ALL ABOUT TAXATION ON EMPLOYEE BENEFIT SCHEMES

(EMPLOYEE PERSPECTIVE)

Chitra Jayasimha
Principal Actuary and Founder - Director, FIAI, FIA (UK)
Universal Actuaries & Benefit Consultants
t + 91 22 49632112| m +91 9987769877
chitra.jayasimha@uabc.co.in
www.uabc.co.in
 TAX IMPLICATIONS ON EMPLOYEE BENEFIT SCHEMES
(EMPLOYEE PERSPECTIVE)

This report is a broad study on employee tax benefits in India. This paper consolidates details on tax implications on
different employee benefit schemes along with allowances for government as well as non-government employees
and strives to mention the tax rules which challenges employees when it comes to managing their taxation on
various forms of income earned.

At present, the tax system is based on the taxation which ensures maximum welfare of the society. Everyone who is
earning in India have to pay income tax. The income could be pension, salary, or could be earnings from a savings
account. This is a direct tax since it is directly charged upon profits or income of employees.

TAXATION ON RETIREMENT BENEFITS

Taxation on Gratuity

Section Particulars Benefits

10(10)(i) Government employees Exempt

The least of the following is exempt from tax:

1. Last Drawn Monthly Salary (Basic + DA) * Number
Non-Government employees covered
10(10)(ii) of years of employment * 15/26
under Gratuity Act
2. Rs. 20 Lakhs**
3. Gratuity Actually received
The least of the following are exempt from tax:
1. Last 10 month’s average salary (Basic + DA) *
Number of years of employment* 1/2
Non-Government employees not
10(10)(iii) 2. Rs. 10 lakhs (The hike to Rs 20 Lakhs is not
covered under Gratuity Act
applicable for employees not covered under the
Payment of Gratuity Act)
3. Gratuity Actually received

• Number of years in service is rounded off to the nearest full year.

• Any amount over and above the exemption limit will be taxed as per the Income Tax slab rates.
** Where Gratuity is received in any earlier period from a former employer and again received from another
employer in a later period, the limit of Rs 20,00,000 will be reduced by the amount of Gratuity Benefit exempt
earlier.

Tax Implication on Employee Benefit Schemes (Employee Perspective) Proprietary & Confidential
Taxation on Leave Encashment

Taxability of Leave
Leave encashment Taxability of Leave Encashment for
Section Encashment for
timing Non-Government Employees
Government Employees

In Service encashment Fully taxable Fully taxable

In the case of death of Amount received by legal Amount received by legal heir is fully
employee heir is fully exempt exempt

Leave Exemption is least of the

following:
At the time of
1) Rs 25,00,000
10(10AA) retirement or
2) Leave encashment amount received
separation (other than Fully exempt
3) 10 months’ salary (based on average
on account of
salary of last 10 months) *
Termination)
4) Cash equivalent to leave to the credit
of employee at time of retirement **

At the time of
termination of Fully taxable Fully taxable
employee

* Here salary means Basic + Dearness Allowance (forms part of pay) + Commission (Fixed % on turnover)
** Cash equivalent to leave to the credit of employee at time of retirement is = {(A X B) – C} X D
where:
A) No of completed year of service (excluding part of the year)
B) Number of leave credited each year (Subject to maximum of 30 leave per year)
C) Number of leave taken or leave encashed during period of employment
D) Average salary for last 10 months

2. Where leave salary is received in any earlier

1. Where leave salary is received from two or more
period from a former employer and again received
employers in the same year, then the aggregate
from another employer in a later period, the limit of
amount of leave salary exempt from tax cannot
Rs 25,00,000 will be reduced by the amount of leave
exceed Rs 25,00,000
salary exempt earlier.

Points to be noted:

3. Relief u/s 89 read with Rule 21A can be claimed

by the employee in cases where the amount of 4. Leave salary (or leave encashment) received by
leave encashment is fully taxable. *** the legal heir of the deceased employee is not at all
taxable in the hands of his legal heirs.

