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Category Archives: Salary Components

Income Tax (IT) Jargon – Financial Year (FY), Assessment Year (AY) and Previous Year (PY)


April 8, 2008 by  ·

 

Financial Year (FY), Assessment Year (AY) and Previous Year (PY) are terms very commonly heard during the Income Tax (IT) returns filing season. This article defines these terms, and explains the difference between them.

Please click here to know the New Income Tax Slabs / Brackets for FY 08-09, and an analysis of its positive impact on your tax liability

It’s that time of the year again – the time when the financial year comes to an end, and we all scramble to collect our income and investment details to prepare for the most hated event of the year – filing our income tax (IT) returns!

(Wondering why a Financial Year is from April to March, and not from January to December? Please read “Why does the financial / fiscal year start from 1st April?“).

And when we start filling out the tax return form, one of the first things that we encounter is the field Assessment Year (AY). And next in line is Previous Year (PY). So, what is an Assessment Year? What is a Previous Year? And, how are these different from a Financial Year (FY)?

It’s time to understand this better!

(Ready to file your income tax return, but confused which form to use? Please read “Income Tax (IT) Return Filing – Which ITR form to use?“)

Unit of Time for Measuring Income, Expenses and Investments

The government charges income tax on the income we earn. From this income, it also allows us to deduct some expenses we incur, and some investments that we make.

But for measuring the income, expenses and investments, we need a unit of time. This unit has been defined world over as 1 year. Thus, almost everywhere in the world, companies and people report their incomes, expenses, investments and other relevant information on a yearly basis.

Financial Year (FY)

The financial information is reported on a yearly basis, and the year for which this information is reported is called aFinancial Year, or FY in short.

The actual start and end of a financial year varies from country to country.

For example, the financial year in India starts on 1st April every year, and ends on 31st March of the following year. Thus, the last financial year in India (for which companies would soon start reporting their incomes) started on 1st April 2007, and ended on 31st March 2008. This is usually denoted as FY 07-08, or FY 08.

In USA, the financial year coincides with the Calendar Year (January to December). Thus, it starts on 1st January every year, and ends on 31st December of the same year. The current financial year in USA started on 1st January 2008, and would end on 31st December 2008. This is usually denoted as FY 08.

The term Financial Year, or FY, is used universally. That is, it is used not just in the context of income tax, but also for all other accounting and reporting.

Assessment Year (AY)

Income from a particular financial year is assessed for income tax in the following year. The financial year in which this assessment takes place is called the Assessment Year (AY).

Thus, for the current tax season, we would be filing the income tax returns for the Financial Year 07-08 (or FY 07-08), and since it would be assessed in the year 2008-2009, the Assessment Year is 08-09 (or, AY 08-09).

The term “Assessment Year” is normally used specifically for Income Tax (IT).

Previous Year (PY)

Now after reading about FY and AY, this should be simple!

In an assessment year, the income from the year preceding it is assessed for income tax. This year is called the Previous Year, or PY in short. So, simply speaking, Previous Year is the financial year for which your income is being assessed. Now that’s simple, isn’t it?

Let’s continue with our example: For the current tax season, we would be filing the income tax returns for the Financial Year 07-08 (or FY 07-08), and therefore, it is also the Previous Year (PY 07-08). Since this income would be assessed in the year 2008-2009, the Assessment Year is 08-09 (or, AY 08-09).

Again, the term “Previous Year” is also normally used specifically for Income Tax (IT).

Now that we understand the terms Financial Year (FY), Assessment Year (AY) and Previous Year (PY) better, I have only one thing to say:

Happy Filing!!

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Posted by on March 23, 2014 in Salary Components

 

LTA


Income tax treatment of leave travel allowance / concession (LTA / LTC)

January 8, 2009 by  ·
The government wants to encourage us to travel more and explore our country, and wants to assist us. That’s why it gives a favourable income tax treatment to allowance given to us for travel. We actually get income tax benefit for tourism! Read on.

Most salaried people get a special allowance for taking vacations, called Leave Travel Allowance (It is also known as Leave Travel Concession or Leave Travel Assistance).

This LTA / LTC has income tax benefits associated with it, provided you meet certain conditions. Let’s understand the income tax treatment of LTA / LTC better.

What is Leave Travel Allowance / Leave Travel Concession (LTA / LTC)?

This is a special allowance that most salaried people get. This allowance is meant for traveling – you are expected to utilize it to spend it for tourism-related travel expenses.

