In addition to remitting Profession tax (PT), companies – conducting business transactions in Chennai – need to pay what is known as Company Tax to the Corporation of Chennai every six month. We find many companies being unaware that there is something called Company Tax to be paid. According to estimates published by the Corporation of Chennai, there are over 25,000 companies that do not remit Company Tax. A large number of companies do not pay Company Tax probably out of sheer ignorance.

Legal basis

The corporation of Chennai is empowered to levy Company Tax as per Section 110 of The Chennai City Municipal Corporation Act, 1919. Every company (Private Limited and otherwise) which operates within the city of Chennai in any half year for not less than 60 days in aggregate shall pay Company Tax every half year to the Corporation of Chennai. The Company Tax is liable to be paid twice (half yearly – Apr to Sep and Oct to Mar) in a financial year.

Company Tax slabs

Calculation of Company Tax is based on the paid up capital of a company. Currently (Mar 2014), the Company Tax is calculated as per the below slabs.

Paid up capital of the company	Company Tax for the half year in Rs
Less than Rs 1 lakh	100
Rs 1 lakh & more but less than Rs 2 lakh	200
Rs 2 lakh & more but less than Rs 3 lakh	300
Rs 3 lakh & more but less than Rs 5 lakh	400
Rs 5 lakh & more but less than Rs 10 lakh	500
Rs 10 lakh & more	1000

Please ensure that your company remits Company Tax to the Corporation of Chennai every 6 months.

It is time consuming and tiring to stand in long winding queues in Rippon Building for remitting PT and Company Tax. The Corporation has enabled online payment of Property Tax. Likewise the Corporation should consider creating a facility for online remittance of PT and Company Tax sooner than later.

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As per the tax rates applicable for A.Y. 2015-16, if the annual taxable salary goes above Rs 1 crore, a surcharge of 10% on Income Tax is to be added to the Income Tax calculated as per the tax slabs. Consequently, the total Income Tax calculation shall include the following.

Total Income Tax = A + B + C

Note: Surcharge is 0% if the annual salary is less than or equal to Rs 1 crore.

The law provides for what is commonly known as marginal relief if the incremental income tax (including surcharge) — when the salary goes above Rs 1 crore — is more than the incremental salary amount (over and above Rs 1 crore).

Why marginal relief?

Let us illustrate the rationale behind providing marginal relief by way of a simple example.

When the annual salary is Rs 1 crore, the Income Tax is calculated as follows.

Annual Taxable Salary	1,00,00,000
Income Tax – A	28,25,000
Surcharge – B	0
Total Education cess – C	84,750
Total Income Tax – A+B+C	29,09,750

If the annual salary increases by Rs 10 beyond Rs 1 crore, a surcharge of 10% is applicable. In the absence of marginal relief, the Income Tax will be calculated as follows.

Annual Taxable Salary	1,00,00,010
Income Tax – A	28,25,003
Surcharge at 10% of Income Tax without marginal relief – B	2,82,500
Total Education cess – C	93,225
Total Income Tax – A+B+C	32,00,728

As you can see from the above, while the salary increases by just Rs 10 (from Rs 1 crore to Rs 1 crore and ten) the Income Tax and Surcharge (excluding Education Cess) increases by Rs 2,82,503. The increase in Income Tax and Surcharge is disproportionate to the increase in salary.

Clearly, the employee is better off taking a pay cut of Rs 10 to bring the salary down to Rs 1 crore!

The Income Tax Department provides for marginal relief on Surcharge to ensure that the increase in Income Tax (including Surcharge) does not go beyond the increase in salary when the salary increases beyond Rs 1 crore. Marginal relief means that the additional Income Tax (including Surcharge) shall be restricted to the increase in salary beyond Rs 1 crore.  The Education Cess however will be calculated as 3% of Income Tax plus restricted Surcharge.

Calculation of marginal relief

Whenever the annual salary increases beyond Rs 1 crore, the calculation of Surcharge shall be as follows. Let us assume the salary is Rs 1,00,74,000 (Rupees One Crore and Seventy Four Thousand) for the purpose of illustration.

Step 1: Calculate the total of Income Tax and Surcharge (excluding Education Cess).

If the annual salary is Rs 1,00,74,000, the Income Tax and Surcharge shall be as follows.

Income Tax	28,47,200
Surcharge (@ 10% of Income Tax)	2,84,720
Income Tax plus Surcharge	31,31,920

Step 2: Check if the incremental salary (beyond Rs 1 crore) is more than the incremental tax (including Surcharge).

Incremental salary (more than Rs 1 crore) = Rs 1,00,74,000 – 1,00,00,000 = Rs 74,000

Incremental tax (including Surcharge) = Rs 31,31,920 (on Rs 1,00,74,000) – 28,25,000 (on Rs 1,00,00,000)= Rs 3,06,920.

In this case, the incremental tax (Rs 3,06,920) is greater than the incremental salary Rs 74,000. Hence, marginal relief is applicable. The total of incremental income tax including surcharge shall be restricted to Rs 74,000.

Step 3: Calculate the Surcharge after taking into account the marginal relief.

Annual salary = Rs 1,00,74,000

Income Tax: Rs 28,47,200 (excluding Surcharge)

When the salary is Rs 1 crore the Income Tax amount (excluding Surcharge) is Rs 28,25,000. The incremental Income Tax (excluding Surcharge) = Rs 28,47,200 – Rs 28,25,000 = Rs 22,200.

Since the incremental Income Tax + Surcharge should be Rs 74,000, and Rs 22,200 has been absorbed in the incremental Income Tax, the remaining amount of Rs 51,800 shall be the Surcharge.

Step 4: Calculate Education Cess on Income Tax and restricted Surcharge.

Annual Taxable Salary	1,00,74,000
Income Tax – A	28,47,200
Surcharge – B	51,800
Total Education cess – C	86,970
Total Income Tax – A+B+C	29,85,970

Try calculating the Surcharge for an annual taxable salary of Rs 2 crore and check if marginal relief is applicable.