Tax Implication on Employee Benefit Schemes (Employee Perspective) Proprietary & Confidential
 Tax on Employee Provident Fund
Scenario
Employer contribution to provident fund
Interest earned on contribution to provident fund
Interest credited to provident fund
Deduction under section 80C on employee’s
contribution
Scenario
Amount withdrawn is < Rs 50,000 before
completion of 5 continuous years of service
Amount withdrawn is > Rs 50,000 before
completion of 5 years of continuous service
Withdrawal of EPF after 5 years of continuous
service
Transfer of PF from one account to another
upon a change of job
Before completion of 5 continuous years of
service\ if employment is terminated due to
employee’s ill health. The business of the
employer is discontinued or the reasons for
withdrawal are beyond the employee’s control
Tax Implication on Employee Benefit Schemes (Employee Perspective)
Taxation on Recognized Provident Fund
Exempt only to the extent of 12% of salary*
(Contribution to PF, Superannuation and NPS together is
capped at Rs 7.5 lakhs for exempt contribution)
1. Interest earned on employee’s contribution up to INR
2.5 lakhs per year for non-government employees and
up to INR 5 lakhs per year for government employees is
tax-free.
2. Interest earned on employer’s contribution up to INR
7.5 lakhs per year is tax-free.
3. Any interest earned on contributions beyond the above
threshold will be taxable.
4. The threshold of INR 2.5 lakhs is increased to INR 5
lakhs for non-government employees in case the
employer is not contributing towards EPF.
Exempt only to the extent rate of interest does not exceed
9.5%
Up to INR 150,000
Taxation on Withdrawal
No TDS. However, If the individual falls under the taxable
bracket, he has to offer such EPF withdrawal in his return of
income
TDS @ 10% if PAN is furnished; No TDS in case Form
15G/15H is furnished
No TDS. Further, the individual need not offer the same in
the return of income as such withdrawal is exempt from tax
No TDS. Further, the individual need not offer the same in
return of income as it is not taxable.
No TDS. Further, the individual need not offer the same in
the return of income as such withdrawal is exempt from tax
Proprietary & Confidential
Tax on Superannuation

Section Particulars Benefits

1/3rd of the corpus distributed before
Fully Taxable
retirement
Employer: Contribution is deductible business
expense.
Employee: Exempt under Section 80CCC up to max
Contributions made to Pension plan
ceiling of INR 150,000 (As per new provision
contribution to PF, Superannuation and NPS together
is capped at Rs 7.5 lakhs for exempt contribution)

17(2)(vii) Interest from Superannuation fund Tax-free

Who can claim Tax deductions Both residents & non-residents

1/3rd of the corpus distributed at

Tax-free
retirement
Tax-free (However, if remaining amount is withdrawn
Monthly annuities* after retirement
then it is taxable)
1/3rd of the corpus distributed before
Fully Taxable
retirement

Monthly annuities* before retirement Fully Taxable

Note: Any benefit received from superannuation fund on death or injury are tax free

* Common annuity options available are:

1. Payable for life.

2. Payable for life guaranteed for 5 yrs/10 years/15 years.
3. Payable for life with a return of capital.
4. Payable jointly on the life of husband and wife.

Tax Implication on Employee Benefit Schemes (Employee Perspective) Proprietary & Confidential
Tax on National Pension Scheme

Particulars NPS Tier - I

The maximum amount eligible for deduction will be the lowest of the below:

a. Actual NPS contribution by employee.

b. 10% of Basic + DA / 20% of the Gross Total Income
Employee’s Contributions to
NPS The aggregate deduction would be subject to the threshold limit of Rs. 150,000 under
section 80C, 80CCC and 80CCD (1).

