2016

Let us take a look at the tax rules governing accommodation provided by the employer – both when the accommodation is owned by the employer and when accommodation is rented by the employer for the benefit of the employee. The term employer in this post refers to non-government employers. Please see the “Definitions” section in this post for the meaning of terms such as accommodation, furnishings, and salary, used in this post.

Rule 3 of the Income Tax Rules, which pertains to valuation of perquisites, provides guidelines on how to tax accommodation provided to employees.

Factors that determine taxability of accommodation provided to employees

According to Rule 3, the following factors determine the perquisite value of the accommodation.

1. Accommodation ownership – owned by the employer or rented by the employer.
2. Whether the accommodation is furnished.
3. Accommodation location – as per the population of the city/town in which the accommodation is located.

The perquisite values (the salary amount to be added to the taxable income) for employer-provided accommodation under different circumstances are as follows.

I. Employer owns the accommodation and the accommodation is unfurnished

i) The accommodation is located in a city with population of over 25 lakh (as per 2001 census).

The perquisite value shall be calculated as 15% of the employee salary as reduced by the rent, if any, actually paid by the employee.

ii) The accommodation is located in a city with population exceeding 10 lakh but not exceeding 25 lakh (as per 2001 census).

The perquisite value shall be calculated as 10% of the employee salary as reduced by the rent, if any, actually paid by the employee.

iii) The accommodation is located in a city with population less than or equal to 10 lakh (as per 2001 census).

The perquisite value shall be calculated as 7.5% of the employee salary as reduced by the rent, if any, actually paid by the employee.

II. Employer owns the accommodation and the accommodation is furnished

i) The accommodation is located in a city with population of over 25 lakh (as per 2001 census).

The perquisite value shall be calculated as 15% of the employee salary as reduced by the rent, if any, actually paid by the employee plus the annual value of the furnishings provided.

ii) The accommodation is located in a city with population exceeding 10 lakh but not exceeding 25 lakh (as per 2001 census).

The perquisite value shall be calculated as 10% of the employee salary as reduced by the rent, if any, actually paid by the employee plus the annual value of the furnishings provided.

iii) The accommodation is located in a city with population less than or equal to 10 lakh (as per 2001 census).

The perquisite value shall be calculated as 7.5% of the employee salary as reduced by the rent, if any, actually paid by the employee plus the annual value of the furnishings provided.

III. Employer rents/leases the accommodation and the accommodation is unfurnished

The perquisite value shall be the actual amount of lease rental paid or payable by the employer or 15% of salary, whichever is lower, as reduced by the rent, if any, actually paid by the employee.

IV. Employer rents/leases the accommodation and the accommodation is furnished

The perquisite value shall be the actual amount of lease rental paid or payable by the employer or 15% of salary, whichever is lower, as reduced by the rent, if any, actually paid by the employee plus the annual value of furnishings provided by the employer.

V. Accommodation provided in a hotel

In case an employee is provided accommodation in a hotel on account of transfer, the accommodation shall be tax-free for a period of 15 days (in total for the year). In any other case, the perquisite value shall be calculated as 24% of salary paid or payable for the year or the actual charges paid or payable to the hotel, whichever is lower, for the period during which such accommodation is provided minus the rent, if any, actually paid or payable by the employee.

VI. More than one accommodation, in case of transfer

When an employee is transferred from one location to another and the employer allows the employee to retain the accommodation in the previous location for the sake of employee convenience, the perquisite value shall be calculated for accommodations provided in both locations and the lower value of the two shall be taken as the perquisite value until a period of 90 days.

Beyond 90 days, the value of perquisite shall be charged for both accommodations (in the previous and the current locations).

The value of perquisite shall be calculated for the accommodations on the basis of the location of the accommodation, whether the accommodation is employer-owned or rented, and whether the accommodation is furnished.

VII. Temporary accommodation at project site

When an accommodation is provided to an employee at a project site (including locations such as a mining site, an on-shore oil exploration site, a dam site, a power generation site or an off-shore site), such an accommodation shall be tax-free, subject to the following condition.

1. The accommodation should be of temporary nature with a plinth area not exceeding 800 square feet and located not less than eight kilometres away from the local limits of any municipality or a cantonment board or
2. The accommodation should be located in a remote area.

Definitions

1. The term accommodation refers to a house, flat, farm house or part thereof, hotel, motel, service apartment, guest house, caravan, mobile home, ship or other floating structure.

2. The term salary refers to the gross salary of the employee after excluding components such as the employer’s contribution to Provident Fund and tax-free allowances. Please check Rule 3 of the Income Tax Rules for the exact definition of the term salary for the purpose of perquisite calculation.

3. Annual value of furnishings

The term furnishings refers to furniture and household appliances (including television sets, radio sets, refrigerators, other household appliances, air-conditioning plant or equipment or other similar appliances or gadgets).

If the furnishings are bought by the employer.
The annual value shall be calculated as 10% of the cost of furnishings.

If the furnishings are hired by the employer from a third party.
The annual value shall be the actual hire charges payable to the third party as reduced by any charges paid or payable for the same by the employee.

4. The term hotel refers to licensed accommodation in the nature of motel, service apartment or guest house.

5. The term remote area means an area that is located at least 40 kilometres away from a town having a population not exceeding 20,000 based on latest published all-India census.

Security deposit/rental advance paid by the employer

Is there is any tax implication with regard to the employer paying the security deposit/rental advance when the employer provides a rented accommodation to an employee? Should there be any perquisite calculation on the deposit/advance provided?

Rule 3 of the Income Tax Rules is silent on the issue of security deposit/rental advance paid by the employer. However, there are case laws in which the tax and judicial authorities have ruled that the security deposit/rental advance shall not be taxable.

