Taxation of salary, Form 16 Part A Part B, Form 12B, BB,BA

Tax planning for Salaried Employees through perquisites

The below table is to depict how the flexipay portion can be planned. However the components of flexipay to be designed based on the latest applicable exemptions in IT Act.

Company leased House vs self rent

One has to choose the best option by calculating the net tax benefit. In case of a company lease, the amount of rent paid by your employer is deducted from your salary and hence your taxable income reduces to that extent. However, perquisite value of such accommodation is added to your taxable income. Perquisite value is the lower of 1) 15% of taxable salary excluding the value of perquisites; or 2) Actual rent paid by the company. For a self lease, on the other hand, you can claim HRA exemption. The tax exemption on HRA is computed as the minimum of following three conditions: i) Actual HRA on your pay slip; ii) 40-50% of your basic salary; iii) The rent amount minus 10% of the salary. If you stay in any of the metros (Mumbai, Kolkata, New Delhi or Chennai), HRA is calculated at 50% of your salary. In other cities/towns, HRA is calculated at 40% of the salary. You have to calculate the net tax benefit under both the options to find which gives you a higher tax saving. “If you are saving more through your HRA claim, then it’s better to opt for a personal accommodation. On the other hand, despite the addition of perquisite, if the overall taxable income is lowered because of company accommodation, opt for that,” says Vaibhav Sankla, executive director, Adroit..

 Driving a company car If your employer provides you with a car lease option, you should consider availing of the same as it would be a tax efficient option. In such case, the EMI paid by your employer to the leasing company is deducted from your monthly salary resulting in reduction in your taxable income. Further, reimbursement of expenses associated with the car (such as driver’s salary, fuel, repairs and maintenance) are also considered as non-taxable. However, perquisite value of such facility is added to your taxable income. (Refer table). Perquisite value is equal to Rs 1,800 per month if the cubic capacity of car is up to 1,600. For cars with higher cubit capacity, the perquisite value is Rs 2,400 per month. Further, Rs 900 per month is added if a chauffeur facility is also provided.

Lifestyle benefits Corporate club membership fee paid by your employer to help you join a club is considered a tax exempt perquisite. This facility can be used by the employee or any of his family members. If the club membership has been taken only for business purposes, you should maintain the details of expenditures such as the date of expenditure, the nature of expenditure and the amount of expenditure. Consequently, the company would provide a certificate stating the same to the employee.

The value of food coupons issued by the employer, redeemable only at eating joints, are exempt from tax as long as the value of the food coupons does not exceed Rs 50 per meal.

Group mediclaim This is a common benefit offered to employees irrespective of their grade and the premium is less than half of an individual mediclaim. Most group health insurance products offer wider coverage and they are more lenient than individual policies. There are several advantages in opting for such group policies. “A corporate cover waives off the 30-day waiting period unlike a standalone health cover, which means that you are not covered for any disease/health ailment that you get within first 30 days from the effective date of the policy,” says Radhakrishna Chamarty, director of India Insure Risk Management & Insurance Broking Services. Secondly, a group cover offers maternity cover, which is rare in standalone policy. “In a group cover, the number of claims can be offset by a set people who wouldn’t make any claim related to maternity. Hence the risk of covering maternity expenses in a group gets diluted because of the dispersion effect from an insurer’s perspective,” says Sanjay Datta, head of health insurance, ICICI Lombard General Insurance. However, in maternity insurance there is a waiting period of nine months. Ideally, the employee should have completed nine months in the organisation before the conception stage. You don’t have to pay for the premium; the company mostly bears the cost. Some companies, however, deduct the premium charges from the employee’s salary. 

Tax Planning At the end of every financial year, many tax payers frantically make investments to minimize taxes, without adequate knowledge of the various available options. The Income Tax Act offers some more opportunities for tax planning , apart from the popular 80C, which could reduce tax liability substantially for the salaried individuals.

