things are often not what they appear to be. 'Yes' may not always mean yes,
and 'no' may not necessarily mean what we generally take it to mean.
So, it pays to be tax-smart; you can get to keep more of your hard-earned
money for yourself rather than having to cough it up to the taxman . . .
*1. Exemption on soft furnishing expenses* Sec. 10(14) [of the Income Tax
Act] offers exemption for expenses (and not allowances) incurred wholly,
necessarily and exclusively in the performance of the duties. There are two
distinct arguments to render soft-furnishing non-taxable.
The first one is to claim that the employee needs to entertain guests at his
residence for official purpose. The second one is that the expense is
incurred to protect the furniture belonging to the office at the residence
of the employee from deterioration.
*2. Notice period salary equivalent paid to employer is not tax deductible*
Most employment conditions require an employee who desires to change his
job, to give his employer a notice of his intentions and serve him for
certain pre-fixed months.
In case an employee desires to leave the services immediately, or before the
notice period, he should pay the employer an amount equivalent to the salary
he would have earned during the notice period or shortfall thereof. Is this
amount deductible from the salary income of the employee?
What the employee is paying to the employer cannot come under the head
'Salaries' since he is not the employer's employer. This amount represents
application of his income and therefore, it is not deductible. He has merely
applied this income to discharge a liability and therefore, it is not tax
deductible.
This is the view generally accepted by all accountants and the income tax
department.
*3. Employment after retirement can be less taxing*
These days many employees are re-employed by their ex-employers on
retainership or contractual basis after their retirement. The fact that the
person happens also to be the ex-employee is immaterial and inconsequential.
Such a person enjoys better concessions than a normal employee. He can claim
deductions for expenses incurred for earning his consultancy fee. Moreover,
the TDS applied by the principal would be only 10% of the fee paid.
*4. How gardener and helper can be tax-free perks*
Here, two points are of great interest: Circular 122, dated 19.10.73,
clarified that if the employer employs a gardener for a building belonging
to the employer, it would not be treated as a perk. This principle continues
to be applicable even now with the possibility of it being extrapolated to
other servants. This is more interesting. A helper engaged for the
performance of the duties of an office or employment of profit; is not
considered as a perk under Rule 2BB, read with Sec. 10(14). Many employees,
particularly at the top level, and especially in view of communication
handshakes available through e-mail, do not necessarily work only in the
office. Some part of the work is done at residence. We will go to the extent
of stating that the employee can directly engage the services of a helper
and claim reimbursement from the employer without it being considered as a
perk.
*5. Tax nuances when a house / flat is given on lease to employer*
Top management category employees usually get rent-free residential house as
a perk. Sometimes, the flat belongs to the employee, taken on lease by the
company from the employee and the employee is allowed to reside in it.
In other words, the landlord of the residential flat used by the employee is
the employee himself and simultaneously he is also a tenant.
Under such a situation, the employee will have to pay tax on the lease rent
received as income from house property and also as perk. Is this double
taxation? Definitely not. The employee is enjoying double benefit and will
have to pay tax on each benefit separately.
Is this flat self-occupied or let-out? Of course it is let-out. No one can
pay rent to himself.
The Sec. 80C deduction is possible both on self-occupied and let out flats.
The interest is deductible in full since the flat is let out. If the
employee pays some rent to his employer, this rent cannot be deducted from
the lease rent for tax purpose. This rent will be taken cognisance of while
computing the perk value.
Before the revision in perk values, many of the employees used to give their
flats or the flats of their wives on lease to the employers and benefit
immensely. Now, after the large-scale amendments to perk values, the
advantage has been watered down.
Nevertheless, normally the lessor takes an interest-free deposit from the
lessee. This is a deposit and not a loan. Consequently, it does not have any
perk value. We do not think the Department will question the size of the
deposit in such cases.
