Although the taxman has been vested with the task of collecting taxes on the incomes of the citizens, he has deemed certain kinds of incomes as 'not included in total income'.
Thus, if any earning that you receive falls under these incomes you don't have to treat it as income or pay tax on it!
Now, let us take a look at the different incomes that are not taxable incomes. . .
1. Agricultural income: Any income which you receive as income from any agricultural activity is deemed as not included in total income. If your father is into agriculture and he gives you a part of the income as a gift, then you don't need to pay tax on it, provided, your father files his tax returns.
2. Income for being partner in a firm: If you receive any income for being a partner of a firm which has already been assessed separately, then the income need not be included in total income. Thus any share in the profits that you have in a firm according to the partnership deed is not taxable.
3. Travel concession/assistance: Any monies that you receive from your company for the purpose of travel to any place in India along with your family for the purpose of leave. The claim can be made two times in a bucket of 4 years.
Family includes wife and children and also parents, brothers or sisters if they are dependent on you. The only check being that you have to maintain original bills to prove travel if the income tax department asks for it.
4. Rs 5,000: An amount of up to Rs 5,000 which you receive for any reason -- other than as prize money and is not a recurring amount -- can be excluded from your total income. It seems to be a very small amount, but sometimes this could be the difference between being in a higher slab and a lower slab.
5. Retirement/death gratuity: Any payment received under a pension or death-cum-retirement gratuity scheme by an individual or his widow, children or dependents.
The gratuity should not be more than the number of years in service multiplied by half month's salary based on a ten-month average. For example, if the average salary for the previous ten months prior to receiving gratuity is 10,000 and years in service is 15, then 15x5,000=75,000 will be not included in total income.
6. Leave salary: Any cash amount received as compensation for earned leave which is encashed at the time of retirement. (This applies only to employees of central/state government).
For employees other than government employees, the leave salary can be encashed up to a limit of ten months worth of earned leave. It also specifies that the entitlement to earned leave should not exceed 30 days for each year of service.
For example, if you have 76 days of earned leave and total years of service is two years, then, only the cash equivalent of 60 days of earned leave is not added to income.
7. Retrenchment: Any compensation received by a workman due to the closure of his company or change in the management of the company if new terms are less favourable than what was previously applicable.
8. Voluntary retirement: Any amount up to a maximum of Rs 500,000 paid at the time of voluntary retirement in accordance with and scheme of voluntary retirement of the company. But, the company paying the VRS should have a framework for VRS as prescribed by the government.
9. Life insurance policy: Any amount received as benefit from a life insurance policy, including bonus payment, is not included in total income. The only exception is the amounts paid as part of keyman policies.
10. Provident Fund: All payment which is received from a provident fund to which the PF Act applies or any PF fund of the government, is not included in total income.
11. Superannuation: Any payment made from a superannuation fund on the death of the beneficiary or as a refund of contributions or if the employee becomes incapacitated before retirement.
12. Payment of rent: Any allowance paid by an employer to an employee to meet expenditure actually incurred on the payment of rent for accommodation. But this is not allowed if the house is owned by the employee or he has not incurred the rental.
13. Income from government securities: Any earnings from interest, premium on redemption or other payment on securities, bonds, annuity certificates, savings certificates and other instruments issued by the central government and also deposits taken by the central government.
In case of Non-Residents, if the bond have come to you by virtue of being a nominee or survivor of the Non-Resident, or if the bonds have been gifted to you by an NRI -- who purchased the instrument in foreign exchange and if the principal and interest will not be taken out of India by the recipient of the gift, the amounts will not be added to income.
14. Scholarships for education are not included in total income.
15. Awards and rewards: All payments receive in cash or kind as an award given by the central or state governments or by a body recognised by the central government to give such awards, will not be included in the total income.
16. Relief funds: Any amounts which are received by an individual as part of the Prime Minister's National Relief Fund or the promotion of folk art fund or students fund or foundation for communal harmony will be treated as not included in income.
