The following particulars of income are submitted by Smt. Suman Garg for the assessment year 2022-23. She lives at Delhi. i) Basic pay 10,000 p.m.

The assessment of an individual’s income for taxation purposes under the Income Tax Act, 1961, is a structured process that categorizes all forms of earnings into specific heads of income. For the assessment year 2022-23, which corresponds to the previous year 2021-22 (financial year April 1, 2021, to March 31, 2022), the income of an individual like Smt. Suman Garg, residing in Delhi, would be computed under these prescribed heads. The information provided, specifically “Basic pay 10,000 p.m.”, falls squarely under the head ‘Income from Salaries’, which is typically the most significant source of income for employed individuals.

Understanding ‘Income from Salaries’ involves a comprehensive analysis of various components that an employee receives from an employer, along with permissible deductions. While only basic pay has been furnished, a complete assessment requires delving into other common elements such as allowances, perquisites, and statutory deductions. This detailed examination is crucial not only for accurate tax computation but also for effective tax planning, allowing an individual to optimize their tax liability within the framework of the law.

Understanding Income from Salaries (Section 15-17 of Income Tax Act, 1961)

The Income Tax Act, 1961, defines ‘salary’ very broadly to include any remuneration received by an individual for services rendered under an employer-employee relationship. This relationship is paramount; without it, the income might fall under ‘Profits and Gains of Business or Profession’. For Smt. Suman Garg, her basic pay of Rs. 10,000 per month is the fundamental component of her salary structure. Annually, this translates to Rs. 1,20,000 (Rs. 10,000 * 12 months). However, ‘salary’ encompasses far more than just basic pay. It includes, but is not limited to, wages, annuities, gratuity, perquisites, profits in lieu of salary, advance of salary, and all forms of allowances.

Components of Gross Salary

To arrive at the gross salary, several elements are added to the basic pay. These components can be fully taxable, partially taxable, or fully exempt, depending on their nature and specific conditions laid down in the Income Tax Act.

1. Basic Pay

This is the fixed component of the salary and is fully taxable. For Smt. Suman Garg, her annual basic pay is Rs. 1,20,000. It forms the foundation upon which other salary components are often calculated (e.g., DA, HRA, PF contributions).

2. Dearness Allowance (DA)

DA is paid to employees to compensate for inflation. Its taxability depends on the terms of employment. If it forms part of salary for retirement benefits, it is generally considered part of salary for all purposes, including computing HRA exemption or provident fund contributions. DA is fully taxable.

3. House Rent Allowance (HRA) (Section 10(13A))

HRA is paid by the employer to the employee for the rent of residential accommodation. It is partially exempt from tax, subject to specific conditions and the least of the following three amounts:

• Actual HRA received.
• 50% of salary (for metro cities like Delhi, Mumbai, Kolkata, Chennai) or 40% of salary (for other cities). ‘Salary’ here means Basic Pay + DA (if it forms part of retirement benefits) + Commission based on turnover.
• Actual rent paid less 10% of salary. If Smt. Suman Garg receives HRA and pays rent, she would be eligible for this exemption. Given she lives in Delhi, the 50% rule would apply. If she does not pay rent (e.g., lives in her own house), the entire HRA received would be fully taxable.

4. Special Allowances (Section 10(14))

The Act provides for various special allowances that are either fully exempt, partially exempt, or fully taxable.

• Transport Allowance: For commuting between residence and office. For AY 2022-23, this allowance is fully taxable for all employees except for certain physically challenged employees (blind or orthopaedically handicapped), who receive an exemption of Rs. 3,200 per month.
• Children Education Allowance: Exempt up to Rs. 100 per month per child, for a maximum of two children.
• Hostel Expenditure Allowance: Exempt up to Rs. 300 per month per child, for a maximum of two children.
• Allowance for performing duties of an office: Exempt to the extent of actual expenditure incurred for official duties. Examples include travelling allowance, daily allowance, conveyance allowance, helper allowance, academic allowance, uniform allowance. Any excess amount received beyond expenditure is taxable.
• Underground Allowance: For employees working in uncongenial, abnormal conditions in underground mines, exempt up to Rs. 800 per month.
• Tribal Area Allowance: Exempt up to Rs. 200 per month in specified tribal areas.
• Compensatory Field Area Allowance, Modified Field Area Allowance, Counter Insurgency Allowance, High Altitude Allowance, High Active Field Area Allowance, Island Duty Allowance: These are primarily for armed forces personnel and are exempt up to prescribed limits.

5. Perquisites (Section 17(2))

Perquisites are non-cash benefits provided by an employer to an employee. They can be fully taxable, taxable in the hands of specified employees only, or fully exempt.

