TAX PAID BY THE EMPLOYER

DELHI ITAT RULING- TAX PAID BY THE EMPLOYER

There is good news for salaried taxpayers, especially
foreign nationals working in India. In case employer picks
up employees tax liability, this perquisite of tax-free salary
will not be taxed again.
A special bench of the Income Tax Appellate Tribunal (ITAT) ,
held that when tax on salary is paid by employer , this
perquisite is exempt from tax under Section 10 (10C) of
the Income-Tax Act, which means that it cannot be taxed
again. Therefore, if an employer picks up the income tax
tab of the employee, this benefit of tax-free employment
will not be taxed again.
This ruling was given in the case of RBF Rig Corp LLC, USA.
Issues when tax is paid by employer
• When tax is paid by the employer, whether it is to be
considered as a perquisite or salary is not expressly
stated under the Act. Tax is statutory obligation of the
employee and when met by the employer it can be
treated as a perquisite. The other view is that the tax
paid by the employer is merely allocation of salary
towards taxes.
• If the tax paid by the employer is considered to be a
perquisite, the next issue to be addressed is whether it
is a “monetary payment” or a “non-monetary
perquisite”. Again ,“monetary payment” and “non-
monetary perquisites” has not been defined under the
Act and different views are expressed as to their
classification. This distinction is important as it has a
direct impact on the taxability of the employee, in
terms of single or multiple grossing up and hence, the
overall cost for the employer.
Delhi Tribunal's judgement
The Tribunal has held that the tax paid by the employer
on behalf of the employee would constitute a
“perquisite”. such tax payment to the government would
not constitute monetary payment to the employee and
therefore not subject to multiple grossing up.
• If the employer agrees to pay Rs 100 net of tax salary
to the employee in India and the tax rate is 34%.
• When such tax payment by the employer is considered
to be a “non-monetary perquisite” then only Rs 34
shall be added to the taxable income of the employee.
• If such tax payment is considered a “monetary
payment” then Rs 34 will be subject to multiple
grossing up and Rs 52 will be added in the taxable
income of the employee, so that after paying a tax of
34% on Rs 152, the employee receives Rs 100 net of
tax salary.