Thus we see that although the taxman is mostly portrayed as a villain, he has been liberal enough to give us the benefit of income tax free income from so many sources.
The above learnings can be applied to our personal lives in two ways:
Try to increase the income, if any, coming under any of the above heads; and
Invest in any of the tax-free avenues given above so that we may get the benefit of the investment as well as tax free income when it comes to our hands later on.
Showing posts with label Tax-Free. Show all posts
Showing posts with label Tax-Free. Show all posts
Thursday, July 30, 2009
Thursday, August 21, 2008
10 tax-smart tips for salary earners
August 19, 2008
As in Alice's Wonderland, so too in the labyrinth-land of income tax, things are often not what they appear to be. 'Yes' may not always mean yes, and 'no' may not necessarily mean what we generally take it to mean.
So, it pays to be tax-smart; you can get to keep more of your hard-earned money for yourself rather than having to cough it up to the taxman . . .
1. Exemption on soft furnishing expenses
As in Alice's Wonderland, so too in the labyrinth-land of income tax, things are often not what they appear to be. 'Yes' may not always mean yes, and 'no' may not necessarily mean what we generally take it to mean.
So, it pays to be tax-smart; you can get to keep more of your hard-earned money for yourself rather than having to cough it up to the taxman . . .
1. Exemption on soft furnishing expenses
Sec. 10(14) [of the Income Tax Act] offers exemption for expenses (and not allowances) incurred wholly, necessarily and exclusively in the performance of the duties. There are two distinct arguments to render soft-furnishing non-taxable.
The first one is to claim that the employee needs to entertain guests at his residence for official purpose. The second one is that the expense is incurred to protect the furniture belonging to the office at the residence of the employee from deterioration.
2. Notice period salary equivalent paid to employer is not tax deductible
Most employment conditions require an employee who desires to change his job, to give his employer a notice of his intentions and serve him for certain pre-fixed months.
In case an employee desires to leave the services immediately, or before the notice period, he should pay the employer an amount equivalent to the salary he would have earned during the notice period or shortfall thereof. Is this amount deductible from the salary income of the employee?
What the employee is paying to the employer cannot come under the head 'Salaries' since he is not the employer's employer. This amount represents application of his income and therefore, it is not deductible. He has merely applied this income to discharge a liability and therefore, it is not tax deductible.
This is the view generally accepted by all accountants and the income tax department.
3. Employment after retirement can be less taxing
These days many employees are re-employed by their ex-employers on retainership or contractual basis after their retirement. The fact that the person happens also to be the ex-employee is immaterial and inconsequential.
Such a person enjoys better concessions than a normal employee. He can claim deductions for expenses incurred for earning his consultancy fee. Moreover, the TDS applied by the principal would be only 10% of the fee paid.
4. How gardener and helper can be tax-free perks
Here, two points are of great interest: Circular 122, dated 19.10.73, clarified that if the employer employs a gardener for a building belonging to the employer, it would not be treated as a perk. This principle continues to be applicable even now with the possibility of it being extrapolated to other servants. This is more interesting. A helper engaged for the performance of the duties of an office or employment of profit; is not considered as a perk under Rule 2BB, read with Sec. 10(14). Many employees, particularly at the top level, and especially in view of communication handshakes available through e-mail, do not necessarily work only in the office. Some part of the work is done at residence. We will go to the extent of stating that the employee can directly engage the services of a helper and claim reimbursement from the employer without it being considered as a perk.
5. Tax nuances when a house / flat is given on lease to employer
Top management category employees usually get rent-free residential house as a perk. Sometimes, the flat belongs to the employee, taken on lease by the company from the employee and the employee is allowed to reside in it.
In other words, the landlord of the residential flat used by the employee is the employee himself and simultaneously he is also a tenant.
Under such a situation, the employee will have to pay tax on the lease rent received as income from house property and also as perk. Is this double taxation? Definitely not. The employee is enjoying double benefit and will have to pay tax on each benefit separately.
