Understanding taxability of salary components

Understanding taxability of salary components

Under the old tax regime applicable by default till 2019-20 there are various scenarios in which tax free salary or benefits can be taken in India payroll. Refer to the article on New regime and Old regime for more details.

There are some tax free heads which are allowed as per law and these are available in the software by default. Additionally Administrators can create custom tax free heads in Monthly Tax Free or Annual Tax Free category which get mapped to Section 10, Taxfree Benefits get mapped to Section 17(2). Please refer to the article on Components of Salary Structure for more details.

Administrators can also create heads in Adhoc Payment category and chose them to be tax free. The tax treatment of these heads would be done on the basis of section which is mapped.

1. Section 10

Heads under this section can be grouped in three categories
1. System defined heads where supporting are needed
- Leave travel allowance : Section 10(5)
- House rent allowance : Section 10(13A)
- Daily allowance / Uniform allowance / Travel allowance / Helper allowance / Research or Academic allowance : Section 10(14)(I)

2. System defined heads where supporting are not needed 
- Children education and hostel allowance : Section 10(14)(II)
- Leave encashment : Section 10(10AA)(II)
- Gratuity : Section 10(10)

3. Custom heads where supporting is as per design (can be designed to be needed or not needed)

In case supporting are needed, then software will process all the amount being paid in these heads as tax free, till the year end verification is done. Post the verification tax would be deducted on the amount which is not verified. You do have an option to disable the verification process but that might show up as non compliance in case of an audit. 

Note - Any amount paid through Adhoc payments through Section 10 heads will be completely tax free and there will be no verification based on supporting receipts.
Handling in Form 16 Part B - the complete amount paid in these heads will be included in "Salaries under section 17(1)" and the tax free amount will be shown as exemption under Section 10.

Example - House Rent Allowance calculation as given below

Annual rent paid                     : 84,000
From                                       : 01-04-2017
To                                            : 31-03-2018
1. HRA Received (in salary)   : 67,500
2. 40% or 50% of Basic           : 108,000
3. Rent > 10% Basic                : 57,000
Least of above is exempt      : 57,000
Taxable HRA                          : 10,500

As per above calculation Actual HRA Rs 67,500 will be include in "Salaries u/s 17 (1)" and Exempt amount Rs 57,000 will shown as exemption u/s 10.

If employee is not staying in a rented accommodation throughout the year and the rent is declared only for partial period during the year then the "HRA Received" and "Basic" are calculated  only for the period for which the employee has declared rent.

2. Section 17(2)

Perquisites cover any payment made or benefit given to the employee in addition to salary or wages. In EazeWork HRMS perquisites are modeled through different mechanisms -

1. System defined heads which are available in this category are explained in the article Managing perquisite components of salary.

2. Loans if taken with perquisite value will also be included in this category. Refer article on Loans with perquisite for more details.

3. Tax-free gift of upto INR 5,000 can be given under this section. Adhoc payments or Monthly taxfree benefits can also be modeled in this category. Refer article on Taxfree gift to employees for more details.

4. Employer contribution exceeding Rs 7.5 lakhs in a financial year in EPF or NPS also falls under the category of perquisites. Refer article for more details

5. Custom perquisite heads - custom taxfree heads can be created and mapped to Section 17(2). These heads can be modeled in two ways
a) as taxfree benefits which are not paid through salary, these are not visible in salary slips or salary register and there is no need to verify the supporting
b) as taxfree salary which is visible in salary slip and salary register. The option to verify the supporting for these heads is available

Handling in Form 16 Part B - the taxable amount will be visible Form 12BA which forms a part of the overall Form 16 Part B. Tax free part will be visible on Annexure to Form 16 under the head "Details of Allowance exempted under section 17(2)".

3. Verification of supporting of taxfree heads

There are two ways to manage the verification of supporting of taxfree heads.

1. Year end tax saving submission - in this option employees will have to provide the supporting documents during their year end tax saving proof submission. Refer article for more details.

2. Updation directly by Payroll Manager - in this option the verified amount is updated directly by Payroll Manager. Refer article for more details.
Note
1. When 24Q monthly return is prepared only the taxable salary for the month will be used for Q1, Q2 and Q3 returns. In Q4 (assuming year end verification is done in Q4) heads like HRA, Custom and Adhoc heads which are mapped to Section 10 or 17(2) will be included.
2. Salary which is paid through Reimbursement Heads are tax free if paid by vouchers which are submitted by employees. If vouchers are not submitted then the payment is done in payroll based on the frequency of settlement of these head. Amount paid in payroll will be included in 24Q and will also be included in Salary under section 17(1). Refer to article on Claiming Reimbursement.

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