Treatment of Tax paid by employer on Non-Monetary Perquisites

Perquisite has a known normal meaning, namely, a personal advantage; something that benefits a man by going “into his own pocket”. The perquisites are taxable under the head salary in the Income Tax Act. As per Section 17(2)(iv), perquisite includes ‘any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee’.

The perquisite may be in cash (by way of allowance) or in kind or in money or money’s worth, and also amenities which are not convertible into money. Thus, the Perquisite can be either monetary or non-monetary and they will always form a part of the income under the head salary.

Exemption of Tax on Non-Monetary Perquisites

The income-tax law provides option to the employer to pay tax on the non-monetary perquisites. However, by virtue of section 10(10CC), tax paid by employer (on behalf of employee) on non-monetary perquisites will be exempt from tax in the hands of employees. Section 10(10CC) of the Income Tax Act’1961 is reproduced hereinbelow:

In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included:

in the case of an employee, being an individual deriving income in the nature of a perquisite, not provided for by way of monetary payment, within the meaning of clause (2) of Section 17, the tax on such income actually paid by his employer, at the option of the employer, on behalf of such employee, notwithstanding anything contained in section 200 of the Companies Act, 1956 (1 of 1956).

An employer and employee can enter into an agreement with the conditions that the tax to be paid on the salary will be borne by the employer. This kind of agreements are nowadays being entered between the inbound expatriate employees and the employer. When tax is borne by the employer on behalf of the employee, it is considered a perquisite as defined in Section 17(2 (iv). It is in the nature of an obligation and hence, non-monetary.

Therefore, as per Section 10(10CC), tax paid on such non-monetary perquisites by the employer will be exempt from tax in the hands of the employee.

Disallowance in the hands of Employer

The tax on Non-monetary perquisites paid by the employer is not a deductible business expenditure in the hands of the employer by virtue of Section 40(a)(v).

Section 40(a)(v) of the Income Tax Act’1961 is reproduced hereinbelow:

Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of
business or profession”

Section 40(a)(v): any tax actually paid by an employer referred to in clause (10CC) of section 10.

Therefore, if any employer, at his option, paid tax on the value of non-monetary perquisite provided by him to his employee, such tax is not allowed to be deducted in computing business income of such employer.

Conclusion:

Therefore, we can draw the following conclusions:

1. Tax paid by the employer on behalf of the employee is a perquisite under Section 17(2)(iv) i.e. a non-monetary perquisite.
2. Non-monetary perquisite forms part of the salary as per Section 17(1)(iv).
3. Such non-monetary perquisite will be taxable in the hands of the employee as income under the head salaries and it will be an allowable business expenditure in the hands of the employer.
4. Any taxes paid on such non-monetary perquisites will be exempt in the hands of the employee as per Section 10(10CC).
5. Any taxes paid on such non-monetary perquisites will be disallowed and hence a non-deductible expenditure in the hands of the employer as per Section 40(a)(v).
6. Total tax paid by the employer on behalf of the employee will constitute TDS and credit shall be available to the employee from his taxes.

(This article is authored by CA Aarushi Jain)