*6. Interest on deposit for a leased flat*
The ITO cannot treat the difference between the market rate of interest and
the actual interest paid by the landlord to his tenant on deposits placed by
the tenant in custody of the landlord, as further rent received. [CIT v
Satya Co. Ltd., (1994) 75Taxman193 (Cal.)].
*7. LTA and Relatives*
As per the Rules, you can claim the LTA benefit only twice during the block
of 4 years. For this purpose
You should be on leave.
You should travel.
During such travel you may have your family with you. Family includes
spouse, children as well as dependent parents, brothers and sisters. In
respect of children born on or after 1.10.98, the exemption will be
restricted only to two surviving children unless the birth after one child
has resulted in multiple births.
The expense incurred by you is exempt up to the LTA received.
Obviously, if your wife and other family members travel, without you
accompanying them, no LTA can be claimed.
*LTA and working couple*
Take the case of a working couple. Both the husband and wife can claim the
exemption on LTA from their employers and claim benefit for 4 journeys in
one block. There is no need for them to take the precaution of not
travelling twice during the same year.
Moreover, they can take the same family members or different ones as long as
they stick to the definition of the members for this purpose.
*8. Tax-free perks of ex-employees*
Aditya Cement Staff Club v Union of India & Others is an interesting case
which states that where an employee has resigned and is allowed to occupy
company quarters free of rent or at concessional rent, it is not to be taken
as perk value, unless it is a contractual obligation to that effect
according to the terms of employment.
In order that any benefit, amenity or payment may be termed as perquisite,
it must be in pursuance of a right conferred on or option given to the
employee to receive such benefit or advantage from his employer.
Unless such advantage or benefit flows from the status of the person working
as an employee it cannot be termed as perquisite. The employee must have a
vested right to claim advantage or benefit whether in cash or in kind, in
order to fall within the purview of perquisite as part of salaries taxable
under the ITA.
*9. Provident Fund not encashed*
Interest on Registered Provident Fund (RPF) of an employee is tax-free. Does
it still remain tax-free after the employee retires and does not claim his
Provident Fund for say 2 to 3 years?
If one goes strictly according to the drafted provisions, it appears that
this interest is tax-free since the amount becomes payable only when the
ex-employee asks for it. However, we are told that many ITOs take the stand
that the balance in Co-PF gets the colour and character of company fixed
deposits when the employee retires. This stand is challengeable.
*10. When PF becomes taxable *
If an employee leaves the service before completion of 5 years, Rule 10 of
Part A of Schedule IV, requires the trustees of a Recognised PF to deduct
tax when the accumulated balance due to an employee is paid. This payment is
to be treated as income chargeable under the head 'Salaries.'
Rule 9 puts a different responsibility on the Assessing Officer. He shall
calculate the total of the various sums of tax which would have been payable
by the employee in the respect of the total income for each of the related
years to arrive at the amount by which such total exceeds the total of taxes
paid by the employee for such years.
This excess amount is payable by the employee in addition to tax on the
income during the year in which the accumulated balance of PF becomes
payable.
According to Rule 8 of Part A of the Fourth Schedule, this requirement of 5
years shall not be applicable where the service has been terminated by
reason of the employee's ill-health, or by the contraction or discontinuance
of the employer's business or other causes beyond the control of the
employee.
All the same, it is not clear if the employer's contribution becomes taxable
if the employee has to retire on attaining superannuation age after a
continuous service of less than 5 years. It is our considered opinion that
since the retirement is beyond the control of the employee, the amount does
not become taxable.
during the year of contribution. It is fully taxed in any case. All he gets
is the deduction which stands withdrawn if the employee withdraws the PF
before 5 years. To tax the contribution once again in the year of withdrawal
is tantamount to double taxation.
In the case of unrecognised provident fund, there is a triple taxation if
the employee withdraws within 5 years. Not only he is not allowed any
deduction on his own contribution but also the employer's contribution is
taxed during the year of contribution and also during the year of
withdrawal.
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