully claim both deductions and tell you about those where you are pushing your luck a little too far.

You own a house but you live in a rented apartment:
Your workplace is far from your house. The commute to office is a big hassle given the traffic snarls. So, you take an apartment on rent near your office, and let out your own house. This is a common practice in metro cities such as Delhi-NCR, where many people own a house in Noida or Ghaziabad but have to commute daily to their office in Gurgaon.

You have a house in one city but stay in a rented house in another. In such cases, you can claim deduction on HRA as well as home loan interest and principal payments. “The probable criteria for testing the correctness of the HRA claim and interest deduction by the tax office will be to substantiate that the place of employment and location of the property are different,”

You stay in a house owned by your parents or spouse:
You own a house but live in a house owned by your parents or spouse. You show that you pay rent to your parents/spouse and, hence, claim both HRA and home loan payment deductions. By doing this way, you may not be doing anything illegal. The law does not prohibit this provided the full cycle of the transaction has been completed. This means that if you have paid rent to your spouse/parents, they should add it to their incomes and disclosed in tax returns. If your case comes up for scrutiny and you fail to furnish the proof of the transaction, you may be in for trouble.

Paying rent to your wife or parents for claiming both HRA and Section 24 deduction
This option may not be construed well within the boundaries of law. If your tax return is picked up for scrutiny, such a transaction can be questioned,” With digitisation of details of income tax assesses and online filing of returns, the authorities now have easy-to-use tracking tools. These enhance the chances of such an anomaly getting caught. Tax authorities, are keeping a close eye on transactions among relatives, especially between spouses. “Paying rent to the spouse may not be safe as the tax department may be keeping an eye on such transactions. If the case goes to the tax department, it will be difficult to explain the transaction,”

Living in a self-owned house:
You are staying in the same house for which you have taken a home loan and yet are claiming HRA deduction. The rule says that if you are claiming HRA deduction of more than Rs 1 lakh a year, you have to furnish the PAN of the property owner. So, you claim HRA deduction on rent less than Rs 1 lakh and also claim deduction on home loan interest and principal payments. Many get away with these adjustments. But if your return is scrutinized for any reason, you may be asked to provide an explanation for all transactions and deductions. You could land into trouble.

If you have two properties, one occupied by self and the other let out
you can claim deduction on interest paid for loans taken to buy both the houses. If the house is self-occupied, the maximum deduction on interest paid is Rs 2 lakhs. However, if the house is let out, the full interest payment can be claimed as a deduction.

Form 12BB – New Form to claim Income Tax Deductions by Employees

All Pay Disbursing officers/DDO’s/AO’s please make an immediate note of your obligation w.e.f 1.6.2016. The CBDT (Central Board of Direct Taxes) has introduced a new form (Form 12 BB) for claiming tax deduction towards LTA, LTC, HRA & interest paid for home loans. The new form mandates people to furnish proof of travel while claiming LTA, LTC, and details of landlord in case of HRA claims. Let us understand this in detail:-

What was the present Rules to submit Income tax  Declaration ?

If you are an employee of a company, at the beginning of every financial year (or) while joining the company you have to submit ‘Income Tax Declaration’ to your employer. This is a provisional statement that has details about your proposed investments and expenses that are Income Tax deductible. At the financial year end, you need to provide supporting Investment Proofs for these investments that you have specified in IT declaration. Based on your proposed investments and expenses, your employer was deducting TDS ,if any from your monthly salary and deposits it to the government account. To calculate TDS, your employer considers the declared investments and expenses that are either Tax Exempted (or) eligible for tax deductions under Income Tax Act. Till date there has been no standard reporting format or template available for furnishing the details of investment or expenditure proofs.

Why this Rule is brought now?

The main reason behind introducing this rule is to plug the loopholes under tax laws by tightening the entire procedure for claiming these tax exemptions. This becomes more important because there was no standard or prescribed format until now for filing these declarations. And in the Budget 2015, the Finance Act had already introduced Section 192(2D) of the Income Tax Act mandating employers to collect all necessary evidences, but the rules and form were yet to be prescribed. The same has been done now.

What is this form to be submitted to pay Roll/DDO’s about?

The declaration needs to be filed for claiming deductions in a prescribed form i.e. Form 12 BB as set up under rule 26C.

What is the obligation casted on the Employer?

