FEBRUARY 21, 2018

By Prabhakar K S

THE Income Tax Act, 1961 (hereinafter 'The Act') provides elaborate provisions on employees' salaries and various benefits available while in as well as post-employment . An employee's salary will be charged to tax under the 'Head Salaries'. Section 15 to 17 of the Act lays down a detailed procedure for computation of income under the said 'Head'. No payment can be charged to tax unless there is a relationship between employer and employee. Hence, the relationship between employer and employee or master and servant plays a vital role in determining an actual tax liability or refund as the case may be. However, few exceptions, same will be taxable under the head 'Other Sources' instead of 'Salaries'. They are Director's sitting fees, salary received by a partner, remuneration received by a Law college teacher for the setting of question papers and evaluating answer scripts, etc.

P Ramanatha Aiyar's Concise Law Dictionary defines the word 'Employee' as 'One who works for an employer, one who is employed, one who works for wages or salary or who is engaged in the service of another, one whose time and skill are occupied in the business of his employer, one who works for another for hire.'

Schedule IV of the Income Tax Act 1961, defines as 'an employee participating in a provident fund but does not include a personal or domestic servant.' Salary, in general, whatever is received in the exercise of an employment will come under the definition of salary, for e.g. basic salary or pay, advance salary, arrears of salary, pensions annuity, bonus, etc. The Supreme Court in Gestetner Duplicators Private Limited v CIT - 2002-TIOL-2006-SC-IT-LB held that commission based on fixed percentage of turnover achieved by an employee shall also be included in salary. Following paragraphs will throw some light on various benefits available to employees.

Employee Benefits - A bird's view

In general, employees are entitled certain benefits in employment contracts, which may vary industry to industry or nature of employment. Few specified benefits may be categorized under five (5) heads, they are –

• Allowances

• Perquisites

• Deduction from salary

• Retirement Benefits

• Arrears of salary

1. Allowances

In general, it is payment beyond the agreed salary. They are monetary benefits, usually payable in cash to meet specific expenses. Under Indian Tax Laws, allowances paid to an employee wholly and exclusively for performing his duties are exempt from tax. Other allowances are taxable with few exceptions or specifically exempted do so.

Illustrated list of Allowances

Fully taxable Allowances are – Dearness allowance, Medical allowance, City compensatory allowance, servant allowance, lunch and tiffin allowance, miscellaneous allowances like marriage allowance, project allowance etc.

Partially or fully exempted allowances from tax are – House rent allowance, transfer allowance, daily allowance, conveyance allowance, helper allowance, academic allowance uniform allowance, children education allowance, hostel allowance etc.

Specifically exempted allowances are - allowances paid to government employees paid outside India, allowances to High Court Judges, etc.

Judicial Precedents with respect to House Rent allowance

What is the position one who resides in his own house but still claimed rent allowance?

The High Court of Karnataka in Patil Vijaykumar v UOI 151 ITR 48 held that house rent allowance paid to an employee who resides in his own house is not exempted from tax.

In another case, the Allahabad High Court in Bajarang Prasad Ramdharani v ACIT 37 taxmann.com held that assessee if living with his wife in a house occupied by her and paying rent to her through bank transfers would be entitled to an exemption.

Recent Developments – W.e.f 01.06.2016, an assessee should furnish supporting evidence for rent paid in Form 12BB.

2. Perquisites

The term 'perquisite' has not been defined compressively in the Act. Section 17(i) (iv) of the Act defines perquisites as a privilege, gain or profit incidental to an employment in addition to regular salary or wages. The Bombay High Court in D. R. Pathak v CIT 99 ITR 14 held that perquisites mean emolument, fee or profit attached to the office or position of an addition to salary or wages.

Black's Law Dictionary, defines that 'emoluments, fringe benefits, or other incidental profits or benefits attaching to an office or position. All taxable perquisites may be classified as taxable and tax-free and also taxable to all and taxable at the hands of specified persons.

Illustrated list of Perquisites

Fully taxable perquisites are

1. Value of rent-free accommodation provided by the employer;

2. Value of any concessional rent provided by the employer;

3. Value of any benefit granted for free of cost or at a concessional rate by the employer to a director, an employee who has substantial interest;

4. Any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by an employee like employee's loan, payment of personal gas and electricity bill.

5. Value of any other fringe benefit or amenity like free meals, Gift or gift voucher, Club memberships etc.

Tax-free perquisites are

1. Accommodation in secluded areas;

2. Accommodation on transfer of employees;

3. Reimbursement of medical or car expenses subject to certain conditions;

4. Educational facilities for employee's children up to Rs. 1,000 p.m. per child, when school is owned or maintained by the employer;

5. Interest-free loan up to certain limit etc.

Taxable in the hands of specified employees' i.e. an employee Director, Person who has substantial Interest etc

1. Free service of sweeper, gardener etc.

2. Free educational facility at employer's school.

3. Provision of a personal journey by the employer engaged in carrying passengers or goods etc.

Judicial Precedents with respect to perquisites

1. The Gujarat High Court in Gujarat Alkalies & Chemicals Ltd v CIT 242 Taxman 125 held that reimbursement of medical expenses incurred by employee or for family up to a ceiling of Rs. 15,000/- would not be included in term perquisite.

