Important Keyword: Income from salary, Salary Components, Salary Income.
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How to Optimize Salary Structure to Reduce Tax Burden?
Crafting a strategic salary structure can be a potent tool in the arsenal of tax-saving measures for individuals. By leveraging the various components of your salary and making the most of available deductions during the tax filing process, you can significantly lighten your tax burden. This article aims to shed light on effective strategies for optimizing your salary structure to minimize your tax liability.
What are the Allowances and Deductions that can Reduce the Tax Liability?
Several salary components can effectively reduce your tax burden when strategically utilized:
House Rent Allowance (HRA) is a vital component of an employee’s salary, especially for those residing in rented accommodations. To avail of the tax exemption on HRA, it must be a part of the salary structure. The exemption amount is determined as follows:
Actual HRA Received: The amount of HRA received from the employer.
Actual Rent Paid – 10% of Basic Salary: The actual rent paid minus 10% of the basic salary.
50% of Basic Salary + Dearness Allowance (DA) (40% for non-metro cities): Fifty percent of the basic salary and DA for employees residing in metro cities, or forty percent for non-metro cities.
Children Education Allowance (CEA) is provided to support an employee’s child’s education. An annual allowance of INR 1200 per child, up to a maximum of two children, is exempt from taxation. Additionally, tuition fees paid for a child’s education can be claimed as a deduction under Section 80C of the Income Tax Act.
Hostel Expenditure Allowance, amounting to INR 3600 per annum per child, is provided to meet hostel expenses for an employee’s children, with a maximum exemption for two children.
Phone Bill Reimbursement covers broadband Internet and mobile phone expenses. However, this benefit may only be extended to specific employees.
Food Coupons, with a value of up to INR 50 per meal, are provided to meet food expenses. Employees can claim up to INR 26,400 annually as an exemption.
Leave Travel Allowance (LTA) assists employees with travel expenses incurred while traveling with their families in India. Exemptions are provided for economy air travel or AC railway travel for two journeys in a block of four calendar years.
Gift Vouchers valued at up to INR 5000 annually can be claimed as an exemption if provided by the employer.
Newspaper/Journal Allowance can be claimed for subscriptions to gain additional knowledge relevant to the job.
Uniform Allowance covers expenses for purchasing and maintaining work uniforms.
Car Maintenance Allowance provides exemptions for car expenses, based on ownership. Employees using employer-owned cars pay taxes on prerequisites, while owners can claim exemptions of INR 2,700 or INR 3,300 per month, depending on engine capacity.
How are these Allowances Calculated in a Salary?
Certainly! Let’s consider two scenarios for Ms. Mehra’s salary structure to illustrate how she can maximize tax savings:
Particulars
Salary Structure 1
Salary Structure 2
Basic Salary
5,00,000
4,00,000
+ HRA
3,00,000
2,00,000
+ Provident Fund (12%)
60,000
48,000
(+) Standard Allowance (Conveyance allowance + medical reimbursement)
40,000
40,000
(+) Leave Travel Allowance
30,000
30,000
(+) Other Allowances
70,000
2,82,000
Total
10,00,000
10,00,000
(-) Exempted HRA
2,50,000
2,00,000
(-) Standard Allowance
40,000
40,000
(-) Leave Travel Allowance
30,000
30,000
(-) Other allowances Meal allowance Mobile bill reimbursement Gift voucher Child’s education allowance Child’s hostel allowance Newspaper/Journal allowance Internet Bill reimbursement
–
26,400 10,000 5,000 2,400 7,200 16,000 12,000
Total taxable Salary
6,80,000
6,51,000
Less: Profession Tax Paid
2,500
2,500
Income under the head Salary
6,77,500
6,48,500
(-) Deductions under Section 80C
1,50,000
1,50,000
Total Taxable Income
5,27,500
4,98,500
Tax on income
18,720
12,920
Saving in tax
5,800
Which ITR Form to file?
