CHAPTER III - TAXATION OF INCOME FROM EMPLOYMENT - RETIREMENT BENEFITS AND PERQUISITES - Revised Discussion Paper – Direct Tax Code (DTC)

1. Chapter VII of the Discussion Paper on the Direct Taxes Code (DTC) deals with computation of income taxable under the head „Income from employment‟. It provides that "Income from employment" will be gross salary as reduced by the aggregate amount of permissible deductions.

1.1 The term „salary‟ is defined to include the value of perquisites, profits in lieu of salary, amount received on voluntary retirement or termination, leave salary, gratuity and any annuity, pension or any commutation thereof. Contributions made by the employer to an approved superannuation fund, provident fund, life insurer and New Pension System Trust is considered as salary.

1.2 Deductions from gross salary are allowed for compensation received under voluntary retirement scheme, amount of gratuity received on retirement or death and amount received on commutation of pension to the extent such amounts are deposited in a Retirement Benefits Account. The employee will have to maintain a Retirement Benefit Account with any permitted savings intermediary in accordance with the scheme framed and prescribed by the Central Government. The permitted 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. Thus, retirement benefits will be exempt only if deposited in Retirement Benefits Account and will be subject to tax on withdrawal from such account.

1.3 Under the DTC, salary will include, inter-alia, the following:-
(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 medical treatment paid for, or provided by, the employer.
The Discussion Paper states that the value of rent-free accommodation will be determined for all employees including Government employees in the same manner as is presently determined in the case of employees in the private sector.

2. Representations have been received from stakeholders that in the absence of adequate social security benefits, the social and economic norm is to use retirement benefit amounts for savings as well as for social expenditure. Hence, taxation of withdrawals from a Retirement Benefit Account would be harsh.

2.1 Though valuation on the basis of market value has not been prescribed in the DTC or the Discussion Paper, apprehensions have also been expressed that if the value of accommodation in the case of government employees will be taken at market rent, it would create a high tax burden. Concerns have also been expressed regarding non-availability of exemption for perquisites in the nature of medical benefits which are available in the current law.

3. Maintaining individual Retirement Benefits Account by permitted savings intermediaries on behalf of all employees would require a centralised nationwide authority to regulate and manage crores of retirement benefits accounts of employees and to deduct tax on withdrawal which entails creation of a separate institutional mechanism, complex logistics and substantial costs. The complexity of maintaining permitted savings accounts has been discussed in the context of the
EET method of taxation. For the same reasons, it is proposed not to introduce the Retirement Benefits Account scheme.

3.1 An employer‟s contribution to an approved provident fund, superannuation fund and New Pension Scheme within the limits prescribed shall not be considered as salary in the hands of the employee. Also, retirement benefits received by an employee will be exempt subject to specified monetary limits. Thus, the amount of gratuity received, the amount received under a voluntary retirement scheme, the amount received on commutation of pension linked to gratuity received and the amount received on account of encashment of leave at the time of superannuation are proposed to be exempt, subject to specified limits, for all employees.

3.2 The method of valuation of perquisites will be appropriately provided in the rules. It is proposed that perquisites in relation to medical facilities/reimbursement provided by an employer to its employees shall be valued as per the existing law with appropriate enhancement of monetary limits. It is clarified that the DTC does not propose to compute perquisite value of rent free accommodation based on market value.