1. Salary Restructuring Restructuring your salary may not always be possible. But if your company permits, or if you are on good terms with your HR department, restructuring a few components could reduce your tax liability.
  • Opt for food coupons instead of lunch allowances, as they are exempt from tax up to Rs. 50 per meal
  • Include medical allowance, transport allowance, education allowance, uniform expenses (if any), and telephone expenses as part of salary. Produce bills of actual expenses incurred for these allowances to reduce tax
  • Opt for the company car instead of using your own car, to reduce high prerequisite taxation.

2. Utilizing Section 80C
Section 80C offers a maximum deduction of up to Rs. 1,00,000. Utilize this section to the fullest by investing in any of the available investment options. A few of the options are as follows:
  •     Public Provident Fund
  •     Life Insurance Premium
  •     National Savings Certificate
  •     Equity Linked Savings Scheme
  •     5 year fixed deposits with banks and post office
  •     Tuition fees paid for children's education, up to a maximum of 2 children

3. Options beyond 80C
If you have exhausted your limit of Rs. 1,00,000 under section 80C, here are a few more options:
  • Section 80D - Deduction of Rs. 15,000 for medical insurance of self, spouse and dependent children and Rs. 20,000 for medical insurance of parents above 65 years
  • Section 80G- Donations to specified funds or charitable institutions.

4. House Rent Allowance
Are you paying rent, yet not receiving any HRA from your company? The least of the following could be claimed under Section 80GG:
  •  25 per cent of the total income or
  • Rs. 2,000 per month or
  • Excess of rent paid over 10 per cent of total income
This deduction will however not be allowed, if you, your spouse or minor child owns a residential accommodation in the location where you reside or perform office duties.

If HRA forms part of your salary, then the minimum of the following three is available as exemption:
  •     The actual HRA received from your employer
  • The actual rent paid by you for the house, minus 10 per cent of your salary (this includes basic  dearness allowance, if any)
  • 50 per cent of your basic salary (for a metro) or 40 per cent of your basic salary (for non-metro).

5. Tax Saving from Home Loans
Use your home loan efficiently to save more tax. The principal component of your loan, is included under Section 80C, offering a deduction up to Rs. 1,00,000. The interest portion offers a deduction up to Rs. 1,50,000 separately under Section 24.

6. Leave Travel Allowance
Use your Leave Travel Allowance for your holidays, which is available twice in a block of four years. In case you have been unable to claim the benefit in a particular four- year block, you could now carry forward one journey to the succeeding block and claim it in the first calendar year of that block. Thus, you may be eligible for three exemptions in that block.

7. Tax on Bonus
A bonus from your employer is fully taxable in the year in which you receive it. However request your employer for the following:
  •  If you anticipate tax rates to be reduced or slabs to be modified in the subsequent year, see if you could push the bonus payment to the subsequent year
  • Produce your tax investment details well before, to prevent your employer from deducting tax on bonus before handing it over

Points to Note :
Keep in mind the below points, to avoid the hassles of last minute tax planning.

  • Give your employer details of loans and tax saving investments beforehand, to prevent any excess deduction
  • Check the Form 16 received at the end of each year from your employer thoroughly
  • It is important to start your tax planning well before 31st March, and to file your returns before the 31st of July each year

Tax Concessions on investment schmes

When you investment in a scheme which is having tax benefits, the money earns interest or returns and the lump sum of principal and interest are paid on maturity. The tax implication for your money at each of these stages can be different in different schemes.

What is EEE?

EEE stands for exempt, exempt, exempt. Here, the first exempt means that your investment is allowed for a deduction. So, you don’t have to pay tax on part of the salary that equals the invested amount. Similarly, the second exempt implies that you don’t have to pay any tax on the returns earned during the accumulation phase.
The third and final exempt means that your income from the investment would be tax­free in your hands at the time of withdrawal.
EEE status is generally enjoyed by long­term investment vehicles, such as Public Provident Fund and Employees Provident Fund. Currently, other instruments such as equity­linked savings schemes (ELSS) and life insurance policies also enjoy the EEE status. However, under the revised draft Direct Taxes Code, the New Pension System will also enjoy the EEE status, but insurance ­cum­ investment plans and ELSS will move to the EET category.

