Salary Income

Salary normally includes wages, annuity, pension, gratuity, commission, perquisites, etc. and any other payment received by an employee from the employer received during the year.

Standard Deduction

Standard deduction from the assessment year 2004-05 onwards :

Salary income before allowing Standard Deduction	Standard deduction from the assessment year 2004-05 onwards
Income from salary  is less than Rs. 1.5 lakhs	40 per cent of gross salary or Rs.30,000 whichever is lower
Income from salary exceeds Rs. 1.5 lakhs but does not exceed  Rs. 5 lakhs	Rs. 30,000
More than Rs. 5 lakhs	Rs. 20,000/-

Deductions on certain receipts

Following deductions on certain receipts are available to salaried employees

A)   Arrear salary:  If salary is received in arrear or in advance, it can be spread over the years to which it relates and be taxed accordingly as per section 89(1) of the Income tax Act.

B)   Leave encashment:  Leave encashment while in service is taxable. Leave encashment received at the time of retirement is fully exempt in the case of Government Servants. In the case of non-govt. Employees, leave encashment is exempt to the extent of the least of the following four amounts: -

• Rs. 3,00,000/-
• Ten months' average salary; 
• Cash equivalent of the leave due at the time of retirement;
• Leave encashment actually received at the time of retirement.

Here the average salary means the average of the salary drawn during the last ten months before retirement.

C)  Gratuity: Any death cum retirement gratuity received by Government or Local Authority employees is exempt from tax. For Non-Government Employees the taxability depends on whether Gratuity is covered under the Gratuity Act.

1.       Gratuity covered under the Gratuity Act
For Gratuity covered under the Gratuity Act, total of gratuity received by an employee, covered by the Gratuity Act, from various employers in whole of service is exempt from tax to the extent of least of the following three amounts:

o        15 days' salary, based on the last drawn salary, for each completed year of service

o        Rs. 3,50,000/-; or

o        The gratuity actually received.

2.       Gratuity not covered under the Gratuity Act
For Gratuity not covered under the Gratuity Act any gratuity not covered by the Gratuity Act, is exempt from tax to the extent of least of the three amounts

o        The half month's salary for each completed year of service; or

o        Rs.3,50,000/-; or

o        The gratuity actually received.

D)   VRS Compensation: Compensation received at the time of voluntary retirement is exempt up to Rs. 5 lakhs under certain conditions.

Deductions on certain payments

Professional tax, which is paid, is allowed as deduction.

Tax-free allowances

Most allowances are taxable like city compensatory allowance, tiffin allowance, fixed medical allowance and servant allowances; encashment of any concession is also taxable.

A) House Rent Allowance

Out of house rent allowance received during the year, least of the following three amounts will not be included in income: -

• The amount equal to 50% of annual salary, for persons staying in Mumbai, Chennai, Calcutta or Delhi, but 40%, for others
• The actual amount of house rent allowance received
• The amount of rent actually paid  in excess of 10% of annual salary

Here, salary includes basic salary, dearness allowance, and commission on fixed percentage, but not other allowances.

B)  Transport allowance

Transport allowance for traveling from residence to office is exempt upto Rs 800 per month.

C) Any allowance granted for encouraging the academic, research and other professional pursuits

To the extent the allowance is utilised for the purpose specified.

D) Children Education Allowance

Rs. 100 per month per child up to a maximum of two children

E) Any allowance granted to an employee to meet the hostel expenditure on his child

Rs. 300 per month per child up to a maximum of two children

Investment in Bonds, Deposits, and Other Schemes

Following incentives are available for investment in specified Investments and schemes.

Rebate u/s 88

For the assessment year 2003-04, the amount of rebate is as follows -

1. Tax rebate under section 88 is available at 30% of the net qualifying amount if the following two conditions are satisfied.

a. income chargeable under the head "Salaries" (before giving deduction under section 16) does not exceed Rs. 1,00,000; and

b. income chargeable under the head "Salaries" is not less than 90% of gross total income.

