NEW RULES REGARDING VALUATION OF PERQUISITES
TAX POLICY is so very intertwined with socio-economic development that any measure to raise the tax level or provide an incentive is fraught with serious consequences for the economy as a whole.
An easy way, however, is to tax the salaried class. Tax deduction at source has proved to be a success. Of late, TDS collections have exceeded even advance tax collections. This is because the disbursing officers have got to obey the letter of the law. It is in this context that evaluation of perquisites assumes importance in calculating the sum total of the tax on salary.
The opening up of the economy has also necessitated taking factors like cross border mobility of employees into account. The modified rules attempt to simplify and rationalise the existing provisions in the light of the Revenue’s own experience and judicial decisions.
Taxation of Salary Perks - Budget 2001
Budget 2001 has provided for very innocuous looking provisions as far as taxation of perquisites and other employment benefits are concerned but which have far-reaching implications.
The budget proposes to insert a new sub-clause (viii) in clause (2) of section 17 of the Income Tax Act, 1961 relating to the definitions of "Salary", "Perquisite" and "Profits in lieu of Salary". The amendment proposes to confer powers to the Central Board of Direct Taxes (CBDT) to prescribe, by rules, the value of any other fringe benefit or amenity included in Salary.
Another important change which Budget 2001 proposes to make is to tax joining bonuses. Currently, several employers offer huge joining bonuses as incentive for joining the employment of the company. This is generally done at very senior levels and the amounts involved are huge. Since the bonus is paid before employment commences and it is given as an incentive for joining and not for work done, technically, it may not be treated as salary income and hence may escape taxation.
Similarly, on cessation of employment, huge sums may be paid by the employer to the employee for not joining competition. There has been a tendency to treat such exit bonus as a capital receipt for not joining competition and hence no income tax is paid thereon.
Budget 2001 proposes to bring such joining / exit bonuses under the purview of taxable salary. Accordingly, any sum received by the employee from any person, whether in lumpsum or otherwise, before joining employment with that person or after cessation of employment with that person will be treated as profit in lieu of salary and taxable as salary income.Most of the above changes are likely to affect salaries at senior levels. Most of the perks will become taxable on market value basis. Similarly and exit bonus will now become taxable.
The following perquisites are taxable is the hands ofall type of employees:-
• Value of rent-free housing accommodation provided by the employer to employee
• Value of Concessional housing accommodation provided by employer to employee
• Amount paid by an employer in respect of an obligation which had the employer not paid, the employee would be liable to pay i.e. where the primary liability of payment is that of the employee and not of the employer. E.g. school fees of employee's children are the primary liability of the employee and not the employer. However if the employer pays the school fees of the employees children, it will be taxable perquisite in the hands of the employee concerned.
• Amount paid by employer, directly or indirectly, to effect a life insurance policy of the employee or for obtaining the benefits of an annuity in favour of the employee.
The following perquisites are not taxed at all in the hands of any employee i.e. they are exempt from income tax :-
• Recreational facilities extended not to a particular employee but to a class of employees
• Amount spent on training of employee or fees paid for refresher course
• No perquisite value is to be calculated on the expenses of telephone including mobile phone paid or reimbursed by the Company, irrespective of any personal user. However the cost of the mobile phone installment would be liable to tax as perquisite if incurred by company.
Some perquisite are taxable only in the hands of specified employees
Before understanding such perquisites, let us understand who specified employees are. The following employees will be treated as specified employees:-
A Director employee i.e. an employee who is also a director of the employer company.
An employee who has substantial interest in the employer company. A person who has more than 20per cent voting power in the company is said to have substantial interest in the employer company.
An employee who is drawing more than Rs.24000 per annum in cash i.e. any employee whose monetary remuneration other than perquisites is more than Rs.24000 will be treated as specified employee. Budget 2001 proposes to increase this limit from Rs.24000 to Rs.50000. This amendment may not have much significance since most employees who get perquisites and other employment benefits in any case draw more than Rs.50000 per annum.
In the hands of specified employees, all perquisites, whether by way of free housing or concessional housing or whether the primary liability of payment is that of employee or employer and any other perquisites other than tax free perquisites above will be taxable income.
Perquisites are taxable in the hands of the employee. However since they are paid in kind, notional monetary the value of the perquisites must be determined in order to get the taxable amount of perquisites. The CBDT will now make rules for the valuation of taxable perks and amenities. The idea is to tax such benefits on cost-to-employer basis and not in any concessional manner.
1. "Act" means the Income tax Act, 1961.
