Volume 2, Issue 15


22nd December, 2009


Tax Alert
New Perquisite Rules

The income tax department has finally notified the new rules laying down the valuation mechanism for perquisites (“perk rules”) given to employees by the employers. The new perk rules were long over due ever since the Finance Minister abolished the Fringe Benefit Tax (FBT) in the previous Budget. The new perk rules have replaced the old perk rules contained in Rule 3 of the Income tax Rules, 1962, (Rules) with retrospective effect from 1st April, 2009. The employer would now be required to recompute the taxes to be withheld from employees’ salaries for current year in light of the new perk rules and recover the same from the employees’ salaries and also pay the same to the Govt.
The new rules do not seek to tax many of the expenses that were subjected to FBT. In effect, the new Rule 3 is very similar to the old Rule 3 as it stood before it was amended in pursuance of the enactment of the sections dealing with FBT.
 

As stated above, the new perk rules were supposed to be introduced since FBT was abolished by the Finance Act, 2009. Since the FBT cast a very wide net and brought within its purview several expenses, there was considerable speculation as to how the new perk rules would deal with the various expenses that were subject to FBT. The question that most people were asking was whether the Finance Minister would try to tax the expenses (that were hitherto subject to FBT ) as perquisites in the hands of employees. Some of the important items of expense which were subject to FBT and in respect of which experts were divided on the question of taxability as a perquisite are travelling expenses, telephone expenses, club expenses etc. Fortunately, the new rules do not seek to tax many of the expenses that were subjected to FBT. In effect, the new Rule 3 is very similar to the old Rule 3 as it stood before it was amended in pursuance of the enactment of the sections dealing with FBT.

We have summarized the new perk rules below and also made a comparison vis a vis the taxation under the erstwhile FBT regime.
Sr No Item of Expense/Payment Taxation during FBT regime upto 31-3-2009 Taxation under new regime as per new Rules w.e.f. 1-4-2009 SKP’s observations/ remarks
1 Unfurnished Residential accommodation owned by the employer (other than the Govt.)

This was taxable as a perquisite in the hands of the employee at following rates:

  • 15% of salary in cities having population exceeding 25 lakhs as per 2001 census
  • 10% of salary in cities having population exceeding 10 lakhs but not exceeding 25 lakhs as per 2001 census
  • 7.5% of salary in other areas
    As reduced by the amount, if any, recovered from the employee.
 Continues to be taxable as a perquisite in the hands of the employee at the same rates. There is no change in the valuation of this perquisite as compared to the position prevailing up to 31-3-2009.
2 Unfurnished Residential accommodation taken on lease or rent by the employer (other than the Govt.) This was taxable as a perquisite in the hands of the employee at the actual amount of rent paid by the employer or 15% of the salary, whichever is lower, as reduced by the rent, if any borne by the employee. Continues to be taxable as a perquisite in the hands of the employee at the same rates. There is no change in the valuation of this perquisite as compared to the position prevailing upto 31-3-2009.
3 Furnished Residential accommodation owned by the employer (other than the Govt.) Taxable as perquisite in the hands of the employee at the value as determined in respect of unfurnished accommodation as increased by 10% of the cost of the furnishings.
If the furniture is hired by the employer, the perquisite value of the furnishing would be actual hire charges as reduced by the amount, if any recovered from employee.		 Continues to be taxable as a perquisite in the hands of the employee at the same rates. There is no change in the valuation of this perquisite as compared to the position prevailing upto 31-3-2009.
4 Hotel accommodation provided by the employer to an employee for not more than 15 days in the aggregate on his transfer from one place to another Not taxable as a perquisite in the hands of the employee. Continues to be not taxable as a perquisite in the hands of the employee. There is no change in the position as compared to the position prevailing upto 31-3-2009.
5 Hotel accommodation provided by the employer to an employee for a period exceeding 15 days in the aggregate on his transfer from one place to another. Taxable as perquisite in the hands of the employee @ 24% of the salary or the actual hotel charges paid, whichever is lower, as reduced by any amount recovered from the employee. Continues to be taxable as a perquisite in the hands of the employee at the same rates. There is no change in the valuation of this perquisite as compared to the position prevailing up to 31-3-2009. However, an issue could arise whether the perquisite value is to be taken in respect of number of days’ stay in a hotel exceeding 15 days or for all the days. In our opinion, one can reasonably adopt the view that the perquisite value should be taken only in respect of number of days exceeding 15 days. Thus, for the first 15 days of stay in a hotel, there should not be any perquisite value.
6 Motor car owned or hired by the employer or is owned by the employee and running and maintenance expenses are borne by the employer and the car is used only for business purposes. The employer paid FBT on the expenses incurred. Not a taxable perquisite provided that certain specified documents are maintained by the employer. This was the position prevailing before FBT was brought onto the statute. Therefore, the original position has now been reinstated.
7 Where the motor car is owned or hired by the employer and is used exclusively for the private or personal purposes of the employee or any member of his household and the expenses are met/reimbursed by the employer The employer paid FBT on the expenses incurred. Taxable as perquisite in the hands of the employee @ actual amount of expenditure incurred by the employer on the running and maintenance of motor car, driver’s salary, depreciation on motor car(@ 10% of cost) less any amount recovered from the employee. This was the position prevailing before FBT was brought onto the statute. Therefore, the original position has now been reinstated.
8 Where the motor car is owned or hired by the employer and is used partly for business purposes and partly for private or personal purposes and the expenses are met/reimbursed by the employer The employer paid FBT on the expenses incurred. Taxable as perquisite in the hands of the employee @ Rs.1,800 per month in case of cars whose engines have upto 1.6 litres of cubic capacity and Rs.2,400 in case of other cars. If chauffeur is also provided by employer then, an additional amount of Rs. 900 per month is added to the value of perquisite. This was the position prevailing before FBT was brought onto the statute. Therefore, the original position has now been reinstated except for the fact that the monthly amounts now taxable are higher than the amounts taxable earlier.
9 Motor car owned or hired by the employer and used by employee partly for business purposes and partly for private or personal purposes and the expenses for personal use are met by the employee The employer paid FBT on the expenses incurred Taxable as perquisite in the hands of the employee @ Rs. 600 per month in case of cars whose engines have upto 1.6 litres of cubic capacity and Rs. 900 in case of other cars. If chauffeur is also provided by employer then, an additional amount of Rs. 900 per month is added to the value of perquisite irrespective of the size of the car. This was the position prevailing before FBT was brought onto the statute. Therefore, the original position has now been reinstated except for the fact that the monthly amounts now taxable are higher than the amounts taxable earlier.