No marginal relief on Education Cess – An anomaly?

It may be noted that marginal relief is available only on Income Tax and Surcharge and not on Education Cess. From the earlier example,

Annual Taxable Salary	1,00,74,000
Income Tax – A	28,47,200
Surcharge – B	51,800
Total Education cess – C	86,970
Total Income Tax – A+B+C	29,85,970

The incremental Income Tax and Surcharge is restricted to the incremental salary of Rs 74,000. However, when we consider the total of Income Tax, Surcharge, and Education Cess of Rs 29,85,970, the total incremental tax vis-a-vis that for the annual salary of Rs 1 crore is Rs 76,220 (Rs 29,85,970 – Rs 29,09,750).

Surely, the total incremental tax of Rs 76,220 is greater than the incremental salary of Rs 74,000. This is because the marginal relief is available only for Surcharge and not for Education Cess.

We wonder why the Income Tax Department left Education Cess out of the purview of marginal relief.

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The Indian Income Tax Act stipulates the conditions under which a salaried employee can claim tax rebate on interest payment on housing loan. Section 24 of the Income Tax Act states that no tax benefit is permissible on interest payment during the years in which construction of the house property is still to be completed. Interest paid during the construction period is eligible for deduction in 5 equal installments (across 5 years) from the year construction is completed.

What about tax rebate on account of principal repayment? When the property, for which a loan has been taken, is under construction, can an employee claim tax benefit under Section 80C for principal repayment?

Some payroll managers are of the view that Section 80C doesn’t prohibit tax benefit on account of principal repayment when the property is under construction. After all, there is no explicit reference to completion of construction or taking possession of the property in the text of Section 80C. Hence, is it not fine to claim tax benefit on principal repayment under Section 80C even when the house property is under construction?

Not quite. A close look at Section 80C suggests that tax rebate on principal repayment may not be admissible when the property is under construction.

The relevant clause under Section 80C(2)(xviii) is presented as follows.

(xviii)  for the purposes of purchase or construction of a residential house property the income from which is chargeable to tax under the head “Income from house property” (or which would, if it had not been used for the assessee’s own residence, have been chargeable to tax under that head), where such payments are made towards or by way of—

(a)  any instalment or part payment of the amount due under any self-financing or other scheme of any development authority, housing board or other authority engaged in the construction and sale of house property on ownership basis; or

(b)  any instalment or part payment of the amount due to any company or co-operative society of which the assessee is a shareholder or member towards the cost of the house property allotted to him; or

(c)  repayment of the amount borrowed by the assessee from—

(1)  the Central Government or any State Government, or

(2)  any bank, including a co-operative bank, or

(3)  the Life Insurance Corporation, or

(4)  the National Housing Bank, or

(5)  any public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes which is eligible for deduction under clause (viii) of sub-section (1) of section 36, or

(6)  any company in which the public are substantially interested or any co-operative society, where such company or co-operative society is engaged in the business of financing the construction of houses, or

(7)  the assessee’s employer where such employer is an authority or a board or a corporation or any other body established or constituted under a Central or State Act, or

(8)  the assessee’s employer where such employer is a public company or a public sector company or a university established by law or a college affiliated to such university or a local authority or a co-operative society; or

(d)  stamp duty, registration fee and other expenses for the purpose of transfer of such house property to the assessee,

but shall not include any payment towards or by way of—

(A)  the admission fee, cost of share and initial deposit which a shareholder of a company or a member of a co-operative society has to pay for becoming such shareholder or member; or

(B)  the cost of any addition or alteration to, or renovation or repair of, the house property which is carried out after the issue of the completion certificate in respect of the house property by the authority competent to issue such certificate or after the house property or any part thereof has either been occupied by the assessee or any other person on his behalf or been let out; or

(C)  any expenditure in respect of which deduction is allowable under the provisions of section 24;

Clause (xviii) stated above suggests that any payment (including principal repayment of housing loan) for the purpose of purchase or construction of a residential house property the income from which is chargeable to tax under the head “Income from house property” can be considered for tax benefit under Section 80C.

In other words, for consideration under Section 80C, the property should be capable of generating income (real or notional) which is chargeable under the head “Income from house property.” Section 22 and 23 of the Income Tax Act present the introduction to income from house property and determination of the annual value of a house property.

When a house property is under construction, there is no likelihood of income, and hence under Section 80C there is no provision for tax rebate on account of principal repayment. Only in the year in which the construction is completed can the principal repayment be considered for tax benefit.

What about stamp duty and registration fee?

The above rule is applicable to not only principal repayment but also stamp duty and registration charges. Such charges cannot be considered for tax benefit under Section 80C as long as the property is under construction.

Please note that stamp duty and registration charges can be considered for Section 80C benefit even in the absence of housing loan as long as the construction/possession of the house property is complete/taken.

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Incorrect employee Permanent Account Number (PAN) in Form 24Q leads to problems for both the organization and employees. Organizations spend significant time and incur costs in refiling Form 24Q for correcting mistakes made in earlier filings. We typically come across 3 types of incorrect PAN.

1. Structurally invalid PAN: The PAN of an employee does not conform to the PAN structure mandated by the Income Tax Department, i.e. the PAN does not have 10 digits, the fourth digit is not “P” etc. At the time of filing of Form 24Q, FVU files with structurally invalid PAN are rejected and organizations need to make corrections to the PAN before they can file Form 24Q.

2. Structurally valid but incorrect PAN: An employee record may contain the PAN of another person in Form 24Q. This leads to credit of TDS to an incorrect person in Form 26AS. Many employees do not check Form 26AS before filing their annual tax return and simply go by the Form 16 issued by their employer for filing their return. If the employee’s PAN is incorrectly entered in Form 24Q, the Income Tax Department – in response to the tax return filed by the employee – may raise a demand for tax payment from the employee. Consequently, the employee is put to hardship while filing the reply to the Income Tax Department’s demand notice. It is not easy for employees to go behind their organization to get Form 24Q refiled with the correct PAN. If the organization does not refile Form 24Q with the correct PAN of the employee, the Income Tax Department’s demand cannot be satisfactorily closed without the employee making the income tax payment as stated in the demand.