2. The Tribunal, Mumbai Bench in Vikas Chimakurty v. Dy. CIT - 2016-TIOL-1749-ITAT-MUM held that perquisite value of the residential accommodation provided by the employer to the assessee shall be the actual amount of lease rent paid or payable by the employer. Hence notional interest on deposits made by the employer to the landlord for providing accommodation to the employee cannot be included in the employee's salary.

3. Deduction from salary

The Act provides a specific deduction of entertainment allowance under section 16(iii). Entertainment allowance received by an employee is first to be included in his gross salary. From gross salary, a deduction for entertainment allowance shall be allowed. Deduction of entertainment allowance will be allowed only for Government employees' up to 20% of their basic salary or Rs. 5000, whichever is less.

4. Retirement Benefits - Key retirement benefits are:

• Employer's contribution to provident funds

Contribution to such a fund may be made both by the employee and the employer. However, the employer's contribution to the provident fund is subject to tax i.e. only in case of his contribution to Recognized provident fund if exceeds 12%.

• Receipt from provident fund

- In the case of statutory provident fund – is exempt from tax

- In the case of recognized provident fund – also exempt from tax subject to certain conditions.

- In the case of unrecognized provident fund – Only the amount representing as interest on employee's contribution is taxable under Income from other sources.

- In the ease of approved superannuation fund - is exempt from tax

- In the case of public provident fund - is exempt from tax

• Commutation of pensions

While monthly pension is fully taxable, the commuted value of pension is exempted from tax subject to certain conditions

• Death-cum-retirement gratuity

- Gratuity received while in service - is fully taxable under the head ?Salaries.

- Gratuity received by the employee at the time of retirement with certain exemptions.

- Gratuity received by the other employees (i.e. other than government employee or covered under the Payment of Gratuity Act 1972.) - is exempt to a certain extent.

• Profits in lieu of salary- The profit in lieu of salary is taxable and includes –

- Any compensation received or due in connection with the termination of service.

- Any compensation received or due in connection with the modification of terms of employment.

- Payment from any unrecognized provident fund but excluding employee's own contribution and interest thereon.

- Any sum received under any Keyman insurance policy.

• Leave salary - means nothing but cash equivalent received by an employee for leave not availed thereof.

- Encashment of leave during the continuation of service - Is fully taxable

- Encashment of leave at the time of retirement - For Government employees – fully exempt but in other cases also exempted but certain extent.

• Compensation for voluntary retirement

Compensation for voluntary retirement is subject to certain conditions under Income Tax Rules, exempted on lump sum payments received or receivable by an employee.

Judicial Precedents with respect to Retirement Benefits

1. Whether non-compete fees is capital receipt or Profits in lieu of salary?

The Tribunal Bangalore Bench, recently in M G Mohan Kumar v DCIT - 2016-TIOL-1505-ITAT-BANG held that payment received by the assessee under the non-compete agreement after cessation of trade with the third party was a capital receipt and not be taxed as profits in lieu of salary.

2. Whether reimbursement of conveyance and other allowances are fringe benefits?

The Gujarat High Court in Kamlesh K Singhal, General Manager v. CIT - 2016-TIOL-2325-HC-AHM-IT held that the impugned benefits were taxed as fringe benefits under Chapter XII-H.

5. Arrears of Salary

Arrears of salary are part of salary due in one or more earlier previous years but received during the current previous year. Arrears of salary are fully taxable in the hands of an assessee. However, he can claim certain reliefs under section 89 of the Act read with Rules 21A (2) to 21A (5). Also, a Department's Circular No. 331 dated 22.03.1982.

Union Budget 2018 - Proposals

The Finance Minister while presenting the Union Budget for 2018-19 proposed few amendments as far as concerned employees' point of view. They are -

• Standard deduction for salaried employees

It is proposed to provide a flat deduction of Rs. 40,000 for all salaried employees without any necessary supporting documents to claim the same.

• Removal of transport allowance and reimbursement of medical expenses

Further, it is proposed to remove certain exemptions like transport allowance and medical reimbursement which in total amounted to Rs. 34,200.

Thus, final effect on employees' benefits after considering the standard deduction has been restricted to Rs. 5,800.

• Deduction on emoluments

It is proposed to allow deduction at 30 percent on emoluments paidto new employees' u/s. 80-JJAA tobe relaxed to 150 days for footwear and leather industry.

(The author is Proprietor, Shree Tax Chambers, Bengaluru and the views expressed are strictly personal.)