Components of salary received from the employer
If the sum of a person’s salary in a whole year crosses the exemption limit of income tax, he is liable to pay income tax. But some components of income from salary are exempted from income tax and they are as follows
· Medical reimbursement
· Transport allowance
· Meal coupons
· Mobile phone bills
· Internet bills
· Leave travel allowance
· Leave travel concession i.e. LTC
· Reimbursement of any kind of liveries bill.
Profit from partnership firm
A partnership firm is a joint organization of two or more persons. Income tax is imposed on the income of the firm and then income tax is deducted from the income of the firm accordingly. After that, the partners receive their shares from that income. Now, a partner is exempted from income tax when he/she receives the share.
Individual share from HUF
The income of HUF is taxable. HUF itself is considered a taxable body. Income tax is paid on the income of HUF. Then the remaining income is distributed among its members. So, the members are not liable to pay income tax.
Benefits from retirement
A person receives some benefits from its employer on his/her retirement. These benefits are either wholly or partially exempted from tax depending if he/she is a government or non-government employee and the amount received. They are as follows,
1. Provident fund
2. Gratuity
3. Leave encashment
Income from Provident funds
In India, Provident funds are compulsory for every employee working in such companies which are registered under The Companies Act, 1956.
With the increase in age, the savings increase proportionately. After the retirement, an individual earns the respective Provident Fund (PF) money which is exempted from tax.
The Employee Provident Fund offers tax-free returns if it has received an active contribution for more than 5 years even if an individual has changed multiple employers in the said period.
Income from Gratuity
Gratuity is a fund an employer provides to its employee. It is one kind of gift that is paid as extra. Following conditions are applicable.
Superannuation: It means when an employee attains the age of retirement i.e. the age of 60 years.
Resignation: For some reasons, an employee may resign his/her job.
On sudden death or any physical loss or health hazard due to accident or disease of the employee.
Calculation of amount
An employee can get the rebate on the gratuity of maximum Rs. 30 lakhs. More than this is taxable. The least of the following are exempted from tax:
· Last salary (basic + DA)* number of years of employment* 15/26
· Rs. 20 lakhs
· Gratuity actually received.
Gratuity Amount = last salary received x 15/26 x no. of years of service
For example : Last Salary (Basic+DA)=200000/-
Service Tenure= 30 yrs.
Amount of Gratuity = 34,61,538/-
Tax is applicable on Rs. 4,61,538 i.e.(3461538-3000000)
Leave Salary
A central government or state government employee may encash his/her leaves accumulated throughout the service period. At the time of retirement or superannuation or resignation, an employee may encash his/her leave. The concerned person can encash maximum 10 months of leave. This encashment of leave salary is tax-free.
The calculation is different for private sector employees. They can avail the exemption of maximum Rs. 3,00,000/-.
Tax-free pension
Pension received from some organizations like UNO is tax-free. Family pension received by dependents of an employee is partially tax-free. It is one-third of pension or Rs. 15,000/- whichever is less. Here are some pensions which are completely tax-free,
· Pension and family pension of gallantry award winners.
· Family pension by self or family members of the armed forces personnel.
Commutation of Pension
On retirement central and state government employees, local authority, defense services, and PSU employees can encash a part of their pension in lump sum. It is known as commutation of Pension. This encashment of pension is tax-free.
Income from a superannuation fund
Literally, superannuation means regular payment of money made into a fund by an employee towards a future pension. It means people pay money while they are working so that they will receive payment when they stop working. Now amount from a superannuation fund to the employee or legal heirs of any employee is completely tax-free.
Voluntary retirement
Any employee can take voluntary retirement before his superannuation. In this case maximum Rs. 5 Lakh is tax-free. Any excess amount is taxable as applicable to that person.
Retrenchment
If any organization or company provide any compensation to its employees due to the closure of the organization, this compensation is tax-free.
Scholarship
Various government institutions, private organizations provide a scholarship to students. In some cases, students are awarded by several institutions. These scholarships or awards are completely tax-free.
Awards or Rewards by Government
Any Rewards or awards given by central or state government or any government authority for literary, scientific or artistic work or for service for alleviating the distress of the poor, the weak and the ailing, for proficiency in sports and games, & Gallantry awards are completely tax-free.
Government relief funds
Government sanctions fund for any kind of natural calamity, riot, or any disturbances like that. The money received by an individual from this kind of fund such as the Prime Minister’s National Relief Fund is not taxable.
