When taxman comes calling on your bonus

If fringe benefit tax makes a comeback in the forthcoming Budget, there could be some tightening of tax evasion

When your company gives you performance-linked bonus in kind -- say a fully paid family holiday, a luxury car or a high-end mobile phone -- chances are they will come to you with taxes deducted at source.

Alternatively, you have to factor in the tax outgo before pocketing any such goodies.

As per Indian tax laws, bonus in kind paid to the employees could be considered as salary income in the hands of the employees.

“Any performance bonus due to the employee from the employer whether paid in cash or in kind is taxable in the hands of the employees as salary income, and the employer has to withhold taxes at source,” says Parizad Sirwalla, partner -- tax, KPMG in India.

The amount to be taxed will depend on the nature of the benefit or amenity provided, if it is provided as a benefit which the employee is entitled to.

“If a performance bonus is declared in cash and subsequently disbursed in cash or kind, the entire amount would arguably be subject to tax.

“However, if certain benefits are contractually spelt out to be given to employees such as car or a holiday, these would be subject to perquisite tax in the hands of employees as per current norms and valuation rules,” says Sirwalla.

In case of a mobile phone has been provided to an employee only for official purposes -- accessing official emails or calls -- then there is no incidence of taxation.

“However, there should be adequate documentation to substantiate this,” says Amarpal Chadha, tax partner, EY.

Otherwise, the cost of the mobile is a taxable perquisite in the hands of the employees, he adds.  

When it comes to fully paid holidays, as per Rule 3(7)(ii) of the Income Tax Rules, 1962, the value of tour, accommodation, and any other expenses borne or reimbursed by the employer for holiday availed by the employee or any member of his household, the actual amount of expenditure incurred by the employer is taxable in the hand of employees.

In case of luxury cars, Rule 3(7)(viii) of the Income Tax Rules, 1962,  says that the value of benefit arising to the employee from the transfer of any movable asset belonging to the employer to the employee or any member of his household shall be the actual cost of such asset to the employer.

One has to factor in reduction in value to the tune of 20 per cent per annum (by the reducing balancing method) on account of normal wear-and-tear.

“In case a new car has been provided to the employee, the perquisite value would be actual cost of the car,” says Chadha.

In case the employee is being provided company-owned or leased car for official and personal purposes, the notional perquisite value would be taxable in the hands of the employees as per Rule 3 of the Income tax Rules, 1962.

“With respect to employer, the above expenditure can be claimed as business expenditure in its books of accounts,” says Chadha.

Interestingly, any gift, voucher or token given by an employer to an employee on ceremonial occasions -- such as Diwali -- are not subject to any tax if their value is less than Rs 5,000.

Tax experts point out that generally companies try to pass off many such expenses as business expenses as any expenses in the line of business are not termed as perquisite.

“But tax authorities hotly contest any such move,” says Riaz Thingna, Partner, Walker Chandiok & Co LLP.

“If Fringe Benefit Tax -- which was introduced in 2005 and taken back in 2009 -- makes a comeback in the forthcoming Budget, there could be some tightening of tax evasion in regard to this aspect, says Thingna.

“But tax planning by corporates will continue,” he adds.

FBT was a levy on certain expenditure in the hands of the employer. According to Kris Lakshmikanth, th chief executive officer at The Head Hunters (India), such gifts to top performers are tactical in nature.

“Companies will continue to be selective while giving out such gifts,” he says.

However, if FBT makes a comeback companies may have to bear the brunt of taxes of such performance bonuses, he adds.