Tax Watch: Your Effective Take-Home Salary May Increase

Over the years, due to the reduction in the effective tax rates, the tax exemptions and deductions available to individuals/salaried employees have reduced. One such relief is provided for under Section 10 (10CC) of the Income-Tax Act, 1961, whereby, the tax paid by the employer, on nonmonetary perquisites is not considered to be taxable income in the hands of employees.

Two issues need to be addressed in this context:

Tax paid by the employer — “perquisite” or “salary” Whether tax paid by the employer is a perquisite or salary is not expressly stated under the Act. One view is that the tax being an obligation of the employee and met by the employer is to be treated as a perquisite. The other view is that the tax paid by the employer is no different from the salary paid to the employee and that it is merely an allocation of salary towards taxes.

If tax paid is a perquisite — whether monetary or non-monetary ?

If the tax paid by the employer is considered to be a perquisite, the next issue to be addressed is whether it is a “monetary payment” or a “non-monetary perquisite” .
The phrase “monetary payment” and “non-monetary perquisites” has not been defined under the Act and different views are expressed as to their classification. This distinction is important as it has a direct impact on the taxability of the employee, in terms of single or multiple grossing up and hence, the overall cost for the employer .

Recent decision of the Special Bench of Delhi Tribunal

In a recent decision, the Special Bench of Delhi Income-Tax Appellate Tribunal has held that the tax paid by the employer on behalf of the employee would constitute a “perquisite” . Further , such tax payment to the government would not constitute monetary payment to the employee and therefore not subject to multiple grossing up.

Overall saving in the cost for the employer

As an illustration, if the employer agrees to pay Rs 100 net of tax salary to the employee in India and the tax rate is 34%. Then, if such a tax payment by the employer is considered to be a “non-monetary perquisite” then only Rs 34 shall be added to the taxable income of the employee. Whereas, if such tax payment by the employer is considered a “monetary payment” then Rs 34 will be subject to multiple grossing up and Rs 52 will be added in the taxable income of the employee, so that after paying a tax of 34% on Rs 152, the employee receives Rs 100 (approximately) net of tax salary.

More beneficial in case of employers not having taxable income

A down side of such relief is that the employer is not eligible to claim corporate tax deduction for such tax paid by it. This exemption, however, is important in case of employers enjoying tax holiday or those having no taxable income or losses in India, as their’s being no taxable income, no corporate tax deduction is claimed and hence, this relief is worth considering. The above ruling may be challenged by tax authorities at higher levels, however , till then this is a welcome ruling to claim relief and optimise overall employment costs by the employer.