What is EET?

EET is exempt, exempt, taxed. Your money at the stages of contribution and accumulation is exempt from tax, which is explained by EE, but at the time of withdrawal, you need to pay a tax on it, denoted by T. Since your accumulation—principal plus return—is taxed at the time of withdrawal, your returns from such instruments come down, depending on your tax slabs. For instance, if you fall in the 20% tax bracket and the rate of return on your investment is 8%, you will lose out 20% of that return and make only 6.4% on your investment.

What is ETE?

ETE stands for exempt, taxed, exempt. If you have an instrument with this status, you would have to pay a tax only on the interest component. For example, a five­year fixed deposit (FD) enjoys the ETE status, where the amount you invest qualifies for a deduction, the interest is taxed and at the time of maturity you needn’t pay tax on your principal

Apart from the above one needs to understand
  • ·         the tax implications of premature withdrawal and
  • ·         Applicability of TDS

 Form to claim Income Tax Deductions by Employees (Form 12BB – New)
If you are an employee of a company, at the beginning of every financial year (or) while joining the company you have to submit ‘Income Tax Declaration’ to your employer. This is a provisional statement that has details about your proposed investments and expenses that are Income Tax deductible.
At the financial year end, you need to provide supporting Investment Proofs for these investments that you have specified in IT declaration.
Based on your proposed investments and expenses, your employer deducts TDS (Tax Deduction at Source, if any) from your monthly salary and deposits it to the government account. To calculate TDS, your employer considers the declared investments and expenses that are either Tax Exempted (or) eligible for tax deductions under Income Tax Act.
Till date there has been no standard reporting format or template available for furnishing the details of investment or expenditure proofs.
As of now, to claim tax benefits or rebate, an employee has to just mention the sum claimed under exempt allowances. But with effective from 1st June, 2016 to claim income tax deductions  you need to submit new Form 12BB to your employer. It is also been made mandatory to submit documentary evidence of your investments / expenditures.
The Central Board of Direct Taxes (CBDT) has recently released New Form No. 12BB. This is going to be the new standard form for salaried tax payers to claim tax deduction on;
  • LTA (Leave Travel Allowance) / LTC (Leave Travel Concession)
  • HRA (House Rent Allowance)
  • Interest payable on Home Loan (Section 24) and
  • All Tax Deductions under Chapter VI-A which relates to allowable deductions under various sections including Section 80C, Section 80CCC Section 80CCD, Section 80D etc.,
Submit new Form 12BB to claim Income Tax Deductions w.e.f 1st June, 2016
Below is the latest and standard Form 12BB. Click on the image to download Form 12BB.
The below details are part of the new Income Tax Rule 26C. Form 12BB has to be submitted by employees to their employers in relation to;
House Rent Allowance :  House Rent Allowance is exempt under section 10 (13A) of the Income Tax Act. To claim HRA, you have to provide documentary evidence i.e., Rent receipts. You also have to provide details of landlord (name & address) and the amount paid as rent. Permanent Account Number (PAN) of the landlord shall be furnished if the aggregate rent paid during the year exceeds one lakh rupees.
Leave Travel Allowance : With effective from 1st June, 2016, the CBDT has made it mandatory for all the salaried employees to submit travel related expenditure proofs to their employers.
Interest Payments on Home Loans: To claim income tax deduction under section 24 on home loan interest payments, you have to furnish details of interest amount payable/paid, lender’s name & address & PAN number of the lender in Form 12BB. (Read: ‘Income from House Property & Income Tax Benefits)

Income Tax Deductions under Chapter VI -A: You have to provide the details & evidences of your investments or expenditures related to various sections like 80C, 80CCC, 80CCD, 80D(medical insurance premium), 80E (deduction of interest on education loan), 80G (donations), Section 80EE etc., in Form 12BB.
The CBDT has advised the employers to assess the evidence submitted by their employees and then accordingly decide the extent of tax that should be deducted at source from their salaries.
I believe that the tax authorities are aiming to bring in consistency in respect of the income tax benefits being claimed and also to ensure that necessary documentary evidence, as prescribed, is maintained while making the claims.

