Leave Encashment

Leave Encashment is taxed differently for following types of employees.
Government employees: Leave encashed during the continuation of service is taxable .
Leave encashed at the time of retirement or superannuation (leaving the job) is exempt from tax.

Non-Government employees: Leave encashed during the continuation of service is taxable.
In case of leave encashed at the time of retirement or superannuation (leaving the job) the exemption is limited to the least of the following:

10 month's average salary;
Rs. 2,40,000;
Amount actually received

Cash equivalent of leave salary standing to his credit not exceeding 30 days for each year of  actual service.

The limit on exemption is applied on the total payment received towards leave encashment from two or more employers, in the same year or in different years.

Salary means last drawn salary and includes basic salary and dearness allowance if terms of employment so provide and also includes commission based on a fixed percentage of turnover.

Average Salary is calculated on the basis of average salary for the 10 months immediately preceeding the retirement or superannuation.

Perquisites of Tax

A perk is an additional benefit provided by an employer, in cash or in kind, apart from regular salary and allowances. It may be in cash or in kind and results in a personal benefit to the employee.Valuation of rent-free unfurnished accommodation. For the purpose of valuation of rent-free unfurnished accommodation, the employees have been grouped as follows:

Union or State Government employees
Semi Government employees
Employees in private sector

Union or State Government employees or Government employees on delegation to a public sector undertaking or a Government body.Valuation is taken at the rent that would have been payable by the employee in accordance with the rules framed by the Government for allotment of houses to its officers.

Employees in private sector

If accommodation is provided in cities other than Delhi, Mumbai, Calcutta and Chennai:

If accommodation is provided in Delhi, Mumbai, Calcutta and Chennai,

Fair Rent Fair Rent is the municipal valuation of the accommodation, or rent which a similar accommodation would realize in the same locality, whichever is higher. However, it cannot exceed the standard rent, if any, fixed or determine under a Rent Control Act. If the employer hires the accommodation, Fair Rent Value is the actual rent paid for the accommodation.

Salary

For the purpose of valuation of perks in respect of rent-free accommodation, salary includes the following:
Basic Salary;
Dearness Allowance/ pay if the terms of employment so provide;
Bonus;
Commission;
Fees;
All other taxable allowances (however, allowances to the extent they are exempt need not be included);
Income and professional taxes paid by the employer on behalf of his employee; and
Electricity, gas , water supply expenses paid or reimbursed by an employer to his employees.
However, salary does not include the following;

Dearness allowance/ pay if it is not taken into account while calculating retirement benefits like provident fund, gratuity, etc. or if it does not form part of salary according to the terms of the employment;
Employer’s Contribution to provident fund account of an employee;
Entertainment allowances to the extent deductible from salary; and
Value of perquisites .

Valuation of rent-free furnished accommodation:

Calculate the perquisite value of unfurnished accommodation as per the applicable category.Add either of the following to value of the unfurnished accommodation so arrived at,10% of the original cost of furnishings, if the furnishings are owned by the employer, or the actual hire charges if the furnishings are taken on hire.

Value of accommodation provided at a concessional rent:

1) Calculate the perquisite value of unfurnished or furnished accommodation as per the applicable category
2) Deduct the rent actually paid from the perquisite value so determined to arrive at the taxable perquisite value.

Valuation of motor car provided for personal use by the employer

1) In case the employee owns the and the employer pays the maintenance and running expenses.
2) In case the car is provided by the employer and
3) Maintenance and running expenses are paid by employer.
4) Maintenance and running expenses are met by employee.

Valuation of the perk in case the employee owns the car

1)If car is used for official purpose - it is not taxable .
2)If car is used for both official and private purpose a reasonable proportion of the sum actually spent by the employer is taxable.
3)If used wholly for private purpose  the entire amount spent by the employer is taxable .

Maintenance and running expenses are met by the employer

1) If the car is used entirely for personal purposes, the value of the perk is the sum of :
a) Remuneration paid to the chauffeur, if any; and
b) Normal wear and tear of the car if it is owned by the employer.
2)If the car is taken on hire, the hire charges attributable to the use of the car for personal purposes is taxable.