Gifts either in cash or in any kind
Any gift received from any relative is totally tax-free. The gift may be in the form of money, jewellery, property, vehicle or any means. But in the case of non-relatives maximum Rs. 50,000/- as a gift can be received. More than this is taxable. Any gift received at the time of marriage from either relatives or nonrelatives is tax-free. Here are some exemptions in case of a person who receives Gifts (either in cash or in any kind) from any person under the provision of Section 56(ii) of the Income Tax Act. Below are some conditions applied to gift.
Gifts received from Relatives
Here are details of relatives as defined by the Income Tax Department.
· Husband or wife i.e. spouse of an individual
· Brother or Sister of an Individual
· Brother or Sister of the spouse of that respective individual
· Brother or Sister of either of the parents of the individual
· Any Linear ascendant or descendant of the individual
· Any Linear ascendant or descendant of the spouse of the individual
· Spouse of the person mentioned above
Gifts are treated as tax-free income sources if the aggregate value of gifts received is less than Rs. 50,000
As mentioned earlier Rs. 50,000/- is the maximum limit of exemption when the gift is received by a non-relative. This value may be in cash or in any kind. If the value of the gift crosses the limit, the whole gift is treated as income from other sources of that receiver.
On the occasion of Marriage of an Individual
On the occasion of Marriage, an Individual can receive gifts of any valuation and the gifts may be in any form or kind. These gifts are fully exempted.
Gifts received from a will or through inheritance or in contemplation of death of the payer
Generally, people receive gifts or property or wealth from their ancestors. Anything received by any will or inheritance is not taxable. The best thing is that there is no upper limit for this kind of receiving. Any amount can be received.
Amount received from Government Schemes
If an Indian citizen or a person of Indian origin irrespective of resident or non-resident has an income from the investment it is tax-free on the following conditions,
· If he has an income from notified Central Government Securities such as National savings certificate, issued before June 1, 2002, and subscribed in foreign currency such as Dollar, Pound, and Euro etc.
· Public Provident Fund or Notified Provident Fund.
· Any payment from Sukanya Samriddhi Yojana.
· Partial withdrawal i.e. up to 25% of the contribution made by an employee from NPS.
· Any income earned as an interest received from Government securities, bonds, annuity certificates, savings certificates etc.
· Gold Monetization Scheme.
Allowances or compensation from the employer
The following allowances are completely tax-free in the hands of any individual Indian,
· Foreign allowance granted by the government of India to its employees’ posted abroad.
· Compensation received from PSU Company at the time of Voluntary retirement or superannuation.
Capital Gains
The following Capital Gains are completely tax-free in the hands of any individual Indian,
· Capital gains on transfer of listed equity shares.
· Compensation received on compulsory acquisition of urban agriculture land.
· Under Andhra Pradesh Capital City Land Pooling Scheme, 2015.
· Capital gains by selling mutual fund units or share or stock up to Rs. 1 Lakh.
Income received from Foreign Government
Remuneration received from a foreign government by an individual who is an Indian resident citizen in connection with any sponsored cooperative technical assistance programme with the foreign government is completely tax-free.
Maturity (or) claim from Insurance companies
Any sum received from the insurance companies including bonus [except Keyman Insurance policy]either the policyholder or the nominee of the policyholder is completely i.e. 100% non-taxable income sources on following cases,
· The maturity money received by the policyholder from the life insurance companies on maturity, claims from money back endowment policy.
· The nominee of the policyholder from the life insurance companies on the death of the policyholder.
Dividend Income from Domestic Companies
Starting from Financial Year 2016-17, any dividend income an individual receives when the company announces dividend is completely tax-free in the hands of any retail investor in case the net value of the dividends in a financial year not exceeding Rs. 10 lakh.
The dividend a retail investor received should be a SEBI registered Indian Company. In that case, the respective company will pay the dividend distribution taxes in accordance with the dividend amount to the government before giving to its shareholders.
Tax-free Interest income from Bank, Post office
Maximum of Rs. 40,000/- earned as interest from regular savings account from any scheduled Bank or registered financial institution is exempted from income tax for a financial year. Interest earned more than this is taxable. If anyone gets Rs. 60,000/- as interest he is liable to pay tax on (Rs. 60,000-Rs. 40,000) = Rs. 20,000/-.
Senior citizens can avail a tax-free income of Rs. 50,000/- from fixed deposits or term deposits in banks or post offices if the person is a pension holder.