Structuring of Car Lease Scheme for employees
  •    EMPLOYER enters a Tripartite Lease Arrangement with Orix Auto Infrastructure Services Ltd (OAIS) as the Lessor, employer as the Lessee and the concerned employee as the Co Lessee. 
  •   The Car is Registered in the name of the company. 
  •   The lease rentals would be paid by the Lessee as long as the Co Lessee is in the employment of the company. 
  • In case of separation of the employee the Lessee would give a notice of 15 days to the Lessor and the Co lessee (Employee) would have the following options as detailed below: 
                   a)  Pay the Foreclosure value of the car as on that date and take NOC, 
                   b) Transfer the lease to his name by submitting required Credit documents     
                        and subject to Orix Credit approval, and
                   c)  Return the car and pay the differential between the Foreclosure value and
                        market price as on that date. 
  • In case option (b) is opted for the employee needs to submit the following required Credit documents on a priority basis to enable OAIS to transfer the lease to his individual name as detailed below: 
                 a) IT returns/ Form 16 for the last 2 years.
                 b) Salary Slips for last 3 months.
                 c) Bank Statements for the last 6 months.
                 d) Copy of Offer letter/ Appointment letter from new company.
                 e) Copy of Pan Card and Address proof.
                 f) Post dated Cheques/ ECS for the balance Lease tenure. 
  •   OAIS will issue NOC to EMPLOYER with respect to the car once the Lease gets settled through any of the above mentioned 3 options.  
  •  Employees CTC will be adjusted to the extent of Car Lease EMIs.
  •  The rate of Interest for Lease would be 13.5 % which is higher than the rate which employee will get by directly taking car loan himself. However if  company reduces CTC and gives car  the same is tax efficient and the savings of tax are more than the higher interest rate charged.

Taxability of shares alloted under ESOP

ESOP is an option given to the employees of the company to purchase the company’s shares at a discounted price than the present market price. This option is generally given to high-ranking employees of the company. There is a Lock-in-period involved wherein after the expiry of the vesting period the shares can be exercised. The price paid to purchase the shares is termed as cost of acquisition of the share.

Treatment of Shares Trading

In India, trading in shares and stocks and earning profits or losses is termed as Capital Gains or Loss. Now these gains or losses can either be classified as Long Term Capital Gains/Loss or Short Term Capital Gains/Loss depending upon the period of holding of the shares/stock. If a share or a stock is held for less than 1 year then it is termed as Short Term else wise it is considered as Long Term.

Similarly, if the shares are listed in the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE), Security Transaction Tax (STT) is charged on the transaction but if these are shares listed in Foreign Share Market or unlisted shares then STT is not charged. Further, STT cannot be claimed as a deduction or treated as an expense while calculating the cost of acquisition or sale proceeds.

As per Income Tax Act 1961, tax liabilities on the Capital Gains are as follows:

Capital GainsSTT ChargedSTT not Charged
Long TermExempt20% Special Rate
Short Term15% Special RateNormal Tax Slab

Also, Indexation can be done only on the Long Term Shares on which STT is not charged.

Factors Determining Tax Liability of ESOP

The following factors determine the taxability of ESOP.

  1. The company could either be a Foreign Company with its stock listed in foreign stock market or an Indian Company having its stocks listed in Indian stock market.
  2. The employee may either be a Resident in India or a Non-Resident Indian.
  3. Bonus shares received at a certain ration on the number of shares already held.
  4. The shares of the company may be sold within 1 year of purchase or later.

Thus, if a Foreign Company provides ESOP then STT is not charged on the transaction but when an Indian Company provides it employees with ESOP, STT is charged on the trading transaction.

Further, for a Resident Indian taxes are liable on the global income earned while a NRI is liable to pay taxes in India on the Income deemed to accrue or received in India. Thus, a NRI is only liable to pay tax on the capital gains arising on shares trading if the shares are of an Indian Company.