Exactly! Choosing the right Income Tax Return (ITR) form is crucial for accurate filing. Here’s a quick summary:
ITR 1 (Sahaj):
Applicable for individuals with income from:
Salary/pension (up to INR 50 lakhs)
One house property
Other sources (excluding lottery winnings and income from race horses)
Not applicable if income includes:
Income from more than one house property
Income from capital gains
Income from business or profession
ITR 2:
Applicable for individuals and HUFs with income from:
Salary/pension (any amount)
More than one house property
Capital gains
Income from other sources (including lottery winnings and race horses)
Not applicable if income includes:
Income from business or profession
ITR 3:
Applicable for individuals and HUFs with income from:
Business or profession
Salary/pension
Capital gains
Income from other sources
Suitable for those with business or professional income in addition to other sources of income
Choosing the correct ITR form ensures accurate reporting of income and compliance with tax regulations.
Important Keyword: Clubbing of Income, HUF, ITR-2, Salary Income.
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Clubbing of Income under Section 64
In the realm of income taxation in India, taxpayers are obligated to report and pay taxes on all earnings accrued throughout the fiscal year. Yet, there are instances where the income of another individual is amalgamated, or “clubbed,” with the taxpayer’s taxable income. In such scenarios, the taxpayer assumes the responsibility of paying taxes not only on their own income but also on the income of others. This practice, termed as “clubbing of income,” is governed by the provisions delineated in Section 64 of the Income Tax Act.
Under these regulations, taxpayers are mandated to incorporate the total income, including any clubbed income, when filing their Income Tax Returns (ITRs) on the designated income tax website. By adhering to these provisions, taxpayers ensure compliance with tax laws and fulfill their obligations towards reporting and paying taxes on their combined incomes.
What is Clubbing of Income under section 64 of the Income Tax Act?
Clubbing of income occurs when the income of another person is included in the total income of the assessee as per the provisions outlined in Section 64 of the Income Tax Act. Essentially, this means that individuals cannot divert their income to others to evade tax liabilities. For instance, if the income of one’s spouse is amalgamated with their own income, resulting in the taxpayer paying taxes on both their income and their spouse’s, it constitutes clubbing of income.
However, certain exceptions exist where income earned from the investment of clubbed income is not subjected to clubbing provisions. For example, if Hari transfers INR 10,000 to his wife Priya, and Priya invests the amount in a Fixed Deposit (FD) scheme, the interest earned on the FD will be clubbed with Hari’s total income, making him liable to pay tax on it. Yet, if Priya reinvests the interest earned from the FD in another investment scheme, the income from this reinvestment will be taxable solely in Priya’s hands. Consequently, Hari is not obligated to pay tax on the reinvested interest income.
According to Section 64, specific persons’ incomes must be clubbed with that of the individual taxpayer. Let’s explore the scenarios where the provisions of clubbing of income are applicable.
Section
Specified person
Specified scenario
Clubbing of Income
Section 60
Any person
Transfer of Income without transfer of Assets either by way of an agreement or any other way,
– Any income from such asset will be clubbed in the hands of the transferor. – Irrespective of whether such transfer is revocable or not.
Section 61
Any person
Transferring asset on the condition that it can be revoked
Any income from such asset will be clubbed in the hands of the transferor
Section 64(1A)
Minor child
Any income arising or accruing to your minor child [Child includes step child, adopted child, and minor married daughter]
– Income will be clubbed in the hands of higher-earning parent. Note: If marriage of child’s parents does not subsist, income shall be clubbed in the income of that parent who maintains the minor child in the previous year
– If minor child’s income is clubbed in the hands of parent, then exemption of INR 1,500 is allowed to the parent.
– Exceptions to clubbing Income of a disabled child (disability of the nature specified in section 80U)
– Income earned by manual work done by the child or by activity involving application of his skill and talent or specialized knowledge and experience
– Income earned by a major child. This would also include income earned from investments made out of money gifted to the adult child. Also, money gifted to an adult child is exempt from gift tax under gifts to ‘relative’.