2."Salary" for the purpose of calculation of perquisites includes pay, taxable allowances, bonus or commission but does not include the following:-
Dearness allowance / pay unless it enters into the computation of Superannuation benefits of the employee concerned.
Employer’s contribution to Provident fund of employee.
Allowances which are exempt from payment of tax.
Value of perquisites as calculated u/s 17(2) of the Income Tax Act 1961.
Any payment/ expenditure specifically excluded under proviso to Clause 2(iii) or proviso to clause (2) of section 17 of the Act. i.e. by way of benefits or amenities to employees whose salary is less than Rs.50,000.
3. "Members of Household" shall include:-
Children and their spouses.
Servants and dependents.
The above categories a, b, c are included irrespective of whether they are dependent or not.
4."Maximum outstanding monthly balance" means the aggregate of outstanding balance for each loan as on the last day of each month.
5. The expression "borne by the Company" referred to in this opinion means the actual amount paid/ payable/reimbursed by the Company as reduced by the amount actually recovered from the employee for the use of the perquisite.
6. "Entertainment expenditure" includes hospitality of any kind and also expenditure on business gifts (other than free samples of the Company’s own product) with the aim of advertising to the general public.
7. "Accommodation" includes a house, flat, farm house or part thereof, or accommodation in a hotel, motel, service apartment, guest house, caravan, mobile home, ship or other floating structure.
8."Hotel" includes licensed accommodation in the nature of motel, service apartment or guest house.
9.The expression "Employee" referred to in this opinion means the employee and his household members.
10.The expression " remote area" means an area that is located at least 40 kilometers away from a town having a population not exceeding 20,000 based on latest published all –India census.
The legal position may be explained as under:-
New form no. 12BA:-
A new form no. 12BA has been inserted in Appendix II of the Act. This is to be certified and attached to form no. 16 issued to employees by the company in the case of those employees whose salary is more than Rs.1,50,000/-.
The employees have an option to compute the value of all perquisites available to them or any member of their household for the period from 1st April 2001, to 30th September 2001 on the basis of the old guidelines.
House Rent Allowance:-
In case of 1).State or Central Government employees & 2).Semi Government employees the perquisite value under the new rules will be the license fee determined in accordance with the rules framed by the Union or State government .
3). Other Employees
(i) Accommodation owned by Company :-
The perquisite value in such cases shall be 10% of the Salary for the period during which the accommodation is occupied in case of cities having population exceeding 4 lacs as per 1991 census and 7.5% of salary for the period during which the accommodation is occupied in other cities.
(ii) Accommodation taken on lease by Company from House hold members of the employees:-
There is no specific restriction on taking accommodation on lease from Household members of employees concerned. Perquisite value shall be calculated as below:-
Actual amount of lease rental borne by the Company, or 10% of the Salary as defined. Whichever is lower.
(iii) Accommodation taken on lease by Company from other than House hold members of the employees:-
There is no specific restriction on taking accommodation on lease from Household members of employees concerned. Perquisite value shall be calculated as in (iii) above. Of course receipts for entire year have to be taken on record.
4. Emloyees on transfer (all employees)
Lower of 10% of salary or the amount of lease rent paid or payable.
(iv) Notional interest on Deposits:-
An issue for consideration is :-
If deposits are given by the Company for taking the premises on lease for the employees, whether any (notional) interest thereon can be deemed to be perquisites to the employee residing therein.
Various Courts have held that the notional interest on such deposits given to lessors cannot be treated as deemed rent. The then Finance Minister had appointed an Expert Group to review the Act. and suggest changes if any required therein. One of the changes suggested by the Expert Group was that the Act should be amended to include notional interest on deposits as deemed rent. The said report was submitted in 1997.
Inspite of the above recommendation, the Act has not been amended till date.
(v)Accommodation provided by the company in a hotel on transfer of employee:-
If stay is for a period upto 15 days, then the perquisite value taken is Nil
In case of stay for a period exceeding 15 days then, perquisite value shall be as under:-
• 24% of the salary as defined for the period during which the accommodation is provided for boarding, or
• the actual charges borne by the company, whichever is lower .
In case of stay for a period exceeding 15 days then, perquisite value shall be computed for the entire period of stay.
(vi) Multiple accommodation on transfer of employee:-
However, in case, an employee is provided accommodation at the new place of posting while retaining the Company’s accommodation at the old place, the value of perquisite shall be determined with reference to the accommodation having lower value. Such lower value shall be limited for a period upto 90 days only.