Bonus shares are given to the current shareholders, in a certain ratio depending upon the number of shares held, free of cost. It is an incentive provided by the company in the form of shares by awarding the current shareholders. If such a share is sold then the cost of acquisition is considered to be Nil resulting the entire sale proceeds to be treated as Capital Gains.

If an employee sales a share within a year of purchase of the share then short term capital gains or loss arises but if the share is sold after one year then it is a long term capital gains or loss.

Taxation of Shares Tendered in Open offer

According to the present regulation, open offers are classified as off-market deals entered into between private individuals. Since there is no securities transaction tax (STT) of 0.1 per cent on the share sale, the taxation, consequently, is different from open market transactions.
For shares tendered in the open offer, the short-term capital gains (less than a year) are taxed at 10 to 30 per cent, depending on the individual's tax slab. In case, the stock has been held for over a year, the long-term capital gains are taxed at 20 per cent without or 10 per cent with indexation benefit – much like debt instruments and gold.
In contrast, for transactions in the secondary market, the short-term capital gains tax on sale of shares or mutual funds is 15 per cent and long-term capital gains tax is zero, if STT has been paid.
For a person in the highest income-tax bracket (30 per cent) looking for short-term gains, selling the share in the secondary market is much more tax efficient as he pays only half the tax amount. Similarly, for a long-term investor, there is no tax.

As Vinod Sharma, head, private broking and wealth management, HDFC Securities, puts it, “For an investor who has held a stock for more than a year, selling in the open market even at a lower price than the offer is a better situation. If the investor tenders the share in the open offer, the stock attracts a long-term capital gains tax.”
A couple of years before, the Securities and Exchange Board of India’s takeover advisory committee had recommended that tax parity be introduced for shareholders who tender their shares in open offers and those who sell through the stock market. According to the committee, the open offer only provides an opportunity to investors to exit the company and, hence, need not be treated as off-market transaction.

Experts feel life could be made much easier for both companies and investors if there isn’t differential treatment of the two transactions. “Today, the acquirer does not get the desired quantity of shares in the open offer because of this reason,” adds Sharma. The retail investor also suffers due to lower capital gains. In the end, both lose.

Revised form 16
Form 16 is issued annually, by an employer to an employee as a proof of salary paid and taxes deducted on it. It has two parts i.e., Part A and Part B as discussed below.

Tax returns of the salaried taxpayers for FY 2018-19 (AY 2019-20) can be filed in form ITR-1 or ITR-2. The details of income from salary, allowances exempt, deductions claimed, are in Part B of Form 16, while Part A contains the employer, employee and employment details such as PAN, address etc.

The Central Board of Direct Taxes (CBDT) has notified certain changes in Form 16. The new Form 16 is made effective from 12 May, 2019. Employers issuing Form 16 for the financial year 2018-19 will have to issue them in the new format.

1) Details under the new Form 16:

Under the new format of Form 16, Part B has been amended to provide more details about the allowances exempt under section 10 such as house rent allowance, leave travel allowance etc., and deductions allowed under Chapter VI-A of the Act i.e. section 80C to 80U.

Form 16 will contain information about the below allowances:

Exempt Allowances required to be disclosed Exempt under section
Leave travel concession 10(5)
Death cum retirement gratuity 10(10)
Commuted value of pension 10(10A)
Leave encashment 10(10AA)
House rent allowance 10(13A)
Any other amount exempt under section 10

Additionally, Form 16 will contain information about the below deductions:

Deductions required to be disclosed Section
Life insurance premium paid, contribution to PPF etc. 80C
Contribution to pension funds 80CCC
Employee's contribution to pension scheme 80CCD(1)
Taxpayer's self contribution to notified pension scheme 80CCD(1B)
Employer's contribution to pension scheme 80CCD(2)
Health insurance premium paid 80D
Interest paid on loan taken for higher education 80E
Donations 80G
Interest income on savings account 80TTA
Amount deductible under any other provision of Chapter VI-A

2) Impact on ITR filing

2a) ITR-1

ITR-1 form can be filed by a resident individual taxpayer having total income up to Rs 50 lakh. Such individuals can report income from salary, one house property, income from other sources and agricultural income up to Rs 5,000 in the ITR-1 form.

