Taxation of Employee Benefits and Perquisites in Bangalore

Taxation of Employee Benefits and Perquisites in Bangalore

Employees while retiring have to pay taxes on pension, gratuity and employee provident fund. In India, employers provide various retirement benefits to employees. The most common retirement benefits offered by employers in Bangalore include pension, the Employee Provident Fund and the National Pension System. These benefits are taxed under ‘Salaries’ as ‘profits in lieu of Salaries’ as specified in section 17. (3). Perquisites in Income Tax are any excess benefit or advantage given to an employee by their employer in addition to the basic wages or salaries. These benefits usually form a part of the total cost to the company (CTC) and the pay structure of every employee. However, a prerequisite does not include a simple reimbursement of any expense made by the employee on behalf of the employer. 


How retirement benefits are taxed in Bangalore?

1. Pension and taxes
In Bangalore all retired employees, mostly senior citizens, earn pension. Pension in Bangalore is either given as a lump sum amount or as a monthly allowance, or a combination of both. The taxation process is different for government and non-government employees. The lump sum amount received at the time of retirement, known as pension maturity, is fully exempted from taxes for government employees. On the other hand, non-government workers, who get a 100 per cent pension minus the gratuity amount, will pay tax on 50 per cent of the total amount. The remaining 50 per cent is exempted from income tax.
But if the private sector employee gets a 100 per cent pension including the gratuity, then one-third amount is exempted from tax and the rest is taxable. On the other hand, the pension received as monthly income is taxed as usual salary as it is tagged as income.

2. Gratuity and taxes
 
For government employees, the gratuity amount they get at the time of retirement is fully exempted from taxation.
For non-government employees, there are two different ways of taxation. For those covered under The Payment of Gratuity Act, of 1972, the exemption is applied on the lowest amount of the following: Actual amount received as gratuity, 15 days salary* for each year working for the firm, or Rs 20 lakh. Here the salary in this case is the last drawn salary (of the employee) x Number of employment years x 15/26.Actual amount received as gratuity, half month salary* for each year working for the firm, or Rs 10 lakh. Here the salary is the average amount of the last 10 months' salary. The salary amount includes basic salary, dearness allowances, and performance-related incentives.

3. Provident Fund and taxes

Employee provident fund (EPF) amount is exempted from tax when if it is withdrawn after retirement In Bangalore. As per the Income-tax (IT) Act, the accumulated balance to the employee’s credit on the date of cessation of employment is exempted from tax.
In Bangalore, if the employee has rendered continuous service with his employer (including previous employers if PF has been transferred) for a period of five years or more or if such continuous service (being less than five years) was terminated due to ill health or contraction or discontinuance of employer’s business or any other cause beyond the control of the employee, then it is exempted from tax.
However, the interest accrued on the accumulated balance, post retirement from employment (i.e., the period when no contribution is made to the EPF), is taxable, irrespective of your total contribution period with EPF.

4. Leave encashment benefits

In Union Budget 2023, leave encashment benefits received by the salaried class at retirement, whose limit was hiked from Rs 3 lakh to Rs 25 lakh, will be tax-free in their hands under the new income tax regime In Bangalore. They can switch to the new regime even in the year of retirement.

The following is an inclusive list under the definition of perquisites in Income Tax. 
  1. 1. In Bangalore, the amount of rent free accommodation received by an employee from the employer
  2. 2. Value of any concession in the matter of rent respecting any accommodation provided to the assesse by his employer. 
  3. 3. Amount paid by the employer against any obligation on behalf of the employee.
  4. 4. Amount of benefit or amenity provided by the employer free of any charge or at a lower or concessional rate in Bangalore.
  5. 5. Value of sweat equity shares the employer provides to its employees either without any charge or at a lower amount.
  6. 6. Amount paid towards the assurance of the life of the employee or against a contract of the annuity. However, this does not apply to any payment to a recognized provident fund or an approved superannuation fund.
  7. 7. Any sum paid towards a superannuation fund by the employer. If the contribution is less than Rs 1 lakh then it will not be considered a perquisite. 
  8. 8. The amount of any other fringe benefit, advantage, or concession provided by the employer to its employees as a part of the employment.

Who Pays Perquisites in Bangalore?

An employer in Bangalore pays perquisites to its employee during the period of employment as a part of the employment or salary. It may be a recurring benefit for every month or a one time benefit. Moreover, a perquisite can be a monetary benefit or a non-monetary benefit. Basically, a perquisite is any advantage that benefits the employee and is a cost to the employer. 

Types of Perquisites in Income Tax

Here’s a brief overview of perquisites and their types:
  1. Tax-exempted Perquisites
Some of the fringe benefits like company-provided laptops and computers, employer-provided refreshments during office hours, travel allowances, etc., are non-taxable. Besides, telephone or mobile bills, employer-provided interest-free salary loans, employers' contributions to provident funds, recreational and free medical facilities, etc., are also counted as tax-exempted perquisites.
  1. Taxable Perquisites
In Bangalore, employee-provided benefits like water and electricity, medical expense reimbursements, rent-free accommodation, gas supply, etc., are perquisites taxable. Moreover, the salary of the employee’s servants, other benefits like gifts above Rs 5000, free meals, gym and club facilities, etc., come under taxable perquisites.
  1. Perquisites Taxable only by Employees
If you are using cars owned by your company, availing education facilities for your children, and domestic servants service, etc., these perquisites are taxable and the tax needs to be paid by the employee.


Tax Exempt Perquisites
Check out the following perquisites that are available for tax exemptions:
  • Officials like the Union Minister, judges of the High Court or Supreme Court, Parliament officials, etc., receive rent-free accommodation from the government. These are examples of tax-exempt perquisites.
  • If you avail interest-free or concessional loans for treatment purposes for diseases included in Rule 3A, it is a tax-exempt perquisite. Moreover, if you get a loan of less than Rs 2,00,000, tax would not be calculated on it.
  • Perquisites included in Section 10(7) of the Income Tax Act are provided by the Indian Government to its citizens. These are also types of tax-exempt perquisites.


Created & Posted by Himanshu Shakya
Accountant at TAXAJ

TAXAJ is a consortium of CA, CS, Advocates & Professionals from specific fields to provide you a One Stop Solution for all your Business, Financial, Taxation & Legal Matters under One Roof. Some of them are: Launch Your Start-Up Company/Business, Trademark & Brand Registration, Digital Marketing, E-Stamp Paper Online, Closure of Business, Legal Services, Payroll Services, etc. For any further queries related to this or anything else visit TAXAJ

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