Section 47- Transactions not regarded as Transfer

Section 47 specifies certain transactions which will not be regarded as transfer for the purpose of capital gains tax:

  1. Any distribution of capital assets on the total or partial partition of a HUF [Section 47(i)].
  2. Any transfer of capital asset by a company to its subsidiary company, the following conditions should be satisfied [Section 47(iv)];
    • The parent company or its nominee must hold the whole of the shares of the subsidiary company;
    • The subsidiary company must be an Indian company
  3. Any transfer of capital asset by a subsidiary company to the holding company, the following conditions should be satisfied [Section 47(v)];
    • The whole of shares of the subsidiary company must be held by the holding company;
    • The holding company must be an Indian company.
  4. Any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company if the amalgamated company is an Indian company [Section 47(vi)].
  5. Any transfer in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company [Section 47(vib)].
  6. Any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company, if the transfer is made in consideration of the demerger of the undertaking [Section 47(vid)].
  7. Any transfer by a shareholder, in a scheme of amalgamation, of shares held by him in the amalgamating company [Section 47(vii)];
    • The transfer is made in consideration of the allotment to him of any share/s in the amalgamated company, except where the shareholder itself is the amalgamated company;
    • The amalgamated company is an Indian company.
  8. Any transfer of a capital asset under a gift or will or an irrevocable trust [Section 47(iii)];
    • However, this clause shall not include transfer under a gift or an irrevocable trust of a capital asset being shares, debentures or warrants allotted by a company directly or indirectly to its employees under the Employees’ Stock Option Plan or Scheme offered to its employees in accordance with the guidelines issued in this behalf by the Central Government.

Deductions & Exemptions

1. Deduction from Salaries [Section 16]

The following shall be deducted from the Gross Salary to arrive at the Taxable Salary on which the tax has to be paid

  1. Standard deduction [Section 16(ia)]
    • A standard deduction of Rs 40,000 is allowed for the FY 2018-19(AY 2019-20).
    • This standard deduction has replaced the existing transport allowance of Rs 19,200, and medical reimbursement of Rs 15,000.
  2. Entertainment allowance [Section 16(ii)] –Least of the following is allowable as deduction for a government Employee:
    1. 5,000
    2. 1/5th of the basic salary
    3. Actual entertainment allowance received
  3. Professional tax [Section 16(iii)]
    • The professional tax or taxes on employment actually paid by the employee is allowed as a deduction.

Note: If professional tax is reimbursed or directly paid by the employer on behalf of the employee, the amount so paid is first included as salary income and then allowed as a deduction.

2. Taxability of Leave Travel Concession [LTC] [Section 10(5)]

What is Leave Travel Concession?

Leave Travel Concession is an allowance/assistance received by the employee from his employer to cover his travel expenses for travelling in India with or without family, when he is on leave from work. LTC is exempt from tax u/s 10(5) of Income Tax Act, 1961.

Conditions for claiming Leave Travel Allowance

  1. Actual journey is a must to claim the exemption.
  2. Only domestic travel is considered for exemptions i.e., travel within India. Therefore, no international travel is covered under LTC.
  3. Exemption is available for travel of an employee alone or with his family where ‘family’ includes employee’s spouse, children and wholly or mainly dependent parents, brothers and sisters of employee. Tax exemption on LTC cannot be claimed for more than 2 children of employee. This restriction is not applicable if the children are born before 1st October, 1998 i.e. Exemption can be claimed for more than 2 children if all of the children are born before 1st October, 1998.

What is Exempt?

Exemption is available only on the actual travel costs i.e., air, rail or bus fare incurred by the employee. No expenses such as local conveyance, sightseeing, hotel accommodation, food etc. are eligible for exemption. Exemption is also limited to LTC provided by the employer.

Example – If LTC granted by employer is Rs 30,000 and actual eligible travel cost incurred by employee is Rs 20,000, exemption is available only to the extent of Rs 20,000 and balance Rs 10,000 would be included in taxable salary income.

How many times can we claim Leave Travel Allowance?

Travel Allowance is available for 2 journeys in a block of 4 years. The blocks are decided by government. The current block is from 2018 to 2021.

