THE TAXING OF SALARY-CODE DECODED

[Dr. Sanjiv Agarwal]

After sixty two years of India's independence, a new direct tax regime is on the anvil. The hallmark of new tax law will be doing away with various exemptions and moving towards lower or moderate tax rates. In new regime, tax rate would be just 10 percent for income upto Rs 10 lakh (as against 30% for Rs five lakh income today). This will be a big relief to salaried assessees. Corporate tax rates  will also get moderated. For investors, a tax like securities transaction tax will be done away with. In case of salary, only deductions permissible will be professional tax (if any), special allowance for employment, transport allowance, VRS compensation, gratuity etc. More importantly, present rupees one lakh investment limit will be hiked three times, all other banks will be grossed up in total income. All in all, it may be a good proposition for employed assessees and businessman too.

The new Direct Tax Code (DTC) may not be taxing too much for employees and people in middle income group but it will certainly change the investment and savings pattern for the future . Investment and savings in instruments like public provident fund, national saving certificate and the like may not be that lucrative as they are today.

The tax slabs and tax rates have been liberally rationalized yielding significant relief to individual assessees. The tax rate which is 30% today at a income of Rs 5 lakh will now be just 10% upto Rs 10 lakh income,  20% between Rs 10 lakh and Rs 25 lakh and 30% above Rs 25 lakh. Thus, 30%  rate will now apply at over Rs 25 lakh as against Rs 5 lakh presently. This has been done to align Indian tax rate will global tax trends. At a income of Rs 10 lakh, tax saving will be Rs 126120 and interestingly, tax saving goes up with hike in income which will encourage taxpayers to voluntarily declare their correct income (the government feels  so).

However, people will be hit by the introduction of new concept of 'Exempt, Exempt Tax (EET)' wherein withdrawals from the saving schemes will be taxed. Thus, when you invest, it will be tax free, when you earn return on such investment, it will be tax free but on withdrawal or redemption or on maturity, it shall be subjected to tax. That 'T' component will worry many people as they have been so far enjoying the benefits of EEE regime. With liberal rates and tax slabs,  perhaps, Government may justify its stand on EET regime. With the slabs going up to Rs 10 lakh @ 10 percent tax and qualifying savings for deduction being hiked from present rupees one lakh to rupees three lakh will almost balance the outgo of tax on withdrawals. In terms of time value of money too, investors will gain as tax would be payable in future (long term) and not today.

For salaried assessees, computation will become simpler as total income would comprise of gross salary less permissible deductions. Thus, all perquisites are likely to be taxed and exemptions like house rent allowance, medical reimbursements, car allowance, leave travel concession leave encashment etc will be done away with.

In case of housing sector, assessee will be deprived of deduction of interest on self occupied house properties and this may prove to be a setback to many as interest deduction is one of the major incentives to go in for housing loans and higher EMIs. Not only this, in case of rented properties, rental value will be taken at higher of actual rent or 6 percent of ratable value  fixed by local authorities or cost of construction or acquisition, as the case may be.

For investors, the differentiation between short term and long term will go away  and all capital gains will be taxed at a single rate with there being no securities transaction tax (STT). All gains on securities shall thus be taxed.

The provisions of the Direct Tax Code (DTC) will affect the salaried taxpayers adversely. Unlike other taxpayers (businessmen) who incur expenses to generate income and are allowed deduction for expenses these in computation of taxable income, the salaried taxpayers have been robbed of deduction of employment related expenses allowed to them in a consolidated way in the form of standard deduction (SD) by the new code. Direct Tax code denies relief under section 89 of the Income-tax Act in respect of Voluntary Retirement Benefit (VRS) received beyond Rs. 5,00,000.

Let's try and understand the specific provisions of this Direct Tax Code.

Income from Employment

Part B of Chapter III (Clauses 19 to 22) in the proposed Code relates to "income from employment".

Clause 19 states that 'income derived by a person from any employment shall be computed under the head' Income from employ ment'. Income from employment is to be 'gross salary' on due or receipt basis whichever is earlier including value of perquisites, and any profit in lieu of salary reduced by the aggregate amount of permissible deductions.

Clause 20 provides that income computed under the head 'Employment' shall be the gross salary as reduced by the aggregate amount of deductions referred to in section 22.