After the expiry of period of 90 days the perquisite value shall be charged for both accommodations.
In case of furnished accommodation in cases (ii), (iii), (iv) and (vi) above, the perquisite value will be increased by 10 % of the cost of furniture including household appliances. If such furniture and household appliances are hired from a third party, the actual hire charges as borne by the Company will have to be added to the value of perquisite.
Employee E who draws annual salary of Rs. 4,00,000/- has been provided with furnished accommodation by the
Company C. The cost of furniture etc. is as under:-
Air Conditioner. Rs. 20,000
Refrigerator Rs. 26,000
Other furniture Rs. 54,000
Total Rs. 100,000
The perquisite value in his hands will be calculated as under:-
Rent free accommodation.
10% of salary Rs. 40,000
Add: 10% of cost of furniture etc.
10% of 100,000 Rs. 10,000
Perquisite Value of
Furnished accommodation Rs. 50,000
(vii) Accomodation in remote areas.
No perquisite value if the accommodation is provided to the employee working at the mining site or an onshore oil exploration site or a project execution site or an offshore site of a similar nature.
In case, the expenses on running and maintenance of motor cars are met or reimbursed to the employee by the company and such motor car is being used partly for personal and partly for official purposes in the following three situations:-
Use of motor car owned by company
Motor car taken on lease by Company from Household members of the employees .
Motor car leased by Company from outsiders (i.e. other than House hold members of the employees.).
The perquisite value may be taken lumpsum as under
in case of motor cars having cubic capacity of engine less than 1.6 litres.
Rs.1,200 p.m. (plus Rs.600 p.m. if driver is also provided)
in case of motor cars having cubic capacity of engine exceeding 1.6 litres.
Rs. 1600 p.m. (plus Rs.600 p.m. if driver is also provided)
In situations (b) and (c) above, Lease receipts are to be taken for the entire year. In (c) there is no specific restriction on lease from household members of the employees concerned .perquisite in both the above cases shall be calculated as in (i) above.
Employee E is using a Maruti Esteem owned/leased by the Company C and is also provided with a driver. The expenses on running and maintenance of motor car is Rs. 14000/- p.m. are met / reimbursed to E by the Company C. E is using the car partly for personal and partly for official purposes
The perquisite value will be Rs. 1200+600 = Rs. 1800/- p.m.
Used exclusively for the private or personal purposes of the employee or any member of his household and the runnig and maintenance expenses are met or reimbursed by the employer.
The perquisite value will be the following :-
Actual amount of expenditure incurred by the employer on running and maintenance of the motor car.
Remuneration to chauffer, if any.
Normal wear and tear of the motor car @ 10% p.a. of the actual cost.
The expenses on maintenance and running for private or personal use are fully met by the employee------- the perquisite value will be Rs. 400 p.m,/ Rs.600 p.m. depending upon the cubis capacity of the engine pus Rs. 600 p.m. if chauffer is also provided.
Motor car is owned by employee. The running and maintenance charges including remuneration to driver if any, is met / reimbursed by company and such motor car isbeing used partly for personal and partly for official purposes:-
The perquisite value in such cases will be taken as:
-the actual amount of expenditure borne by the employer as reduced by Rs. 1,200 p.m. or Rs. 1,600 p.m. depending on the cubic capacity of engine of the motor car. In both the above situations if driver is provided Rs. 600 would be further reduced. Bills for actual running and maintenance of car and receipts for salary paid to driver are required to be maintained.
Company C has incurred expenses of Rs.10,000 p.m. including salary to driver on the Maruti Esteem owned by it’s employee E. E is using the car partly for personal and partly for official purposes
The perquisite value in the hands of E is Rs.10,000 - 1800 = Rs.8200 p.m.
Obviously, the perquisite value in the hands of the employee, under this option, would be generally higher than in (i) above.
Thus, it is advisable that the Companies adopts the policy of giving the employees Company owned or leased cars, where ever possible.
If the employee has used the car and has incurred expenses wholly and exclusively for official purposes, the perquisite value in cases (i) and (ii) above shall be NIL, provided the following certificates / details are to be maintained:-
Certificate from the employee
I _________________certify that the amount of Rs. _______ was incurred by me on motor car expenses _________ for the period _________wholly and exclusively for the performance of official duty.
Details of Motor car expenses
Name of Employee:______________
Due to practical difficulties, the details in columns 6, 7 and 8 may be maintained or an overall basis.
Certificate from Supervising authority of Employee
_________________certify that the amount of Rs. _______ was incurred by ___________ on motor car expenses. _________ for the period _________wholly and exclusively for the performance of official duty.
