Let us take a look at the issues payroll managers need to consider while using meal vouchers / food coupons as a head of employee compensation. We will use the terms “food coupon” and “meal voucher” interchangeably in this post.

Taxability

Many payroll managers mistakenly believe that food and food coupons provided to employees are entirely tax free. Food and food coupons are tax free only to a certain extent. The perquisite valuation rule (Rule 3 (7) (3) of the Income Tax Rules) governing provision of food and food coupons is as follows. You can take a look at the source by clicking here.

(iii) The value of free food and non-alcoholic beverages provided by the employer to an employee shall be the amount of expenditure incurred by such employer. The amount so determined shall be reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity:

Provided that nothing contained in this clause shall apply to free food and non-alcoholic beverages provided by such employer during working hours at office or business premises or through paid vouchers which are not transferable and usable only at eating joints, to the extent the value thereof either case does not exceed fifty rupees per meal or to tea or snacks provided during working hours or to free food and non-alcoholic beverages during working hours provided in a remote area or an off-shore installation.

The highlights of the rule stated above are as follows.

1. The value of food and non-alcoholic beverages or meal vouchers provided by the employer is exempt from income tax to the extent of Rs. 50 per meal. If the value of food and non-alcoholic beverages or meal vouchers exceeds Rs. 50 per meal, the value in excess of Rs. 50 shall be taxable.

2. “Meal” can be understood to refer to breakfast, lunch, and dinner. Rule 3(7)(iii) does not specify the maximum number of meals which can be consumed each day for availing the Rs. 50 per meal tax exemption. One or two meals per day during working hours could be considered as reasonable.

3. The tax exemption is to be calculated on a per-meal basis and not on a per-month basis. If we assume that employees can consume 2 meals each day during working hours, Rs. 50 per meal tax exemption translates into Rs. 100 tax free food coupons per working day.

4. For a meal voucher to be tax exempt to the extent of Rs. 50 per meal, the meal voucher should be used only during working hours. If an employee consumes two meals a day using meal vouchers in a working day and works for 22 days in a month (excluding holidays on say, Saturdays and Sundays), then meal vouchers can be tax exempt only to the extent of Rs. 2,200 per month (Rs. 50 per meal x 2 x 22 days). If the organization (which does not work on Saturdays and Sundays) provides meal vouchers worth Rs. 3,000 for the month, then Rs. 800 (Rs. 3,000 – Rs. 2,200) shall be taxable in the hands of the employee. Payroll managers should also exclude leave days (for e.g. casual leave and sick leave) on which employees do not work while calculating tax exemption on food coupons.

5. Meal vouchers issued to employees should be non-transferable and used only in eating joints. Since tax exemption is restricted to Rs. 50 per meal, payroll managers would do well to issue meal vouchers only in Rs. 50 (or lesser) denomination.

6. While employers cannot keep track of whether food coupons/meal vouchers are used only during working hours and only in eating joints, payroll managers should inform employees regarding the tax rule governing meal vouchers, and ask employees to adhere to the rules.

When to issue meal vouchers–beginning or end of the month?

Some organizations issue meal vouchers at the end of the month while others issue meal vouchers at the beginning of the month. We have come across a company which issues meal vouchers in advance for each quarter. You may choose to issue meal vouchers whenever you wish. However, in order to claim tax exemption, employees are supposed to use meal vouchers for consuming food during working hours. If an organization issues meal vouchers at the end of a month, it could be argued that the total amount of meal vouchers issued in that month shall be fully taxable in that month since there is no way the meal vouchers can be used by employees for consumption in that month. In such a case, tax exemption to the extent of Rs. 50 per meal, if applicable, can be claimed only in the next month.

Display in payslip

Some organizations show the value of meal vouchers on both the pay and the deduction sides of payslip while some do not. We are of the view that meal voucher–given that it is a non-cash perquisite–is to be kept out of the payslip. After all, we do not show the value of perquisites such as accommodation and car in the payslip.

Impact of loss of pay

Whether or not the value of meal vouchers issued to employees gets impacted by loss of pay shall be determined by the business rules in your organization. But please note that if loss of pay is to be applied, the value of meal vouchers should be adjusted for loss of pay in order to calculate the perquisite value of meal vouchers for taxation.

Issuance of meal vouchers in the first and last month of service

In the first and last months of an employee’s service, if the employee works less than full month, many organizations pay the corresponding value of meal vouchers by cash and tax it fully. This is because the amount payable to employee under the meal voucher head may not correspond to the meal voucher denominations available. For example, if an employee is entitled to get meal voucher to the extent of Rs. 2,000 per month and in the first/last month (a 30-day month) of service he works only for 7 days, then the value of meal vouchers to be issued to the employee for the first/last month shall be Rs. 467 after rounding off. Given that meal vouchers may not add up to Rs. 467 on account of denomination not being available, you may consider paying it out as cash in the first/last month of service.

The alternative is to issue meal vouchers for the whole month, irrespective of when an employee joins or leaves the organization, and make a cash deduction in the payroll/final settlement to the extent the employee has not worked for the month.

If you decide to issue meal vouchers in advance each month, you will have to recover the cash value, if applicable, of meal vouchers  from an employee who leaves your organization before the end of month during the final settlement calculation.

Meal vouchers as a flexi-pay component

Some organizations allow employees to switch between meal vouchers and cash as and when employees wish. While there is nothing wrong in giving the flexibility to employees, payroll managers need to take cognizance of the additional administrative effort in managing issuance of meal vouchers and keeping track of the pay structure changes when employees switch from meal vouchers to cash and vice versa.