ITA No. 6591/Mum/2014 (Assessment Year: 2010-11)
An investment advisory firm provided accommodation to one of its employees and as part of the same paid Rs 20 lakh as a deposit to the house owner. At the time of assessment, the assessing officer was of the view that the Rs 20 lakh deposit should be construed as a benefit, akin to an interest-free loan, in the hands of the employee. Further, the assessing officer applied a notional interest of 12% on the deposit and concluded that Rs 2.4 lakh (20% of Rs 20 lakh) should be added to the taxable income of the employee as perquisite. The case was taken up by the appellate tribunal and the tribunal ruled in favour of the assessee dismissing the Income Tax Department’s contention that the security deposit should be looked at as a loan. The tribunal based its verdict on an earlier case in which the High Court of Bombay adjudicated on Income Tax Appeal No.3516 of 2010 (COMMISSIONER OF INCOME TAX-26 Vs SHANKAR KRISHNAN).

The first paragraph of the Bombay High Court judgement takes the question head on.

Where an employer takes residential premises on rent by giving security deposit
for the benefit of employees, whether the notional interest on such security deposit
is liable to be included in the perquisite value of the accommodation given to the
assessee employee is the question raised in this appeal?

Paragraph 9 of the judgement provides the answer to the above question in no uncertain terms.

Thus, on a plain reading of Rule 3, it is seen that the perquisite value of the
residential accommodation provided by the employer is to be computed on actual
amount of lease rental paid or payable by the employer and not on notional basis.
Therefore, in our opinion, the contention of the revenue that the notional interest on
the deposits paid by the employer to the landlord has to be taken into consideration
while computing the perquisite value of the residential accommodation cannot be
accepted in view of the express words used in Rule 3 of the Income Tax Rules, 1962
as amended w.e.f. 1.4.01.

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Employers seek information on and proof of investments/expenditure from employees who wish to avail tax benefits each year. The benefits include those on allowances such as House Rent Allowance and Leave Travel Allowance, and those on deductions such as interest payment on housing loan (Section 24) and payments towards life insurance premium etc. under Section 80C, and other sections. As of now (May 2016), there is no format as prescribed by the Income Tax Department with regard to how information on investments/expenditure should be collected. So far, organizations have been using their own formats for the purpose of collecting information from employees in this regard.

The Income Tax Department, by way of a notification dated 29-Apr-2016, has prescribed a format called Form No. 12BB for collection of investment/expenditure information from employees. This comes into effect on 01-June-2016.

According to Rule 26C of the Income Tax Rules:

The assessee shall furnish to the person responsible for making payment under sub-section (1) of section 192, the evidence or the particulars of the claims referred to in sub-rule (2), in Form No.12BB for the purpose of estimating his income or computing the tax deduction at source.

Information to be submitted in Form No. 12BB

Form No. 12BB should contain:

1. Name, address, and PAN of the employee.
2. Financial year to which the form pertains.
3. For each of the tax benefit sought, the following information:
   • Nature of the claim (House Rent Allowance, Leave Travel Assistance, Housing Loan Interest, Benefit under Section 80C etc.)
   • Amount in Rs (HRA paid, LTA paid, Housing Loan Interest payable/paid, Investment under Section 80C. etc.)
   • Evidence/particulars (Landlord details for HRA, Lender details for housing loan, details for other benefits claimed)

Employees should sign Form No. 12BB with the declaration that the information provided is complete and correct, and submit the same to the employer along with the supporting documents.

You can take a look at the format of Form No. 12BB here.

Additional information to be provided in Form No. 24Q

A. Report landlord PAN to the Income Tax Department

Currently, employees who wish to avail HRA exemption are required to submit the PAN of their landlord to the employer if the rent payment exceeds Rs 1 lakh in a year. Until now, employers were not required to submit information on landlord PAN to the Income Tax Department. From FY 2016-17 onwards, employers will have to report the PAN of the landlord in Annexure II of Form No. 24Q. In the entry numbered 357 in Form No. 24Q Annexure II, the following should be provided.

In case of House Rent Allowance claim-Name and Permanent Account Number of the landlord if aggregate payment during the previous year exceeds rupees one lakh

B. Report PAN of the housing loan lender to the Income Tax Department

If an employee wishes to seek interest deduction under Section 24 (on housing loan), the PAN of the loan provider, if available, should be reported to the Income Tax Department from now on. In the entry numbered 358 in Form No. 24Q Annexure II, the following should be provided.

In case of deduction of interest under the head “Income from House property” – Name and Permanent Account Number of the lender (if available)

Here are the PAN of some of the banks/financial institutions for your benefit.

Bank / Financial Institution	Permanent Account Number (PAN)
Allahabad Bank	AACCA8464F
Axis Bank Limited	AAACU2414K
Bank of Baroda	AAACB1534F
Bank of India	AAACB0472C
Bank of Maharashtra	AACCB0774B
Canara Bank	AAACC6106G
Canfin Homes Limited	AAACC7241A
Central Bank of India	AAACC2498P
City Union Bank Limited	AAACC1287E
Corporation Bank	AAACC7245E
DCB Bank Limited	AAACD1461F
Deutsche Bank	AAACD1390F
Dewan Housing Finance Corporation Limited	AAACD1977A
Dhanlaxmi Bank Limited	AABCT0019J
GIC Housing Finance Limited	AAACG2755R
GRUH Finance Limited	AAACG7010K
HDFC Bank Limited	AAACH2702H
Housing Development Finance Corporation Limited	AAACH0997E
ICICI Bank Limited	AAACI1195H
IDBI Bank Limited	AAACI1603C or AABCI8842G
Indian Bank	AAACI1607G
Indian Overseas Bank	AAACI1223J
Indusind Bank Limited	AAACI1314G
Kotak Mahindra Bank Limited	AAACK4409J
LIC Housing Finance Limited	AAACL1799C
Oriental Bank of Commerce	AAACO0191M
PNB Housing Finance Limited	AAACP3682N
Punjab & Sind Bank	AAACP1206G
Punjab National Bank	AAACP0165G
REPCO Home Finance Limited	AACCR0209F
State Bank of Bikaner and Jaipur	AADCS4750R
State Bank of Hyderabad	AADCS4009H
State Bank of India	AAACS8577K
State Bank of Mysore	AACCS0155P
State Bank of Patiala	AACCS0143D
Syndicate Bank	AACCS4699E
The Hongkong & Shanghai Banking Corporation Limited	AAACT2786P
The South Indian Bank Limited	AABCT0022F
UCO Bank	AAACU3561B
Union Bank of India	AAACU0564G
United Bank of India	AAACU5624P
Vastu Housing Finance Corporation Limited	AABCV9934C
Vijaya Bank	AAACV4791J
YES Bank Limited	AAACY2068D

