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42.  Salaried Employee will have to Restructured his Salary After the FBT Regime

Complete change has now taken place in the sphere of taxation of salary income particularly after the provisions relating to Fringe Benefit Tax have been scrapped by the Finance (No.2) Act, 2009 which has recently been passed by the Parliament. It is a very well known fact now that on and from the financial year 2009-10 the provisions of Fringe Benefit Tax have been scrapped in toto. In view of the non-applicability of the provisions of the Fringe Benefit Tax now the salaried employee will have to restructure his salary package in consultation with the employer. In the non FBT regime now, it is time now to carefully plan the salary and perquisite of the employees taking into account the provisions relating to taxation of salary and perquisites.

Whereas in most cases under the FBT Regime, if certain perquisites. were payable by the employer to the employee the employer was required to make payment of Fringe Benefit Tax of approximately 7% in respect of benefits extended in the form of Fringe Benefit. Now that the FBT has been completely removed hence in most cases the value of the perquisite will have to be added to the salary income of the employee and the employee will therefore be called upon to make payment of income tax on such benefits and perquisites, which are added to his income. However, a deep study of the provisions of the Income Tax Act, 1961 as also the provisions contained in Income Tax Rules, 1962 would reveal that there are still innumerable options permissible to the salaried employee whereby tax planning of a salaried employee can be effected even when the Fringe Benefit Tax is not payable by the employer.

In the first instance the most important planning which should be taken into consideration while preparing a-designer salary package for an employee is that the employee should-be granted either a rent free accommodation or a lumpsum for house rent allowance. The provisions to this effect are the same as in the past and the tax liability will arise to the employee as it was arising in the past. There will be no change in taxation of perquisite in the form of rent free accommodatiow or house rent allowance even in the regime of no FBT. However, whenever the salary package is designed for an employee care should be taken either to give a lumpsum house rent allowance or to grant a rent free accommodation to the employee.

The second most important point which should now be considered while restructuring the salary package is to have a peep into the various tax free allowances which can be enjoyed by an employee. In the past in respect of some of these allowanëes the fringe benefit tax was applicable but now if we properly plan these allowances then we find that in most cases these allowances can be paid to the employees without affecting any tax liability on the employee. Before catching upon the important exempt allowances which are exempted for a salaried employee it is worthwhile to remember that under the provisions of the Income Tax Law and more particularly as per Section 10(14) of the Income Tax Act, the special allowances which are granted to a salaried employee for meeting the expenses wholly, necessarily and exclusively in the performance of the duties of an office are exempted from the purview of income tax payment by an employee. However, the said section as contained in the Income Tax Act, 1961 does not contain the list of these exempted allowances. The list of exempted allowances is, however, contained in Rule 2BB of the Income Tax Rules, 1962. Hence, at the time of restructuring of the salary package of an employee care should be taken to grant him maximum tax free allowances in terms of said Rule 2BB. In the first stage the simple allowance which can be granted to each and every employee relates to granting of a Transport Allowance which is exempted upto
` 800 per month. The Transport Allowance is granted for the purposes of commuting from residence to office and from office to residence. Any transport allowance in excess of ` 800 per month will be added to the salary of the employee. There are various special compensatory and other special allowances, which are also exempted as per Rule 2BB. An exhaustive list of these allowances is appearing in Rule 2BB but in practical effect these are applicable mainly for the army people. For other salaried employees at present Children Education Allowance of ` 100 per month per child upto a maximum of two children is also exempted. Likewise, if the child is in a hostel and hostel allowance is granted to the employee to meet the hostel expenditure on the child then the same is also exempted upto ` 300 per month per child subject to the maximum of two children. In addition to these petty’ allowances the said Rule 2BB also contains a specific provision whereby any allowance granted to meet the cost of travel or on transfer is also completely exempt from income tax. Similarly, the allowance granted on tour or for the purposes of journey in connection with the transfer of the employee to meet to ordinary daily charges which are incurred by an employee on account of absence from normal place of office duty are also exempted. In the similar manner any allowance which the employee receives on account of conveyance allowance for the purposes of performance of office duties is also exempt from the purview of income tax liability of the salaried employee in terms of the said Rule 2BB. However, whenever the conveyance allowance is granted to the employee care should be taken that no free conveyance should be provided by the employer. If the free conveyance is provided by the employer in that situation conveyance allowance will not be exempted.

