16 becomes quite a topic of discussion in all office campuses during the tax
filing season. Though we know that Form 16 is for tax filing, many of us
still find it hard to understand the components of Form 16 while filing the
return. Understanding Form 16 is the key to better tax planning.
after taking about form 16 the entire day in office, you wonder what it
actually is while returning home, then this is the answer for you.
Form 16: Form 16 is the certificate issued by the employer to
employee stating the details of income earned and the tax deducted on your
behalf and paid to the government. Every employee who is subjected to TDS is
supposed to receive their Form 16 by April 30 every year. However many
employers issue it post this deadline.
Important points to be noted:
No Form 16 is required if TDS is not deducted from salary
If TDS is deducted by banks to the pension holder, banks
should also issue Form 16. For interest income, the bank issues form 16A
Components of Form 16:
16 can be said to be comprised of some real major components. These are
discussed briefly so that next time while filing for tax, you know exactly what
you are filling in.
PAN stands for Permanent Account Number, which is a 10 digit
alpha-numeric code generated by the Income Tax Department of India. The tax
department has made it mandatory for everyone (including NRIs, PIOs &
Companies) who wishes to indulge in any type of investments or financial
transactions in India. Carrying on business, filing or paying taxes, investing in
India, buying a property, opening a bank or demat account, etc. now require a
PAN number. Read more about understanding PAN Cards.
TAN or Tax Deduction and Collection Account Number is a 10
digit alpha numeric number, required to be obtained by all persons/companies who
are responsible for deducting or collecting tax. TAN nos. are also unique to
Gross salary refers to the employee's total remuneration including
allowances, over time pay, Commissions, and bonuses, and any other amounts
before any deductions are made.
Perquisites are nothing but the perks you enjoy. It is the
additional benefit provided by the employer to the employee in addition to the
salary or wages provided.
For example, Rent Free accommodation, Loans at a subsidized
rates to employees etc.
Profits in lieu of Salary
Profit in Lieu of Salary is a part of the salary income, thus
it is taxable under the head 'Income from salary'. It is any payment made to
employees in lieu of salary. This means any payment due to, or received by
employee from his employer (or former employer) at or in connection with the
termination of employment or due to modification in terms and conditions
Example: Gratuity, Commuted value
of pension, Retrenchment Compensation etc. received or due to be received to
the extent which is not exempt, and which it does not consist of contribution
made by the employee, or interest thereon will be taxable as profit in lieu of
Allowance is a payment made by employer to an employee to
enable him/her to meet certain cost of expenditure incurred on behalf of the
employer, expenses which he/she may not have underwent otherwise. This
generally forms the part of the employee's taxable income.
Example: - Medical Allowance, Travel Allowance etc.
of the most important allowances that you will come across in Form 16 are :
HRA (House Rent Allowance)
HRA is a special allowance given to an employee to meet his
rent expenses. It is exempt from tax to the extent of least of the following:
a) HRA received from employer
b) Rent Paid in excess of 10% of the salary
c) 40% or 50% of the Salary (50 % in case of an individual
belongs to metropolitan cities like Mumbai, Delhi, Chennai, Kolkata for all
others it is 40%).
Salary for HRA calculations: Basic+ DA+ Commission (Paid as a
fixed percentage of sales)
(Above exemption is only available on actual payment of rent).
For example, Let us understand this
with an example. Say, you live in Hyderabad and your salary structure for a
month is as follows:
Basic - Rs 12,000
HRA - Rs 5,000
Other taxable allowances - Rs 2,000
Monthly rental expenses - Rs. 7,000
Now, HRA will be exempt to the extent of the least of:
Rs 4,800 (40% of salary for non-metro); or
Rs 5,000 (HRA received); or
Rs 5,800 (excess of rent paid over 10 per cent of salary,
i.e. (7000-(10% of 12,000)
HRA exemption will be the least of the above i.e. 4,800.
Conveyance allowance is usually paid for the welfare of the
employees to compensate for the expenses they bear while commuting to office every
day. Conveyance allowance is exempt to the extent of Rs. 800. An orthopedically
handicapped employee enjoys a higher exemption of Rs. 1,600
Medical allowance is paid by the company to cater the amount
spends by employee on medical treatment and medicines. Medical allowance can be
paid out monthly or yearly. Medical allowance is a fully taxable component of
the salary. However, if you receive reimbursement of medical expenses against
submission of bills, such reimbursement is tax free up to Rs. 15000 per year.
Entertainment allowance is imparted to employees to enable
them to avail entertainment services. Deduction on entertainment
allowance is only is allowed to government employees. The amount of deduction allowed
is to the extent of least of the following -
Rs. 5,000 (OR)
1/5th or 20% of the salary (excluding all other allowances
benefit or any other perquisites)
Government encourages certain type of savings -mostly long
term savings for your retirement - and therefore offers you tax breaks on such
savings. These tax breaks are nothing but deductions allowed from the gross
total income (Chapter VI A).
Education cess is a contribution made towards the Secondary
and Higher Education development in the economy. All taxes in India are subject
to an education cess, which is 3% of the total tax payable.
Relief u/s 89
Relief is granted to individuals when salary is paid in
arrears in a lump sum.
For example, Salary (received in arrears/advance, family
pension received in arrears, retirement benefits such as gratuity, commuted
pension, VRS and retrenchment compensation)
With all the knowledge imparted in this article, you are now well
harnessed to file your taxes with proper knowledge and confidence.
Written by Sridhar Nag
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