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How to simplify Indian Income Tax Act? Part I

I have just finished one round of tax filing work for the financial year 2014-15. While going through the tax questions from the clients, I realized the complications and confusions created by the age old Income Tax Act. Incidentally, in today’s Economic Times, the new revenue secretary Mr. Hasmukh Adhia said ‘Simplification of rules and transparency through technology top agenda

Here is my first list of issues which you can consider! By the way, you don’t need Mr. Rahul Gandhi’s approval for amending the following!

Tax on salary is one of the important source of revenue to Government of India.

What is salary?

Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of “Salaries” including therein (i) Wages (ii) Annuity or pension (iii) Gratuity (iv) Fees, Commission, perquisites or profits in lieu of salary (v) Advance of Salary (vi) Amount transferred from unrecognized provident fund to recognized provident fund (vii) Contribution of employer to a Recognised Provident Fund in excess of the prescribed limit (viii) Leave Encashment (ix) Compensation as a result of variation in Service contract etc. (x) Contribution made by the Central 16 Government to the account of an employee under a notified pension scheme

What is ‘salary’ for the purpose of computing House Rent Allowance exemption?

Salary for this purpose will include dearness allowance if it counts for retirement benefits, and commission; but excludes all other allowances and perquisites

What is ‘salary’ for the purpose of computing retrenchment compensation?

Salary means all remuneration capable of being expressed in terms of money which would be payable to a workmen and will include all allowances (including dearness allowance), value of amenities provided by the employer, and value of any travel concession. However, bonus, employer contribution to retirement benefit scheme and gratuity will be excluded.

What is ‘salary’ for the purpose of computing gratuity?

For this purpose, wages/salary will represent the rate of wages last drawn, and it will include dearness allowance, but will not include bonus, commission, house rent allowance, overtime wages or any other allowance.

What is ‘salary’ for the purpose of computing tax exemption on payment to and from provident funds?

Salary here means basic salary. It includes dearness allowance and dearness pay if terms of employment so provide, and excludes all other allowances and perquisites. If however, as per contract of employment, commission at a fixed percentage of turnover achieved by an employee, and then such commission would partake of the character of salary.

What is ‘salary’ for the purpose of computing the perquisite such as rent-free accommodation?

Salary includes pay, allowances, bonus or commission payable monthly or otherwise, or any monetary payment, by whatever name called, and received from one or more employers. It also includes fee, all other taxable allowances. However, employer’s contribution to the provident fund, allowances which are exempt from the payment of tax such as house rent allowance and special allowances.

Can we have single definition for salary? If the need be, amend the definition under PF Act, ESI Act or any other Acts, but at the end, we should have one simple and single definition of salary.

Thought for the day

“When you are in the final days of your life, what will you want? Will you hug that college degree in the walnut frame? Will you ask to be carried to the garage so you can sit in your car? Will you find comfort in rereading your financial statements? Of course not. What will matter then will be people. If relationships will matter most then, shouldn’t they matter most now?” by Max Lucado.

 

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About CA Prasad Chartered Accountant

CA Prasad Chartered Accountant
CA Prasad is a practicing Chartered Accountant and partner in Bangalore -based CA Firm. For further information or query, please email it to [email protected]