Section 15 of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] provides for incomes chargeable under the head ‘Salaries’ such as any salary due from an employer or former employer in the previous year whether paid or not, any salary paid or allowed in the previous year by or on behalf of the employer or a former employer, though not due or before it became due and any arrears of salary paid or allowed in the previous year by or on behalf of an employer or a former employer, if not charged to income tax for an earlier previous year shall be treated as salary income. The income mentioned in section 15 of the Act is chargeable to tax under the head “Salaries” subject to certain deductions/allowances mentioned in section 16 and section 17 of the Act.
Budget Speech on Relief to salaried taxpayer
Before dealing with the proposed amendment to the provisions of sections 16 and 17 dealing with the computation of income from salaries, the relevant excerpts of speech of Hon’ble Finance Minister Shri Arun Jaitley is reproduced as under:
“Relief to salaried taxpayers 151
The Government had made many positive changes in the personal income-tax rate applicable to individuals in the last three years. Therefore, I do not propose to make any further change in the structure of the income tax rates for individuals. There is a general perception in the society that individual business persons have better income as compared to salaried class. However, income tax data analysis suggests that major portion of personal income-tax collection comes from the salaried class. For assessment year 2016-17, 1.89 crore salaried individuals have filed their returns and have paid total tax of ₹ 1.44 lakh crore which works out to average tax payment of ₹ 76,306/- per individual salaried taxpayer. As against this, ₹ 1.88 crore individual business taxpayers including professionals, who filed their returns for the same assessment year paid total tax of ₹ 48,000 crore which works out to an average tax payment of ₹ 25,753/- per individual business taxpayer. In order to provide relief to salaried taxpayers, I propose to allow a standard deduction of ₹ 40,000/- in lieu of the present exemption in respect of transport allowance and reimbursement of miscellaneous medical expenses. However, the transport allowance at enhanced rate shall continue to be available to differently-abled persons. Also other medical reimbursement benefits in case of hospitalisation etc., for all employees shall continue. Apart from reducing paper work and compliance, this will help middle class employees even more in terms of reduction in their tax liability. This decision to allow standard deduction shall significantly benefit the pensioners also, who normally do not enjoy any allowance on account of transport and medical expenses. The revenue cost of this decision is approximately ₹ 8,000 crore. The total number of salaried employees and pensioners who will benefit from this decision is around ₹ 2.5 crore.”
Amendment of Section 16 of the Act
Under the existing provisions of section 16, the income chargeable under the head Salaries shall be computed after considering certain deductions specified therein.
Clause 7 of Finance Bill, 2018 seeks to amend section 16 of the Act relating to computation of income from salary.
The Finance Bill, 2018 proposes to insert a new clause (ia) after clause (i) of section 16 of the Act so as to provide standard deduction of ₹ 40,000/- or the amount of salary whichever is less while computing the income chargeable under the head Income from Salaries.
Reason for amendment
Under the existing provisions of clause (ii) of section 16 only Government employees are entitled to a deduction of entertainment allowance of a sum equal to one-fifth of the salary or ₹ 5,000/-, whichever is less. Further, a deduction of any sum paid on account a tax on employment within the meaning of clause (2) of Article 276 of the Constitution, leviable by or under any law is also allowable to all the salaried employees.
The proposed clause aims at providing a standard deduction to all the assessees who are declaring income under the head Salaries an amount of ₹ 40,000/- or the amount of salary whichever is less. This amendment will take effect from 1st of April, 2019. Thus, the same is applicable for the assessment years 2019-20 onwards.
Amendment of section 17 of the Act
The existing provisions of sub-clause (2) Section 17 defines the term perquisite which is chargeable in the hands of the assessee under the head income from salary. However, as per the proviso appended to the above sections certain payments or amounts received by the employee from his employer shall not be treated as perquisite under section 17 of the Act. The existing clause (v) of the proviso occurring after sub-clause (viii) of section 17(2) of the Act provides that any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family not exceeding fifteen thousand rupees in the previous year shall not be treated as perquisite in the hand of the employee. Thus, under the existing provisions an assessee declaring salary income is entitled to claim deduction of ₹ 15,000/- incurred towards medical purposes for himself or towards his family.
Clause 8 of Finance Bill, 2018 proposed to omit clause (v) of the proviso occurring after sub-clause (viii) in clause 2 of section 17 of the Act. Thus, the Finance Bill, 2018 withdrew the expenditure of ₹ 15,000/- deductible from his employer on account of medical expenses incurred during the year on the treatment of employee or his family while computing the income from salaries.
Further, as mentioned in the memorandum explaining the provisions in the Finance Bill, 2018 the exemption in respect of Transport Allowance (except in case of differently abled person) is also stands withdrawn. Thus, the transport allowance of ₹ 19,200/- earlier allowed to the assessee’s while computing the income from salaries is also withdrawn by the Finance Bill, 2018.
Reasons for amendment
The reason for the amendment is clear from the Budget Speech of Hon’ble Finance Minister Shri Arun Jaitley wherein he has said that the proposed amendment will help the middle class employees in reducing their tax liability. Further, as per the earlier provisions, the employees claiming the benefit of section 17 has to furnish relevant papers of medical bills, whereas now the standard deduction of ₹ 40,000/- is available to all class of employees without requirement of maintaining any paper work. The proposed amendment is also helpful to the pensioners, who normally do not enjoy any benefit of allowance on account of transport and medical expenses.
Analysis of the proposed amendment
The present amendment is likely to benefit the individual assessee by giving them a standard deductions of ₹ 40,000/- while computing the income from salary. However, at the same time, the proposed amendment will take away the benefit of deduction on account of medical expenses amounting to ₹ 15,000/- and travel allowance of ₹ 19,200/- (i.e. ₹ 1,600/- per month) aggregating to ₹ 34,200/-. Thus, the benefit given through the proposed amendment is only ₹ 5,800/-. When we take an example of an individual having salary income of ₹ 5 lakh per annum, the total benefit available to him under the proposed amendment is only ₹ 290/- (i.e. 5% of ₹ 5,800/-) and if the salary income is ₹ 10 lacs, he will get the benefit of ₹ 1,160/- (i.e. 20% of ₹ 5,800/-) only.
Further, the proposed amendment will be available to all class of salaried individual and it is not required to maintain any documents to claim the benefit. The proposed amendment is also beneficial to the pensioners who are not claiming any benefit of medical allowance or travel allowance.
This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent years.