Composite leasing of Motor cars:-
Provision of one or more motor cars by the employer for office as well as personal purpose.
The perquisite value of one car to be computed as if used partly in performance of duties and partly for private and personal purpose and for the other car or cars as if sch cars are exclusively used for private and personal purposes.
Credit cards and Club expenses:-
Used for personal only:-
If the credit card / club facilities are used by the employee for personal benefit only, then all expense borne by the company (including the annual membership fees / charges) will be the perquisite of the employee.
Used for personal and official purposes:-
Similarly, if the captioned facilities are used by the employee for official as well as personal use, then the cost borne by the company for such personal use will be taxed as perquisite. However, in such cases, the entire annual membership fees / charges borne by the company would also be taxed as perquisite.
Used solely for official purposes:-
Obviously, there shall be no perquisite where the expenses are incurred wholly and exclusively for official purposes subject to compliance of the following procedures:-
Complete details employee wise (like date of expenditure, nature and purpose of expenditure, its business expediency and persons entertained). The suggested format for maintaining such details is as under:
(a) Credit card expenses
Name of Employee:______________
All bills/ tickets/ supportings should be attached.
(b) Club expenses
Name of Employee: ____________
All bills/ supportings should be attached.
Certificate from the employee
I _________________certify that the amount of Rs. _______ was incurred by me vide credit card/ club membership no. _________ for the period _________wholly and exclusively for the performance of official duty.
Certificate from Supervising authority of Employee:
I _________________certify that the amount of Rs. _______ was incurred by ___________ on credit card/ club membership no. _________ for the period _________wholly and exclusively for the performance of official duty.
(c) Corporate Club membership:-
It may however be noted that the initial fees paid by the company for acquiring corporate membership of the club will not be considered as perquisite. This is logical as no individual specific employee benefits by such payment.
Company C has taken corporate club membership of "The Club". It has paid Rs. 5,00,000/- for acquiring the corporate membership. The annual charges paid per anum are Rs. 10,000/- p.m.
Its Managing Director E is using the membership for personal as well as official use. He has spent Rs. 15,000 for club services. However, he has submitted information to the company in the prescribed format only for Rs. 4,000 being expense incurred for official use.
The perquisite value in the hands of E is
Rs. 11,000 + Rs.10,000 = Rs. 21,000/-.
E does not use the membership for personal use
Then the perquisite value in his hands shall be Nil provided he submits all details in prescribed format.
Company C has reimbursed it’s employee E the annual charges of Rs. 1000/- p.a.
E is using the membership for personal as well as official use . He has spent Rs. 20,000 on credit card. However, he has submitted information to the company in the prescribed format only for Rs. 7,000 being expense incurred for official use.
The perquisite value in his hands is Rs. 1,000+ Rs. 13,000=Rs.14,000/-.
R is using the membership for official purposes only .
The perquisite value in his hands is Nil provided he submits all details in prescribed format.
Loans to Employees:-
Currently, interest free loans / loans at concessional rates of interest by the employer to employees does not come under the purview of taxable perks. The new rule may provide to tax the differential interest as salary income. This may affect a large number of employees.
As a staff welfare measure and out of commercial expediency, the employer provides various loans to its employees either free of interest or at concessional rate of interest.
The revenue authorities contended that appropriate notional interest be taxed as perquisites in the hands of the employee. However, various Courts ruled that such a contention is untenable in law in absence of specific provisions to that effect.
With a view to get over the adverse judicial rulings, the new rules on perquisites lay down specifically that such notional interest will be taxable perquisite as under:
In case of housing loans and conveyance loans- 10% p.a.
In case of other loans - 13% p.a
Such interest is calculated on the maximum outstanding monthly balance, as reduced by interest actually paid by employee (in case of concessional loans.)
The aggregate balance in housing loan account of employee E is Rs. 1,00,000 at the beginning of the month. During the month Rs. 20,000 has been repaid by E. The interest for that month will be charged on the closing balance of Rs. 80,000.
The perquisite value will be 10% of Rs.80,000= Rs.8,000/-
Medical and petty loans:-
No perquisite value will be charged on the following:-
on medical loans for treatment of diseases specified in Rule 3A of the Income Tax Rules. If any amount is received by the employee under any medical insurance scheme, then the perquisite will be charged on such reimbursement.
or on other petty loans where the aggregate amount of loans do not exceed Rs.20,000/-. This is to help the employees earning low salaries.