Parting thoughts

1. According to the income tax rules, employees can submit a “No PAN” declaration from their landlord, if the landlord does not have PAN. The current format of Form No. 12BB does not refer to the No PAN declaration. The Income Tax Department would do well to clarify this.
2. In Annexure II of Form No. 24Q, we present one row of information for each employee. In case of an employee presenting more than one landlord/housing loan lender PAN due to the fact that the employee has paid rent to more than one landlord or taken housing loan from more than one lender, we are not sure how to enter the same in Form No. 24Q. We are also not sure if an entry should be made in Form No. 24Q in case of No PAN declaration from the landlord. We await the new format of Form No. 24Q to be notified by the Income Tax Department for clarity on this.
3. We find many payroll managers being undisciplined about collecting investment/expenditure proof from employees while finalizing tax calculations each year. Now that Form No. 12BB has been notified by the Income Tax Department, payroll managers would do well to ensure that they collect Form No. 12BB from employees at the time of final settlement processing for exiting employees and before the end of the year for active employees. In the event of a query from the Income Tax Department, employers may well have to submit Form No. 12BB for scrutiny.

Please check with your payroll software or service provider regarding Form No. 12BB after 01-June-2016.  Of course, if you are a customer of Hinote, we will make it available for you on our payroll portal – sorry, couldn’t resist that :D.

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Currently (as of May 2016), the deadlines for Form No. 24Q filing are as follows:

Quarter	Deadline
First quarter, ending 30th of June	Immediately following 15th of July
Second quarter, ending 30th of September	Immediately following 15th of October
Third quarter, ending 31st December	Immediately following 15th of January
Fourth quarter, ending 31st of March	Immediately following 15th of May

The Income Tax Department, by way of a notification dated 29-Apr-2016, has changed the deadline for Form No. 24Q filing each quarter.

Revised Form No. 24Q filing deadline

With effect from 01-June-2016, the deadlines for Form No. 24Q filing are as follows.

Quarter	Deadline
First quarter, ending 30th of June	Immediately following 31st of July
Second quarter, ending 30th of September	Immediately following 31st of October
Third quarter, ending 31st December	Immediately following 31st of January
Fourth quarter, ending 31st of March	Immediately following 31st of May

As you may have observed, organizations will have an additional 15 days for filing Form No. 24Q each quarter from 01-June-2016 onwards. Given that the last date for TDS remittance is the 7th, we at Hinote receive TDS challan information from many of our clients only after the 7th, and consequently burn the midnight oil to file Form No. 24Q by the 15th after completing all the checks regarding TDS data. The additional 15 day period comes as a relief to us and payroll compliance managers.

Deadline for Form No. 16 issuance

For the last quarter, the Form No. 24Q filing deadline has been extended to 31st of May. Rule 31 of the Income Tax Rules states that Form No. 16 should be issued “by 31st day of May of the financial year immediately following the financial year in which the income was paid and tax deducted.” This means that the deadline for Form No. 16 issuance too is 31st of May. Given that it takes a few days for the TRACES system to generate Part A of Form No. 16 once Form No. 24Q is filed, it is currently impossible to issue Form No. 16 by 31st of May if Form No. 24Q is filed on 31st May or even a day or two ahead of 31st of May.

Maybe the Income Tax Department should consider moving the Form No. 16 issuance deadline by a week or 15 days after 31st of May.

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State Bank of India (SBI) has published the reference lending rates for the purpose of loan perquisite calculation for the financial year 2016-17. You can find the SBI rates as on 01-Apr-2016 here.

SBI provides reference rates for different types of loan (home loan, car loan etc.) and employers should use the correct reference rate for the purpose of perquisite calculation. For example, if a car loan is provided to an employee, the reference rate for perquisite calculation shall be the SBI car loan rate.

Reference rate for personal loan provided to employees

SBI’s loan product called “Xpress Credit” corresponds to personal loans provided by employers to their employees. There are 3 categories of reference rates under this loan – Full Check-off, Partial Check-off, and No Check-off. The term Check-off, in this context, refers to the system whereby the employer regularly deducts a portion of an employee’s salary and makes payments towards loan repayment. If the loan repayment from an employee happens entirely by way of salary deduction (and not by the employee paying by cheque/cash outside of salary deduction), the Full Check-off rates should be considered for perquisite calculation.

For 2016-17, SBI has published a range of rates for the 3 categories (Full, Partial, and No Check-off). It is not clear how employers should interpret the range provided. For example, the reference rate range for the “Full Check-off” category is as follows:

Full Check-off: 330 bps – 380 bps above Base Rate i.e., 12.60 % p.a. – 13.10% p.a.

If an employer provides a personal loan at 0% interest rate and the loan deduction happens entirely by way of deduction from salary, should the employer consider 12.60% or 13.10% as the reference rate? It would be useful if SBI or the Income Tax Department provides a clarification on how employers should interpret the range of reference loan rates published by SBI.

In addition to offering Xpress Credit, SBI offers a number of other personal loan products such as SBI Saral – the interest rates for these products are different from those of Xpress Credit as of 01-Apr-2016. It may be noted that SBI has chosen Xpress Credit alone as the reference loan product for perquisite calculation in the personal loan segment.

You can read about how to calculate perquisite value on loan provided to employees in this blog post.

