Fringe benefit gained popularity in India after the introduction of the Fringe Benefit Tax under the Finance Act, 2005. Fringe benefits include those items paid to the employees over and above their normal “salary”. Fringe benefits are the benefits received by the employee taxable in the hands of the employer. Many benefits did not fall into the purview of tax under the Income tax Act, 1961. This led to the introduction of the Fringe Benefit Tax.
There are various benefits which come under the term ‘fringe benefits’. This article identifies some of the fringe benefits defined under the Indian Income Tax Act, 1961. Fringe benefits can be broadly categorised into two groups viz., fringe benefits provided directly to the employees in the form of concessional or free rates, and deemed fringe benefits on certain expenses stated in Section 115 WB(2).
Under Section 115WB(2) the following come under the definition of deemed fringe benefits. Contribution to the superannuation fund is an example of the fringe benefit. Services provided at free or concessional rates are gaining popularity. Concessional food, lower travel rates become taxable in the hands of the employer. For example, Sodexho coupons are being provided to the employees over and above the individual salaries. Even though this is exempted in the hands of the employee, the employer has to pay the fringe benefit tax on it.
Employee’s club bills are met by the employer in certain levels of the organisational hierarchy. The club bills are generally paid to aid in customer entertainment. But the fringe benefits can be exempted from taxation if the employer’s auditors can prove that they were genuine expenses incurred by the company. Entertainment expenses, sales promotion expenses etc are considered to be a taxable expense in the hands of the employer. Other types of fringe benefits include the cost of company leased cars. The employee gets tax exemption on certain expenses incurred in the maintenance of the car while the fringe benefit tax is to be paid by the employer.
The most popular benefit gained by the employee over and above the salary is the stock options. It has two options- the fringe benefit tax on the stock options are generally paid by the company, but at times the burden of tax can be transferred to the employees. But unlike in ESOPs, fringe benefit tax liability on other items cannot be passed on to the employees as this might turn out to be expensive to the company in the long run as employee retention becomes difficult.
Educational expenses incurred when the employees seek higher education are a taxable expense in the hands of the employer. Gifts granted, reimbursement of the telephone bills, club bills, foreign travel and stay, all fall under the head ‘fringe benefits’. Other types of fringe benefits include conference expenses. In some cases the employees take part in the international or national conferences representing the company. IETF, DSL Forum etc are typical examples of the conferences wherein the employee attend representing the company. These expenses come under the category of fringe benefit.
Perquisites come under the term ‘fringe benefits’ on a wider perception, even though the Indian Income tax Act sees the two as two different expenses taxable under two persons. For example the tax on perquisites is to be paid by the individual under the head ‘salary’ while the fringe benefits are taxable in the hands of the employer.
Identifying the head to which each expense falls into is required in ensuring tax filing by the right person.