• Rent-Free Accommodation: Taxable value calculated based on population of the city or as per actual rent paid by employer (for unfurnished accommodation), with an addition for furnished accommodation.
• Conveyance (Motor Car) Facility: Taxable value depends on whether the car is owned by employer/employee, and whether used for official/personal purposes.
• Medical Facilities: Generally, medical treatment or reimbursement of medical expenses provided by the employer in approved hospitals/institutions is exempt. However, any amount paid by an employer directly to an employee for medical treatment (other than specified cases) is taxable. Health insurance premium paid by employer is exempt.
• Education Facilities: Exemption up to Rs. 1,000 per month per child for up to two children for education provided in employer’s institution. Beyond this, it’s taxable.
• Interest-Free or Concessional Loans: The value of the perquisite is the interest charged by SBI on similar loans, reduced by any interest paid by the employee.
• Club Membership/Use of Employer’s Assets: Taxable as per prescribed rules.
• Employer’s Contribution to Approved Superannuation Fund: Exempt up to Rs. 1.5 lakh per annum.
• Stock Options (ESOPs): Taxable at the time of exercise as perquisite (difference between fair market value and exercise price).

6. Profits in Lieu of Salary (Section 17(3))

This includes any compensation received by an employee from the employer in connection with termination of employment or modification of terms of employment (e.g., golden handshake), unutilized leave encashment (taxable subject to certain exemptions for government employees and others up to specific limits), or any amount due from an employer or former employer.

7. Gratuity (Section 10(10))

Gratuity received by an employee on retirement or termination is exempt up to certain limits:

• Government Employees: Fully exempt.
• Employees covered by Payment of Gratuity Act, 1972: Exempt up to the least of: Rs. 20 lakhs, 15 days’ salary for each completed year of service, or actual gratuity received.
• Other Employees: Exempt up to the least of: Rs. 20 lakhs, half-month’s salary for each completed year of service, or actual gratuity received.

8. Pension (Section 10(10A))

• Uncommuted Pension: Fully taxable as salary.
• Commuted Pension:
  • Government Employees: Fully exempt.
  • Other Employees: If gratuity is also received, 1/3rd of the commuted value of the entire Pension is exempt. If no gratuity is received, 1/2 of the commuted value of the entire pension is exempt.

9. Leave Encashment (Section 10(10AA))

• During Service: Fully taxable.
• At Retirement/Termination:
  • Government Employees: Fully exempt.
  • Other Employees: Exempt up to the least of: Rs. 3 lakhs (as per AY 2022-23 limit), 10 months’ average salary, actual leave encashment received, or cash equivalent of unavailed leave (max 30 days per year of service).

10. Provident Funds

Various types of provident funds exist, with different tax treatments for contributions, interest, and withdrawals.

• Recognized Provident Fund (RPF):
  • Employer’s Contribution: Exempt up to 12% of salary (Basic + DA forming part of retirement benefits). Contribution exceeding this limit is taxable as perquisite.
  • Employee’s Contribution: Eligible for deduction under Section 80C.
  • Interest on PF: Exempt up to 9.5% per annum. Interest exceeding this is taxable. For AY 2022-23, interest on employee’s contribution exceeding Rs. 2.5 lakh in a financial year is taxable.
  • Withdrawal: Fully exempt if employee has rendered continuous service of 5 years or more, or if service is terminated due to ill-health, employer’s business discontinuation, or other reasons beyond employee’s control. Otherwise, taxable.
• Public Provident Fund (PPF): Exempt-Exempt-Exempt (EEE) status. Contributions are eligible for 80C deduction, interest is exempt, and withdrawals are exempt.
• Statutory Provident Fund (SPF): Applies to government and semi-government employees. All aspects (contributions, interest, withdrawals) are fully exempt.
• Unrecognized Provident Fund (URPF): Neither employer’s contribution nor interest on it is taxable during service. At the time of withdrawal, employer’s contribution and interest on it are taxable as ‘Profits in lieu of Salary’. Employee’s contribution is not taxable, but interest on employee’s contribution is taxable as ‘Income from Other Sources’.

Deductions from Salary (Section 16)

After computing the gross salary, certain statutory deductions are allowed to arrive at ‘Income from Salaries’.

1. Standard Deduction (Section 16(ia))

For AY 2022-23, a Standard Deduction of Rs. 50,000 or the amount of salary, whichever is less, is allowed to all salaried employees. This deduction was reintroduced from AY 2019-20, replacing transport allowance and medical reimbursement. This is a significant deduction for Smt. Suman Garg, reducing her taxable salary directly.