It can be given out every year, or once every 2 or 4 years. Many organizations also allow you to accumulate this allowance for 2 years.

Income tax and LTA / LTC

The LTA / LTC that you get is fully exempt from income tax, provided it satisfies certain conditions. Here are the conditions:

The amount is actually spent on travel

You have to actually spend this amount on transportation. The spending can be for you and your family members, but you have to be one of the travelers.

Here, family means spouse and children (including adopted children and stepchildren). Parents, brothers and sisters are also included if they are dependent on you.

It has to be for transportation

The amount has to be spent on transportation – either air, rail or road.

Any amount spent for lodging and boarding is not considered. Thus, food related expenses and hotel expenses are not exempt from income tax.

Also, this exemption is for primary travel between your city of stay and your destination. Other travel expenses like taxi / cab fare, auto fare, etc. can not be claimed as exempt.

Travel within India

The travel has to be within India – foreign travel is not considered. The government wants to boost tourism within India, not international travel!

Shortest Distance and Cap on claim amount

The amount exempt would be the amount required for travel to your destination by the shortest route, depending on the mode of your travel.

If you travel by air, the maximum amount that can be claimed as exempt is the economy class air fare to your destination by the shortest route.

If you travel by rail (or road), the maximum amount that can be claimed as exempt is the air conditioned first class (AC I Class) rail fare to your destination by the shortest route.

(Please see the example at the end of the article to understand this better)

Proof of travel

Proof of travel needs to be preserved and presented to claim this exemption. The tickets are considered valid proof.

If you arrange travel through a hired or rental car, the receipt from the travel agency or car rental agency is considered valid proof. Please note that any non-transport component (like driver allowance) is not considered for income tax exemption.

LTA / LTC and Block of 4 years

Apart form the above conditions, there is one more condition that causes confusion: The LTA / LTC tax exemption can be claimed only twice in a block of 4 years.

These blocks of 4 years are predefined by the government. These are:

2002 – 2005
2006 – 2009
2010 – 2013

And so on. The current block is 2014 – 2017.

Please note that these years are calendar years, and not financial years.

(Confused by terms like financial year and assessment year? Please read  “https://hrmexpress.wordpress.com/2014/03/23/income-tax-it-jargon-financial-year-fy-assessment-year-ay-and-previous-year-py/”

to know these terms better)

Example

Let’s understand the concept of “twice in a block of four years” through an example.

If you claim LTA exemption in 2006, then, you can claim it only once more till 2009. Thus, if you claim it again in 2007, you can not claim it before 2010, as you would have already claimed it twice in the block 2006 – 2009.

However, if you do not claim LTA exemption in 2006 and 2007, you can claim it for both 2008 and 2009, and also for 2010 and 2011, as 2010 and 2011 fall under the next block of 4 years: 2010 – 2013. Thus, it is possible to claim LTA / LTC exemption for 4 years in a row!

Carry forward of LTA / LTC Benefits

What if you can not claim LTA / LTC exemption for some reason?

No need to worry. The exemption doesn’t lapse – it can be carried forward to the next block of 4 years.

The only condition in this case is that the exemption has to be availed in the very first year of this subsequent block.

Thus, in this next block, you can claim a total of 3 exemptions!

Spouses and LTA

A question that is very commonly asked is: If both husband and wife are eligible for LTA, can both of them claim it?

Yes, they can very much claim LTA individually. The rules of LTA apply individually to each, which means that each spouse can claim LTA twice in a block of four years.

Thus, a family can claim LTA exemption four times in a block of four years if both spouses are eligible for LTA.

The only restriction is that both spouses can not claim LTA exemption for the same journey.

There is no other restriction: The LTA exemption can be claimed for the same family members, or different family members as allowed by the rules (as explained above). The family can in fact also travel twice in the same year, and each spouse can claim exemption for one journey.

(Note: The rules regarding claims by spouses might be slightly different in case of government employees. Please check with your organization / department to know the exact rules applicable if you are a government employee and claim LTC / LTA)

Example

Let’s say you and your spouse are traveling to Bangalore from Mumbai. But instead of going from Mumbai to Bangalore, you go from Mumbai to Hyderabad, and then got to Bangalore. You travel by train in the AC 3 tier category.

The cost of AC 3 tier train tickets are as follows:

Mumbai – Hyderabad: Rs. 800
Hyderabad – Bangalore: Rs. 700
Bangalore – Hyderabad: Rs. 700
Hyderabad – Mumbai: Rs. 800

Thus, you spend a total of Rs. 6,000 for two people.