3. Structurally valid, but non-existent PAN: There are instances when a PAN is structurally correct but the PAN may not have been assigned to anyone by the Income Tax Department. Here again, employees may be put to hardship on account of not receiving the TDS credit in their Form 26AS.

Organizations would do well to verify the PAN of their employees prior to filing Form 24Q. The TRACES site now allows organizations to verify PAN of employees one by one. This is not very helpful in case an organization has even 100 employees whose PAN need to be verified. Checking the PAN of each employee one after another can be very arduous.

Currently, the Income Tax Department allows certain authorised entities to verify PAN (through screen, file upload or third-party software APIs) online. Among TDS deductors, only companies are included in this list. Also, there is a fee to be paid for this service. Maybe it is time the department considered allowing all organizations to avail this facility free of cost. After all, if the department can allow verification of a single PAN (through the TRACES site) at any point in time, why not allow verification of multiple PANs in one go? PAN verification prior to filing of Form 24Q can lead to significant time and cost savings to organizations by preventing incorrect PAN from getting into Form 24Q files.

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Section 192 (2B) of the Income Tax Act allows an employee to furnish particulars of income under any head other than “Salaries”  for the same financial year and of any tax deducted at source thereon. In other words, an employer can consider an employee’s other income and the tax deducted at source (TDS) on the other income while calculating TDS on salary.

Section 192 (2B) is presented as follows.

[(2B) Where an assessee who receives any income chargeable under the head “Salaries” has, in addition, any income chargeable under any other head of income (not being a loss under any such head other than the loss under the head “Income from house property”) for the same financial year, he may send to the person responsible for making the payment referred to in sub-section (1) the particulars of—

(a) such other income and of any tax deducted thereon under any other provision of this Chapter;

(b) the loss, if any, under the head “Income from house property”,

in such form and verified in such manner as may be prescribed, and thereupon the person responsible as aforesaid shall take—

(i)  such other income and tax, if any, deducted thereon; and

(ii) the loss, if any, under the head “Income from house property”,

also into account for the purposes of making the deduction under sub- section (1) :

Provided that this sub-section shall not in any case have the effect of reducing the tax deductible except where the loss under the head “Income from house property” has been taken into account, from income under the head “Salaries” below the amount that would be so deductible if the other income and the tax deducted thereon had not been taken into account.]

Conditions for considering Other Income

The following conditions have been imposed by Section 192 in this regard.

1. The employee should submit a declaration under Rule 26B with details of Other Income and TDS on Other Income, to the employer.

2. The employee cannot declare a loss under any “Other Income” other than “Income from House Property.”

3. The addition of TDS on Other Income should not reduce the tax deductible on salary.

The first two conditions are easy to understand. Let us explain the third condition with the help of an example.

An employee receives an annual taxable salary of Rs 250,000 after all deductions. As per the income tax rates prevailing for the financial year 2013-14, the total annual tax on salary, including Education Cess, is Rs 3,090. The employee has Other Income of Rs 200,000 and the TDS deducted on Other Income is Rs 40,000 (20% on Rs 200,000).

The total income including salary and Other Income is Rs 450,000 (Rs 250,000 plus Rs 200,000) for the year and the total tax on Rs 450,000 is Rs 23,690 for the year. Please note that the total tax including Education Cess (Rs 23,690) for the year is less than the TDS of Rs 40,000 deducted on Other Income. Just because the TDS on Other Income is higher than the total annual tax, the employer cannot ignore deducting tax on salary.

According to Section 192, the TDS on Other Income should not have the effect of reducing the tax deductible under the head “Salaries” except where the loss under the head “Income from house property” has been taken into account, and hence the employer will have to deduct Rs 3,090 as TDS on salary.

Entries in Form 24Q and Form 16

Payroll managers can consider TDS on Other Income for the sake of calculating tax on salary. However, from the point of view of issuing Form 16 and filing Form 24Q, TDS on Other Income poses a problem to the employer.

In both Form 16 and Annexure 2 in Form 24Q for the last quarter, the details of Other Income can be displayed, but there is no provision to display details of TDS on Other Income. As a result, in both Form 16 and Form 24Q (fourth quarter), it would look as though there is a shortfall in tax deducted by the employer while in reality it is not the case. Let us take a look at an example to examine this.

An employee receives an annual taxable salary of Rs 250,000 after all deductions in financial year 2013-14. The employee has Other Income of Rs 100,000 and the TDS deducted on Other Income is Rs 10,000 (10% on Rs 100,000).

The total income including salary and Other Income is Rs 3,50,000 (Rs 250,000 plus Rs 100,000) for the year and the total tax on Rs 3,50,000 is Rs 13,390 for the year.

If the employer considers TDS on Other Income and deducts tax on salary accurately, Part B in the Form 16 issued by the employer will have the following amounts.

11. Total Income (8 – 10)	Rs 3,50,000
12. Tax on Total Income	Rs 13,000
13. Add Surcharge	Rs 0
14. Add Education Cess	Rs 390
15. Tax Payable (12+13+14)	Rs 13,390
16. Relief under section 89 (attach details)	Rs 0
17. Tax payable (15-16)	Rs 13,390

 

While the total tax payable is shown as Rs 13,390 in Part B of Form 16, the total tax deducted and remitted (across the 4 quarters) shown in Part A of Form 16 (downloaded from the Traces site) shall be Rs 3,390. The difference of Rs 10,000 between the Tax Payable amount of Rs 13,390 shown in Part B and the total tax deducted/remitted amount of Rs 3,390 shown in Part A is of course on account of the TDS on Other Income (Rs 10,000). The Part A document downloaded from the Traces site contains only the TDS deducted/remitted by the employer and does not include the TDS on Other Income.