Section 64(1)(ii)
Spouse
If your spouse receives any remuneration irrespective of its nomenclatures such as Salary, commission, fees, or any other form and by any mode i.e., cash or in-kind from any concern in which you have a substantial interest
– Income shall be clubbed in the hands of the taxpayer or spouse, whose income is greater (before clubbing). The exception to clubbing: – Clubbing is not applicable if the spouse possesses technical or professional qualifications in relation to any income arising to the spouse and such income is solely attributable to the application of his/her technical or professional knowledge and experience
Section 64(1)(iv)
Spouse
Income from assets that taxpayer transfers directly or indirectly to the spouse without adequate consideration
– Income from out of such asset is clubbed in the hands of the transferor. Provided the asset is other than the house property.
– Exceptions to clubbing i.e. no clubbing of income in the following cases:
a. Where the spouse receives the asset as part of the divorce settlement
b. If the taxpayer transfers the asset before marriage
c. No husband and wife relationship subsists on the date of accrual of income
Section 64(1)(vi)
Daughter-in-law
Income from the assets that taxpayer transfers to son’s wife for inadequate consideration
Any income from such assets transferred is clubbed in the hands of the transferor
Section 64(1)(vii)
Any person or association of person
Transferring any assets directly or directly for inadequate consideration to any person or AOP to benefit your daughter-in-law either immediately or on a deferred basis
Income of taxpayer shall include income from such assets
Section 64(1)(viii)
Any person or association of person
Transferring any assets directly or directly for inadequate consideration to any person or association of persons to benefit your spouse either immediately or on a deferred basis
Income of taxpayer shall include income from such assets
Section 64(2)
Hindu Undivided Family
In case, a member of HUF transfers his individual property to HUF for inadequate consideration or converts such property into HUF property
Income of taxpayer shall include income from such property
Transfer of income without transfer of an asset to any person
Clubbing of income occurs when the transferor directs income from an asset to another person without transferring ownership of the asset itself. According to clubbing provisions, the total income of the transferor will include this income, and they are responsible for paying tax on it.
For instance, let’s consider Pranav, who owns a property and directs the rental income to his wife Divya without transferring ownership of the property to her. In this scenario, as per the clubbing provisions, although Divya receives the rental income, Pranav is still liable to pay tax on it since he is the original owner of the property generating the income.
Transfer of asset (revocable transfer) to any person
When a transfer of assets is revocable, it means that the transferor maintains the right or authority to reclaim the entire asset or its income at any point during the transferee’s lifetime. In such cases, the provisions of clubbing come into effect. This implies that even if the owner transfers the asset to the transferee, the income generated from that asset remains taxable in the hands of the transferor.
However, if the transfer is made via an irrevocable trust during the lifetime of the beneficiaries or transferee, clubbing of income does not apply. For instance, let’s consider Pranav, who transfers both the rental income and the property to Divya but retains the option to reclaim the property at any time. Since this transfer is revocable, the rental income remains taxable in Pranav’s hands, despite the assets being transferred to Divya.
Clubbing of Spouse Income
Income earned by your Spouse from the firm/company in which you have substantial interest
A substantial interest in a company or firm refers to a significant ownership stake or entitlement to profits. This can manifest in two ways:
Ownership of Shares: If an individual, either independently or jointly with relatives, owns shares that account for 20% or more of the voting power in a company.
Entitlement to Profits: If an individual, either independently or jointly with relatives, is entitled to 20% or more of the profits in a firm.
When an individual possesses a substantial interest in a firm or company where their spouse earns income, specific tax provisions regarding the clubbing of income apply:
Inclusion of Spouse’s Income: If the individual’s total income exceeds that of their spouse, the individual’s total income must include the income earned by their spouse.
Exception for Professional or Technical Skills: If the income earned by the spouse results from the practical application of their professional or technical skills, the clubbing provisions do not apply.
Limited Application: Clubbing provisions only apply to certain types of income such as salary, commission, fees, or remuneration.