Some of the other important allowances which can be received by a salaried employee without attracting income tax liability are the allowances in the form of a helper provided to an employee specially when helper is engaged for the purposes of performance of official duties. Similarly, if the employee receives academic, research and training pursuits allowance in that situation such allowance would also be exempted from income tax if spent in educational and research institutions.

The uniform allowance which is granted to an employee for performance of his duty is also fully exempted without any upper limit while calculating the salary of the employee. In respect of uniform allowance the amount should be used for the purchase or maintenance of the uniform for the purpose of wearing the same during the performance of official duty. Thus, the above-mentioned allowances should form a part of the management strategy for restructuring the salary package in tune with the changed scenario after the abolition of the Fringe Benefit Tax. Moreover the employee can also receive reimbursement in respect of magazine and books, etc. for official use.
Whenever various types of allowances are provided to the employee care should be taken to ensure that only those allowances are granted to the salaried employees which are mentioned in Rule 2BB because the same alone would be exempted. Hence, any allowance which is not mentioned in the said Rule 2BB if granted to an employee then the same would be fully subjected to income tax in the hands of the employee.

The employee should also receive reimbursement of medical expenses to the tune of ` 15,000 per annum because the same is not included in the salary income. LikeWise if any Mediclaim Policy is taken by the employer the value of that is also not to be added in the salary income. The employee should also receive leave travel assistance for travelling in any part of India two times in a block of four calendar years. Care should always be taken by the employee to ensure that he does not receive Medical allowance or Leave Travel Allowance because the amount received in the form of such allowance would be as income of the employee, hence the employee should receive only reimbursement and not allowances specially for medical expenses and the leave travel.

Whenever the salaried employee is provided with a car special care has to be taken in respect of taxing it as perquisite. Under the erstwhile provision of the Income-tax Law at the time of FBT regime even if the car was provided exclusively for personal use in that situation the entire expenses were subjected to FBT and they were not taxed in the hands of the employee. However, now the valuation of a perquisite in the form of a motor car will be governed by the provisions contained in Rule 3 of the Income Tax Rules, 1962.

If the car is used exclusively for the purposes of official duties in that event no perquisite will however be added but for this purpose complete details have to be maintained of the journey undertaken for official purposes including date of journey, destination, mileage and the expenditure. However, if the car is for official as well as personal use in that situation the perquisite value will be
` 1,800 per month if the cubic capacity of the car engine does not exceed 1.6 ltrs., if it exceeds 1.6 Itrs. in that event the perquisite value will be ` 2,400. If the driver is also provided to run the car for office as well as personal use, in that situation, the sum of ` 900 per month will be further added to the salary income. In case the driver is only for official use then there will be no perquisite value.

In general please do remember that any reimbursement of expenses for office use will not be a perquisite under the new concept. However, the actual expenses of sweeper, gardener, watchman as also expenses on gas, electricity, water charges, etc. would now become fully taxable in the hands of the employee. The free food provided to an employee in office will not be perquisite if provided during working hours at office or business premises but meal vouchers, etc. would be exempt upto
` 50 per meal only. Likewise, gift vouchers or gifts upto ` 5,000 per annum would be tax free and balance would be added to the salary income. Now, the shares received free from the employer will be taxed as perquisite and similarly the contribution to superannuation in excess of ` 1 lakh will also be a perquisite. Other fringe benefits which would be taxable as perquisite would be announced by the Government from time to time.

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