Employee can also claim any additional self-contribution (up to Rs 50,000) under
section 80CCD(1B) as NPS tax benefit.
The maximum amount eligible for deduction will be the lowest of the below:
a. Actual NPS contribution by employer.
Employer’s Contributions
b. 10% of Basic + DA (14% in case of Government employer)
to NPS
The aggregate deduction would be subject to the threshold limit of Rs. 750,000 in
respect of employer’s contribution to PF, Superannuation and NPS together.
In case of Premature Withdrawal:
• Lump sum withdrawal of 20% is taxable.
Withdrawals before • Balance 80% corpus must be utilized for purchasing annuity which is taxable as
Retirement per the tax slab in the year of payout.
In case of Partial Withdrawal:
This portion of withdrawal is not taxable.

Maximum amount that you can withdraw at the retirement is 60% of the
accumulated wealth which is entirely tax-free and balance 40% needs to be utilized
for the purchase of annuity providing monthly pension to the subscriber taxable at
Withdrawals After
the applicable tax slab.
Retirement
Subscribers can withdraw the entire corpus if it is less than or equal to Rs 5 lakh
without purchasing an annuity plan under the new NPS guidelines. These
withdrawals are also tax-free.

Tax Implication on Employee Benefit Schemes (Employee Perspective) Proprietary & Confidential
TAX ON OTHER ALLOWANCES

What is Allowance?

An allowance is a fixed amount of money received by a salaried employee from his employer to meet a particular
type of expenditure over and above salary. For example, companies provide overtime allowance to employees if they
work more than fixed working hours. Similarly, there are many other allowances which are provided to salaried
individuals. Allowances are treated as part of the salary and are taxable, except for those for which specific
exemptions have been provided under various sections of Income Tax Act. Based on their respective tax treatment,
these allowances can be categorized into three buckets

Taxable, Non-Taxable and Partially Taxable.

Taxable/Partially Taxable/Non-Taxable Allowances

Section Particulars Benefits

Least of the following is exempt:
a) Actual HRA Received
b) 40% of Salary (50%, if house situated in metro cities i.e.,
Mumbai, Kolkata, Delhi or Chennai)
c) Rent paid minus 10% of salary
10(13A) House Rent Allowances
* Salary= Basic + DA (if part of retirement benefit) + Turnover
based Commission
Note:
i. Fully Taxable, if HRA is received by an employee who is living
in his own house or if he does not pay any rent.

Least of the following is exempt:

a) Rs 5,000
Entertainment allowance
16 (ii) b) 1/5th of gross salary (excluding any allowance, benefits or
(for Private Sector
other perquisite)
employees)
c) Actual entertainment allowance received

Children Education Up to Rs. 100 per month per child up to a maximum of 2 children
10(14)
Allowance is exempt

Hostel Expenditure Up to Rs. 300 per month per child up to a maximum of 2 children
10(14)
Allowance is exempt

This allowance is received by employees who tend to work more

than the operational hours decided by the company. It can
Overtime allowance happen due to urgent assignments and firm project deadlines.
Any Overtime Allowance received by the employees is
completely taxable.

Transport Allowance
granted to an employee to
meet expenditure on This provision is removed after introduction of Std Deduction of
10(14)
commuting between place Rs 50,000
of residence and place of
duty

Tax Implication on Employee Benefit Schemes (Employee Perspective) Proprietary & Confidential
 Conveyance Allowance
granted to meet the
Exempt up to an amount of Rs. 19,200 per annum or Rs. 1,600
10(14) expenditure on conveyance
per month
in performance of duties of
an office
Research Allowance
granted for encouraging the
10(14) Exempt to the extent of expenditure incurred
academic research and
other professional pursuits
10(14) Uniform Allowance Exempt to the extent of expenditure incurred
Allowances paid by the
Fully Exempt
UNO to its employees
Amount payable by the
employer for an insurance
17(2)(v) Fully Taxable
on life of employee or for
an annuity contract

CCA is offered by companies to its employees to compensate

City compensatory
for a relatively high cost of living in metropolitan cities. This is
allowance
fully taxable.