Monetary limits:

SL.No. Journey performed by Limit
1 Air Amount not exceeding the air economy fare of the National Carrier by the shortest route to the place of destination
2 Any other mode:  
(i)   Where rail service is available Amount not exceeding the air- conditioned first class rail fare by the shortest route to the place of destination
(ii) Where rail service is not available :  
  (a) A recognized public transport system exists amount not exceeding the 1st class or deluxe class fare, as the case may be, on such transport by the shortest route to the place of destination
  (b) No recognized public transport system exists amount equivalent to the air- conditioned first class rail fare, for the distance of the journey by the shortest route, as if the journey had been performed by rail

Carry Forward

If an employee has not availed of LTC for one or two permitted journeys in a particular block of 4 years then he is entitled to carry one journey over to the next block. In such a situation, the exemption will be available for 3 journeys in the next block.

3. Remuneration received by an individual who is not a citizen of India [Section 10(6)]

What is covered under this section?              

  • Remuneration received by an ambassador or other officials of the Embassy, Received by consular officer of a foreign State in India, Received by a trade commissioner
  • Remuneration received by him as an employee of foreign enterprise for service rendered by him during his stay in India.                                                                                                    
  • Remuneration received for employment on a foreign ship provided his stay in India does not exceed 90 days.
  • Remuneration received by an employee of foreign govt. during his stay in India for his training in India – Such remuneration is fully exempt in cases of Institution owned by Govt, a company wholly owned by Central or State govt. or partly owned by Central and partly by State Govt and their subsidiaries or any corporation established by or under Central or State Act.

Conditions for exemption under section 10(6):

  • The foreign enterprise is not engaged in any trade or business in India.
  • His stay in India does not exceed in the aggregate a period of 90 days in such previous year.
  • Such remuneration is not liable to be deducted from the income of the employer.

4. Tax paid on behalf of foreign company deriving income by way of royalty or fees for technical services [Section 10(6A)]

Conditions for exemption under section 10(6A):

  • Payment made to a foreign company by way of royalty or fees for services rendered to Indian Government or an Indian concern.
  • Such income is liable to be taxed in India
  • Tax paid will not be grossed up with the income of the foreign company

Example – A foreign company renders technical services to an Indian company and as per agreement, foreign company is to be paid fees of Rs.1, 00, 000. Tax of Rs.30, 000 on such fees is also paid by the Indian company. Tax paid by Indian company will be exempt and so it will not be grossed up with the income of the foreign company and such foreign company’s income will be only Rs.1,00,000

The exemption is not available, if the agreement is entered on or after 01.06.2002

5. Tax paid on behalf of foreign company or non-resident in respect of other income [Section 10(6B)]

Tax paid by Indian Government on behalf of a foreign company or non-resident in respect of any income (not being salary, royalty or fees for technical services) will be exempt from tax in the hands of such foreign company or non-resident if such income is related to any agreement entered into before June 1, 2002 by the Indian Government

6. Section 10(6BB) -Tax paid on income received by foreign government or a foreign enterprise on leasing aircraft

Any income received by a foreign government or a foreign enterprise from an Indian company, which is engaged in the operation of aircraft and such income is by way of consideration of acquiring an aircraft or an engine of aircraft (other than payment for providing spares or services in connection with the operation of leased aircraft) on lease under an agreement entered into after 31-3-1996 but before 1-4-2007 and approved by the Central Government in this behalf, and the tax on such income is payable by such Indian company under the terms of agreement, the tax so paid shall be fully exempted.

Conditions for exemption under section 10(6BB):

  • The Indian company should be engaged in the business of operation of aircraft.
  • Such agreement should be entered in the period March 1996 to April 2007
  • The benefit shall be available only to that foreign enterprise which is non-resident.

Example:

Say an agreement has been entered on 1-4-2004. The payment made by Indian Company to foreign enterprise is Rs.2,00,000 and the tax borne by the Indian company is Rs.40, 000. Thus in the return of the foreign enterprise will be shown as Rs.2, 00,000 and the Rs.40, 000 tax paid by Indian company will be exempt.