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Rule 2BB of the Income Tax Rules specifies the allowances paid to employees which are not taxable. One of the allowances which is exempt from tax is what is commonly called Uniform Allowance.

Rule 2BB exempts from income tax:

any allowance granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit.

Recently, a payroll manager known to us wished to introduce a head of pay called Attire Allowance in his organization. A certain sum of money was to be provided to employees under the head for the purpose of buying clothes for office wear. The entire amount paid under the head was to be tax exempt as long as the employees provided proof of expenditure by way of receipts for purchase of clothes. The organization did not enforce uniform clothing for its employees. The payroll manager was of the view that the amount paid under Attire Allowance shall be fully non-taxable. His argument was that the term uniform stated in Rule 2BB can be liberally interpreted as any clothing which is used for office wear, and hence Attire Allowance can be tax exempt.

We are not in agreement with the above view.

Rule 2BB refers to “uniform.” According to the Oxford English Dictionary, the meaning of the word uniform is as follows.

The distinctive clothing worn by members of the same organization or body or by children attending certain schools.

The term distinctive clothing in the above denotes that unless the clothing reflects similar design, colour, etc. it cannot be referred to as uniform. Employees can be said to be wearing uniform only when their outfits are identical and as per the design standard prescribed by the organization. Of course, there can be differences in uniform among certain classes of employees on the basis of, say, seniority or nature of work, within the same organization.

Unless an organization has an explicit policy related to uniform to be worn by employees, any amount paid for the purpose of buying clothes, even if for office wear, shall be fully taxable.

Why should the word uniform be interpreted strictly and not be understood as any formal attire worn at workplace?

Legislative Intent

Rule 2BB presents the allowances for the purposes of clause (14) of section 10 of the Income Tax Act. Section 10, as you may know, specifies the income which are not to be included in Total Income for taxation. Section 10(14) refers to

any such special allowance or benefit, not being in the nature of a perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, as may be prescribed, to the extent to which such expenses are actually incurred for that purpose.

According to Section 10(14), the allowance should be granted to meet expenses incurred wholly, necessarily and exclusively for the performance of official duties, for it to be tax exempt. While expenses on uniform can be deemed to be wholly for official purpose, expenses on other clothing, even if formal wear, cannot be said to have been incurred wholly for official purposes. Hence, it is important to interpret the word uniform in Rule 2BB in a strict manner.

Case Laws

The income tax authorities have, on more than one occasion, held that allowances for clothing shall be fully taxable unless the organization has a defined policy for employee uniform.

1. ITA No. 155, 159, 287 & 332 Ahd 2012

The Income Tax Department’s below argument was accepted by the adjudicating authority.

"Appellant's contention that the normal dress worn by its 
employees in office is "uniform" cannot be accepted. 
 
If appellant's interpretation of 'uniform' were to 
be accepted, in every office, any dress worn by the employees'
would qualify as 'uniform'.

There is no doubt that there was no 'uniform' prescribed in 
ONGC during the period under consideration and this fact was
well within the knowledge of appellant.
 
Conclusion drawn by the ACIT(TDS) that additional salary in the
garb of 'uniform allowance' was being paid is therefore, on 
sound footing. Since the payment in question was not towards
purchase or maintenance of "uniform', it cannot be covered under 
Rule 2BB(l)(f) read with section 10(14)(i)."

2. ITA Nos. 674 to 676, 856 and 857 Ahd 2011

The adjudicating authority rejected that the head of pay called Office Wear Allowance can be tax exempt in the absence of uniform clothing policy.

"At the time of hearing before us, the ld. Counsel for the assessee
could not establish how the wear-allowance paid to the employees was 
exempt u/s 10(14). During the course of argument before us, he fairly 
admitted that there was no dress code for the employees. Thus, the 
employees were free to wear any dress.

When there was no dress code and the employees were free to wear any 
dress, how the wear-allowance can be said to be granted to meet the 
expenses wholly, necessarily and exclusively in the performance of 
duties of an office."

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In the previous post, we had a look at taxability of fuel expense reimbursement to employees for motor car provided by the employer. What about employee-owned car?

Employee owns the car and the employer reimburses fuel expense to employee
The monthly perquisite value is as follows.

i) The car is used wholly and exclusively for official duties.
When the car is used only for official purpose, the monthly perquisite value for the purpose of taxation is Rs 0. This is irrespective of fuel and other car running and maintenance expense amount reimbursed to an employee. For example, if a company reimburses Rs 1 lakh per month for the purpose of fuel expenses to an employee, the entire Rs 1 lakh shall be tax free as long as the car is used solely for official purposes.

Please note that the following conditions should be met for the reimbursement to be tax free.

–	the employer should maintain complete details of journey undertaken for official purpose including date of journey, destination, mileage, and the amount of expenditure incurred.
–	the employer should issue a certificate to the effect that the expenditure was incurred wholly and exclusively for the performance of official duties.

From the above, it should be clear that the fuel expense reimbursement shall be fully non-taxable only if the car is wholly used for official purposes and the organization maintains details of journeys undertaken by the employee.

ii) The car is used partly for official purposes and partly for personal purposes of the employee.
When the car is used for both official and personal purposes, the monthly perquisite value for the purpose of taxation is as follows.

Running expenses	Car engine cubic capacity does not exceed 1.6 litres	Car engine cubic capacity exceeds 1.6 litres
The expenses for maintenance and running are fully met or reimbursed by the employer.	Actual amount incurred by the employer minus Rs 1,800 (plus Rs 900, if chauffeur is also provided to run the motor car), per month.	Actual amount incurred by the employer minus Rs 2,400 (plus Rs 900, if chauffeur is also provided to run the motor car), per month.

Can an employee claim a benefit of more than Rs 1,800/Rs 2,400 per month specified in the above table?