For instance, consider Pranav, who holds a 51% stake in a private limited company. His wife Divya receives a monthly salary of Rs. 20,000 from the same company, despite not actively contributing to its operations. Pranav’s total annual income amounts to Rs. 10,00,000, whereas Divya’s total income (excluding her salary from the company) is Rs. 5,00,000. In this scenario, Pranav’s total income should include Divya’s salary of INR 2,40,000, resulting in a taxable income of INR 12,40,000 for Pranav.
Income from the asset transferred to the Spouse against inadequate consideration
When a taxpayer transfers an asset to their spouse for inadequate consideration, specific tax provisions regarding the clubbing of income from such assets come into play:
Inclusion of Income: The taxpayer’s total income must include income from the transferred asset if it was transferred to the spouse for inadequate consideration. The taxpayer will be liable to pay tax on the income derived from the asset.
Exception for Separation or Divorce: If the transfer of the asset is part of an agreement to live apart or divorce, the provisions for clubbing of income do not apply.
Let’s illustrate these provisions with examples:
First Scenario: Rohan transfers an asset worth INR 1,50,000 to his wife for a consideration of INR 50,000. In this case, Rohan’s total income shall include ⅔rd (two-thirds) of the income from the asset, and he would be liable to pay tax on this income. However, the remaining ⅓rd will be taxable in the hands of his wife, as she has paid INR 50,000, which represents 1/3rd (one-third) of the value of the property.
Second Scenario: Mr. Akash gifts INR 5,00,000 to his wife, who invests this amount in a fixed deposit and receives interest of INR 4,500 per annum. Since Mrs. Akash converts the cash received into another asset (FD), the interest she earns of INR 4,500 would be clubbed into the income of Mr. Akash as per Section 64(1)(iv) of the Income Tax Act.
Note: As per the judgment in R Dalmia Vs CIT (1982) and similar judgments, pin money (i.e., an allowance given to the wife by her husband for her personal and household expenses) is not taxable. Furthermore, if the spouse acquires the asset out of pin money, the provisions for clubbing of income shall not apply.
When taxpayer transfers an asset to any person or association of person for the immediate or deferred benefit of Spouse
When a taxpayer transfers an asset to their spouse for inadequate consideration, specific tax provisions come into effect:
Inclusion of Income: The taxpayer’s total income must include the income that arises from such an asset. They are liable to pay tax on this income.
In simple terms, if a taxpayer transfers an asset to their spouse for a lower value than its actual worth or for no consideration, any income generated from that asset will still be considered as part of the taxpayer’s income for tax purposes. Consequently, the taxpayer will be responsible for paying taxes on that income.
Clubbing of Income of Son’s Wife
When taxpayer transfers asset to son’s wife
When a taxpayer transfers an asset to their son’s wife for inadequate consideration, specific tax provisions apply:
Inclusion of Income: The taxpayer’s total income will include any income earned by their son’s wife from the transferred asset. Consequently, the taxpayer is liable to pay tax on the total income, including the income earned by their son’s wife.
When taxpayer transfers asset to any person or association of person for the immediate or deferred benefit of son’s wife
When a taxpayer transfers an asset for the benefit of their son’s wife for inadequate consideration, specific tax rules come into play:
Inclusion of Income: The taxpayer’s total income will encompass any income generated from the transferred asset. Consequently, they are responsible for paying taxes on the income derived from the asset, even if it’s earned by their son’s wife.
It’s important to note that clubbing provisions are applicable only if the taxpayer maintains a relationship with both their spouse and their son’s wife at the time of transferring the asset and when the income is earned.
Clubbing of Income of a Minor Child
When it comes to the income of a minor child, specific rules apply to determine which parent’s total income should include the minor’s earnings:
Higher Total Income: The parent with the higher total income will need to include the income earned by the minor child, including a married minor daughter, as per the clubbing of income provisions.
Separated Parents: In cases where the parents are living apart due to the absence of a marital relationship, the income earned by the minor child will be clubbed in the total income of the parent who is responsible for the child’s maintenance.