7. Section 10(6C) Technical fees received by a notified foreign company

Any Income derived by a foreign company (so notified by Central govt.) by way of royalty or fees for technical services under an agreement for providing services in or outside India in projects connected with security of India shall be fully exempted.

8. Section 10(7) – Perquisites and Allowances paid by Government to its Employees serving outside India

Any allowances or perquisites paid or allowed outside India by the Government to a citizen of India, for rendering services outside India, are exempt.

Conditions for claiming exemption under section 10(7):

  • Income should be chargeable under the head ‘Salaries’;
  • The payer should be Government of India;
  • The recipient should be an Indian citizen — whether Resident or Non-Resident;
  • The services should be rendered outside India.

9. Section 10(45) – Exemption of Allowance or perquisite to chairman/member of UPSC

Any allowance or perquisite, as may be notified by the Central Government in the Official Gazette, in this behalf, paid to the chairman or a retired chairman or any other member or retired member of the Union Public Service Commission, shall be exempt.

Exemption Limit

  • Following allowances and perquisites given to serving Chairman/Member of UPSC is exempt from tax:
    1. Value of rent free official residence
    2. Value of conveyance facilities including transport allowance
    3. Sumptuary allowance
    4. Leave travel concession
  • Allowances to Retired Chairman/Members of UPSC – Exempt subject to maximum of Rs. 14,000 per month for providing the services of an orderly and for meeting secretarial expenses incurred on contract basis.

Perquisites

1.Interest-free or concessional loan [Sub-rule 7(i) of Rule 3]

Any loan given free of interest or concessional interest shall be a taxable perquisite and calculated as follows:

  1. Find out the ‘maximum outstanding monthly balance’ (i.e. the aggregate outstanding balance for each loan as on the last day of each month);
  2. Find out rate of interest charged by the SBI as on the first day of relevant previous year in respect of loan for the same purpose advanced by it;
  3. Calculate interest for each month of the previous year on the outstanding amount (mentioned in Step 1 at the rate of interest given in Step 2)
  4. From the total interest calculated for the entire previous year (step 3), deduct interest actually recovered, if any, from employee
  5. The balance amount (Step 3-Step 4) is taxable value of perquisite.

Nothing is taxable if:

  1. Loan in aggregate does not exceed ₹ 20,000; or
  2. Loan is provided for treatment of specified diseases

2.Use of moveable assets [Sub-rule 7(vii) of Rule 3]

Value of perquisite is determined as under:

Asset given Value of benefit
(a) Use of laptops and computers Nil
(b) Movable assets, other than –
(i) laptops and computers; and
(ii) assets already specified
10% p.a. of the actual cost of such asset, or the amount of rent or charge paid, or payable by the employer, as the case may be (-) Amount paid by/recovered from an employee

Note: Where the employee is paying any amount in respect of such asset, the amount so paid shall be deducted from the value of perquisite determined above.

3.Transfer of moveable assets [Sub-rule 7(viii) of Rule 3]

Value of perquisite is determined as under:

Assets transferred Value of perquisite
Computers and electronic items Depreciated value [@50% on WDV] of the asset
Motor Cars Depreciated value [@20% on WDV] of the asset
Any other asset Depreciated value [@10% on SLM] of the asset

Note: Where the employee is paying any amount in respect of such asset, the amount so paid shall be deducted from the value of perquisite determined above.

*Note WDV is Written down value and SLM is Straight Line Method

Allowances

Different types of allowances are given to employees by their employers.  Generally allowances are given to employees to meet some particular  requirements like house rent, expenses on uniform, conveyance etc.