If the car is used for both official and personal purposes, there is no need for the employer to maintain details of journeys made. But please note that the benefit shall only be to the extent of Rs 1,800 (plus Rs 900 with chauffeur) if the engine capacity is less than or equal to 1.6 litres and Rs 2,400 (plus Rs 900 with chauffeur) if the engine capacity is greater than 1.6 litres. If an employer spends more than Rs 1,800/Rs 2,400 per month on official journeys, the benefit can be increased to the actual amount spent as long as the employer maintains complete details of journey undertaken for official purpose and issues a certificate to the effect.

Note:

1. Please note that Rule 3 of the Income Tax Rules specifies perquisite amounts for a calendar month and hence it is important that employers record the months for which the perquisite value is applicable, in payroll. Also, employers should receive receipts towards vehicle maintenance expenses in total from employees in case employees seek a reimbursement. For example, if the fuel expense reimbursement of Rs 15,000 is for the month of April, the employer should receive fuel receipts for the entire Rs 15,000 for the month of April.
2. The employer should ascertain that an employee owns a car (by way of checking documents such as the RC book) prior to providing the reimbursement.

Illustration 1
An employee owns a car (with 1.5 litres engine capacity) and his employer reimburses Rs 20,000 per month towards fuel and other car maintenance expenses incurred for both official and personal journeys. The company does not reimburse driver salary and does not maintain records for the official journeys undertaken. What is the monthly perquisite value?

Ans: Since the car’s engine capacity is less than 1.6 litres and the car is used for both official and personal purposes, the perquisite value per month is Rs 20,000 (actual amount incurred towards car running expenses) minus Rs 1,800 = Rs 18,200 per month.

What about taxability of fuel expense reimbursement for employee-owned vehicle which is not a car?

Employee owns a vehicle (say, a motorcycle) other than car and the employer reimburses the fuel expense amount to employee
Rule 3 specifies perquisite valuation for “any other automotive conveyance” (automotive vehicles other than car) as follows. One case presume that the term “other automotive conveyance” refers to vehicles such as motorcycle and autorickshaw. The monthly perquisite value is as follows.

i) The vehicle is used wholly and exclusively for official duties.
When the vehicle is used only for official purpose, the monthly perquisite value for the purpose of taxation is Rs 0. This is irrespective of fuel and other vehicle running and maintenance expense amount reimbursed to an employee. For example, if a company reimburses Rs 1 lakh per month for the purpose of fuel expenses to an employee, the entire Rs 1 lakh shall be tax free as long as the vehicle is used solely for official purposes.

Please note that the following conditions should be met for the reimbursement to be tax free.

–	the employer should maintain complete details of journey undertaken for official purpose including date of journey, destination, mileage, and the amount of expenditure incurred.
–	the employer should issue a certificate to the effect that the expenditure was incurred wholly and exclusively for the performance of official duties.

From the above, it should be clear that the fuel expense reimbursement shall be fully non-taxable only if the vehicle is wholly used for official purposes and the organization maintains details of journeys undertaken by the employee.

ii) The vehicle is used partly for official purposes and partly for personal purposes of the employee.
When the vehicle is used for both official and personal purposes, the monthly perquisite value for the purpose of taxation is as follows.

Running expenses	Perquisite value per month (Rs)
The expenses for maintenance and running are fully met or reimbursed by the employer.	Actual amount incurred by the employer minus Rs 900

Can an employee claim a benefit of more than Rs 900 per month specified in the above table?

If the vehicle is used for both official and personal purposes, there is no need for the employer to maintain details of journeys made. But please note that the tax benefit shall only be to the extent of Rs 900 per month. If an employer spends more than Rs 900 per month on official journeys, the tax benefit can be increased to the actual amount spent as long as the employer maintains complete details of journey undertaken for official purpose and issues a certificate to the effect.

Note:

1. Please note that Rule 3 of the Income Tax Rules specifies perquisite amounts for a calendar month and hence it is important that employers record the months for which the perquisite value is applicable, in payroll. Also, employers should receive receipts towards vehicle maintenance expenses in total from employees in case employees seek a reimbursement. For example, if the fuel expense reimbursement of Rs 15,000 is for the month of April, the employer should receive fuel receipts for the entire Rs 15,000 for the month of April.
2. The employer should ascertain that an employee owns the vehicle (by way of checking documents such as the RC book) prior to providing the reimbursement.

Illustration 2
An employee owns a motorcycle and his employer reimburses Rs 5,000 in the month of April towards fuel and other maintenance expenses incurred for both official and personal journeys. The employer does not maintain records for the official journeys undertaken. What is the perquisite value for April?

Ans: Since the motorcycle is used for both official and personal purposes, the perquisite value for April is Rs 5,000 (actual amount incurred towards motorcycle running expenses) minus Rs 900 = Rs 4,100.

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Organizations use “Fuel Expense Reimbursement” as a pay component for tax saving, particularly for members of middle and senior management. The typical payroll treatment for the head of pay is as follows:

1. Pay a certain sum of money as remuneration under the head each month.
2. Seek petrol/diesel purchase receipts from employees.
3. Provide full tax exemption to the extent receipts are submitted.
4. Tax the amount for which receipts are not submitted.

We find employees getting paid significant sums of money under the head and receiving 100% tax exemption to the extent fuel receipts are submitted.

Payroll managers would do well to note that there is no blanket 100% tax benefit on fuel expense reimbursement. In fact, there is no direct reference to petrol/fuel expense reimbursement in the income tax law. Rule 3 of the Income Tax Rules, which pertains to valuation of perquisites, provides guidelines on how to tax amounts paid to employees for the purpose of meeting “running and maintenance charges” of motor car and other vehicles. The term running and maintenance charges includes expenses incurred on petrol/diesel.

Factors that determine taxability of fuel expense reimbursement for car

According to Rule 3, the following factors determine the extent to which fuel expense reimbursement should be taxed.