10 Motor car owned by the employee and used partly for business purposes and partly for private or personal purposes and the running and maintenance expenses are met by the employer The employer paid FBT on the expenses incurred. Taxable as perquisite in the hands of the employee. The difference between the amount of expenses incurred and the limit given in Item No. 8 above will be considered as the perquisite value. However, if it can be proved that a higher portion of the expenditure is attributable for official purposes, the taxable perquisite will be reduced to that extent, subject to certain specified documents submitted by the employee and the same are maintained by the employer and a certificate is issued by the employer. This is a very harsh provision and therefore, it will be very unattractive for an employer to reimburse motor car expenses to an employee owning a motor car as the perquisite value taxable in the hands of the employee would be very high.
11 Automotive conveyance other than motor car owned by the employee and used partly for business purposes and partly for private or personal purposes and the running and maintenance expenses are met by or reimbursed by the employer There was an ambiguity about this item under the FBT regime. Some employers were not paying FBT on it. At the same time, in the absence of necessary rules, it was also not being considered as a perquisite in the hands of the employees. Taxable as perquisite in the hands of the employee. The difference between the amount of expenses incurred and Rs. 900 per month will be considered as the perquisite value. However, if it can be proved that a higher portion of the expenditure is attributable for official purposes, the taxable perquisite will be reduced to that extent provided prescribed records of the same are kept.  
12 Salaries of personal attendants, including a sweeper, gardener and a watchman, whether paid/reimbursed or given as an allowance by the employer to the employee. Taxable as perquisite in the hands of the employee @ the actual cost to the employer as reduced by the amount, if any, recovered from the employee. Continues to be taxable as a perquisite in the hands of the employee at the same rates. There is no change in the position as compared to the position prevailing upto 31-3-2009.
13 Utilities services like gas electricity or water, whether paid/reimbursed or given as an allowance by the employer to the employee. Taxable as perquisite in the hands of the employee @ the actual cost incurred by/cost of manufacture to the employer as reduced by the amount, if any, recovered from the employee. Continues to be taxable as a perquisite in the hands of the employee at the same rates. There is no change in the position as compared to the position prevailing upto 31-3-2009.
14 Provision of free or concessional educational facilities for any member of the employee’s household Taxable as perquisite in the hands of the employee @ the actual cost incurred by/cost of manufacture to the employer as reduced by the amount, if any, recovered from the employee. The value of benefit shall be determined as amount of expenditure incurred by the employer as reduced by the amount recovered from the employee. There is no change in the position as compared to the position prevailing upto 31-3-2009.
15 Provision of interest free or concessional loans to the employee in excess of Rs. 20,000 in the aggregate. Taxable as perquisite as per specified limit. Continues to be taxable as a perquisite in the hands of the employee at the same rates. There is no change in the position as compared to the position prevailing upto 31-3-2009. Perquisite in respect of small loans up to Rs. 20,000 in the aggregate continues to be exempt.
16 The expenditure on travelling and touring The employer paid FBT on the such expenses incurred whether on official purposes or for personal purposes. If personal expenses of the employee are borne by the employer then the same would be considered as a taxable perk in the hands of the employee. The value of benefit shall be determined as amount of expenditure incurred by the employer as reduced by the amount recovered from the employee. If the expenditure is incurred on official purposes, then the same would not be considered as a perk.  
17 Free food and non alcoholic beverages provided by the employer The employer paid FBT on such expenses unless the expenses were in respect of food and beverages provided by the employer to the employees in office or factory. Expenses in respect of food and beverages provided by the employer to the employees in office or factory during office hours will not be taxed as perquisites in the hands of the employees. Other expenses will be taxed as perquisites at cost as reduced by the amount, if any, recovered from the employee. This was the position prevailing before FBT was brought onto the statute. Therefore, the original position has now been reinstated.
18 Meal coupons which are not transferable and which are usable only at eating joints or outlets These were neither taxable as perquisites in the hands of the employee nor as fringe benefits in the hands of the employer. These will continue to be exempt in the hands of the employee if value of the coupons does not exceed Rs 50 per meal. This was the position prevailing before FBT was brought onto the statute. Therefore, the original position has now been reinstated. It is
possible to take a view that if the coupon value exceeds Rs. 50, the entire amount may be considered as a perquisite based on the literal interpretation of the rule. However, CBDT’s annual circular dealing with TDS on salary seems to suggest that only the amount in excess of Rs. 50 would be considered as perquisites. Our view is in favour of this interpretation.