(A)   Allowances which are fully taxable:

  1. Dearness Allowance: Dearness Allowance (DA) is an allowance paid to employees as a cost of living adjustment allowance paid to the employees to cope with inflation. DA paid to employees is fully taxable with salary.
  2. Overtime Allowance: Employers may provide an overtime allowance to employees working over and above the regular work hours.
  3. City Compensatory Allowance: City Compensatory Allowance is paid to employees in an urban center which may be highly expensive and to cope with the inflated living costs in the cities. This allowance is fully taxable.
  4. Interim Allowance: It is an allowance provided by employer in place of final allowance.
  5. Project Allowance: It is an allowance provided by employer to employees to meet project expenses.
  6. Tiffin/Meals Allowance: Sometimes employers may provide Tiffin/Meals Allowance to the employees, is fully taxable.
  7. Cash Allowance: The employer provides a cash allowance like marriage allowance, bereavement allowance or holiday allowance.
  8. Non-Practicing Allowance: When physicians are attached to Clinical Centers of the various Laboratories/Institutes, any non-practicing allowance paid to them become fully taxable.
  9. Warden Allowance: When an employer pays an allowance to an employee working as a Warden i.e. Keeper in an educational Institute, the allowance received is fully taxable.
  10. Servant Allowance: When an employer pays an employee to engage services of a servant, such an allowance is taxable.
  11. Transport Allowance:   Provided to an employee other than blind/ deaf and dumb/ orthopedically handicapped employee.
  12. Entertainment Allowance : Please refer https://blog.taxsmile.com/deductions-exemptions/

(B) Allowances which are partially taxable

1.House Rent Allowance (HRA) – Section 10(13A):

HRA is a special allowance specifically granted to an employee by his employer towards payment of rent for residence of the employee. HRA granted to an employee is exempt to the extent of least of the following:

Metro Cities (i.e. Delhi, Kolkata, Mumbai, Chennai) Other Cities
1. HRA actually received for the relevant period 1. HRA actually received for the relevant period
2. Rent paid (-) 10% of salary for the relevant period 2. Rent paid (-) 10% of salary for the relevant period
3. 50% of salary for the relevant period 3. 40% of salary for the relevant period

Notes:

  • Salary includes basic salary, dearness allowance (if it enters into retirement benefits) and fixed percentage commission on turnover achieved by the employee.
  • Exemption is not available to an assessee who lives in his own house or in a house for which he has not incurred the expenditure of rent.
  • Relevant period means the period during the said accommodation was occupied by assesse during the previous year.

Let’s take an example.

Suppose that you’re residing in Mumbai and paying a rent of Rs 35,000 p.m. and that your salary package comprises the following:

  • Basic – Rs. 50,000 p.m.
  • DA – Nil
  • HRA – Rs. 28,000 p.m.

Now, the exempted amount of HRA will be least of the following three figures:

  1. HRA received i.e., Rs. 28,000
  2. Actual rent paid less 10% of salary Rs. 30,000   [35,000 – (10% of 50,000)]
  3. 50% of salary (50,000+0) i.e., Rs. 25000

The least of the three is Rs 25,000; therefore, in this particular case you’re entitled for HRA tax exemption of Rs. 25,000 p.m.

2.Special Allowance – Section 10(14):