We may clarify that in case the aggregate balance of loans is more than Rs. 20,000/, then interest on the entire amount of loans will be treated as perquisite.
Also, in case the aggregate balance in loan accounts falls below Rs.20,000/, then also interest on the amount of loans will be treated as perquisite.
Provision of Sweeper, Gardner, Watchman or personal attendant:-
Companies are known to make life sweet for corporate executives by providing sweepers, watchmen, gardeners, personal attendants, and so on. State governments have archaic rules enabling babus utilize attendants, paying Rs 75 a month.
When a gardener or sweeper or watchman is provided by the employer to the employee for his residence and the salary is borne by the employer, an amount of Rs120 per month per servant is currently the taxable value. Under the new rules, it may be taxable on cost-to-employer basis. The impact of this amendment will be that the employee will disclaim responsibility for supervision of such servants even if they are needed for the maintenance of the garden or the upkeep of the residence. These rules may not be made applicable to top civil servants in the Central/State government. Malis are common in government quarters in New Delhi. Their expenses are met not by the employee but also the New Delhi Municipality. Will any civil servant agree to the inclusion of the perquisite value of the mali in his salary? The perquisite value shall be the actual cost borne by the Company in this case.
The term "domestic servant" in the earlier rules has been replaced by the term "personal attendant". This is wider in scope.
Supply of Gas, Electric energy or water:-
The perquisite value shall be the actual cost borne by the Company in this case.
Where the supply is made from sources are owned by the employer the perquisite would br the manufacturing cost per unit incurred by the employer.
Provision of free or concessional educational facilities to household member:-
The guidelines have contemplated three different possibilities:
The perquisite value shall be the actual cost borne by the Company where the educational institution is itself maintained and owned by the Company
In case the educational institution is not owned and maintained by the Company, the perquisite value shall be determined with reference to the cost of such education in a similar institution or near the locality, where free educational facilities are allowed to the employees household members in any other educational institution.
In all other cases, the perquisite value of free or concessional facilities shall be the actual cost borne by the Company
However no perquisite value shall be taken in (i) & (ii) if the benefit per child does not exceed Rs. 1000 per month. There is no exemption in (iii).
The allowance of Rs. 100/- per child per month continues to be exempt in case of two children as per Section 10(14).
The value of free meals provided by the Company during office hours at office or business premises or through non-transferable paid vouchers usable at eating joints are not treated as perquisites upto Rs. 50/- per meal.
The perquisite rules itself clarify that the value of tea or snacks provided during office hours inclusive of late sitting hours are not treated as a perquisite. In other cases the amount of expense incurred by the employer.
At present, lunch allowance at Rs 35 a day is taken as tax-free. The rules have raised the limit to Rs 50 per meal during work hours. Lunch may be in the employer's premises, a free/subsidised meal, or paid vouchers which are non-transferable but usable at eating points by the staff for whom meals are not provided.
Corporate employees have to incur expenses in five-star hotels for various business purposes. The draft guidelines take this contingency into account. If an employee claims exemption for meal entertainment expenses for bona fide reasons of business in performance of his duties, he should be able to support the claim with reasonable record of the accounts spent on particular occasions, the nature of the entertainment, the persons entertained and the reason for entertainment.
Which corporate executive will give the names of persons entertained, the nature of entertainment and the reason for entertaining? The rules declare that in the absence of records, 30 per cent of the amount incurred shall be treated as perquisite. One can say with little doubt that no employee will henceforth undertake to entertain business clientele on the terms stipulated in the draft rules.
Gift, voucher or token in lieu of gift provided below Rs. 5000/- in the aggregate per annum to any employee of the Company or any household member of the employee on ceremonial occasions or otherwise are not treated as perquisite.
The Company C gifts Rs. 4,500/- to employee E on the occasion of his daughter’s marriage.
The entire amount will be exempt.
The Company C gives a cheque of Rs. 10,000/- to employee E on his transfer as gift.
The exemption upto Rs.5,000/- on gifts etc is available provided the value of gift is less than Rs. 5,000/-. In this case, as the gift is more than Rs. 5,000/- the entire amount is taxable perquisite.
Transfer of movable assets:-
If the company transfers any of its moveable assets to the employee, then the perquisite value shall be taken as:-
In case of computers and electronic items
The cost of the asset as reduced by the cost of normal wear & tear @ 50% for each completed year of usage by Company on reducing balance.
In case of motor cars
The cost of the asset as reduced by the cost of normal wear & tear @ 20% for each completed year of usage by Company on reducing balance.