There is no provision in Form 16 and Annexure 2 of Form 24Q (fourth quarter) to present TDS on Other income. By taking a look at just Form 24Q (fourth quarter) – in its current format – the Income Tax Department will not be able to figure out whether the difference between the Tax Payable figure in Part B of Form 16 and the Tax deducted/remitted figure in Part A of Form 16 is as a result of a genuine under deduction of tax by the employer or due to TDS on Other Income. In case the Income Tax Department raises a query in this regard, the employer needs to explain that the difference is on account of the TDS figure on Other Income.

The Income Tax Department should consider modifying the format of Form 16 and Annexure 2 of Form 24Q (fourth quarter) to show TDS on Other Income separately. This will ensure that the Tax Payable amount (due to salary) in Part B of Form 16 is equal to Tax deducted/remitted amount in Part A of Form 16.

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Jan 2017 update: The ESI wage ceiling has been enhanced to Rs 21,000 with effect from 01-Jan-2017, please take a look at our blog post here.

Payroll managers are aware that the existing wage limit (as of Nov 2013) for coverage under the ESI Act is Rs 15,000 (Rupees Fifteen Thousand) per month. Also, that once the ESI contribution begins, the contribution should continue until the end of the contribution period (Apr to Sep or Oct to Mar) even if the salary (for the purpose of ESI calculation) increases beyond Rs 15,000 per month during the contribution period.

One of our customers asked us the following question in this regard.

In case the salary goes above Rs 15,000, say to Rs 17,000, during the contribution period, should we calculate ESI on the actual salary (Rs 17,000) or should the salary be restricted to Rs 15,000 for ESI calculation?

Many payroll managers mistakenly believe that salary, when it goes above Rs 15,000 during the contribution period, should be restricted to Rs 15,000 for the purpose of ESI calculation. The logic is that since salary for ESI coverage limit is Rs 15,000 per month, there is no need to calculate ESI on any amount above Rs 15,000. We find many payroll managers being incorrectly informed on this.

The ESI department has adequately clarified that during the contribution period ESI should be calculated on total ESI salary and the salary should not be restricted to Rs 15,000 in case the salary goes above Rs 15,000. In other words, if the total ESI salary is Rs 17,000, ESI deduction and contribution should be calculated on Rs 17,000 and not on Rs 15,000. Payroll managers should note that employees get additional benefits on the ESI amount calculated on salary above Rs 15,000.

In one of its publications, the ESI department has cleared the air on this issue.

An employee whose wages crosses the prescribed ceiling limit in any month at anytime after commencement of the contribution period, continue to be an employee till the end of that contribution period. Though there is a wage ceiling limit for coverage of an employee, there is no ceiling limit in the definition of wages for payment of contribution. Hence contribution is payable on the total wages without any ceiling limit.

Payroll managers would do well to follow the ESI department’s directive in this regard.

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In an earlier post we looked at the conditions governing tax exemption on leave travel allowance (LTA). In this post we will look at the calculation of the tax exemption amount. As mentioned in the earlier post, the exemption is available only on travel expenses (ticket fare etc.) incurred by the employee on leave travel. Expenses on local conveyance, boarding, lodging, sightseeing etc. cannot be considered.

Many people mistakenly believe that whatever is spent on leave travel towards ticket fare, taxi fare etc. can be considered in full for tax exemption. There are several conditions — as laid down by Section 10(5) of the Income Tax Act and Rule 2B of the Income Tax Rules — which govern calculation of the actual tax exemption. Let us see how one can calculate the tax exemption if an employee submits details of the travel expenses to the employer.

The two critical determinants of tax exemption on LTA are the mode of travel and the places visited by the employee.

Mode of travel determines extent of tax exemption

Whatever be the mode of transport (train, air, ship etc.) used by the employee, the extent of tax exemption is determined as per the following rules.

S. No	Journey performed by	Exemption Limit
1.	Air	Economy Air fare of the national carrier (Air India) by the shortest route to the place of destination.
2.	Any mode (bus, train, ship, taxi etc.) other than air to places which are connected by rail.	First Class Air conditioned rail fare by the shortest route to the place of destination.
3.	Any mode (bus, train, ship, taxi etc.) other than air to places which are not connected by rail.	a) Where public transport system exists, first class or deluxe class fare on such transport by the shortest route to the place of destination. b) Where no public transport system exists, first class A/C rail fare, for the distance of the journey by the shortest route, as if the journey has been performed by rail.

Table 1

[notification style=”error” font_size=”12px” closeable=”true”] The Income Tax Act and Rules refer to travel from one place (origin) to another (destination). While there is no explicit reference to the return journey in tax law, it may be assumed that the term “journey” for the purpose of determining tax exemption on LTA includes both “To” and “Fro” journeys. [/notification]

In case an employee travels to many places, calculation of tax exemption gets somewhat complex. We will see how to calculate tax exemption when an employee visits more than one place later. Let us first look at some illustrations when an employee travels from one place to another and gets back.

Leave travel to a single destination

If an employee travels by air from one place to another and gets back, the exemption shall be the actual air fare expenses incurred by the employee or the economy air fare in an Air India flight for the same places, whichever is lesser.

 Illustration 1

An employee travels by air from Chennai to Mumbai (and back) by business class and incurs Rs 50,000 towards air ticket fare. The return economy air fare from Chennai to Mumbai costs Rs 13,000 by Air India flight. The company reimburses Rs 50,000 towards LTA. What is the tax exemption available to the employee?

Ans: Since the economy air fare is lesser than the actual fare expense incurred by the employee, the tax exemption shall be limited to Rs 13,000. The LTA amount to the extent of Rs 37,000 will be taxable.

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If an employee (and his family) travels by train or any other mode (other than air)  from one place to another and back (the places are connected by train), the exemption shall be the actual train fare/ticket/travel expenses incurred by the employee or the First A/C train fare (if the employee had made the trip by train), whichever is lesser.

 Illustration 2

An employee travels from Chennai to Hyderabad by taxi and incurs Rs 30,000 towards taxi fare. The First A/C train fare for Chennai to Hyderabad costs Rs 2,000. The company reimburses Rs 30,000 towards LTA. What is the tax exemption available to the employee?