19 Electronic Meal Cards which are not transferable and which are usable only at eating joints or outlets and which fulfill certain other specified conditions These were neither taxable as perquisites in the hands of the employee nor as fringe benefits in the hands of the employer. This is missing in the new Rules. It appears that the Govt. may be considering discontinuance of the electronic meal card system since, in any case, hardly any employer was using the same.
20 Gifts, whether given on ceremonial occasions or otherwise The employer paid FBT on the expenses incurred on providing gifts of any value. This will now be taxed as a perquisite in the hands of the employee and the value of any gift/ voucher aggregate of which is more than Rs 5,000 in the year, shall be considered to be the value of the perk. This was the position prevailing before FBT was brought onto the statute. Therefore, the original position has now been reinstated.
21 Credit Card expenses The employer paid FBT on the expenses incurred under respective heads as applicable, whether on official purposes or for personal purposes. This will now be taxed as a perquisite in the hands of the employee and the expenditure incurred by the employer as reduced by the amount, if any, recovered from the employee shall be the value of the perk. If the expenditure is incurred wholly and exclusively for official purposes and prescribed records of the same are kept, then the same will not be considered as a perk. This was the position prevailing before FBT was brought onto the statute. Therefore, the original position has now been reinstated.
22 Use by an employee of any movable asset belonging to the employer or hired by the employer Taxable as perquisite in the hands of the employee @ 10% of the cost of such asset or the amount of rent or charge paid by the employer, as the case may be, as reduced by the amount, if any, recovered from the employee. Continues to be taxable as a perquisite in the hands of the employee at the same rates. There is no change in the position as compared to the position prevailing upto 31-3-2009.
23 Transfer to an employee of any movable asset belonging to the employer Taxable as perquisite in the hands of the employee @ specified rates of the cost of such asset as reduced by the amount, if any, recovered from the employee. In the case of computers and electronic items, the normal wear and tear would be calculated at the rate of 50% and in the case of motor cars at the rate of 20% on reducing balance method. In respect of other assets, the perquisite will be valued at the rate of 10% of actual (original) cost. Continues to be taxable as a perquisite in the hands of the employee at the same rates. There is no change in the position as compared to the position prevailing upto 31-3-2009.
24 Club membership fees The employer paid FBT on the expenses incurred on club membership for the employees. If expenses are incurred wholly and exclusively for official purposes and for which the employer maintains certain specified documents/ details, there will be no perquisite taxable in the hands of the employee. In other cases, the amount of expenditure incurred by the employer (other than on initial fee for the membership in case of corporate membership) as reduced by the amount, if any, recovered from the employee. This was the position prevailing before FBT was brought onto the statute. Therefore, the original position has now been reinstated.
25 Employee Stock Option Plan (ESOP) / Sweat equity At the time of exercising the options, the employer paid FBT on the differential between the fair market value and the amount, if any recovered from the employee. This will now be taxed as a perquisite in the hands of the employee and the difference between the fair market value and the amount, if any recovered from the employee will be considered as the value of the perk. In case of unlisted shares, the valuation has to be done by a Category I Merchant Banker.
26 Contribution to Super Annuation Fund The employer paid FBT on contribution in excess of Rs. 100,000 per annum per employee. Amount contributed in excess of Rs. 100,000 per annum per employee would be taxed as perquisite in the hands of such employee. This amendment was made in the Section 17 itself through the Budget and is not on account of the new Rules.
27 Expenditure like conference charges, employee welfare expenditure, expenditure on festival celebrations The employer paid FBT on the expenses incurred under the respective heads of FBT. In absence of any specific valuation mechanism, it appears that these are not taxable in the hands of the employees as perquisites.  
28 Perquisites other than those stated above (other than telephone expenses incurred by the employer on behalf of the employee) The value of benefit was determined as amount of expenditure actually incurred by the employer, as reduced by the amount recovered from the employee. Continues to be taxable as a perquisite in the hands of the employee at the same rates. There is no change in the valuation of this perquisite as compared to the position prevailing upto 31-3-2009.
 

Conclusion:

FBT has been abolished w.e.f. 1-4-2009 and the concept of taxing the various benefits in the hands of the employee has also been reinstated w.e.f. 1-4-2009. However, the rules to enable this provision have been notified only now in December, 2009. This implies that every employer will have to rework the taxable salary for its employees for the months for which salary has already been paid (April to November) and consequent increase, if any, in the tax to be deducted at source will have to be recovered and paid immediately to avoid interest payments. Therefore, employers would be well advised to inform their employees immediately about this and educate them on the possibility of an increase in tax deduction from the December salary and consequent lower net take home pay for this month.