Facts of the Case:
Dheeraj is an employee of the Reserve Bank of India (RBI). His monthly income details are:
Basic Pay: INR 3,500
Dearness Allowance (D.A.): INR 1,000 (20% transferred to Provident Fund)
Education Allowance: INR 2,800 for three children
House Rent Allowance (HRA): INR 1,000
The objective is to compute his net salary income for the assessment year.
Issues:
The main task at hand is to calculate Dheeraj's total taxable salary income, which will involve addressing the following concerns:
How to account for allowances and deductions?
How to handle deductions related to the Provident Fund?
What is the tax treatment of the education allowance and HRA?
Rule of Law:
Income from salary includes basic pay, allowances, perquisites, profit in lieu of salary and retirement benefits. It also covers the value of any benefit or perquisite, whether convertible into money or not, obtained from the employer.
As per Indian Income Tax Act, 1961, the computation of taxable salary income is made as follows:
Basic Pay: This is fully taxable.
Dearness Allowance (D.A.): This is also fully taxable.
Education Allowance: As per section 10(14) read with Rule 2BB of the Income Tax Act, any allowance granted to meet the cost of education of children is exempt to the extent of the least of the following amounts:
Actual amount of allowance received
INR 100 per month per child up to a maximum of two children.
House Rent Allowance (HRA): This is exempt under section 10(13A) up to the least of the following amounts:
Actual HRA received
50% of (Basic Salary + D.A.) in case of metro cities or else 40%
Rent paid less 10% of salary (Basic Salary + D.A.)
Provident Fund: The portion of D.A. transferred to the provident fund is exempt from tax under section 10(12) and 80C.
Application of Law and Discussion:
Let's compute the salary income based on the given facts and rules:
Basic Pay: The entire basic pay of Rs 3500 per month or Rs 42000 annually is taxable.
Dearness Allowance: The taxable DA is Rs 800 per month or Rs 9600 annually.
Education Allowance: The exemption limit is Rs 100 per month per child for up to two children, i.e., Rs 200 per month or Rs 2400 annually. Dheeraj receives Rs 2800 per month or Rs 33600 annually for three children. Hence, the taxable portion is Rs 31200 (33600 - 2400).
House Rent Allowance: Assuming Dheeraj stays in a rented house and the rent paid by him exceeds 10% of his salary, the HRA exemption would be Rs 1000 per month or Rs 12000 annually. If these conditions are not met, the entire HRA amount would be taxable.
Total Taxable Salary (Before Standard Deduction): Rs 42000 (Basic Pay) + Rs 9600 (DA) + Rs 31200 (Education Allowance) = Rs 82800.
Standard Deduction: A standard deduction of Rs 50,000 is allowed.
Revised Total Taxable Salary (After Standard Deduction): Rs 82800 - Rs 50000 = Rs 32,800.
Conclusion: Compute Net Salary Income for the Assessment year
Given the aforementioned computations, the net taxable salary income of Dheeraj for the assessment year would be as follows:
Basic Pay: INR 42,000
Taxable D.A. (after PF deduction): INR 12,000 - INR 2,400 = INR 9,600
Taxable Education Allowance: INR 31,200
HRA: Exempt
Standard Deduction: INR 50,000
Hence, the total taxable salary income = INR 42,000 (Basic Pay) + INR 9,600 (D.A.) + INR 31,200 (Education Allowance) - 50,000 (Standard Deduction) = INR 32,800.
It should be noted that Dheeraj's contributions to the Provident Fund can be claimed as a deduction under Section 80C of the Income Tax Act, subject to a maximum limit of INR 1.5 lakh, thereby further reducing his taxable income.
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