Ans: Since the First A/C fare is lesser than the actual fare expense incurred by the employee, the tax exemption shall be limited to Rs 2,000. The LTA amount to the extent of Rs 28,000 will be taxable.

Illustration 3

An employee and his family travel by train from Chennai to Hyderabad by second A/C and incur Rs 13,000 towards train fare. The First A/C train fare for Chennai to Hyderabad for the employee and his family costs Rs 16,000. What is the tax exemption available to the employee?

Ans: Since actual fare expense incurred by the employee is less than the First A/C fare, the tax exemption shall be limited to Rs 13,000.

Illustration 4

An employee and his family travel by taxi from Place A to Place B which are not connected by train and incur Rs 6,500 towards taxi fare. How should the tax exemption be calculated?

Ans:

– If there is public transport facility (say, bus) available for travel between Place A and Place B:

The tax exemption amount shall be Rs 6,500 or the first class/deluxe fare by way of the public transport, whichever is lesser.

– If there is no public transport facility available for travel between Place A and Place B:

The tax exemption amount shall be Rs 6,500 or the First A/C train fare for travel between 2 other places of the same distance as from Place A to Place B.

Leave travel to multiple destinations

Calculation of tax exemption gets complex when an employee travels to multiple places as part of leave travel. In addition, employees may use multiple modes of transport to complete their leave travel. This makes calculation even more difficult.

If an employee travels to more than one destination, the basis of calculating tax exemption shall be as follows:

Where the journey is performed in a circuitous route, the exemption is limited to what is
admissible by the shortest route. Likewise, where the journey is performed in a circular
form touching different places, the exemption is limited to what is admissible for the
journey from the place of origin to the farthest point reached in India, by the shortest route.

Since the law provides for calculation of tax exemption on travel expenses between only 2 places, the employer should determine the farthest place (travelled to by the employee) from the place of origin and specify the same as the travel destination. Further, the employer should determine the shortest route from the place of origin to the place of destination. For the shortest route, the employer should apply the rule related to mode of travel (as stated in Table 1) and determine the tax exemption.

Illustration 5

An employee travels from Chennai to Hyderabad via Bangalore by Third A/C compartment and spent money on ticket fare as follows.

• “To” journey: Chennai – Bangalore: Rs. 900——————————-Bangalore – Hyderabad: Rs 1,200
• “Fro” journey: Hyderabad – Bangalore: Rs. 1,200 ————————Bangalore – Chennai: Rs 900

All told, the employee spent Rs 4,200 on leave travel. What is the tax exemption?

Ans: Step 1: Since the employee travelled to multiple destinations (Bangalore and Hyderabad), the employer needs to determine the farthest place from Chennai (place of origin). The farthest place from Chennai is Hyderabad.

Step 2: Since the mode of travel is train and travel by the shortest route from Chennai to Hyderabad would involve taking a direct train from Chennai to Hyderabad, the employer needs to calculate the First A/C fare from Chennai to Hyderabad and back.

First A/C train fare: Chennai to Hyderabad and back: Rs 4,500.

Since the total train fare expense incurred by the employee is less than the first A/C train fare of Rs 4,500, the tax exemption is Rs 4,200.

Leave travel to multiple destinations by multiple modes of transport

This is when the calculation of tax exemption gets really difficult. When an employee travels to many places, the employer needs to determine the farthest place (from the place of origin) and calculate the shortest distance. This is the easy part.

However, the law is not clear as to which mode of transport should be considered for the purpose of calculating tax exemption when an employee uses more than one mode of transport. Given that air fare (economy class) and train fare (First A/C) are prescribed as the benchmark by tax law, if an employee travels by both air and train during leave travel, which benchmark (air or train fare) should be considered for the purpose of calculating tax exemption?

There are only 2 benchmark modes of transport (air fare if the travel is by air and train fare if the travel is by any other mode) prescribed by the income tax department for the purpose of exemption calculation. We are of the view that if an employee uses both air and train, employers should use the train fare as the benchmark for calculating tax exemption since this case would fall under “other mode” of transport. Unless an employee travels by air to all destinations during his leave travel, air fare should not be considered as the benchmark.

Illustration 6

An employee’s leave travel is as follows:

• First leg: Chennai to Mumbai – Air travel
• Second leg: Mumbai to Delhi – Train travel
• Final leg: Delhi to Chennai – Taxi travel

How should the tax exemption be calculated?

Ans:

Step 1 – Determine the farthest place and label it as the destination.

Since Delhi is the farthest place from Chennai, Delhi shall be the destination.

Step 2 – Determine the mode of travel

While the employee travelled by air from Chennai to Mumbai, he travelled by train and taxi to other places. Hence, train shall be considered as the mode of transport for the purpose of tax exemption calculation. It may be noted that all the places the employee travelled to are connected by train in this example.

Step 3 – Calculate the tax exemption.

Since Chennai (origin) and Delhi (destination) are connected by train, consider the First A/C train fare of the train which takes the shortest route from Chennai and Delhi. Compare the train fare with the actual travel expense incurred by the employee. The amount which is lesser of the two shall be the exemption amount.

Employers should collect and scrutinize proof of leave travel

Many employers are under the impression that they need not collect proof of leave travel as per a Supreme Court judgement. According to the judgement:

There is no circular of Central Board of Direct Taxes (CBDT) requiring the employer under Section 192 to collect and examine the supporting evidence to the Declaration to be submitted by an employee(s).

However, in the TDS circular issued in the recent past, the Income Tax Department has specified that employers need to collect and scrutinize the proof of travel (ticket etc.) before granting tax exemption. The relevant excerpt from the Income Tax Department circular is as follows.

Obligation of the employer –The employer has to satisfy the obligation that leave travel
(fare) concession is not taxable in view of section 10(5) the employer is not only required to
be satisfied about the provisions of the said clause but also to keep and preserve evidence in
support thereof.

All employers should now collect proof of travel from employees if they wish to grant tax exemption on LTA.

