If you are a salaried employee, you might have wondered how the fringe benefit tax (FBT), introduced from 1 April 2005, has affected your pay cheque. Which portion of your salary and benefits does it hit and which part escapes its bite?
Allowances and perquisites of an employee, unless specifically exempt under the Income Tax Act, are chargeable to tax under the head 'Salary.' While the law has remained largely static with respect to taxability of allowances, the coming into force of FBT has led to amendments in Rule 3, dealing with taxability of perquisites. We will deal here with taxability of some common perks.
Perquisite means a gain or profit made incidentally from employment in addition to the regular salary or wages. Perquisite is taxable under the head salary only if it is allowed by an employer to his employee in the course of employment and results in some personal advantage to the employee.
The definition of perquisite that Section 17(2) of the Income Tax Act gives includes the value of accommodation provided rent-free or at a concessional rent, the value of any benefit provided free of cost or at a concessional rate to specified employees, any amount paid by the employer to discharge any obligation of an employee, the employer's contribution to specific employee welfare funds, and the value of any other fringe benefit (excluding the fringe benefits on which fringe benefit tax is payable) as may be prescribed.
The employee has to pay tax for the perquisites of gas, electricity and water, but not for club membership.
Medical facilities provided to an employee or any member of his family in a hospital maintained by the employer or the government or approved by the government are not considered a perquisite. Similarly, medical treatment provided for specified diseases in any hospital approved by the chief commissioner of income tax is also not a perquisite.
In certain cases and subject to certain conditions, the cost of medical facilities provided outside India is also not taxable in the hands of the employee as a perquisite.
Reimbursement of medical expenses incurred in a private hospital or for medical treatment up to Rs 15,000 a year is not a taxable perquisite. Group medical insurance premium paid by an employer for his employees is also not taxed as a perquisite.
Income Tax Rule 3 gives a list of perquisites for which the employee has to pay tax. This rule was substantially amended with the introduction of FBT. Only those perquisites which are specifically stated in Rule 3 are taxed. As per the rule, the employee has to pay tax for the following perquisites:
- Furnished or unfurnished accommodation provided rent-free or at a concessional rent.
- Supply of gas, electricity and water.
- Educational facility.
- Domestic servants provided.
- Loan given without interest or at a concessional rate of interest. The difference between the rate of interest charged by the employer and the State Bank of India's rate of interest for a similar loan on the first day of the year in which the employee took the loan from his employer is considered a perquisite.
- Use of movable assets.
- Sale of movable assets to employees at a nominal price. The difference between the written down value of the asset as on the date of sale and the amount recovered from the employee is a perquisite. Electronic items or computers are written down at the rate of 50 per cent for each completed year of use by the reducing balance method. Motor cars are written down at the rate of 20 per cent for each completed year of use by the same method. Any other asset is depreciated at the rate of 10 per cent of the actual cost for each completed year of use. Let's assume P Ltd purchased a car on May 15, 2002 at Rs 6.5 lakh (Rs 650,000). The car was sold by P Ltd on January 1, 2006 to its employee Z for Rs 1.5 lakh (Rs 150,000). The written down value of the car at the rate of 20 per cent by the reducing balance method after three completed years of use is Rs 3.33 lakh (Rs 333,000). The difference between Rs 3.33 lakh and Rs 1.5 lakh, that is, Rs 1.83 lakh (Rs 183,000), is the value of the perquisite in the hands of Z.
FBT is, among other things, payable on expenditure incurred on entertainment, hospitality, employees' welfare, tour, travel and conveyance, lodging and boarding, running and maintenance of car, use of telephone, maintenance of guest house, festival celebration, use of health club, use of club facilities, gifts and scholarships.
The following perquisites provided to employees or their family members are not taxable in the hands of the employees:
- Car;
- Club membership;
- Refreshments and meals provided in or outside office;
- Travelling cost of employee borne by employer;
- Credit card;
- Gifts to employee;
- Stay in holiday homes of employer;
- Providing use of laptop and computer;
- Educational facility extended to employee's children in an institution owned and maintained by employer, where the cost of education does not exceed Rs 1,000 per month;
- Loan given interest free or at a concession to employee, where the amount of loan does not exceed Rs 20,000, or loan given for medical treatment of specified diseases;
- Shares, debentures and warrants issued by employer free of cost or at a concessional rate under employees' stock option plan framed in accordance with Centre's guidelines;
- Non-transferable vouchers, usable only at eating joints, if the value thereof per meal is reasonable.
So, before you let the company provide you the car, check who'll be paying the chauffeur.
The author is a member of the Bombay Chartered Accountants' Society (www.bcasonline.org)