Is this flat self-occupied or let-out? Of course it is let-out. No one can pay rent to himself.
The Sec. 80C deduction is possible both on self-occupied and let out flats. The interest is deductible in full since the flat is let out. If the employee pays some rent to his employer, this rent cannot be deducted from the lease rent for tax purpose. This rent will be taken cognisance of while computing the perk value.
Before the revision in perk values, many of the employees used to give their flats or the flats of their wives on lease to the employers and benefit immensely. Now, after the large-scale amendments to perk values, the advantage has been watered down.
Nevertheless, normally the lessor takes an interest-free deposit from the lessee. This is a deposit and not a loan. Consequently, it does not have any perk value. We do not think the Department will question the size of the deposit in such cases.
6. Interest on deposit for a leased flat
The ITO cannot treat the difference between the market rate of interest and the actual interest paid by the landlord to his tenant on deposits placed by the tenant in custody of the landlord, as further rent received. [CIT v Satya Co. Ltd., (1994) 75Taxman193 (Cal.)].
7. LTA and Relatives
As per the Rules, you can claim the LTA benefit only twice during the block of 4 years. For this purpose
You should be on leave.
You should travel.
During such travel you may have your family with you. Family includes spouse, children as well as dependent parents, brothers and sisters. In respect of children born on or after 1.10.98, the exemption will be restricted only to two surviving children unless the birth after one child has resulted in multiple births.
The expense incurred by you is exempt up to the LTA received.
Obviously, if your wife and other family members travel, without you accompanying them, no LTA can be claimed.
LTA and working couple
Take the case of a working couple. Both the husband and wife can claim the exemption on LTA from their employers and claim benefit for 4 journeys in one block. There is no need for them to take the precaution of not travelling twice during the same year.
Moreover, they can take the same family members or different ones as long as they stick to the definition of the members for this purpose.
8. Tax-free perks of ex-employees
Aditya Cement Staff Club v Union of India & Others is an interesting case which states that where an employee has resigned and is allowed to occupy company quarters free of rent or at concessional rent, it is not to be taken as perk value, unless it is a contractual obligation to that effect according to the terms of employment.
In order that any benefit, amenity or payment may be termed as perquisite, it must be in pursuance of a right conferred on or option given to the employee to receive such benefit or advantage from his employer.
Unless such advantage or benefit flows from the status of the person working as an employee it cannot be termed as perquisite. The employee must have a vested right to claim advantage or benefit whether in cash or in kind, in order to fall within the purview of perquisite as part of salaries taxable under the ITA.
9. Provident Fund not encashed
Interest on Registered Provident Fund (RPF) of an employee is tax-free. Does it still remain tax-free after the employee retires and does not claim his Provident Fund for say 2 to 3 years?
If one goes strictly according to the drafted provisions, it appears that this interest is tax-free since the amount becomes payable only when the ex-employee asks for it. However, we are told that many ITOs take the stand that the balance in Co-PF gets the colour and character of company fixed deposits when the employee retires. This stand is challengeable.
10. When PF becomes taxable
If an employee leaves the service before completion of 5 years, Rule 10 of Part A of Schedule IV, requires the trustees of a Recognised PF to deduct tax when the accumulated balance due to an employee is paid. This payment is to be treated as income chargeable under the head 'Salaries.'
Rule 9 puts a different responsibility on the Assessing Officer. He shall calculate the total of the various sums of tax which would have been payable by the employee in the respect of the total income for each of the related years to arrive at the amount by which such total exceeds the total of taxes paid by the employee for such years.
This excess amount is payable by the employee in addition to tax on the income during the year in which the accumulated balance of PF becomes payable.
According to Rule 8 of Part A of the Fourth Schedule, this requirement of 5 years shall not be applicable where the service has been terminated by reason of the employee's ill-health, or by the contraction or discontinuance of the employer's business or other causes beyond the control of the employee.
