Blog

2021

Treatment of House Rent Allowance under the Income Tax Act 1961

House Rent Allowance (HRA) is the allowance provided by an employer to their employee as a compensation for house rental expenses paid by the employee. It forms part of the salary paid by the employer to their employee.

House Rent Allowance or HRA is a salary component paid to employees by an employer towards the accommodation cost of living in that city. Even though it is a part of your salary, unlike your basic pay, HRA isn’t entirely taxable, subject to conditions (a percentage of HRA is exempted under Section 10 (13A) of the IT Act, 1961).

House rent allowance (HRA) is a basic component of your salary. However, most of us are not familiar about the rules that can help us save tax on it. If you are a salaried employee living on rent, then here's how you can use HRA to reduce your tax liability.

Archive


2021

TDS

Dividend refers to a reward, cash or otherwise, that a company gives to its shareholders. Dividends can be issued in various forms, such as cash payment, stocks or any other form. Essentially, a dividend is the distribution of some of a company's earnings to a class of its shareholders, as determined by the company's board of directors. It requires the shareholders’ approval to pay dividend. However, it is not obligatory for a company to pay dividend.

In a nutshell, the dividend is simply an equity (and preference) shareholders profit share in the company and section 194 calls for the deduction of tax on such dividend income given to shareholders.

2021

Overview of Employees State Insurance Scheme in India

Employees' State Insurance is a self-financing Social Security and Health Insurance Scheme for Indian workers. The fund is managed by the Employees' State Insurance Corporation (ESIC) according to rules and regulations stipulated in the ESI Act 1948. ESIC is a Statutory and an Autonomous Body under the Ministry of Labour and Employment, Government of India.

The Employee State Insurance Scheme (ESI) is one of the largest social security schemes, globally. ESI provides primarily sickness benefits and some other benefits to approximately thirteen crores Indians that include Insured Employees and their dependents.

Applicability of the Scheme:

  • This scheme extends to the whole of India and covers all places of business registered under either in the Factories Act or under the Shops and Establishments Act. However, this scheme is not applicable to the seasonal factory or mine.
  • This scheme is applicable only in the areas defined as ‘Implemented Area’ under this scheme.

2021

TDS on Winningfrom LotteryCrossword PuzzleorHorseraces

TDS on Winnings from Lottery or Crossword Puzzle (Section 194B)

We all are aware of many famous reality shows and game shows like ‘Kaun Banega Crorepati’, Indian Idol and Dance India Dance etc. These shows offer huge prizes in the form of cash as well as kind. Similarly, many people are fond of buying lottery tickets and some win them too. The income earned from such sources is not tax free. The price money received by a person is subject to TDS under Section 194B of the Income Tax Act, 1961. 

2021

Payment of Gratuity and its Tax Treatment in India

 

Gratuity is a lump sum amount that employers pay their employees as a sign of gratitude for the services provided. It is paid as a reward for the employee’s long service rendered. Gratuity is generally paid at the time of retirement but one can also ask for it while moving jobs after a certain length of service (5 years).

In India, all matters related to gratuity are governed under the Payment of Gratuity Act, 1972. The act was passed by the Parliament on 21st August 1972 and came into force on 16th September the same year.

All central and state government departments, defense, and local governing bodies are covered under this act. Private organisations can come under its purview subject to fulfillment of certain conditions.

The key idea behind the introduction of this Act was to provide monetary benefit to employees who have provided an extended term of service to a single employee.

Applicability of Gratuity:

Organisations with a workforce of 10 employees on a single day in the preceding 12 months are liable to pay gratuity.
Once gratuity provisions are applicable to any organization, it shall remain applicable to it in future even if number of employees are less than 10.

Time of Payment of Gratuity:

An eligible employee will receive gratuity on following events:

  • Retirement;
  • Resignation;
  • Demise;
  • Disablement due to an accident or a disease;
  • VRS;
  • Termination;
  • Lay off due to retrenchment.

Note:

  • To be eligible, an employee has to render his/her services for 5 continuous years.
  • However, this condition is not taken into consideration in situations of demise or disablement of an employee.

Computation of Continuous Service:

The following rules apply to the calculation of continuous service under the Payment of Gratuity Act, 1972.