In any other cases
The cost of the asset as reduced by the cost of normal wear & tear @ 10% for each completed year of usage by Company.
In all the above cases, the perquisite value determined as above would be reduced by amount recovered from the employee for such transfer.
Use of moveable assets:
The Value of benefit to an employee from the use of computers and laptops is not treated as a perquisite
The Value of benefit to an employee from the use of any moveable asset other than those already specified above belonging to the Company or hired by it shall be determined at 10% p.a. of the actual cost of the asset or the amount of rent or charges borne by the company
Travelling & touring accommodation:-
The tourism industry, at present, is in the doldrums and the levy of tax on the basis of cost to the employer will certainly be a disincentive. Employees may choose to encash the facility and pay the tax thereon.
Again, whether the expense borne by an employer in respect of travel by the employee's spouse during official tour amounts to a benefit or perquisite has been a litigious issue. Courts have held that it may not amount to a taxable perquisite (CIT vs Parthasarathy (118 ITR 869) and CIT vs Sarabhai (208 ITR 139)). The rules will alter the law on the subject.
i. The valuation of perquisite on expenses on travelling and touring accommodation is as under:-
Any cost incurred by the employee within limits of the amount referred in Rule 2B shall not be treated as perquisite.
Any cost in excess shall be treated as perquisite.
The amount of expenses incurrd by the employer for any holiday availed by the employee or any member of his household .
If the employer owns such facilities and is not available uniformly to all employees ,the value at which such facilities are offered by other agencies to the public.
Perquisite will arise in respect of members of the household accompanying the employee on official tuor.
If the tour is extended as a vacation ,perquisite willl be determined for such extended period of stay or vacation.
No more free tickets for you or your family if you work with any airlines or the Railways. No more freebies too if your employer is in the transport or cargo business. The difference between the amounts recovered from you and the value at which your employer offers these services to the general public will be a taxable perquisite in your hands. There are no changes in the existing regulations for leave travel assistance exemption.
Perhaps the only true tax-free benefit in the new rules is for expenses actually incurred by your employer on your telephones, including mobile phones. If your employer meets these expenses, they will not be added to your taxable salary.
The value of any other benefit or amenity, service, right or privilege borne/ provided by the Company shall be determined at the cost to the Company under an arms length transaction
The arm's length rule
In keeping with the current fashion, the guidelines invoke the arm's length rule for evaluating the cost of benefit or amenity not specifically mentioned in the draft rules. If the service, right or privilege is acquired by the employer under an arm's length transaction, the taxable value of the perquisite will be the cost price to the employer as reduced by the employees contribution, if any.
Where it is not possible to arrive at the cost on the basis of arm's length principle, the taxable value will be the amount that the employee can be reasonably expected to pay to retain the benefit reduced by the amount of consideration, if any, paid by the employee.
Currently, nothing is treated as taxable perquisite on account of free / concessional allotment of shares, debentures or warrants to employees under an Employees Stock Option Plan on allotment of shares under ESOPs. When the employee sells the shares, the difference between sale price and cost is taxable as capital gains. Budget 2001 proposes to give this benefit only to ESOPs issued in accordance with SEBI guidelines. If the ESOPs do not comply with SEBI guidelines (which may be the case in case of unlisted companies which intend to go public or in case of ESOPs of the foreign parent company to employees of the Indian subsidiary company), then the difference between fair market value and actual cost in the hands of the employee of any shares or other securities allotted free or at a concessional rate to an employee under the stock option or sweat equity scheme will be taxable in the year in which the option is exercised by the employee. When the employee actually sells the shares, the difference between the sale price and fair market value on date of exercise of option will be taxable as capital gains.
Taxation of ESOPs may become complicated, especially for employees of unlisted companies and ESOPs granted by the parent company of Indian Subsidiaries outside India since these employers are not likely to comply with SEBI guidelines. Such employees may have to pay tax on notional income basis which may lead to cash flow problems for them. And, they may lose money if ultimately, at the time of selling they make a loss.
Valuation of fringe benefits:
A new clause (vi) has been inserted in section 17(2) which provides that the value of any fringe benefit or amenity provided to an employee shall be determined in such manner as may be prescribed in the Income-tax Rules.
1. The chartered Accountants Newsletter for the month of December.
5. Various other websites
6. The notes from the seminar of Vile Parle Study Circle hosted by Mr. C. A. Gupta , an employee in M/s. C.C.Choksi.
7. The notes from the seminar of Indian Merchants Chamber.