Earlier the employers were not under any statutory obligations for collecting bills or other proofs in order to prove the fact that their employees have actually utilized the money they are claiming towards these claims.

But, the current amendment with the introduction of this rule will now make all the employers obligated to collect all the relevant information in the prescribed format apart from collecting the proof of evidence, before they can allow the respective benefits under various tax benefits to the employees.

Details needed to furnish LTA, LTC and HRA claims

The circular as issued by the government has not specified the documents required to be submitted for claiming deductions but the existing documents that employees used to provide should hold good. Following are the documents which are required to claim these benefits:-

How to claim HRA ?

House Rent Allowance is exempt under section 10 (13A) of the Income Tax Act. To claim HRA, you have to provide documentary evidence i.e., Rent receipts. You also have to provide details of landlord (name & address) and the amount paid as rent. Permanent Account Number (PAN) of the landlord shall be furnished if the aggregate rent paid during the year exceeds one lakh rupees.As per the notification issued by the government, a person claiming HRA (Housing Rent Allowance) for over Rs. 1 lakh needs to furnish name, address and PAN i.e. Permanent Account Number of the landlord, apart from giving the rent receipts. With this the government can start tracking the fraudulent claims and can also verify whether the rent received by the landlord has been duly disclosed in their tax-return.

How to claim LTA/LTC ?

With effective from 1st June, 2016, the CBDT has made it mandatory for all the salaried employees to submit travel related expenditure proofs to their employers. To claim LTA (Leave Travel Allowance) or LTC (Leave Travel Concession), people need to provide the evidence of expenditure, and submit boarding pass and tickets for claiming LTA or LTC.

How to claim deductions on Housing Loan ?

To claim income tax deduction under section 24 on home loan interest payments, you have to furnish details of interest amount payable/paid, lender’s name & address & PAN number of the lender in Form 12BB.

How to claim Deductions u/s Chapter VI-A ?

People need to submit relevant proof for claiming deductions under chapters VIA(A) and VI-A that cover Sections 80C, 80CCC, 80CCD, 80E, 80G, 80TTA. Sections 80CCC, 80CCD and section 80C allow a deduction of Rs. 1.5 lakhs on specified investments.

What will be the impact of this new Rule ?

The Income tax department is aiming to bring in consistency in respect of the income tax benefits being claimed and also to ensure that necessary documentary evidence, as prescribed, is maintained while making the claims.

The new rule and the forms will make it really easy for both the taxpayer and the employer because it brings standardization which will help employees and employers both. Moreover from the government’s point of view, the new format will ensure collection and maintenance of information, and will assist them in streamlining their assessment process and curb the malpractice of fake claims.

When will this rule come into effect?

The rules will be applicable from June 1, 2016.


Honorarium – Whether it is treated as profession for claiming deduction U/s.44ADA

Honorarium is the part of salary for income tax purpose in India. As held in Sri Vardaraja swami Transports P Ltd V/s RPF Commissioner AIR 1966 Mad 466 and AAR (New Delhi) No. 597 of 2002 in case of Max Muller Bhavan,  (2004) 268 ITR 31, 32, 35 – 36 (AAR)

Honorarium to Government employees                                                                                      Govt employees may invoke exemption u.s 10 (17A)                                                                    U/s 10 [(17A)   any payment made, whether in cash or in kind,—

       (i)  in pursuance of any award instituted in the public interest by the Central Government or any State Government or instituted by any other body and approved77 by the Central Government in this behalf; or

          (ii)  as a reward by the Central Government or any State Government for such purposes as may be approved by the Central Government in this behalf in the public interest;]

Honorarium to Professional’s                                                                                                              Honorarium is not for any services rendered on request and authorization to do work or as per agreement- the work as well as honorarium both are voluntarily. An author submit article without any obligation, the same may be published or not. The publisher may or may not pay honorarium even after publication of article. The honorarium is not mutually decided. It is paid as an honor or regard and not as consideration for service or goods, provided voluntarily. Therefore, honorarium e.g. to author of articles, is not in nature of professional or technical fees to which provisions of S. 194J apply.

Honorarium to neither Professional’s nor employee
If the person receiving the honorarium is neither employee nor professional then payee is not liable to deduct TDS u/s 192 nor u/s 194J. However the person receiving the Honorarium will have to show it as income from other sources.