Clause 21 mentions about the scope of 'gross salary' which shall be the amount of salary due or paid to a person, by or on behalf of his employer or former employer in a financial year.

Definition of Salary

'Salary' has been defined comprehensively to include within its ambit all that an employee receives from his employer - even those payments which are exempt  presently. The definition reads as under:

'Salary' would include:

(a) wages;

(b) remuneration;

(c) any allowance, concession or assistance;

(d) any fees or commissions;

(e) perquisites;

(f) profits in lieu of, or in addition to,any salary;

(g) any advance or arrear of salary;

(h) any allowance granted to the employee to

(i) meet his personal expense at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides; or

(ii) compensate him for the increased cost of living.

(i) any allowance or benefit, granted to the employee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit;

(j) any allowance in the nature of personal allowance granted to remunerate or compensate the assessee for performing duties of a special nature relating to his office or employment;

(k) any amount receivable, directly or in directly, by an employee from his employer, in connection with his voluntary retirement or termination of service or voluntary separation;

(1) any payment received by an employee in respect of any period of leave not availed by him;

(m) the contribution made by the employer in the financial year, to the amount of an employee maintained with the permitted savings intermediaries [Section 66(2)];

(n) any contribution by the employer to any fund other than an approved fund or the interest, if any, on such contributions;

(0) any annuity, pension or any commutation thereof;

(p) any gratuity;

Under the new Tax Code, shall also include the following amounts will also be treated as salary:

(a)the value of rent free, or concessional accommodation provided by the employer irrespective of whether the employer is a Government or any other person;

(b)the value of any leave travel concession;

(c)the amount received on encashment of unavailed earned leave on retirement or otherwise;

(d)medical reimbursement; and

(e)the value of free or concessional treatment paid for, or provided employer.

It has however been clarified that the value of rent-free accommodation will be determined for all employees (including Government em­ployees) in the same manner as is presently done in the case of employees in the private sector.

In the Income Tax Act 1961, the amounts re­ceived in respect of amounts re­ceived on voluntary retirement under a VRS Scheme, gratuities received, amounts received on commutation of pension are totally exempt from tax, under section 10 of the IT Act 1961. In the new code, such amounts would be treated as deductions, and would be allowed only if such amounts are deposited in a Retirement Benefits Account (RBA) maintained with any permitted savings interme­diary in accordance with the scheme framed and prescribed by the Central Government in this behalf. The amounts received from an approved superannuation fund hitherto exempt from in­come-tax will henceforth be treated as, me/ or exempt in a similar manner under EET.

The approved savings intermediaries will be approved provident funds, approved super­annuation funds, life insurer and New Pension System Trust. The accretions to the deposits will remain untaxed till such time as they are al­lowed to accumulate in the account. Any withdrawal made, or amount received, under whatever circumstances, from this account will be included in the income of the assessee for the year in which the withdrawal is made or the amount is received. Accordingly, it will be subject to tax at the appropriate personal marginal rate.

The assessees will be allowed certain deductions from salary. [Clause 22]

(a) any sum paid on account of a tax on em­ployment within the meaning of clause (2) of Article 276 of the Constitution;

(b) the amount received from his employer for journey by the person between his resi  dence and office or any other place of work, to the extent prescribed;

(c) any such special allowance or benefit spe­cifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, as may be prescribed, to the extent to which such expenses are

actually incurred for that purpose;

(d) the amount due or received, directly or indirectly, from his employer, in connec­tion with his voluntary retirement or ter­mination of service or voluntary separation under any scheme framed for this purpose in accordance with such guidelines as may be prescribed;

(e) the amount of any gratuity received from one or more of his employers, subject to limits as may be prescribed, if the amount is received­

(i) on his retirement, or on his becoming    incapacitated prior to such retirement, or on termination of his employment; or

(ii) by the spouse, children, or depen­dents on the death of the person.