Time of Continuous Service

Types of Business Establishment

Mines & Quarries

an establishment that works for less than 6 days in a week

In case of any other establishment

Required No. of days to be considered as 1 year of continuous employment:

190

190

240

Required No. of days to be considered as 6 months of continuous employment:

95

95

120

Notes:

  • In case of seasonal establishment, attendance is required for more than 75% of the days when the establishment is functional.
  • Disablement leave, earned leave and maternity leave are counted as days worked in the calculation mentioned above.

Computation of Gratuity:

  • 15 days of wages (Basic + DA) of each year of completed service is considered for calculation.
  • The wages drawn by an employee in the last month of employment shall be taken for computation of 15 days wages.
  • As per the Gratuity Act, the amount of gratuity cannot be more than Rs 20 lakh. Any excesses would be treated as ex-gratia.

Computation of Gratuity when employer is covered under the Gratuity Act:

Step 1: Determine Tenure of Service of an Employee:

  • The very first step is to determine the tenure of service of the employee for the purpose of gratuity.
  • If an employee has worked for more than 6 months during the last year of employment, then it will be considered as full year of service for the purpose of gratuity.
  • Suppose the tenure of service is 6 years 7 months, then you receive the gratuity for 7 years. If tenure of service is 6 years and 4 months than tenure of service shall be taken as 6 years only.

Step 2: Compute 15 days Wages:

  • We know that 15 days of wages (Basic + DA) of each year of completed service is considered for calculation. This 15 days of wage amount is computed based on the salary drawn by the employee in the last month of employment.
  • To compute wages of 15 days of employment, divide salary of the last month of employment with 26 and multiply the amount with 15.

15 days Salary = 15 * Salary of Last Month of Employment / 26

Step 3: Determine Gratuity Payable:

  • The amount of gratuity payable by the employer to the employee is determined by multiplying 15 days salary with number of years of service. This implies that an amount equal to 15 days of salary is allowed as gratuity for every completed year of service.
  • The formula for computation of amount of gratuity is as follows:

Amount of Gratuity = Number of Years of Service * 15 * Salary of Last Month of Employment / 26

Computation of Gratuity when employer is not covered under the Gratuity Act:

  • Where an employer is not covered under Gratuity Act, the gratuity shall be calculated as per above steps only except that number of days in a month are taken as 30 days instead of 26 days.
  • The formula would be as follows:

Amount of Gratuity = Number of Years of Service * 15 * Salary of Last Month of Employment / 30

Example:

 

Particulars

Employer covered under Gratuity Act

Employer not covered under Gratuity Act

A

Last drawn monthly salary of the employee

50,000

50,000

B

Tenure of Service

10

10

C

Per Day Salary of the Employee

(A/26) =1923

(A/30) = 1667

D

15 Days Salary for Gratuity Computation (C * 15)

28,846

25,000

E

Amount of Gratuity payable to the employee (B * D)

2,88,462

2,50,000

 

Treatment of Gratuity under Income Tax:

  • The tax treatment of the gratuity amount depends on the type of employee who has to receive the gratuity.
  • Government Employee: The amount of gratuity received by any government employee (whether central/state/local authority) is exempt from the income tax.
  • Private Sector Employee: Where the employer is covered under the Gratuity Act, least of the following amounts shall be exempt from Income Tax:

Lease of the following amount is exempt from tax:

  1. Rs. 20 Lakhs;
  2. The actual amount of gratuity received;
  3. The eligible gratuity.

Example: A private sector employee has received Rs. 10 Lakh as gratuity from his employer. The eligible gratuity amount is Rs. 4,00,000. In this case, the lowest of the three figures is Rs 4,00,000 which is exempt from tax. Employee must pay tax on the remaining amount of Rs 6,00,000 as per income tax slab.

 

2021

TDS on payment

TDS is the abbreviation for Tax Deducted at Source. TDS is a direct taxation mechanism which was introduced to collect taxes from the source of income itself or at the time of income payout. Under this mechanism, a person liable to make payment to any other person is required to deduct tax at source from the total amount payable and transfer the balance to the recipient of such income. The person liable to make payment is called deductor while the recipient of the income is called the deductee. The deductor would deduct TDS at the time of crediting the amount to the account of the deductee or at the time of actual payment whichever is earlier. The TDS so deducted shall reflect in Form 26AS of the deductee for the relevant financial year. The deductee can take tax credit of such TDS amount at the time of filing of Income Tax Return.

Financial Management