The government on 18 December notified the new rules for computing the value of perquisites received by an employee. As a precursor to the new rules, Budget 2009 had (in July) abolished the fringe benefit tax (FBT) levy on employers and made such benefits taxable in the hands of employees.
Introduced in 2007, FBT was a levy on employers in respect of benefits provided to their employees. However, the FBT levy was largely regarded as a regressive tax and the Budget move to abolish it came as a breather for the business community. With the FBT withdrawal, though, the burden to pay tax on benefits is now shifted back to employees, as was the case under the pre-FBT regime. The new rules provide the basis for computing the perquisite value in the hands of the individual employees.
Impact for FY10
The regime change is effective 1 April 2009. Though the new rules have been only recently notified, they would apply in computing value of perquisites provided during the entire fiscal year 2009-10. Several companies had not considered the perquisite value in computing the monthly deduction of tax (TDS, or tax deducted at source) for the current year. The perquisite value determination under the new rules would result in a reworking of the income base and the consequent TDS amount. The additional TDS, including the shortfall for the earlier months of the year, would have to be recouped out of the salary disbursals for the balance months of the year. This could translate into a significant impact on the take-home component for these months.
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The new rules are largely in line with the old rules for perquisite valuation in the pre-FBT era with certain changes for housing, car and Esop (employee stock option) perquisites. The specific changes in the valuation rules for these components as also a general impact on the change in regime for these and other salary components is discussed below.
Housing: For house rent allowance (HRA), the Income-tax Act provides specific exemption under section 10(13). This does not change.
Even under the FBT regime, rent-free or concessional accommodation was regarded as a perquisite and its value, as determined under Rule 3 of Income-tax Rules, was subject to tax in the hands of the employee. The perquisite value, generally speaking, was computed based on a specific percentage (15-20%) of the salary as reduced by the amount recovered from the employee.
The new rules provide a moderate reduction of 5-7.5% (of salary) in computing the perquisite value.
In cases where the accommodation is leased by the employer, the perquisite value will be the lower of actual rent paid by the employer or 15% (earlier 20%) of salary.
Car: Under the FBT regime, costs incurred by an employer towards providing a motor car and/or bearing expenses on running and maintenance were subject to FBT at an effective rate of 6.67% in the hands of the employer. However, the same would now be taxable as a perk in the hands of the employees.
Under the new rules, the perquisite value depends on whether the car is owned/hired by the employer or the employee. In either case, where the car is used wholly for official purposes, the perquisite value will be nil. Where car is owned/hired by the employer and provided to an employee for both official and personal purposes, the perquisite value is determined at Rs1,800-2,400 per month (plus Rs900 per month if a chauffeur provided), depending upon the car’s engine capacity.
Where the car is owned by the employee and the actual running and maintenance expenses are met by the employer, the perquisite value is the actual expenses less Rs1,800-Rs2,400 per month (plus Rs900 for chauffeur’s salary).
Esops: With the scrapping of FBT, Esops are now taxed in the hands of the employees. Under the new rules, the perquisite value would be computed having regard to the fair market value (FMV) of the shares/specified security allotted or transferred to the employee on the exercise date (or within six months) as reduced by the exercise price (if any, paid by the employee). Under the FBT regime, the FMV as on the vesting date was to be considered for computing the FBT levy. The FMV will be with reference to the stock exchange price in the case of listed shares/securities or as determined by a Category I merchant banker in the case of unlisted shares/securities.
Overall, the regime change is unlikely to impact the overall tax costs for Esops, except, of course, the fact that tax will be recovered from the employee instead of the employer.
Some other components: Generally speaking, the new rules specify that the value of other perquisites provided to an employee or any member of his household shall be determined having regard to the CTC, i.e., the actual expenses incurred by the employer (net of any recovery from the employee). These would, typically, cover salary components such as household aides (gardener, sweeper, etc.), household supplies (water, electricity, gas, etc.) free/concessional education facilities, club membership/regular fees, credit card fees, travel costs, etc. In respect of such components, the regime change could significantly raise the overall tax cost from 2-16% of the CTC under the FBT regime to nearly 34% (assuming the highest slab) as per the new rules.
Incidentally, there are a few exceptions that are not taxable, such as telephone/mobile expenses, medical loans, food/non-transferable meal vouchers, etc., up to Rs50 per meal and gifts below Rs5,000.
Certainly, the FBT levy abolishment was a reformist move. But, with the new regime shifting the tax levy on perks back to the employee and the new perquisite valuation rules significantly altering the tax impact on certain salary components, one is likely to see a rejig in the overall salary structure for 2010 to adjust for the shift in tax levy.
Ketan Dalal is executive director and Vishal Shah is associate director, PricewaterhouseCoopers. Your comments and feedback are welcome atgroundrules@livemint.