Travel proof

• In case of air travel, air ticket and boarding passes.
• In case of train travel, the train ticket.
• In case of travel by taxi, the taxi bill should contain the name of the employee, details of the places visited, distance covered and date of travel.
• If an employee travels with family, the details of the family members (name, relationship and age) should be submitted to the employer. The employee should submit a declaration that his parents, brothers and sisters — whose travel expenses are to be included for tax exemption– are wholly dependent on him.

[notification style=”warning” font_size=”12px” closeable=”true”] When an employee’s family includes small children and senior citizens whose travel expenses are sought /to be included and if First AC train fare is the benchmark, employers should use the corresponding train fare of children and senior citizens for the purpose of tax exemption. [/notification]

Illustration 7

An employee travels with his wholly-dependent, 75 year old father on leave by taxi and incurs taxi fare. When looking at the corresponding First A/C train fare for comparison, the employer should consider the discounted train fare which a 75-year old person is entitled to for the purpose of calculating tax exemption.

Issued faced by employers

As we mentioned in our earlier post, we believe that the law governing tax exemption on LTA is complex to understand and difficult to follow. Let us take a look at the typical issues employees face while calculating tax exemption on LTA.

1. When employees travel to multiple destinations, it may not be easy to determine the farthest place by compliance personnel.
   For example, let us assume that an employee who works in a Chennai based company visits many places in Assam and Meghalaya on leave travel. It may not be easy for the compliance personnel sitting in Chennai to determine accurately the farthest place. Also, determining the farthest place can be arduous and time consuming if there are many employees who do circuitous leave travel.
2. When an employee visits places which are not connected by train, employers may find it difficult to get details regarding public transport in the areas visited by the employee in order to calculate tax exemption.
3. Calculating equivalent First AC train fare can be time consuming, particularly when an employee travels with his family.
4. Many employers pay LTA as a monthly fixed pay and collect travel bills for scrutiny and calculate tax exemption on LTA only towards the end of the year. If an employee travels in the early part of the year, the First A/C train fare or air fare at the time of travel may not be the same as that towards the end of the year when employers calculate tax exemption. If there is a change in train fare towards the end of the year, employers may not find it easy to locate the train/air fares which were in effect at the time of the employee’s travel.

The Income Tax Department should consider simplifying the rules governing tax exemption on LTA. Compliance officers in employer organizations currently find it difficult to meet the onerous conditions laid down in this regard. A simpler set of rules will go a long way in enhancing compliance.

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As a company engaged in the business of payroll processing and statutory compliance related to payroll, we wonder if the tax law governing tax exemption on Leave Travel Allowance (LTA) is the most complex tax legislation in India. Not only is the law difficult to understand and interpret but also quite difficult to implement. Each year organizations face significant difficulty while calculating tax exemption on LTA when they carry out the year-end tax compliance work. Let us examine the law and the practice related to calculation of LTA exemption in this post.

Section 10(5) of the Income Tax Act, 1961 (along with Rule 2B of the Income Tax Rules) governs calculation of tax exemption on LTA. The key conditions as specified by Section 10(5) (and Rule 2B) are as follows.

LTA payment to employees

LTA should have been paid/be payable to an employee if an employee wishes to avail tax exemption on LTA. In other words, if an employee does not receive an amount under a separate head of pay — called for example LTA or LTC — for the purpose of meeting leave travel expenses, the employee cannot avail tax exemption on account of leave travel.

Also, in any particular tax year (Apr to Mar), tax exemption shall be limited to the LTA (or by whatever other name the head of pay for the purpose of meeting leave travel expenses is called) amount which is paid to an employee in that tax year.

Illustration:

An employee is eligible to receive Rs 12,000 in a tax year (Apr to Mar) under the LTA head of pay. However, the employee can choose not to receive the LTA amount in a tax year and he or she can carry forward the LTA amount to the next tax year. What is the maximum LTA amount on which tax exemption should be calculated?

If an employee chooses to receive LTA each year (without carrying it forward), the maximum tax exemption the employee can receive shall be Rs 12,000 per tax year.

If an employee chooses to carry forward the amount in tax year 1 and receives Rs 24,000 under LTA in tax year 2, his LTA tax exemption shall be Rs 0 in tax year 1 since he did not receive any amount under LTA and in tax year 2, the maximum tax exemption he can receive on LTA shall be Rs 24,000.

How often can tax exemption be availed?

The tax exemption on LTA can be availed only in respect of two journeys performed in a block of four calendar years.

This is where the complexity related to calculation of tax exemption on LTA starts. According to the income tax law, an employee should have undertaken leave travel for the purpose of claiming tax exemption and in a block of 4 calendar years the employee can claim tax exemption for 2 journeys.

While income tax is calculated on LTA paid during a tax year (Apr to Mar), the exemption itself shall be provided only for 2 journeys across 4 calendar years. The first block (as specified by the tax department) of 4 calendar years commenced in Jan 1986. We are currently (Oct 2013) in the block starting Jan 2010 and ending in Dec 2013. An employer, before providing tax exemption on LTA, needs to check if the employee has availed tax exemption for more than 2 journeys in the particular block of 4 years. For example, let us assume that an employee claims tax exemption on LTA for the journeys he undertook in Apr 2010 and Apr 2011. If in the tax year Apr 2012 to Mar 2013 the employee claims tax exemption on LTA for the journey he undertook in say, Apr 2012, the employer should not provide any tax exemption since the employee has already used up the tax exemption on 2 journeys in the block (Jan 2010 to Dec 2013).

If an employee works with the same employer through the block of 4 years, the employer will know if the employee has availed tax exemptions for 2 journeys in the block. But if an employee moves from one employer to another during a block of 4 years, the second employer should check with the employee whether the employee has received tax exemption for more than 2 journey thus far in the block from the earlier employer and provide tax exemption accordingly.

In addition to the above, if an employee does not avail tax exemption (for either 1 or 2 journeys) on LTA in a block of 4 calendar years, he or she can avail tax exemption for 1 journey in the first year of the next block of 4 years. In other words, an employee can avail up to 3 exemptions in a block of 4 years if the employee did not avail tax exemption on 1 or 2 journeys in the previous 4 year block.