(f) the amount of any death-cum-retirement  gra­tuity received under the Payment of Gra­tuity Act, 1972 or from the Central Govern­ment, State Government, local authority or any public sector company;

(g) the amount received in commutation of pension under a scheme of his employer, framed in accordance with the prescribed rules, to the extent of­

(i) one-third of the pension, in a case where he receives any gratuity; and

(ii) one-half of such pension, in any other case; and

(h) Pension for Param Vir Chakra, Maha Vir Chakra or VirChakra Awardee

Perquisites

'Perquisite' under the DTC will mean the following -

"amenity, facility, privilege or service, whether convertible into money or not, provided directly or indirectly to the assessee by his employer, whether by way of reimbursement or otherwise:-

(a) the value of any accommodation computed in the prescribed manner;

(b) any sum payable to effect an assurance on life or to effect a contract for an annuity;

(c) any sum payable to any permitted savings intermediaries;

(d) the value of any sweat equity share allotted or transferred, as on the date on which the option is exercised by the assessee;

(e) the value of any obligation which, but for payment by the employer, would have been

     payable by the assessee, computed in the prescribed manner; and

(f) the value of any other amenity, facility, privilege or service, computed in the prescribed manner."

How "Perquisites" will be taxed

The specific perquisites will also be taxed differently under the new code.

Sweat Equity share- The value of sweat equity shares allotted or transferred by an employer to his employee on or after the date the Code comes into force shall be taxable in his hands as perquisite. It does not matter whether the sweat equity shares were allotted or transferred free of cost or at a concessional rate or not. Further, if the employee concerned gifts these sweat equity shares, such gift will be regarded as transfer and attract capital gains tax.

Medical Reimbursements/ Free or concessional medical treatment by employers -presently, medical reimbursements and value of free or concessional medical treatment provided by employer to the employee as perquisites is exempted from tax. Under the Direct Tax Code, these will be fully taxable as perquisite.

Employers Contributions to Approved PF/ Superannuation fund- Any contribution made by the employer, in the financial year, to the account of an employee with any permitted savings intermediary shall be deemed to be received by the employee in that financial year and included in his total income for the financial year. The entire contributions from employer to approved provident fund approved superannuation fund shall be deemed to be income of employee of the financial year in which they are made and included in salary income (income from employment). However, a deduction up to limit of Rs. 3,00,000 (under clause 66 in respect of savings and tuition fees of children) shall be allowed in computing total income.

Salaried assessees -Exemptions snatched

For those in employment, the Code has proposed to strip off their current     exemptions, including House Rent Allowance (HRA) up to 40 per cent or 50 percent of their      salary, biannual Leave Travel Concession (LTC) for family holiday travel in India, medical reimbursement of up to Rs. 15,000, unlimited value of free or concessional medical treatment for the family and children's education of Rs. 1,200 per child and hostel allowance of Rs.3,600 per child.

In fact, the Code now proposes to allow only a few small deductions in respect of professional tax paid, transport allowance to the extent as may be prescribed and some special allowances as may be notified, to meet expenses incurred for official duties.

Both employment & retirement have been made more taxing under the DTC! Let's see now-

Allowances & perks-now taxable

House Rent Allowance (HRA), Leave Travel Concession (LTC), medical reimbursement, value of free or concessional medical treatment and children's education & hostel allowance.

Petty deductions that will still continue

Professional tax paid, transport allowance to the extent prescribed and prescribed special allowances to meet expenses incurred for official duties.

Retirement not to be easy

Leave encashment on retirement, to be fully taxable.

VRS compensation, death or retirement gratuity and commutation of pension to be exempt, only if deposited in a Retirement Benefit Account (RBA)

However, any amount drawn from RBA (including PF contributions and accretions after April 1, 2011) under any circumstances will be treated as taxable in the year of withdrawal.

Presently not even one percent of income tax assessees file wealth tax returns. It is proposed to have a combined return of    income and wealth. Good news is that wealth tax shall be payable at a very nominal rate of 0.25 percent of net wealth. The present limit of taxable net wealth is just Rs 30 lakh, which will be hiked to Rs 50 crore. Thus, any body having wealth of more than Rs 50 crore shall have to pay wealth tax also on revised definition of wealth, which will now include shares also.

Conclusion

It is hoped that the DTC shall be more equitable, balanced and simpler for honest tax payers. With such liberal tax rates and slabs, if the assessees don't pay taxes honestly, the penalties are going to be very stringent in new regime.

 

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