2. If gross total income does not exceed Rs. 1,50,000 ,tax rebate is available at 20% of the net qualifying amount.

3. If gross total income exceeds Rs. 1,50,000 but does not exceed Rs. 5,00,000, tax rebate is available at 15% of the net qualifying amount.

4. If gross total income exceeds Rs. 5,00,000 tax rebate under section 88 is not available.

Deductions on Interest etc. U/s 80L

Deduction is the amount, which is reduced from the gross total income before computing tax. If interest is earned on Govt. Securities, Bank deposits, Post Office deposits, debentures, National Savings Certificates etc., deduction up to Rs. 12,000/- u/s 80 L is allowable from the net  income after deducting the expenditure incurred in earning it.  Further, an additional deduction up to Rs. 3,000/- will be allowable on interest from Govt. Securities, if not already covered in the Rs. 12,000/- limit mentioned earlier.

Deductions on premium for medical insurance

If premium for medical insurance is paid by cheque for a person, or his dependent family member or member of the HUF, deduction up to Rs. 10,000/- for insurance premium paid is allowable.  In respect of senior citizens the maximum limit for deduction will be up to Rs. 15,000/-.

Deduction on Contribution to pension fund

If an individual contributes to specified pension funds deduction up to Rs.10,000/- u/s 80CCC is allowable. The pension will however be taxable on receipt.

Deductions Related to House Property

Various deductions and incentives are given for Investment in House Property

Deductions for Self occupied property

The only entitled deduction is interest, if any payable, on loan taken for the purchase or construction of the house property. The maximum deduction on this account is Rs.30, 000/-; However, for properties acquired or constructed from 1st April 1999 out of borrowed funds, maximum limit is Rs. 1,50,000/-

Deductions for let out property

The deductions available for computing House Property Income are:

· 30% of the net annual value for repair and maintenance and rent collection expenses for the property

· Interest on money borrowed to build, buy or repair the property;

Exemptions on profit on sale of house

The profits on sale of house can be deducted if they are invested in another house or in the bonds of National Bank of Agricultural And Rural Development or of the National Highway authority of India. These exemptions are subject to certain conditions and the reinvestment has to be made within the prescribed time. 

Investment in Shares

The benefits on Investment in Shares are as under :

• Dividend from shares and equity-based mutual funds is exempt in the hands of recipient.
• If shares, debentures and mutual fund units are held for more than 12 months the profits on sale is taxed as long-term capital gain in which case a lower tax rate is applied. Also the cost of purchase is increased as per a cost inflation index.
• The losses in share transaction can be carried forward for adjustment against profits of subsequent years.

Senior Citizens

Senior citizens (individuals >= 65 years at any time during the relevant previous year have following benefits

• Higher limit of Rs 15,000/- of premium for medical insurance
• An additional rebate from tax payable up to a maximum of Rs 20,000/-.
• Higher deduction of Rs 60,000/- (instead of Rs. 40,000/-) under section 80 DDB if expenditure for specified disease is incurred for senior citizen 

Women Tax Payers

All women resident in India get a special rebate up to Rs. 5,000/- out of the tax payable by them.  This rebate will not be allowable for women tax payers above sixty five at any time during the relevant previous year, who will get senior citizen rebate of Rs. 20,000/-.

Miscellaneous Deductions

• In case of winnings from lotteries and races no deduction is allowable.
• For family pension, the allowable deduction is 1/3rd of the pension or Rs. 15,000/- whichever is lower.
• For income from other sources, any revenue expenditure, exclusively incurred for earning such income is allowed as deduction.
• Deductions up to a maximum limit of Rs. 40,000/- u/s.  80DD. is allowable if any expenditure has been incurred on the treatment, nursing,, training of a handicapped dependent, or for creating an insurance benefit for such person a deduction subject to the condition that  doctor working in a government hospital has issued the necessary certificate.
• Deductions up to Rs.40,000/- u/s 80DDB on treatment of specified diseases is allowed if an individual or an HUF actually incurs expenditure for treatment of certain specified diseases for himself, dependents or a member of HUF. For treatment of senior citizens, the amount of deduction will be up to Rs.60,000 /-. This deduction is available only for certain specified diseases.