All the same, it is not clear if the employer's contribution becomes taxable if the employee has to retire on attaining superannuation age after a continuous service of less than 5 years. It is our considered opinion that since the retirement is beyond the control of the employee, the amount does not become taxable.
It is erroneous to feel that the employee's contribution to PF is not taxed during the year of contribution. It is fully taxed in any case. All he gets is the deduction which stands withdrawn if the employee withdraws the PF before 5 years. To tax the contribution once again in the year of withdrawal is tantamount to double taxation.
In the case of unrecognised provident fund, there is a triple taxation if the employee withdraws within 5 years. Not only he is not allowed any deduction on his own contribution but also the employer's contribution is taxed during the year of contribution and also during the year of withdrawal.
The first one is to claim that the employee needs to entertain guests at his residence for official purpose. The second one is that the expense is incurred to protect the furniture belonging to the office at the residence of the employee from deterioration.
2. Notice period salary equivalent paid to employer is not tax deductible
Most employment conditions require an employee who desires to change his job, to give his employer a notice of his intentions and serve him for certain pre-fixed months.
In case an employee desires to leave the services immediately, or before the notice period, he should pay the employer an amount equivalent to the salary he would have earned during the notice period or shortfall thereof. Is this amount deductible from the salary income of the employee?
What the employee is paying to the employer cannot come under the head 'Salaries' since he is not the employer's employer. This amount represents application of his income and therefore, it is not deductible. He has merely applied this income to discharge a liability and therefore, it is not tax deductible.
This is the view generally accepted by all accountants and the income tax department.
3. Employment after retirement can be less taxing
These days many employees are re-employed by their ex-employers on retainership or contractual basis after their retirement. The fact that the person happens also to be the ex-employee is immaterial and inconsequential.
Such a person enjoys better concessions than a normal employee. He can claim deductions for expenses incurred for earning his consultancy fee. Moreover, the TDS applied by the principal would be only 10% of the fee paid.
4. How gardener and helper can be tax-free perks
Here, two points are of great interest: Circular 122, dated 19.10.73, clarified that if the employer employs a gardener for a building belonging to the employer, it would not be treated as a perk. This principle continues to be applicable even now with the possibility of it being extrapolated to other servants. This is more interesting. A helper engaged for the performance of the duties of an office or employment of profit; is not considered as a perk under Rule 2BB, read with Sec. 10(14). Many employees, particularly at the top level, and especially in view of communication handshakes available through e-mail, do not necessarily work only in the office. Some part of the work is done at residence. We will go to the extent of stating that the employee can directly engage the services of a helper and claim reimbursement from the employer without it being considered as a perk.
5. Tax nuances when a house / flat is given on lease to employer
Top management category employees usually get rent-free residential house as a perk. Sometimes, the flat belongs to the employee, taken on lease by the company from the employee and the employee is allowed to reside in it.
In other words, the landlord of the residential flat used by the employee is the employee himself and simultaneously he is also a tenant.
Under such a situation, the employee will have to pay tax on the lease rent received as income from house property and also as perk. Is this double taxation? Definitely not. The employee is enjoying double benefit and will have to pay tax on each benefit separately.
Is this flat self-occupied or let-out? Of course it is let-out. No one can pay rent to himself.
The Sec. 80C deduction is possible both on self-occupied and let out flats. The interest is deductible in full since the flat is let out. If the employee pays some rent to his employer, this rent cannot be deducted from the lease rent for tax purpose. This rent will be taken cognisance of while computing the perk value.
Before the revision in perk values, many of the employees used to give their flats or the flats of their wives on lease to the employers and benefit immensely. Now, after the large-scale amendments to perk values, the advantage has been watered down.
Nevertheless, normally the lessor takes an interest-free deposit from the lessee. This is a deposit and not a loan. Consequently, it does not have any perk value. We do not think the Department will question the size of the deposit in such cases.