  1. Allowances prescribed for the purposes of section 10(14) (i) : Allowances that are exempt to the extent of actual allowance received or actual amount spent whichever is lower.
    • Travelling Allowance: Any allowance granted to meet the cost of travel on tour or on transfer.
      • Explanation – “allowance granted to meet the cost of travel on transfer” includes any sum paid in connection with the transfer, packing and transportation of personal effects on such transfer.
    • Daily Allowance: Any allowance, whether granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.
    • Conveyance Allowance: Any allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office or employment of profit.
    • Helper Allowance: Any allowance granted to meet the expenditure incurred on a helper where such helper is engaged in the performance of the duties of an office or employment of profit.
    • Academic Allowance: Any allowance granted for encouraging the academic, research and training pursuits in educational and research institutions;
    • Uniform Allowance: Any allowance granted to meet the expenditure on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit.
  2. Allowances prescribed for the purposes of section 10(14) (ii) :
    Allowances that are exempt to the extent of the amount received or the limit specified whichever is lower.
Sl No. Name of Allowance Extent to which allowance is exempt
1. Any Special Compensatory Allowance in the nature of Special Compensatory (Hilly Areas) Allowance or High Altitude Allowance or Uncongenial Climate Allowance or Snow Bound Area Allowance or Avalanche Allowance 800 or 300 per month depending upon the specified locations
7,000 per month in Siachen area of Jammu and Kashmir
2. Any Special Compensatory Allowance in the nature of border area allowance or remote locality allowance or difficult area allowance or disturbed area allowance 1,300 or 1,100 or 1,050 or 750 or 300 or 200 per month depending upon the specified locations
3. Special Compensatory (Tribal Areas / Schedule Areas / Agency Areas) Allowance [Specified States] 200 per month
4. Any allowance granted to an employee working in any transport system to meet his personal expenditure during his duty performed in the course of running such transport from one place to another, provided that such employee is not in receipt of daily allowance 70% of such allowance upto a maximum of  10,000 per month
5. Children Education Allowance 100 per month per child upto a maximum of two children
6. Any allowance granted to an employee to meet the hostel expenditure on his child 300 per month per child upto a maximum of two children
7. Compensatory Field Area Allowance [Specified areas in Specified States] 2,600 per month
  8. Compensatory Modified Field Area Allowance [Specified areas in Specified States] 1,000 per month
9. Any special allowance in the nature of counter insurgency allowance granted to the members of the armed forces operating in areas away from their permanent locations. 3,900 per month
10. Any transport allowance granted to an employee who is blind or deaf and dumb or orthopedically handicapped with disability of the lower extremities of the body, to meet his expenditure for commuting between his residence and place of duty 3,200 per month.
11. Underground Allowance granted to an employee who is working in uncongenial, unnatural climate in underground mines. 800 per month
12. Any special allowance in the nature of high Altitude allowance granted to the member of the armed forces operating in high altitude areas
For altitude of 9,000 to 15,000 feet
For above 15,000 feet



1,060 per month
1,600 per month
13. Any special allowance in the nature of special compensatory highly active field area allowance granted to the member of the armed forces 4,200 per month
14. Any special allowance in the nature of Island (duty) allowance granted to the member of the armed forces in Andaman & Nicobar and Lakshadweep Group of Islands 3,250 per month

Let’s take an example.

Mr. X has two children residing in Karnataka. He is in receipt of children education allowance of 150 p.m. for his son and 70 p.m. for his daughter. He also receives the following allowances:

  • Transport allowance      : 1,800 p.m.
  • Tribal area allowance    : 500 p.m.

Compute his taxable allowances.

Solution:

Taxable allowance in the hands of Mr. X is computed as under –

  1. Children Education Allowance: [(Actual allowance received – Exempted allowance i.e., Rs 100) * No. of months* No. of children]
    • Elder son [(150 – 100) p.m. × 12 months]     = 600
    • Younger son [(70 – 70) p.m. × 12 months]   = Nil                     
  2. Transport allowance (1,800 p.m. × 12 months) = 21,600
  3. Tribal area allowance : [(Actual allowance received – Exempted allowance i.e., 200) * No. of months]
    • [(500 – 200) p.m. × 12 months] = 3,600

Taxable allowances [600+0+21,600+3,600] = 25,800. Here transport allowance is taxed and no deduction provided, as it will be taken care in section 16 (ia)[standard deduction]

Meaning & Charge

Salary [section 17(1)]:

The meaning of the term ‘salary’ for purposes of income-tax is much wider than what is normally understood. The term ‘salary’ for the purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans etc.).

Salary under section 17(1) includes the following:

  1. Wages,
  2. Any annuity or pension, 
  3. Any gratuity, 
  4. Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages,
  5. Any advance of salary
  6. Leave salary or leave encashment, 
  7. The contribution made by the Central Government or any other employer to Employee Pension Account referred to in Section 80CCD
  8. Provident Fund:
    • Annual accumulation to the balance of a recognised provident fund.
    • Transferred balance in recognized provident fund.

Profits in lieu of salary [Section 17(3)]

Any Payments received or due in addition to your salary or wages from your employer is called profit in lieu of salary.

It includes the following:

  •  Compensation on account of termination of his employment
  • Compensation on account of modification of the terms and conditions of employment
  • Payment from provident or other fund
  • Keyman Insurance policy
  • Any sum received before his joining any employment or after termination of his employment.