Exceptions to Clubbing of Income for Minor Child:
There are certain circumstances where the clubbing of income provisions for a minor child does not apply:
Income from Manual Work: If the minor child earns income through their manual work, the clubbing provisions will not be applicable.
Utilization of Skill: Similarly, if the minor child uses their skill, talent, specialized knowledge, or experience to earn income, clubbing of income will not apply.
Disability: In cases where the minor child is disabled as per Section 80U, clubbing of income does not apply.
Transfer to Married Minor Daughter: If a house property is transferred to a married minor daughter, clubbing provisions do not apply, and any income generated by the house property remains taxable in the hands of the parents.
Clubbing of Income of a Major Child
For a child who has attained the age of 18 years or above (major child), there is no clubbing of their income with the total income of the parents. Whether the major child earns income through their specialization/skill or invests money or assets transferred by their parents, the income remains taxable in their hands.
For instance, if Rohan, who is 18 years old, receives a gift of Rs. 50,000 from his parents and invests it in an FD scheme, the interest income earned on the FD will be taxable in Rohan’s hands alone, without any application of clubbing provisions.
Clubbing of Income from HUF Property
If an individual is a member of a Hindu Undivided Family (HUF) and transfers their property to the common pool of the HUF for inadequate consideration, the total income of the individual will include the income from such property. Consequently, the individual will be liable to pay tax on the total income as per the clubbing of income provisions.
However, if the transferred asset is subsequently distributed among family members due to a complete or partial partition of the HUF, any income derived from the asset by the individual’s spouse will be clubbed in the individual’s total income, and tax will be payable accordingly.
Important Keyword: Capital Gains, ESOP, Form 16, Salary Income.
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Taxation on ESOPs
Employee Stock Ownership/Option Plans (ESOPs) stand as a strategic approach for companies aiming to foster a deeper sense of engagement and commitment among their employees. These initiatives operate by granting employees a direct stake in the company, often in the form of shares. By doing so, ESOPs cultivate a vibrant workplace culture where every team member feels personally invested in the company’s success.
This approach not only offers employees tangible financial rewards but also cultivates a shared sense of purpose and unity. With each staff member motivated by a common goal of advancing the company’s interests, ESOPs can serve as a powerful driver of employee satisfaction and organizational growth.
What are ESOPs?
ESOPs, or Employee Stock Ownership Plans, represent a valuable employee benefit program offered by companies to their workforce. These plans enable employees to acquire company stock at a price lower than the prevailing market rate, thereby providing them with an opportunity to become shareholders in the organization. ESOPs can take various forms, including direct stock issuance, profit-sharing schemes, or bonuses.
The process of issuing ESOPs typically involves several steps:
Decision by the Company: The company or employer decides to issue ESOPs as part of its employee compensation strategy.
Employee Exercise: Employees who are eligible for ESOPs have the option to exercise them, which involves purchasing the allocated shares at the predetermined price.
Share Sale: Following the exercise of ESOPs, employees may choose to sell the acquired shares at a later date, potentially realizing a profit if the stock price has appreciated.
Before implementing an ESOP program, employers must adhere to the rules and regulations outlined in the Companies Act of 2013. These regulations govern the issuance, administration, and reporting requirements associated with ESOPs, ensuring transparency and fairness in their implementation.
ESOP Terms
Meaning
Grant Date
The date on which the employer and employee agree to provide the employee with the option to acquire shares of the company.
Vesting Date
Date on which the employee is entitled to buy shares.
Vesting Period
The period between the grant date and the vesting date.
Exercise Period
The duration during which an employee may purchase vested shares.
Exercise Date
The Date on which the employee exercises the stock option.
Exercise Price
The Price at which the employee exercises the stock option.
Tax Implications of ESOPs
SOPs entail taxation at two significant junctures:
At the Time of Purchase/Exercising: When an employee exercises their stock option by agreeing to purchase the shares, it is regarded as a perquisite under the salary income category. The taxable amount is determined by the disparity between the Fair Market Value (FMV) on the exercise date and the exercise price.