1. Car ownership – Provided by the employer or owned by the employee
2. Car usage:
   • For official purposes alone
   • For personal purposes alone
   • Partly for official and partly for personal purposes
3. Cubic capacity of the car engine: Lesser than/equal to or more than 1.6 litres

The monthly perquisite values (the salary amount to be added to the taxable income) for fuel expense reimbursement under different circumstances are as follows.

Employer provides the car and reimburses the fuel expense amount to employee
The car could be owned or hired by the employer and provided to the employee. The car may be used by the employee or any member of the employee’s household. The monthly perquisite value is as follows.

i) The car is used wholly and exclusively for official duties.
When the car is used only for official purpose, the perquisite value for the purpose of taxation is Rs 0. This is irrespective of fuel and other car running and maintenance expense amount reimbursed to an employee. For example, if a company reimburses Rs 1 lakh per month for the purpose of fuel expenses to an employee, the entire Rs 1 lakh shall be tax free as long as the car is used solely for official purposes.

Please note that the following conditions should be met for the reimbursement to be tax free.

–	the employer should maintain complete details of journey undertaken for official purpose including date of journey, destination, mileage, and the amount of expenditure incurred.
–	the employer should issue a certificate to the effect that the expenditure was incurred wholly and exclusively for the performance of official duties.

From the above, it should be clear that the fuel expense reimbursement shall be fully non-taxable only if the car is wholly used for official purposes and the organization maintains details of journeys undertaken by the employee.

ii) The car is used exclusively for personal purposes of the employee or any member of his household.
When the car is used only for personal purpose, the total perquisite value for the purpose of taxation is the following.

Actual amount of expenditure incurred by the employer on the running and maintenance of motor car including driver salary, if any.
plus
Normal wear and tear of the car. The annual normal wear and tear value is calculated as 10% of the actual cost of the car. If the car expense reimbursement is for a period which is less than a year, the wear and tear value should be correspondingly adjusted for the period.
minus
Any amount charged from the employee for use of the car.

In summary, if a car provided by an employer is used entirely for personal purposes of an employee, the total running and maintenance expense incurred/reimbursed by the employer is taxable in the hands of employee.

iii) The car is used partly for official purposes and partly for personal purposes of the employee.
When the car is used for both official and personal purposes, the perquisite value for the purpose of taxation is as follows.

Running expenses	Car engine cubic capacity does not exceed 1.6 litres	Car engine cubic capacity exceeds 1.6 litres
a) The expenses for maintenance and running are fully met or reimbursed by the employer.	Rs 1,800 per month (plus Rs 900, if chauffeur is also provided to run the motor car)	Rs 2,400 per month (plus Rs 900, if chauffeur is also provided to run the motor car)
b) The expenses for running and maintenance for private or personal use are met by the employee. The employer reimburses expenses pertaining to official use.	Rs 600 per month (plus Rs 900, if chauffeur is also provided to run the motor car)	Rs 900 per month (plus Rs 900, if chauffeur is also provided to run the motor car)

Note:

1. If the car is used for both official and personal purposes, there is no need for the employer to maintain details of journeys made. The perquisite value is irrespective of the actual amount reimbursed.
2. Rule 3 does not explicitly state what the perquisite value is if an employee uses an employer provided car for partly official and partly personal purposes and foots the entire bill for car running expenses.

Illustration
A company provides a car (with 1.5 litres engine capacity) to an employee and reimburses Rs 20,000 per month towards fuel and other car maintenance expenses incurred for both official and personal journeys. The company does not reimburse driver salary. What is the monthly perquisite value?

Ans: Since the car’s engine capacity is less than Rs 1.6 litres and the car is used for both official and personal purposes, the perquisite value per month is Rs 1,800.

We find many organizations providing “Vehicle Maintenance Reimbursement” for employer-provided car as a head of pay to employees, given that the maximum perquisite value is only Rs 3,300 per month if the usage is declared as partly official and partly personal. While this is a legitimate tax saving idea, employers should ensure that the underlying transaction is genuine and the documentation is valid and complete. Let us explain this.

Some organizations create car lease agreements with employees’ friends and relatives (without a car actually being provided to the employee) in order to create an impression that there is a car lease transaction. In many cases organizations do not pay any car lease rent to the car owner. The idea behind such lease agreements is just to create a picture that cars are hired by the employer for the use of employees. The employees are then provided with vehicle expense reimbursements and the corresponding perquisite values are added to the taxable income of employees. From a compliance point of view, such employers argue that since they have created lease agreements, they are in compliance with Rule 3 of the Income Tax Rules.

Please note that compliance with income tax rules requires that any documentation created is for a genuine transaction. If a company creates agreements with individuals for the purpose of creating car lease documentation, the Income Tax Department could well check the following in order to establish the genuineness of the transaction.

1. Does the organization pay car lease rentals to the owner of the car as per the agreement?
2. Does the organization comply with the service tax rules pertaining to car lease transactions for employee use. In other words, if an organization needs to pay service tax for car lease charges under the reverse charge mechanism, does it pay the required service tax?
3. If the car lease agreement is with individuals, does the agreement specify the details of the car? Does the organization maintain copies of documents such as the RC book in order to ensure that the car actually exists?

Payroll managers should ensure that car leases are genuine, and lease agreements do not exist just for the sake of seeking tax benefits.

What if an employer provides more than one car to an employee?

When an employer provides more than one motor car for the use of an employee or the members of the employee’s household, the perquisite value shall be calculated as follows.

1. With regard to the car which is wholly and exclusively used for official purposes, the perquisite value shall be zero.
2. The perquisite value for the second car shall be calculated as though the car is used partly for official and partly for personal purposes and the employee has borne the running and maintenance expenses (described earlier in this article).
3. The perquisite value for third, fourth, etc. cars shall be calculated as though the cars are used fully for personal purposes (described earlier in this article).