2. Entertainment Allowance (Section 16(ii))

This deduction is available only to government employees. The amount of deduction is the least of:

• Actual entertainment allowance received.
• Rs. 5,000.
• 20% of basic salary. For private sector employees, entertainment allowance is fully taxable as part of gross salary, with no deduction allowed under Section 16(ii).

3. Professional Tax (Section 16(iii))

Any amount paid as professional tax or tax on employment by an employee is allowed as a deduction from salary. If the professional tax is paid by the employer on behalf of the employee, it is first included in the gross salary as a perquisite and then allowed as a deduction under Section 16(iii). The maximum limit for professional tax is Rs. 2,500 per annum, as per Article 276 of the Constitution of India.

Computation of Income from Salaries for Smt. Suman Garg

Given only the basic pay, the initial computation for Smt. Suman Garg for AY 2022-23 would be:

• Basic Pay: Rs. 10,000 p.m. * 12 months = Rs. 1,20,000
• Add: Other Salary Components (Assumed Zero for now, as no information provided): Rs. 0
  • (e.g., Dearness Allowance, HRA, Other Allowances, Perquisites, etc.)
• Gross Salary: Rs. 1,20,000
• Less: Deductions under Section 16:
  • Standard Deduction (Section 16(ia)): Rs. 50,000
  • Entertainment Allowance (Section 16(ii)): Rs. 0 (assuming private employee)
  • Professional Tax (Section 16(iii)): Rs. 0 (no information provided)
• Income from Salaries: Rs. 1,20,000 - Rs. 50,000 = Rs. 70,000

It is crucial to emphasize that this calculation is based solely on the provided basic pay. In a real-world scenario, Smt. Suman Garg’s employer would issue Form 16, which comprehensively lists all salary components, perquisites, and deductions, enabling a precise calculation of her ‘Income from Salaries’.

Overall Tax Computation for Individuals (AY 2022-23)

After computing ‘Income from Salaries’, this amount is aggregated with income from other heads (Income from House Property, Profits and Gains of Business or Profession, Capital Gains, Income from Other Sources) to arrive at the Gross Total Income (GTI).

Deductions under Chapter VI-A

From the Gross Total Income, various deductions are allowed under Chapter VI-A of the Income Tax Act. These deductions are aimed at encouraging savings, investments, and certain expenditures. Some common deductions include:

• Section 80C: Investments in LIC, Public Provident Fund (PPF), Employee Provident Fund (EPF), National Savings Certificates (NSC), Equity Linked Saving Schemes (ELSS), principal repayment of home loan, children’s tuition fees, etc. Maximum deduction of Rs. 1.5 lakhs.
• Section 80CCD (1B): Additional deduction of up to Rs. 50,000 for contribution to National Pension System (NPS), over and above 80C limit.
• Section 80D: Medical insurance premium paid for self, spouse, dependent children, and parents. Different limits apply based on age (senior citizen or not). Preventive health check-up expenses are also covered within these limits.
• Section 80E: Interest paid on education loan taken for higher education of self, spouse, or children. No monetary limit on deduction, but deduction is allowed for 8 consecutive assessment years or until the interest is fully paid, whichever is earlier.
• Section 80G: Donations to certain approved charitable institutions. Deduction amount varies (50% or 100%) and may be subject to a qualifying limit based on the donor’s adjusted gross total income.
• Section 80TTA: Interest on savings bank account, up to Rs. 10,000 (for individuals below 60 years).
• Section 80TTB: Interest on savings bank account and fixed deposits, up to Rs. 50,000 (for senior citizens, i.e., 60 years or above).

The sum of all eligible deductions under Chapter VI-A is subtracted from the Gross Total Income to arrive at the Total Taxable Income.

Residential Status

Smt. Suman Garg lives in Delhi, which generally implies she is a ‘Resident’ for tax purposes. Her Residential Status (Resident and Ordinarily Resident, Resident but Not Ordinarily Resident, or Non-Resident) for the previous year 2021-22 would determine the scope of her taxable income in India (e.g., global income vs. India-sourced income). Assuming she is a Resident and Ordinarily Resident, her global income would be taxable in India.

Tax Regimes for AY 2022-23

For AY 2022-23, individual taxpayers have the option to choose between two tax regimes:

1. Old Tax Regime: This is the default regime where individuals can avail various exemptions (like HRA, LTA) and deductions (under Section 80C, 80D, 80G, etc., and Standard Deduction). The tax rates are the traditional slab rates.
2. New Tax Regime (Section 115BAC): Introduced from AY 2021-22, this regime offers lower tax rates but requires the taxpayer to forego most of the exemptions and deductions available under the old regime (e.g., HRA, LTA, standard deduction, most Chapter VI-A deductions like 80C, 80D, etc.). Only a few deductions like employer’s NPS contribution u/s 80CCD(2) and transport allowance for physically challenged are allowed.