This perquisite is taxed in the fiscal year when the employee exercises the ESOP.
The employer is responsible for deducting Tax Deducted at Source (TDS) on this amount and providing Form 16 to the employee.
It is incumbent upon the employee to report this income as Salary Income in their Income Tax Return (ITR), claim TDS Credit, and pay tax on such income at the applicable slab rates.
Example
Neha, an employee at Zomato, exercised her ESOP options during the financial year 2023-24. She chose to purchase shares of the company on 07/07/2023, acquiring a total of 2000 shares at a price of INR 120 per share. The Fair Market Value (FMV) of these shares at the time of exercise was INR 165 per share. Let’s delve into the tax implications of this transaction:
In this scenario, the company will treat the INR 3,30,000 as taxable salary and deduct TDS accordingly. When filing her Income Tax Return (ITR), Neha must report the INR 3,30,000 as Perquisites under the head “Income from Salaries”.
Budget 2020 Amendment
In the Budget 2020 announcement, the finance minister introduced a significant change regarding the taxation of shares allotted to employees by startups under Employee Stock Ownership Plans (ESOPs). Starting from the financial year 2020-21, employees receiving ESOPs from eligible startups no longer need to pay tax in the year of exercising the option. Instead, the deduction of Tax Deducted at Source (TDS) on the perquisite amount can be deferred by the employer until one of the following events occurs, whichever is earlier:
Expiry of 5 years from the year of ESOP allotment
Date of sale of ESOP by the employee
Date of termination of employment
At the time of sale or transfer of shares
When an employee sells the shares, it is treated as Capital Gains. Here’s the tax treatment for the sale of shares under ESOP:
Capital Gain is calculated as the difference between the Sale Price and the Fair Market Value (FMV) as on the exercise date.
The period of holding is calculated from the exercise date to the date of sale.
Capital Gains are taxed in the financial year in which the employee sells the shares.
The employee must report Capital Gains in their Income Tax Return (ITR) and pay tax on such income at the applicable rates.
Furthermore, in the case of ESOPs from a foreign company, the tax treatment is similar to that of domestic securities. However, it is obligatory for employees to disclose their holdings under Schedule Foreign Assets (FA) while filing their ITR.
Type of Share
Period of Holding
Capital Gain
Tax Rate
Listed Shares
<= 12 months
STCG u/s 111A
15%
> 12 months
LTCG u/s 112A
10% in excess of INR 1 lakh
Unlisted Shares
<= 24 months
STCG
slab rates
> 24 months
LTCG u/s 112
20% with Indexation
Example
In the given scenario, Neha sold her ESOPs on 20/01/2024, after exercising them on 07/07/2023, with an FMV of INR 165 per share on the exercise date and a sales price of INR 225 per share.
Here’s how the tax treatment and calculation of tax liability unfold:
Period of Holding: 07/07/2023 to 20/01/2024 (less than 12 months)
Type of Capital Gain: Since the shares are from a company listed on a recognized stock exchange in India and the holding period is less than 12 months, it qualifies as a Short-Term Capital Gain.
Tax Rate: The applicable tax rate is 15% under Section 111A.
Capital Gain per share: Sales Price – FMV = 225 – 165 = INR 60 per share
Total Capital Gains: 2000 shares * INR 60 per share = INR 1,20,000
Tax Liability: INR 1,20,000 * 15% = INR 18,000
Thus, Neha’s tax liability on the Short-Term Capital Gains from the sale of her ESOPs amounts to INR 18,000 for the financial year 2023-24.
How to calculate FMV for ESOPs?