Now, the shortest route to your destination in this case would be Mumbai to Bangalore. The AC First class ticket costs Rs. 2,350 for this. So, your round trip fare would have been Rs. 9,400 for two people.

The amount exempt from income tax is the lesser of these two. Thus, in this example, even when you haven’t traveled through the shortest route, you can claim income tax exemption for the full amount of Rs. 6,000.

And what about the actual allowance that you get?

Let’s say you get a leave travel allowance of Rs. 10,000. Would it be fully exempt?

No. As we saw, the amount exempt is the lesser of the amount actually spent and the fare by the defined class through the shortest distance.

Thus, the amount exempt from income tax would be Rs. 6,000. The remaining Rs. 4,000 would be taxable, and would be included in your income.

Happy traveling!

Ref:http://www.raagvamdatt.com/income-tax-treatment-of-leave-travel-allowance-concession-lta-ltc

 
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Posted by on March 23, 2014 in Salary Components

 

THE CONTRACT LABOUR (REGULATION AND ABOLITION) ACT, 1970


contract_labour_regulation_and_abolition_act_1970 Ref: http://pblabour.gov.in/pdf/acts_rules/contract_labour_regulation_and_abolition_act_1970.pdf

 
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Posted by on January 19, 2013 in Salary Components

 

Entertainment Allowance


The provisions regarding the entertainment allowance and its deduction from salary are discussed below –

 

Entertainment allowance as per Section 16(ii) is first included in salary income under the head “Salaries” and thereafter a deduction is given on the basis enumerated in the following points:

  • In the case of a Government employee (i.e., Central Government or a State Government employee), the least of the following is deductible:
  1. Rs. 5,000
  2. 20 percent of basic salary ; or
  3. Amount of entertainment allowance granted during the previous year.

In order to determine amount of entertainment allowance deductible from salary, the following points need consideration:

1. For this purpose “salary” excludes any allowance, benefit or other perquisites.

2. Amount actually expended towards entertainment (out of entertainment allowance received) is not taken into consideration.

In the case of a non-Governmental employee (including employees of statutory corporation and local authority), entertainment allowances is not deductible, and are completely chargeable to tax

Ref: http://taxguru.in/income-tax/entertainment-allowance-deduction-salary.html

 
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Posted by on January 18, 2013 in Salary Components

 

Allowances and tax exemption under the head salary


N Allowance Type Tax Exemption
1 House Rent Allowance (HRA) Minimum of the following will be tax free allowance1.A)For Metro cities-(Delhi, Chennai, Mumbai, Calcutta):-50% of Salary (Basic + DA + Fixed % of Commission on Sale)

B)Other Than Metro-40% of Salary

2.House Rent Allowance (HRA) received by employee by the company

3.Actual rent paid over the 10 % of Salary i.e =Rent paid to Landlord Less 10% of Salary (Basic + DA+ Fixed % on Sale)

2 Allowance paid to meet the cost of travel on tour on transfer
Note: Including sum paid for transfer/packing/transportation of personal effect
Exempted from tax up to the extent the allowance utilized for the travel
3 Allowance granted to meet the travel cost for performance of duty Exempted from tax up to the extent the allowance utilized for the travel
4 Allowance granted for transfer: daily allowance incurred on account of absence from his normal place of duty
Note: Granted for period of tour or for journey
Exempted from tax up to the extent the allowance utilized for the purpose
5 Allowance granted to meet the expenditure on helper for performance of duties of office Exempted from tax up to the extent the allowance utilized for the purpose
6 Allowance granted for encouraging the academic/research/professional pursuits Exempted from tax up to the extent the allowance utilized for the purpose
7 Allowance granted to purchase of uniform or maintenance of uniform for wearing during the performance of duties of an officer Exempted from tax up to the extent the allowance utilized for the purpose
8 Allowance granted to employee of transport business entity to meet his personal expenses during running of such transport 70% of total expense maximum to 10,000
9 Children education allowance Rupees 100 per child per month upto two children
10 Children hostel allowance Rupees 300 per child per month upto two children
11 Allowance granted to employee to  meet expenditure for commuting from residence to place of duty 800 Per Month
12 Allowance granted to employee who is blind or orthopaedically handicapped with disability of lower extremities to meet expenditure for commuting from residence to place of duty 1,600 Per Month
13 Underground Allowance granted to employee working in uncongenial, unnatural climate in underground mines 800 Per Month
14 Allowance granted to member of armed forces for work in highly active field area 4,200 Per Month
15 Allowance to  High Court Judge under section 22A(2), 22C  or to Supreme court judge under section 23B Exempted from tax
16 Entertainment allowance to Government empoyeeNote: Entertainment allowance first included in the salary under the head of salary and then deduction is given as per detail given left. Least of the following is exempted from tax
a) Rs 5,000
b)20% of Basic Salary
c)The Actual amount of entertainment allowance