The income tax act only talks about a maximum of 2 (or 3) journeys for the purpose of tax exemption in a block of 4 years. An employee can undertake both the journeys in the first year and claim tax exemption in the first year itself. If 2 journeys are undertaken in the first year itself, the employee has to wait for the next block of 4 years before he can avail tax exemption on LTA.

We wonder how the income tax department came up with the idea of looking at calendar year for the purpose of LTA tax exemption. Maybe the calendar year idea came from statutes such as the Shops and Establishments Act which mandate providing leave to employees as per calendar year.

Also, why a maximum of 2 tax exemptions in a block of 4 years? Employers find it difficult to keep track of the number of times an employee avails tax exemption on LTA. The tax department could allow tax exemption on LTA each tax year. This would make the life of employers easy. After all, what is wrong in encouraging people to take a vacation each year instead of twice every 4 calendar years?

What does “travel expense” mean?

Travel expenses refer to the cost of travel (ticket fare etc.) alone. Expenses on boarding, lodging, sightseeing etc. should not be considered for the purpose of tax exemption. In addition, travel expenses should pertain to leave travel within India. Expenses on overseas travel cannot be considered for the calculation of tax exemption.

Can travel expenses of an employee’s family be considered?

Yes, travel expenses incurred on both the employee and his/her family members can be considered for tax exemption subject to the following conditions.

a. The employee should have taken leave from his organization and travelled along with his/her family members for availing the tax exemption. In other words, if an employee does not travel, the travel expenses of his family members cannot be considered for tax exemption.

b. “Family” in this regard means (i) the spouse and children of the employee, and (ii) the parents, brothers and sisters of the employee provided that they are wholly or mainly dependent on the employee. Please note that if the parents, brothers and sisters of the employee are not dependent on the employee, their travel expenses cannot be considered for the purpose of tax exemption.

There is a twist with regard to the travel expenses of an employee’s children as per sub-rule (4) of rule 2B of the Income Tax Rules. Tax exemption on LTA is not be admissible to more than two surviving children born after 1-Oct-1998. This restriction is not however applicable in respect of children born before 1-Oct-1998, and also in cases where an employee, after getting one child, begets multiple children (twins/triplets/quadruplets, etc.) on the second occasion. In other words:

• the exemption is admissible to all surviving children born before 1-Oct-1998;

• the exemption is admissible to only two surviving children born on or after 1-Oct-1998. However, if an employee after his or her first child, begets twins, triplets etc. the multiple children (twins, triplets etc.) on the second occasion will be counted as one child only.

Also, Section 2 (15B) of the Income Tax Act defines a child as including step-child and an adopted child of an employee.

Why should the income tax law penalize employees if they have more than 2 children by not extending the law to cover travel expenses of the third (and subsequent) children unless they are twins, triplets etc.? Why can’t the tax department be considerate towards families with more than 2 children? Surely, there must be better ways of incentivizing people to keep their families small!

Many people believe that the entire travel expense can be considered for tax exemption. Not quite. There are several conditions one needs to consider in order to arrive at the exact amount of tax exemption. After having read this post so far, if you believe that the conditions for availing tax exemption on LTA are onerous, just wait until you read the next post which will deal with the the calculation of tax exemption on LTA in detail and also the issues faced by employers while administering tax exemption on LTA.

After reading the next post you will appreciate why we wonder whether the tax law governing tax exemption on LTA is among the most complex legislations to read and put in practice.

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As per a recent circular issued by the Income Tax Department, employees who pay house rent of more than Rs 1 lakh per annum should submit the Permanent Account Number (PAN) of their landlord to the employer if they wish to claim tax exemption on House Rent Allowance (HRA). This is effective for the tax year 2013-14 (A.Y. 2014-15). In case the landlord does not have PAN, employees should collect a declaration to that effect from the landlord and submit the same to the employer.

The relevant excerpt from the circular is as follows.

Further if annual rent paid by the employee exceeds Rs 1,00,000 per annum, it is mandatory for
the employee to report PAN of the landlord to the employer. In case the landlord does not have
a PAN, a declaration to this effect from the landlord along with the name and address of the
landlord should be filed by the employee.

In the tax year 2012-13, employees were required to submit the PAN of the landlord only if the annual rent they paid was above Rs 2 lakh. With the Income Tax Department bringing the rent amount floor to Rs 1 lakh for the tax year 2013-14, a large number of employees are likely to get impacted.

What if an employee changes residence and has multiple landlords in a year?

If an employee resides in one house throughout the year and pays rent in excess of Rs 1 lakh, the employee needs to furnish the PAN of/declaration from the landlord. However, if an employee changes residence during the year and pays less than Rs 1 lakh to each landlord but pays in excess of Rs 1 lakh in aggregate in annual rent, how should the directive in the circular be understood?

For example, if an employee lives in a house for the first six months in the year paying a total rent of Rs 60,000 and lives in another house for the remaining six months paying a total rent of Rs 60,000, should he furnish the PAN of both the landlords since the aggregate rent he pays is more than Rs 1 lakh in the year?

Is the emphasis on the aggregate annual rent paid by the employee or on a single landlord receiving more than Rs 1 lakh in rent in a year? The circular is not clear in this regard.

We would like to adopt a conservative view on this and suggest that employers seek the PAN of/declaration from the landlord(s) if the annual rent paid by an employee exceeds Rs 1 lakh — irrespective of whether there is one or many landlords, and irrespective of whether the rent paid to each landlord exceeds Rs 1 lakh.

A word of suggestion

Kindly inform your employees that if they are unable to submit the PAN of/declaration from their landlord they will lose tax exemption on HRA if their annual rent exceeds Rs 1 lakh in 2013-14. HRA exemption is an important avenue of tax saving for many employees and loss of HRA exemption can lead to a significant increase in tax for the employees towards the end of the year.