However, if the car is used for both personal and official purposes, then the above expenses are taxable on a proportionate basis as per the usage of car.

Maintenance and running expenses are met by employee

1) If the car is used entirely for personal purposes, the value of the perk is the sum of :
Remuneration paid to the chauffeur, if any; and Normal wear and tear of the car if it is owned by the employer.
2) If the car is taken on hire, the hire charges attributable to the use of the car for personal purposes is taxable.

Valuations of other conveyance like two wheelers

1) If the employee uses a two wheeler provided by the employer partly for official purposes, and partly for personal purposes, a reasonable proportion of amount spent by the employer on running, maintenance and the normal wear and tear is treated as a perk and is chargeable to tax in the hands of the employee.

2) If the two wheeler is wholly used for personal purposes then the entire amount actually spent on the expenses mentioned above and the normal wear and tear is taxable as perk.

Valuation of free supplies of gas, electricity and water for household consumption

1) If the supply is made from resources owned by the employer, the perk value will be nil.
2) If gas, electricity and water are purchased from third parties, the expenditure incurred by the employer in procuring these is taxable as perk. In case, the supplies are consumed partly for official purposes and partly for personal purposes, the value of the perk will be restricted to the amount actually spent by the employer or 6.25% of the employee’s salary whichever is less. For this purpose "salary" includes dearness allowance, if the terms of employment so provide, and includes commission based on a fixed percentage of turnover achieved by an employee but excludes all other allowances and perquisites.
3)If gas, electricity or water supply connection is taken in the name of employee and bills are paid or reimbursed by the employer perquisite is taxable in the hands of all employees.

Free educational facilities provided by the employer

The actual expense incurred or reimbursed by the employer for providing educational facilities to the family of the employee is added to the employee’s salary. However, if the educational institution is maintained by the employer, the value of perk is determined with reference to cost of education in a similar institution in or near the locality, and in such cases, is taxable in the hands of specified employees only.

Leave Travel Concession [section10(5)]

LTC is a perk received by an employee for a journey undertaken in India. LTC is taxable to the extent it is not exempt from tax. The exemptions are available as follows :

A taxpayer can claim exemption in respect of two journeys in a block of 4 calendar years. The current block of 4 years is January 1, 1998 to December 31, 2001. If the employee has not availed of the travel concession on one of the two permitted occasions (or on both occasions) in a block of 4 years, the journey performed in the first year following that block is also eligible for exemption and such journey will not be taken into account for determining the tax exempt journeys for that following block.

However, the employee will be taxed on the amount of leave travel concession encashed by him without actually undertaking a travel.
The amount of LTC given to an employee for journeys (to any place in India) with family, while in service or after retirement, is exempt from tax to the extent of amount actually spent, subject to the limits as prescribed:

In case of air travel

: an amount not exceeding the air economy fare of the National Carrier by the shortest route to the destination; Where place of origin of journey and destination are not connected by air but connected by rail or by any other mode of transport, an amount not exceeding the first class AC rail fare by the shortest route; and Where the place of origin of journey and destination or a part of it is not connected by rail, the amount eligible for exemption an amount not exceeding the first class or deluxe class fare by the shortest route, on a recognized public transport system, if such a system exists ; and
an amount equivalent to the first class AC rail fare, for a journey by the shortest route in case a recognised public transport system is not present.An individual can claim the exemption in respect of only two of his children born on or after October 1, 1998. Children born out of multiple birth (e.g. twins) after the first child born after October 1, 1998, will be treated as one child.

Perks under the Income Tax Act includes

Rent free or concessional accommodation provided by the employer Any amenity granted or provided free of cost or at concessional rate to an employee:

who is a director;
has a substantial interest in the company; does not fall in the above categories but whose salary income excluding all non-monetary benefits or amenities exceeds Rs. 24,000 per annum; Any specified security allotted or transferred, directly or indirectly, by any person free of cost or at concessional rate to an employee; Any sum paid by the employer in respect of any obligation that would otherwise have been paid by the employee; Amount payable by the employer, whether directly or through a fund other than a recognized provident fund or approved superannuation fund or a deposit-linked insurance fund, to effect an assurance on the life of the employee or to effect a contract for an annuity.

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