The period of perquisite value

Please note that Rule 3 of the Income Tax Rules specifies perquisite amounts for a calendar month and hence it is important that employers record the months for which fuel reimbursements are made and the corresponding perquisite value is applicable, in payroll. Also, employers should receive receipts towards vehicle maintenance expenses in total from employees. For example, if the fuel expense reimbursement of Rs 15,000 is for the month of April, the employer should receive fuel receipts for the entire Rs 15,000 for the month of April.

In the next post, we will take a look at the basis of perquisite value calculation for fuel expense reimbursement for car owned by the employee.

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A new tax year is about to begin and it is time to get ready to implement the budget proposals related to tax on salary. As you are aware, the Union Budget for FY 2016-17 was tabled in the Parliament by the Finance Minister of India on 29-Feb-2016. Here are the key proposals related to computation of tax on salary which payroll managers need to consider for FY 2016-17.

1. The tax slabs remain the same.

The tax rates for salaried employees below 60 years of age for FY 2016-17 shall be the same as those for FY 2015-16.

Total Income for the Year in Rs	Tax Rate in %
Up to 2,50,000	Nil
2,50,001 to 5,00,000	10
5,00,001 to 10,00,000	20
Above 10,00,000	30

The tax rates for salaried employees aged 60 years and above but below 80 years for FY 2016-17 are as follows.

Total Income for the Year in Rs	Tax Rate in %
Up to 3,00,000	Nil
3,00,001 to 5,00,000	10
5,00,001 to 10,00,000	20
Above 10,00,000	30

Note:
1. The Education cess including Higher Education cess stays at 3%.

2. Tax relief under Section 87A

The tax credit under Section 87A has been increased to Rs 5,000 for FY 2016-17 (from Rs 2,000 for FY 2015-16) if the total income does not exceed Rs 5 lakh for the year. This means that there will be no tax payable up to a taxable salary of Rs 3 lakh per annum.

3. Increase in surcharge

In case the total taxable income goes beyond Rs 1 crore in the year, a surcharge of 15% (subject to marginal relief) is to be deducted – the surcharge was 12% in FY 2015-16.

4. Employer contribution to superannuation fund

Any employer contribution made to a superannuation fund in excess of Rs 1.5 lakh shall be taxable – the limit was Rs 1 lakh in FY 2015-16.

5. Construction period in respect of housing loan interest benefit

As per Section 24, the acquisition or construction of house property should now be completed within five years (it was  3 years in FY 2015-16) from the end of the financial year in which capital was borrowed – for an employee to get the interest benefit of Rs 2 lakh (for a self-occupied house). Given the delays in construction of apartments/house properties these days, the increase in time limit from 3 to 5 years will help a number of employees who wish to avail benefit under Section 24.

6. Benefit to first home buyers

Section 80EE – The budget provides for a benefit of Rs 50,000 on interest payment towards housing loan taken by first home buyers subject to the following conditions.

a. The benefit shall be available from FY 2016-17 and continued with in subsequent years until the limit of Rs 50,000 is attained. Please note that this benefit is in addition to the interest benefit provided by Section 24 of the Income Tax Act.

b. The housing loan should be sanctioned by a financial institution during the period beginning on the 1st day of April, 2016 and ending on the 31st day of March, 2017.

c. The amount of loan sanctioned for acquisition of the residential house property should not exceed Rs 35 lakh.

d. The value of residential house property should not exceed Rs 50 lakh.

e. The employee should not own any residential house property on the date of sanction of loan.

f. The employee should have taken the housing loan from a financial institution (a banking company to which the Banking Regulation Act, 1949 applies, or any bank or banking institution referred to in section 51 of that Income Tax Act or a housing finance company).

The Finance Bill states that the assessee should not own any residential house property on the date of sanction of loan. Does this mean that an assessee could have owned and sold a house property prior to the date of sanction of loan and still be eligible for this benefit? The Finance Bill does not explicitly state that the employee should be first time home buyer to be eligible for this benefit. However, the Finance Minister, in his budget speech, clearly mentions that this benefit is available to “first – home buyers.” Hence, we presume that an employee should not be owning or have owned any house property at the time of or prior to the date of sanction of the loan in order to be eligible for Section 80EE benefit.

7. Taxability of employer’s contribution to Provident Fund (PF)

Currently, any employer PF contribution in excess of 12% of salary (Basic and Dearness Allowance) is taxable as per The Fourth Schedule of the Income Tax Act. The Finance Bill has introduced a limit of Rs 1.5 lakh in addition to the 12% limit. Consequently, as per the revised Rule 6(a) of the Fourth Schedule of the Income Tax Act, the exemption on PF contribution made by the employer shall now be restricted to 12% of the salary of the employee or Rs 1.5 lakh, whichever is lower.

The limit of Rs 1.50 lakh has been dropped in the amendment to the Finance Bill 2016, as passed by the Parliament. Consequently, any Employer PF contribution which is more than 12% of salary shall be taxable in the hands of an employee without the Rs 1.5 lakh limit.

8. Deduction in respect of rent paid – Section 80GG

Employees, who do not receive House Rent Allowance from their employer, but pay house rent, are eligible to seek deduction in respect of rent paid, under Section 80GG. The maximum deduction which was Rs 2,000 per month in FY 2015-16 has been increased to Rs 5,000 per month for FY 2016-17. Please note that the conditions pertaining to Section 80GG should be met by an employee for availing the benefit.

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If you thought that regulatory authorities are all about coercing us into submission by instilling the fear of punishment, you may have to think again. The Employee Provident Fund Organization, commonly referred to as the Provident Fund Department, has announced an incentive scheme in order to motivate employers to complete Universal Account Number (UAN) related formalities.

The PF Department introduced the UAN as the unique identifier for each PF member over a year ago. According to the PF Department:

The UAN will act as an umbrella for the multiple Member Ids allotted to an individual by different establishments. The idea is to link multiple Member Identification Numbers (Member Id) allotted to a single member under single Universal Account Number. This will help the member to view details of all the Member Identification Numbers (Member Id) linked to it. If a member is already allotted Universal Account Number (UAN) then he / she is required to provide the same on joining new establishment to enable the employer to in-turn mark the new allotted Member Identification Number (Member Id) to the already allotted Universal Identification Number (UAN).