6. Interest on deposit for a leased flat
The ITO cannot treat the difference between the market rate of interest and the actual interest paid by the landlord to his tenant on deposits placed by the tenant in custody of the landlord, as further rent received. [CIT v Satya Co. Ltd., (1994) 75Taxman193 (Cal.)].
7. LTA and Relatives
As per the Rules, you can claim the LTA benefit only twice during the block of 4 years. For this purpose
You should be on leave.
You should travel.
During such travel you may have your family with you. Family includes spouse, children as well as dependent parents, brothers and sisters. In respect of children born on or after 1.10.98, the exemption will be restricted only to two surviving children unless the birth after one child has resulted in multiple births.
The expense incurred by you is exempt up to the LTA received.
Obviously, if your wife and other family members travel, without you accompanying them, no LTA can be claimed.
LTA and working couple
Take the case of a working couple. Both the husband and wife can claim the exemption on LTA from their employers and claim benefit for 4 journeys in one block. There is no need for them to take the precaution of not travelling twice during the same year.
Moreover, they can take the same family members or different ones as long as they stick to the definition of the members for this purpose.
8. Tax-free perks of ex-employees
Aditya Cement Staff Club v Union of India & Others is an interesting case which states that where an employee has resigned and is allowed to occupy company quarters free of rent or at concessional rent, it is not to be taken as perk value, unless it is a contractual obligation to that effect according to the terms of employment.
In order that any benefit, amenity or payment may be termed as perquisite, it must be in pursuance of a right conferred on or option given to the employee to receive such benefit or advantage from his employer.
Unless such advantage or benefit flows from the status of the person working as an employee it cannot be termed as perquisite. The employee must have a vested right to claim advantage or benefit whether in cash or in kind, in order to fall within the purview of perquisite as part of salaries taxable under the ITA.
9. Provident Fund not encashed
Interest on Registered Provident Fund (RPF) of an employee is tax-free. Does it still remain tax-free after the employee retires and does not claim his Provident Fund for say 2 to 3 years?
If one goes strictly according to the drafted provisions, it appears that this interest is tax-free since the amount becomes payable only when the ex-employee asks for it. However, we are told that many ITOs take the stand that the balance in Co-PF gets the colour and character of company fixed deposits when the employee retires. This stand is challengeable.
10. When PF becomes taxable
If an employee leaves the service before completion of 5 years, Rule 10 of Part A of Schedule IV, requires the trustees of a Recognised PF to deduct tax when the accumulated balance due to an employee is paid. This payment is to be treated as income chargeable under the head 'Salaries.'
Rule 9 puts a different responsibility on the Assessing Officer. He shall calculate the total of the various sums of tax which would have been payable by the employee in the respect of the total income for each of the related years to arrive at the amount by which such total exceeds the total of taxes paid by the employee for such years.
This excess amount is payable by the employee in addition to tax on the income during the year in which the accumulated balance of PF becomes payable.
According to Rule 8 of Part A of the Fourth Schedule, this requirement of 5 years shall not be applicable where the service has been terminated by reason of the employee's ill-health, or by the contraction or discontinuance of the employer's business or other causes beyond the control of the employee.
All the same, it is not clear if the employer's contribution becomes taxable if the employee has to retire on attaining superannuation age after a continuous service of less than 5 years. It is our considered opinion that since the retirement is beyond the control of the employee, the amount does not become taxable.
It is erroneous to feel that the employee's contribution to PF is not taxed during the year of contribution. It is fully taxed in any case. All he gets is the deduction which stands withdrawn if the employee withdraws the PF before 5 years. To tax the contribution once again in the year of withdrawal is tantamount to double taxation.
In the case of unrecognised provident fund, there is a triple taxation if the employee withdraws within 5 years. Not only he is not allowed any deduction on his own contribution but also the employer's contribution is taxed during the year of contribution and also during the year of withdrawal.
Excerpt from the book, Taxpayer to Taxsaver by A. N. Shanbhag and Sandeep Shanbhag, published by Vision Books
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