Smt. Suman Garg would need to compare the tax liability under both regimes and choose the one that is more beneficial to her.

Tax Slabs for AY 2022-23 (for Resident Individuals below 60 years)

• Old Tax Regime:

  • Up to Rs. 2,50,000: Nil
  • Rs. 2,50,001 to Rs. 5,00,000: 5%
  • Rs. 5,00,001 to Rs. 10,00,000: 20%
  • Above Rs. 10,00,000: 30% A rebate under Section 87A is available for total income up to Rs. 5,00,000. The rebate is Rs. 12,500 or the amount of tax payable, whichever is less. This effectively makes income up to Rs. 5,00,000 tax-free for those opting for the old regime and eligible for the rebate.

• New Tax Regime (Section 115BAC):

  • Up to Rs. 2,50,000: Nil
  • Rs. 2,50,001 to Rs. 5,00,000: 5%
  • Rs. 5,00,001 to Rs. 7,50,000: 10%
  • Rs. 7,50,001 to Rs. 10,00,000: 15%
  • Rs. 10,00,001 to Rs. 12,50,000: 20%
  • Rs. 12,50,001 to Rs. 15,00,000: 25%
  • Above Rs. 15,00,000: 30% The rebate under Section 87A is also available in the new regime for total income up to Rs. 5,00,000.

After calculating the tax liability, a Health and Education Cess of 4% is levied on the income tax payable. Surcharge is also levied at 10%, 15%, 25%, or 37% on the income tax if the total income exceeds Rs. 50 lakhs, Rs. 1 crore, Rs. 2 crores, or Rs. 5 crores respectively.

Applying to Smt. Suman Garg

Based solely on the provided basic pay of Rs. 10,000 per month, Smt. Suman Garg’s annual basic salary is Rs. 1,20,000.

• Gross Salary (based on basic pay only): Rs. 1,20,000
• Less: Standard Deduction: Rs. 50,000
• Income from Salaries: Rs. 70,000

Under both the old and new tax regimes for AY 2022-23, the basic exemption limit for individuals below 60 years is Rs. 2,50,000. Since Smt. Suman Garg’s computed ‘Income from Salaries’ (Rs. 70,000) is well below this exemption limit, she would have no tax liability on this income, assuming no other income components or sources. She would also not need to claim any Chapter VI-A deductions to reduce this income further for tax purposes, as it is already below the taxable threshold.

However, this is a highly simplified scenario. In reality, a salaried individual’s total income statement usually includes a multitude of components beyond basic pay. To accurately ascertain Smt. Suman Garg’s tax position, a detailed breakdown of all other salary components (like DA, HRA, other allowances, perquisites), any other income sources (e.g., interest income from savings, rental income from house property, capital gains), and her investments/expenditures eligible for Chapter VI-A deductions would be absolutely essential. Her employer would typically deduct Tax Deducted at Source (TDS) based on an estimated total income. Smt. Suman Garg would then use Form 16 provided by her employer to file her Income Tax Return (ITR).

The assessment of income tax for any individual, including Smt. Suman Garg, is a multi-faceted process governed by the Income Tax Act, 1961. It begins with the classification of income into specific heads, with ‘Income from Salaries’ being a prominent one for employed individuals. This head encompasses not just the basic pay but a wide array of allowances, perquisites, and other benefits, each with its own set of rules regarding taxability and exemptions.

While the provided information of Smt. Suman Garg’s basic pay allows for a foundational calculation, it represents only a fraction of what constitutes a comprehensive salary package. The calculation demonstrated how basic pay is adjusted by statutory deductions like the Standard Deduction to arrive at ‘Income from Salaries’. For AY 2022-23, with a basic pay of Rs. 10,000 per month, her annual taxable salary (after standard deduction) of Rs. 70,000 falls below the basic exemption limit, indicating no tax liability on this specific income component.

However, a complete and accurate tax assessment necessitates a holistic view of all income particulars, including various allowances, perquisites, and income from other sources. Furthermore, the choice between the old and new tax regimes, coupled with eligible deductions under Chapter VI-A, significantly influences the final taxable income and tax liability. Therefore, Smt. Suman Garg would need to meticulously gather all her income details and consult her Form 16 to ensure accurate compliance and optimize her tax position.