1) Partially Taxable: Free meals in excess of Rs.50 per meal

less amount paid by the employee shall be a taxable perquisite
2) Exempt from tax: Following free meals shall be exempt from
tax:
17(2) a) Food and non-alcoholic beverages provided during working
Tiffin/meals allowance/meal
(viii) read with hours in remote area or in an offshore installation;
vouchers
Rule 3(7)(iii) b) Tea, Coffee or Non-Alcoholic beverages and Snacks during
working hours are tax free perquisites;
c) Food in office premises or through non-transferable paid
vouchers usable only at eating joints provided by an employer is
not taxable, if cost to the employer is Rs. 50 (or less) per meal.

Gift/ Voucher/ Coupon on a) Gifts in cash or convertible into money (like gift cheque) are
17(2)
ceremonial occasions or fully taxable
(viii) read with
otherwise provided to the b) Gift in kind up to Rs.5,000 in aggregate per annum would be
Rule 3(7)(iv)
employee exempt.

a) Expenditure incurred by the employer towards annual or

periodical fee etc. (excluding initial fee to acquire corporate
17(2)(viii) read membership) less amount recovered from the employee is a
with Rule Free Recreation/ Club taxable perquisite.
3(7)(vi) Facilities b) Expenses incurred on club facilities for the official purposes
are exempt from tax.
c) Use of health club, sports and similar facilities provided
uniformly to all employees shall be exempt from tax.
Taxable value of perquisites
Use of movable assets of a) Use of Laptops and Computers: Nil
17(2)(viii) read
the employer by the b) Movable asset other than Laptops, computers and Motor
with Rule
employee is a taxable Car*: 10% of original cost of the asset (if asset is owned by the
3(7)(vii)
perquisite employer) or actual higher charges incurred by the employer (if
asset is taken on rent) less amount recovered from employee.

Tax Implication on Employee Benefit Schemes (Employee Perspective) Proprietary & Confidential
 Taxable value of perquisites
a) Computers, Laptop and Electronics items: Actual cost of
asset less depreciation at 50% (using reducing balance method)
for each completed year of usage by employer less amount
17(2)(viii) read Transfer of movable assets recovered from the employee
with Rule by an employer to its b) Motor Car: Actual cost of asset less depreciation at 20%
3(7)(viii) employee (using reducing balance method) for each completed year of
usage by employer less amount recovered from the employee
c) Other movable assets: Actual cost of asset less depreciation
at 10% (on SLM basis) for each completed year of usage by
employer less amount recovered from the employee.

Taxable value of perquisite shall be computed based on cost to

the employer (under an arm’s length transaction) less amount
17(2)(viii) read
Any other benefit or recovered from the employee.
with Rule
3(7)(ix) amenity extended by
employer to employee However, expenses on telephones including a mobile phone
incurred by the employer on behalf of employee shall not be
treated as taxable perquisite.

1) Expense incurred or reimbursed by the employer for the

medical treatment of the employee or his family (spouse and
children, dependent parents, brothers and sisters) in any of the
following hospital is exempt in the hands of the employee:
a) Hospital maintained by the employer
b) Hospital maintained by the Government or Local Authority or
any other hospital approved by Central Government
c) Hospital approved by the Chief Commissioner having regard
Medical facilities in
17(2) to the prescribed guidelines for treatment of the prescribed
India/Medical Insurance
diseases.
2) Medical insurance premium paid or reimbursed by the
employer is not taxable.
3) Any other expenditure incurred or reimbursed by the
employer for providing medical facility in India is not chargeable
to tax up to Rs. 15,000 in aggregate per assessment year.
(This provision is removed after introduction of Std Deduction of
Rs 50,000)

Tax Implication on Employee Benefit Schemes (Employee Perspective) Proprietary & Confidential
Tax on Motor Car

1. Motor Car is owned or hired by the employer

Engine Capacity up to 1600 cc Engine Capacity above 1600 cc

Circumstances
(value of perquisite) (value of perquisite)