Type of Share
Meaning
Trading Status
Fair Market Value (FMV)
Listed Shares
Listed on a recognized stock exchange in India
Traded on a recognized stock exchange as on the exercise date
Average of opening and closing price
Listed Share
Listed on a recognized stock exchange in India
Not traded on a recognized stock exchange as of exercise date
Closing price on the date preceding the exercise date
Unlisted Share
Not listed on a recognized stock exchange in India
NA
Price determined by a merchant banker
Treatment of Loss from Sale of ESOPs
When it comes to losses incurred from the sale of shares obtained through ESOPs, they are treated as Capital Losses. Here’s how the taxation and treatment of such losses unfold:
Loss on the sale of listed shares held for over 12 months or unlisted shares held for over 24 months qualifies as a Long-Term Capital Loss.
Long-Term Capital Loss (LTCL) can be set off against Long-Term Capital Gain (LTCG) exclusively. Any remaining loss can be carried forward for up to 8 years and set off against LTCG only.
Loss on the sale of listed shares held for up to 12 months or unlisted shares held for up to 24 months is termed a Short-Term Capital Loss.
Short-Term Capital Loss (STCL) can be set off against both Short-Term Capital Gain (STCG) and Long-Term Capital Gain (LTCG). Any remaining loss can be carried forward for up to 8 years and set off against both STCG and LTCG.
Important Keyword: Salary Income, Income Tax Department, E-Verify, Income Tax Compliance, Section 5(1).
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Tax Liability for Salary Income
Salary income under section 5(1) of the Income Tax Act encompasses various components received by an individual from their employer, including wages, annuities, pensions, gratuities, fees, commissions, perquisites, profits in lieu of salary, advance of salary, and leave encashment, among others.
However, taxpayers may encounter verification issues from the Income Tax Department (ITD) through SMS, calls, or emails for several reasons:
Non-filing of Income Tax Returns (ITRs) for the given assessment year, leading to potential tax liabilities.
Mismatch between the details provided by taxpayers and the information received by the Income Tax Department (ITD) for that assessment year.
Reporting of significant transactions during a financial year that deviate from the taxpayer’s profile.
Responding to Verification Issues: Taxpayers facing verification issues must respond promptly. The response should be submitted online through the compliance portal provided by the Income Tax Department (ITD).
Ensuring compliance with tax regulations and addressing verification issues in a timely manner is crucial for taxpayers to avoid potential penalties or discrepancies in their income tax filings. By understanding these processes, taxpayers can navigate the taxation system more effectively and contribute to a transparent and efficient tax environment.
Verification issue in the computation of tax liability from Salary Income
Code
Description
Response
A1
Total receipts as per taxpayer pertaining to the above information
Amount
A2
Less: Amount relating to another year/PAN
PAN year-wise list
A3
Less: Amount covered in other information
Amount
A4
Less: Exemption/Deduction/Expenditure/ Set off of Loss
Exemption/Deduction wise list
A5
Income/Gains/Loss (A1-A2-A3-A4)
Computed
Understanding salary components and their taxation is crucial for taxpayers.
Here’s a simplified guide to help individuals comprehend these processes:
A1-Total Receipts: This refers to the total gross salary received from the employer, including all salary components, to be mentioned as a final amount.
A2- Amount Relating to Other Year or PAN: If any part of the salary pertains to another person’s PAN or another assessment year, details should be provided in the PAN table.
A3- Amount Repeatedly Covered: Any mistakenly covered amounts should be mentioned under the Remarks section to nullify repetition.
A4- Exemption/Deduction/Expenditure/Set off of Loss: This section includes gross salary and various allowances exempted from taxation. Taxpayers need to select the correct category from the drop-down list, including exemptions related to house rent, leave travel, gratuity, perquisites, and others.
A5- Income/Gain/Loss: This section involves self-computation of taxable salary income using the formula A5=(A1-(A2+A3+A4)). If the computed income exceeds the minimum threshold of Rs. 2.5 lakh, taxpayers should file their Income Tax Returns (ITRs).
It’s essential for taxpayers to accurately declare their salary income and claim any applicable exemptions or deductions to ensure compliance with tax regulations. By understanding these concepts, individuals can navigate the taxation system more effectively and fulfill their tax obligations efficiently.