The UAN is critical for the efficiency of processes (access to updated PF account information, triggering of transfer request when an employee moves from one employer to another, etc.) related to PF management. As part of UAN formalities, there are tasks that need to be completed by both the employer and the employee. These include completion of “Know Your Customer” (KYC) and UAN activation. According to information released by the PF Department, while over 6 crore UANs have been allotted, the basic formalities (seeding of UANs with PAN/Aadhaar and mapping of employee’s bank account to the UAN) are yet (as of Feb 2016) to be completed for over 1.5 crore UANs. Also, given that UANs are not required to be stated in the monthly PF-ECR at the time of PF remittance, many employers do not complete UAN formalities as part of onboarding of new joinees.

In order to motivate employers to complete UAN formalities, the PF Department, in a recent circular, has announced a couple of incentive schemes by which employers can receive a refund of a portion of the administrative charges paid to the PF Department.

Incentive Refund Scheme A

An establishment can claim refund of 10% of the administrative charges by meeting the following conditions each month:-

(i) Providing member’s details as required under Form No. 11 (New) (80% or above)

(ii) Seeding of all the three i.e AADHAAR (at least 80% of (i) above, bank account (100% of (i) above) and PAN (wherever applicable).

(iii) UAN activation (100% of (i) above)

Incentive Refund Scheme B

An establishment can claim refund of 5% of the administrative charges by meeting the following conditions each month:-

(a) Providing member’s details as required under Form No. 11 (New) (60% or above).

(b) Seeding of all the three i.e AADHAAR (70% of (a) above, bank account (80% of (a) above) and PAN (wherever applicable).

(c) UAN activation (60% of (a) above).

Note:

1. The incentive, by way of refund, shall be payable at the end of every quarter starting from quarter ending March, 2016, as per the procedure prescribed by the Central Provident Fund Commissioner. The circular does not detail the method for claiming the refund. We presume the PF Department will be notifying the method by way of another communication.
2. The establishments, in order to be eligible for Incentive Refund Scheme A or B, should have fulfilled the criteria in each month of a quarter.
3. The incentive schemes shall be in operation for one year with effect from 1-Jan-2016 to 31-Dec-2016 (i.e. for the quarters beginning Jan-2016, Apr-2016, Jul-2016, and Oct-2016).

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According to Section 15 of the Income Tax Act, the following income shall be chargeable to income tax under the head “Salaries”—

(a)  any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;

(b)  any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;

(c)  any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.

Section 15 states that salary should be taxed whenever it is due or paid, whichever is earlier. For example, let us assume that an organization pays salary to its employees on the first day of each month for the month which ended the previous day. One could then state that the salary for a month falls due on the last day of the month while the date of payment is the first day of the next month. As per Section 15, the salary should be taxed on the basis of the tax rates prevailing on the last day of the month, which is the date of salary accrual.

Now let us take a look at Section 192 which states the rules for tax deducted at source (TDS).

192. (1) Any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.

Section 192 states that TDS on salary shall be deductible at the time of salary payment and the TDS amount shall be “computed on the basis of the rates in force for the financial year in which the payment is made.”

There is no lack of clarity on the letter of Section 192 when read on a standalone basis. However, given that organizations deduct the entire tax on salary by way of TDS unlike deduction of a fixed rate of say, 10% as tax on payments pertaining to professional services, Section 192 should be in absolute consonance with Section 15.

Where is the conflict?

Many organizations pay salary in the first week of each month for the month ended the previous 30th or 31st. In such organizations, as per the letter of Section 192, the March salary paid in April will have to be taxed (for the purpose of TDS) as per the rates for the next financial year (starting April). This is because Section 192 states that the tax calculation should be as per the rates in force for the year in which the payment is made.

When the salary which accrues on 31-Mar is paid on 01-Apr, shouldn’t the TDS on salary not be as per the rates prevailing on 31-Mar? If yes, then how can TDS calculation be as per Section 192 which states that TDS should be calculated as per the rates prevailing on 01-Apr?

The way Section 192 is worded puts it in conflict with Section 15 of the Income Tax Act which states that taxability on salary arises whenever salary is due/accrued or paid, whichever is earlier.

Organizations typically tax salaries that accrue in March as per tax rates for that financial year ending March in accordance with Section 15, whether the salary is paid in April or later. If one goes by Section 192, as it is currently worded, such organizations can be viewed as deducting tax in contravention to Section 192.

Issues with Form 24Q filing for the last quarter

Let us assume that an organization pays March salary on 01-Apr and remits the TDS to the Income Tax Department on 07-May. How can the organization submit the salary and TDS details to the tax authorities?

In Form 24Q of the fourth quarter, the organization cannot state 01-Apr as the “Date of Payment/Credit” in Annexure I since 01-Apr lies outside the period of the last quarter. The organization can state the accrual date of 31-Mar as the “Date of Payment/Credit” and 07-May as the “Date of TDS Deposit”  in Annexure I. However, what if the Income Tax Department raises a demand for delayed TDS remittance with the argument that since the “Date of Payment/Credit” is 31-Mar, the TDS amount should have been remitted on or before 30-Apr instead of 07-May?

Also, the organization for obvious reasons, cannot show March salary in the first quarter Form 24Q of the next year.

Let us take another example, where salary accruing on 31-Mar is paid to employees on 01-May and consequently, TDS is remitted on 07-June. Given that 31-May is the last date for issue of Form 16, should the organization leave out March salary in the Form 16 or wait until 07-June, remit TDS and file Form 24Q for the fourth quarter and then make a delayed issue of Form 16?

It would help if the Income Tax Department illustrates these atypical situations and provides guidance for handling such situations.

The letter of Section 192, as it currently exits, fails the case of March salary paid in April.

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