1.1 Where maintenance and running expenses including driver remuneration are met or reimbursed by
employer
If car is used wholly and exclusively
Fully Exempt
in the performance of official duties.
Amount taxable is as follows:
If car is used exclusively for the
Expenditure on running and maintenance of motor car incurred by
personal purposes of the employee
employer + Driver Remuneration + (10% of cost of vehicle for wear and
or any member of the household.
tear – Amount charged from employee for such use)
If car is used partly in the
Tax exempt: Tax exempt:
performance of duties and partly for
Rs. 1,800 per month (plus Rs. 900 Rs. 2,400 per month (plus Rs. 900
personal purposes of the employee
per month, if driver is also hired) per month, if driver is also hired)
or any member of the household.

1.2 Where maintenances and running expenses are met by the employee
If car is used wholly and exclusively
Not a perquisite, hence, not taxable
in the performance of official duties.
Amount taxable is as follows:
If car is used exclusively for the
Expenditure on running and maintenance of motor car incurred by
personal purposes of the employee
employer + Driver Remuneration + 10% of cost of vehicle for wear and tear
or any member of the household.
– Amount recovered from the employee
If car is used partly in the
Tax exempt: Tax exempt:
performance of duties and partly for
Rs. 600 per month (plus Rs. 900 per Rs. 900 per month (plus Rs. 900 per
personal purposes of the employee
month, if driver is also hired) month, if driver is also hired)
or any member of the household.

2. Motor Car is owned by the employee

Engine Capacity up to 1600 cc Engine Capacity above 1600 cc

Circumstances
(value of perquisite) (value of perquisite)

Where maintenance and running expenses including driver remuneration are met or reimbursed by
employer
If car is used wholly and exclusively
Fully Exempt
in the performance of official duties.

If car is used exclusively for the Amount taxable is as follows:

personal purposes of the employee Actual expenditure incurred by the employer – Amount recovered from
or any member of the household. employee

Amount taxable: Amount taxable:

If car is used partly in the
Actual expenditure by employer - Actual expenditure by employer -
performance of duties and partly for
Rs. 1,800 per month (Rs. 900 per Rs. 2,400 per month (Rs. 900 per
personal purposes of the employee
month, if driver is also hired) - month, if driver is also hired) -
or any member of the household.
Amount recovered from employee Amount recovered from employee

Tax Implication on Employee Benefit Schemes (Employee Perspective) Proprietary & Confidential
3. Where the employee owns any other automotive conveyance and actual running, and maintenance
charges are met or reimbursed by the employer

Engine Capacity up to 1600 cc Engine Capacity above 1600 cc

Circumstances
(value of perquisite) (value of perquisite)

If it is used wholly and exclusively in

the performance of official duties.
If it is used partly in the performance
of duties and partly for personal
purposes of the employee or any
member of the household.
Fully Exempt
Amount taxable: Amount taxable:
Actual expenditure incurred by the Actual expenditure incurred by the
employer – Rs 900 per month – employer – Rs 900 per month –
Amount recovered from employee Amount recovered from employee

4. What happens if the employer provides multiple cars?

If your employer provides one car for your use and another car for your family member’s use, the benefits from the
value of perquisites will be applicable to only one car. The other car will be considered solely for personal purposes
and will not be eligible for any tax benefits.

Tax Implication on Employee Benefit Schemes (Employee Perspective) Proprietary & Confidential
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Contact Information

Chitra Jayasimha
Principal Actuary and Founder - Director, FIAI (India), FIA (UK), FIII
Universal Actuaries & Benefit Consultants
t + 91 22 49632112 | m +91 9987769877
chitra.jayasimha@uabc.co.in
www.uabc.co.in

Tax Implication on Employee Benefit Schemes (Employee Perspective) Proprietary & Confidential
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Tax Implication on Employee Benefit Schemes (Employee Perspective) Proprietary & Confidential