The ITR-1 form requires broad details of the components of income from salary i.e., salary, perquisites and profits in lieu of salary. However, the form requires complete details of allowances exempt under section 10. Therefore breakup of exemption under each allowance such as HRA, LTA, gratuity etc must be separately reported. Each of the deductions under chapter VI-A must also be separately reported. After the notification of the new Form 16, these details would be available from the new Form 16 issued to an employee and thus facilitate the filing of the ITR. If you use an online platform to file your ITR, these details can be automatically populated to your ITR, minimising your effort and helping you e-file accurately.

2b) ITR-2

The form ITR-2 applies to taxpayers who are individuals and Hindu Undivided Families (HUFs) who do not have income from business or profession. Also, taxpayers who have total income exceeding Rs 50 lakh and are not eligible to file ITR-1 can file ITR-2.

In addition to the details of allowances and deductions required under ITR-1, the ITR-2 form requires complete break-up of the details of various components of salary. It requires specifications of the amounts falling under salary, perquisites and profits in lieu of salary. However, the new format of Form 16 does not provide the break-up of the salary components. This information can be drawn from the annexure to Form 16 provided by an employer. An illustration of the annexure is provided below:

Salary components Amount Amount
1. Salary as per provisions of section 17(1)
a. Basic salary XXX
b. House rent allowance XXX
c. Leave travel allowance XXX
d. Uniform allowance XXX
e. Special allowance XXX
f. Other allowance XXX
Total salary as per section 17(1) XXX
2. Value of perquisites under section 17(2) as per form 12BA XXX
3. Profits in lieu of salary under section 17(3) as per form 12BA XXX

2c) Other information available under the new format Form 16 which taxpayers would also report in the ITR forms:

2C1) Income (or admissible loss) from house property as reported by an employee to the employer

The taxpayer can report the income (loss) from house property under the section 'Details of Income from House Property' of ITR-1 or ITR-2.

2C2) Income under the head 'Other Sources' reported by an employee to the employer

The taxpayer can report the income under the head other sources under the section 'Income from other sources' of of ITR-1 or ITR-2.

2C3) Total amount of salary received from other employers

An employee will have to provide employer wise salary details. The complete break-up of details of the various components of salary have to be provided for salary earned from each employer during the financial year. For this purpose, an employee would need to refer to the annexure to Form 16 received from the respective employer and fill in the details in the ITR-2. Some websites allow uploading of more than one Form 16, making this task super easy.

ITR-1 does not require the reporting of employer wise details of salary as required in ITR-2 above.

Thus, the above changes in Form 16 along with the annexure to Form 16 would provide all the details necessary for filling up the salary data in ITR-1 and ITR-2. Further, under ITR-2, the details would facilitate cross verification of the claims for exemptions under section 10 made by the employees as against the allowances received as components of the salary.

Form 12B and Form 12BA of Income Tax (TDS)

 Form 12BA : is a detailed statement of perquisites to be issued by employer to employee. Perquisites provided by employer are taxable as salary under 17(2).As a general rule, the taxable value of perquisites in the hands of the employees is its cost to the employer. However, specific rules for valuation of certain perquisites have been laid down in Rule 3 of the I.T. Rules. Form 12BA specifies the value of perquisite considered for Tax Deduction at Source by employer and acts as Annexure to Form 16.

Form12B : is a statement to be provided by employee who is joining new employer in the middle of financial year, to his employer with respect to details of income earned from previous employment and tax deducted at source on such income if any. Employer will deduct TDS as appropriate, after considering the Form 12B submitted by employee. Employee will get a consolidated Form 16 of current and previous employers for the year. Submission of 12B is not compulsory and hence employer would give an option to submit to 12B but not insist for the same.

Form 12BB is the investment and expenditure declaration which employee submits to employer for claiming exemption from TDS by employer 

PART B of Form 16 ( mandatory from May 2019)