However, the following receipts will not be termed as “Profits in lieu of salary” to the extent they are exempt under section 10:

  • Death-cum retirement Gratuity
  • Commuted value of Pension
  • Retrenchment compensation received by a workman
  • Payment received from statutory provident fund
  • Payment received from recognised provident fund
  • Payment received from approved superannuation fund
  • House Rent Allowance

Section 15 – Charging section of salaries

Section 15 of the Income Tax Act provided that any amount due to or received by an employee including arrears of salary from an employer or former employer.

The charging section can be broken down in order to understand the taxability of income under the head salaries:   

Employer-employee relationship

Before an amount received can be taxed under the head ‘salaries’, it is important that there should exist between the payer and the payee the relationship of an employer and employee.

For example:

Sujatha an actress is employed in Chopra films, where she is paid a monthly remuneration of Rs.2,00,000. She acts in various films produced by various producers. The remuneration for acting in such films is paid directly to Chopra films by the different producers.

In this case Rs.2,00,000 is taxed as salary income in the hands of Sujatha since the relationship of an employer and employee exists between Sujatha and Chopra films.

  • In the above example,
    •  If Sujatha receives fees for acting in other films from the producers. In this case the fees so received would be taxed under the head income from profession and not under the head salaries as there is no employer employee relationship.
    • If a person is acting as an agent during the course of the business. There is no relationship between them as master and servant and therefore not taxable under the head income from salaries.

Contract OF service Vs. Contract FOR service

These words are generally used interchangeably. There is a wide difference in terms of income being chargeable under different heads of income.

In contract of service, employer-employee relationship is in existence and the employer can direct and control as to what is required to be done and how it is to be done by the employee. As an employer and employee relationship exists the income so derived would be taxed under the head income from salaries.

Under contract for service, the contractee can specify what is to be done and it is for the contractor to independently find out best ways to execute the same duty. As there is no employer and employee relationship it would not be taxed under the head income from salaries but would be taxed under the head income from business.

Other points

  • In case of a director of the company, the employer-employee relationship cannot be assumed, the relationship is ascertained based on service agreement or articles of association of the company
  • Salaries of MP’s and MLA’s are not chargeable under the head “Salaries” but it is chargeable under the head ‘income from other sources’ as there is no employer- employee relationship with the government.
    • The next question which arise is what is income received by chief ministers of state? It is income taxable under the head income from salaries as it is not a political post, but it is a constitutional post appointed by the governor.
  • An advocate general is not an employee of the government. He is paid a retainership fee or he holds office during the period of the governor would not make him an employee. Hence the income earned by him is not taxable under the income from salaries.
  • In case of any salary, bonus, commission, remuneration or by whatever name called, received as a partner of the firm. Such income would not be taxed as income from salary as there is no employer-employee relationship between the partner and the partnership firm.

Year of chargeability

After knowing that the income is chargeable to tax under the income from salaries it is important to understand when is such income chargeable to tax.

Salary is taxable on due basis or on receipt basis whichever is earlier. i.e. salary due in a PY is taxable whether or not received during the previous year. Where salary is received in advances is taxable even if it is not due during the previous year.

Loan taken from employer is however not taxable even if it is subsequently recovered from salary. Therefore, advance of salary is taxable but advance against salary is not taxable.

Place of accrual

The place of accrual of salary is the place where the service is rendered. Therefore, the salary paid outside India to a non-resident in respect of services rendered in India, it is deemed to have accrued or arisen in India.

Salary paid to an Indian citizen by the government of India is deemed to accrue or arise in India even though the service rendered outside India, subject to exemptions u/s 10 which are discussed in the article exemptions.

Surrender of salary

The salary received by an individual can be utilised based on the will and fancies of the person. An employee forgoes salary or requests the employer to contribute his salary to a charitable cause or any other purpose. This is a mere application of the income of the individual and therefore taxable. The only exception to the above rule is, surrender of salary under the relevant approval of Central Government. Section 2 of Voluntary Surrender of Salaries Act 1961, salary surrendered to the central government by any person will not be included in the computation of inco