Please request your employees to be prepared to submit the PAN of/declaration from their landlords whenever they submit the rent receipts. We have a few months to go before we start collecting rent receipts as part of the year-end scrutiny. Employees, if they are informed well in advance, will have sufficient time to collect the PAN of/ declaration from their landlords.

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Let us take a look at the issues payroll managers need to consider while using meal vouchers / food coupons as a head of employee compensation. We will use the terms “food coupon” and “meal voucher” interchangeably in this post.

Taxability

Many payroll managers mistakenly believe that food and food coupons provided to employees are entirely tax free. Food and food coupons are tax free only to a certain extent. The perquisite valuation rule (Rule 3 (7) (3) of the Income Tax Rules) governing provision of food and food coupons is as follows. You can take a look at the source by clicking here.

(iii) The value of free food and non-alcoholic beverages provided by the employer to an employee shall be the amount of expenditure incurred by such employer. The amount so determined shall be reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity:

Provided that nothing contained in this clause shall apply to free food and non-alcoholic beverages provided by such employer during working hours at office or business premises or through paid vouchers which are not transferable and usable only at eating joints, to the extent the value thereof either case does not exceed fifty rupees per meal or to tea or snacks provided during working hours or to free food and non-alcoholic beverages during working hours provided in a remote area or an off-shore installation.

The highlights of the rule stated above are as follows.

1. The value of food and non-alcoholic beverages or meal vouchers provided by the employer is exempt from income tax to the extent of Rs. 50 per meal. If the value of food and non-alcoholic beverages or meal vouchers exceeds Rs. 50 per meal, the value in excess of Rs. 50 shall be taxable.

2. “Meal” can be understood to refer to breakfast, lunch, and dinner. Rule 3(7)(iii) does not specify the maximum number of meals which can be consumed each day for availing the Rs. 50 per meal tax exemption. One or two meals per day during working hours could be considered as reasonable.

3. The tax exemption is to be calculated on a per-meal basis and not on a per-month basis. If we assume that employees can consume 2 meals each day during working hours, Rs. 50 per meal tax exemption translates into Rs. 100 tax free food coupons per working day.

4. For a meal voucher to be tax exempt to the extent of Rs. 50 per meal, the meal voucher should be used only during working hours. If an employee consumes two meals a day using meal vouchers in a working day and works for 22 days in a month (excluding holidays on say, Saturdays and Sundays), then meal vouchers can be tax exempt only to the extent of Rs. 2,200 per month (Rs. 50 per meal x 2 x 22 days). If the organization (which does not work on Saturdays and Sundays) provides meal vouchers worth Rs. 3,000 for the month, then Rs. 800 (Rs. 3,000 – Rs. 2,200) shall be taxable in the hands of the employee. Payroll managers should also exclude leave days (for e.g. casual leave and sick leave) on which employees do not work while calculating tax exemption on food coupons.

5. Meal vouchers issued to employees should be non-transferable and used only in eating joints. Since tax exemption is restricted to Rs. 50 per meal, payroll managers would do well to issue meal vouchers only in Rs. 50 (or lesser) denomination.

6. While employers cannot keep track of whether food coupons/meal vouchers are used only during working hours and only in eating joints, payroll managers should inform employees regarding the tax rule governing meal vouchers, and ask employees to adhere to the rules.

When to issue meal vouchers–beginning or end of the month?

Some organizations issue meal vouchers at the end of the month while others issue meal vouchers at the beginning of the month. We have come across a company which issues meal vouchers in advance for each quarter. You may choose to issue meal vouchers whenever you wish. However, in order to claim tax exemption, employees are supposed to use meal vouchers for consuming food during working hours. If an organization issues meal vouchers at the end of a month, it could be argued that the total amount of meal vouchers issued in that month shall be fully taxable in that month since there is no way the meal vouchers can be used by employees for consumption in that month. In such a case, tax exemption to the extent of Rs. 50 per meal, if applicable, can be claimed only in the next month.

Display in payslip

Some organizations show the value of meal vouchers on both the pay and the deduction sides of payslip while some do not. We are of the view that meal voucher–given that it is a non-cash perquisite–is to be kept out of the payslip. After all, we do not show the value of perquisites such as accommodation and car in the payslip.

Impact of loss of pay

Whether or not the value of meal vouchers issued to employees gets impacted by loss of pay shall be determined by the business rules in your organization. But please note that if loss of pay is to be applied, the value of meal vouchers should be adjusted for loss of pay in order to calculate the perquisite value of meal vouchers for taxation.

Issuance of meal vouchers in the first and last month of service

In the first and last months of an employee’s service, if the employee works less than full month, many organizations pay the corresponding value of meal vouchers by cash and tax it fully. This is because the amount payable to employee under the meal voucher head may not correspond to the meal voucher denominations available. For example, if an employee is entitled to get meal voucher to the extent of Rs. 2,000 per month and in the first/last month (a 30-day month) of service he works only for 7 days, then the value of meal vouchers to be issued to the employee for the first/last month shall be Rs. 467 after rounding off. Given that meal vouchers may not add up to Rs. 467 on account of denomination not being available, you may consider paying it out as cash in the first/last month of service.

The alternative is to issue meal vouchers for the whole month, irrespective of when an employee joins or leaves the organization, and make a cash deduction in the payroll/final settlement to the extent the employee has not worked for the month.

If you decide to issue meal vouchers in advance each month, you will have to recover the cash value, if applicable, of meal vouchers  from an employee who leaves your organization before the end of month during the final settlement calculation.

Meal vouchers as a flexi-pay component

Some organizations allow employees to switch between meal vouchers and cash as and when employees wish. While there is nothing wrong in giving the flexibility to employees, payroll managers need to take cognizance of the additional administrative effort in managing issuance of meal vouchers and keeping track of the pay structure changes when employees switch from meal vouchers to cash and vice versa.

Meal vouchers in case of arrear pay

Your organization may decide to include meal vouchers when there is a pay hike with retrospective effect. You may issue additional meal vouchers towards “meal voucher arrear” in case of a retrospective hike. But please note that the tax exemption can be availed only to the extent of Rs. 50 per meal.

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