Ref: http://allinfoindia.com/eLearning/Income%20tax/Type%20of%20allowance%20under%20the%20head%20salary.php

http://allinfoindia.com/eLearning/Income%20tax/hra%20rule%20limit%20exemption%20detail.php

 
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Posted by on January 18, 2013 in Salary Components, TDS

 

Medical Allowances and Medical Reimbursement


Medical allowance is taxable. Under the income tax any amount paid as allowance is considered as a part of salary and hence it becomes taxable.

Medical allowance monthly paid in salary is 1250, annually it is 15000.00

Medical reimbursement upto of Rs.15000.00 per year made by an employer to employee are exempted from payment of income tax. For this employee has to claim this reimbursement.

For claiming reimbursement of expenses, every employee is required to give undertaking or to submit bills to support the claim.

These expenses may be in shape of doctor’s consultation fee, purchase of medicines or payment of fee / charges towards pathological test. The expenses can be on him / her self or other dependents of the family including father, mother, or dependent brother sister.

To claim reimbursement employee must keep the support with him / her even though the same has not been asked for by the employer. Onus to prove is with the employee only because he/she is availing tax benefits from income tax authorities against these reimbursements.

Points to be remembered

  • Medical allowance is a fixed allowance paid every month to the employees irrespective of the fact whether they submit the supporting bills or not.
  • Medical reimbursement is a payment made to an employee against the medical bills produced by him/her subject to his/her entitlement.
  • The maximum tax benefit available is Rs.15000 per annum.
  • To help your employees claim tax benefit, kindly advise them to submit bills for the amount of allowance received every month so that there is no problem

Process to claim tax benefit on your medical expenses is –

  1. Awareness – Know the various income tax sections available to claim tax benefits on your medical expenses
  2. Documentation – Keep records of your medical expense, like medical bills, doctor prescription, etc
  3. Benefit Period – Medical expenses tax exemption are on financial year basis. That is your tax exemptions need to be claimed within the financial year in which your medical expenses occurred. Medical expenses cannot be carried forward to subsequent financial year for claiming tax exemptions in subsequent financial year
  4. Expense Reporting – Submit all your medical expenses data and documents to your company payroll or CA before end of financial year. So that your exemptions for tax savings is accommodated in your taxation before the end of financial year. Do not wait till end of financial year, and then try to claim tax refund from Income Tax Department. As getting tax refund is tedious and takes its own time running into months to years

Ref: http://www.citehr.com/1424-medical-allowances.html

http://sdoye.com/2010/05/medical-expenses-by-default-are-eligible-for-tax-benefits/

http://www.citehr.com/198678-medical-allowance-v-s-medical-reimbursement.html

 

 
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Posted by on January 18, 2013 in Salary Components

 

Characteristics of Salary


The relationship of payer and payee must be of employer and employee
for an income to be categorized as salary income.

For example: Salary
income of a Member of Parliament cannot be specified as salary, since it is
received from Government of India which is not his employer.
2. The Act makes no distinction between salary and wages, though generally
salary is paid for non-manual work and wages are paid for manual work.
3. Salary received from employer, whether one or more than one is included
in this head.
4. Salary is taxable either on due basis or receipt basis which ever matures
earlier:

i) Due basis – when it is earned even if it is not received in the previous
year.
ii) Receipt basis – when it is received even if it is not earned in the previous
year.
iii) Arrears of salary- which were not due and received earlier are taxable
when due or received, which ever is earlier.
5. Compulsory deduction from salary such as employees’ contribution to
provident fund, deduction on account of medical scheme or staff welfare
scheme etc. are examples of instances of application of income. In these
cases, for computing total income, these deductions have to be added
back.

Ref: http://www.du.ac.in/fileadmin/DU/Academics/course_material/TM_04.pdf

 
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Posted by on January 18, 2013 in Salary Components