Meal vouchers in case of arrear pay

Your organization may decide to include meal vouchers when there is a pay hike with retrospective effect. You may issue additional meal vouchers towards “meal voucher arrear” in case of a retrospective hike. But please note that the tax exemption can be availed only to the extent of Rs. 50 per meal.

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In the previous post, we had a look at the basis of perquisite calculation on loans provided to employees and members of their household. According to Rule 3 (7)(i) of the Income Tax rules, the taxable value of benefit an employee derives on account of a loan provided to him is equal to the Rupee value of the interest payable on a similar loan provided by the State Bank of India (SBI). For the purpose of perquisite calculation, SBI’s interest rate, as on 1st April of the year in which the loan schedule is in effect, should be considered.

The interest benefit (as stated above) should be calculated on the maximum outstanding monthly balance (of the loan in the loan repayment schedule) as reduced by any interest paid by the employee. “Maximum outstanding monthly balance” refers to the loan balance as on the last day of each month.

Let us take a look at some illustrations to understand how loan perquisite should be calculated.

Illustration 1

An employee is provided with a loan of Rs 10,000 which is recovered across 10 installments from the employee’s salary each month. The employee does not receive any other loan in the year.

Perquisite calculation: The perquisite value is zero since the total loan amount provided does not exceed Rs 20,000 in the year.

Illustration 2

An employee is provided with a loan of Rs 100,000 which is recovered across 10 installments from the employee’s salary each month. The loan is provided for the purpose of the employee meeting expenses related to the treatment of a disease which is listed in Rule 3A of the Income Tax rules.

Perquisite calculation: The perquisite value is zero since the loan is provided for treatment of a disease which is specified in Rule 3A. However, the employer should seek relevant documents to establish the proof of expenses (medical certificate, bills etc.) for treatment of the disease.

Illustration 3

On 01-May-2013, an employee is provided with an interest free personal loan of Rs 100,000 which is recovered across 10 installments from the employee’s salary each month starting May 2013. The SBI interest rate as on 01-Apr-2013 is 14.7%.

Perquisite calculation:  The perquisite value for the year 2013-14 is calculated as follows.

Month	Opening Balance	Monthly Deduction	Closing Balance (Maximum Outstanding Monthly Balance)	Perquisite Value**
May-13	100,000.00	10,000.00	90,000.00	1,102.50
Jun-13	90,000.00	10,000.00	80,000.00	980.00
Jul-13	80,000.00	10,000.00	70,000.00	857.50
Aug-13	70,000.00	10,000.00	60,000.00	735.00
Sep-13	60,000.00	10,000.00	50,000.00	612.50
Oct-13	50,000.00	10,000.00	40,000.00	490.00
Nov-13	40,000.00	10,000.00	30,000.00	367.50
Dec-13	30,000.00	10,000.00	20,000.00	245.00
Jan-14	20,000.00	10,000.00	10,000.00	122.50
Feb-14	10,000.00	10,000.00	–	–
Total		100,000.00		5513.00

** Perquisite value = Maximum Outstanding Monthly Balance (Closing Balance) x 14.7% / 12

The total perquisite value of Rs 5,513 should be included in the gross taxable salary for the purpose of taxing the employee’s salary for the year.

A word on the “maximum outstanding monthly balance.”

It may be noted that the perquisite value is calculated on the maximum outstanding balance which is defined as the outstanding balance as on the last day of each month, as per the income tax rules.

a. It is not clear what the relevance of the word maximum is in “maximum outstanding balance.”

b. It is probably little more logical to calculate the perquisite on the opening loan balance each month instead of the outstanding balance as on the last day of each month. However, the income tax rule allows calculation only on the closing balance each month. Consequently, if the loan is repaid before the last day of the month the perquisite value for that month is zero. Let us take a look at the next illustration to understand this.

Illustration 4

On 01-May-2013, an employee is provided with an interest free personal loan of Rs 100,000 which is repaid by the employee in full on 25-May-2013. The SBI interest rate as on 01-Apr-2013 is 14.7%.

Perquisite calculation:  The maximum outstanding balance (the outstanding balance as on the last day of May 13) is zero since the loan is repaid on 25-May-2013. Hence, the perquisite value is zero.

In this case, the employee enjoys interest benefit for 25 days in May 2013. However, the perquisite value is zero on account of the fact that the perquisite value is required to be calculated on the balance as on the last day of the month.

Illustration 5

On 01-May-2013, an employee is provided with an interest free personal loan of Rs 100,000 which is recovered across 10 installments. The repayment happens on the first of each month with the first loan installment falling on 01-June-2013. The SBI interest rate as on 01-Apr-2013 is 14.7%.

Perquisite calculation:  The perquisite value for the year 2013-14 is calculated as follows.

	Opening Balance	Monthly Repayment (on 1st of each month)	Closing Balance (Maximum Outstanding Monthly Balance)	Perquisite Value**
May-13	100,000.00	–	100,000.00	1225.00
Jun-13	100,000.00	10,000.00	90,000.00	1102.50
Jul-13	90,000.00	10,000.00	80,000.00	980.00
Aug-13	80,000.00	10,000.00	70,000.00	857.50
Sep-13	70,000.00	10,000.00	60,000.00	735.00
Oct-13	60,000.00	10,000.00	50,000.00	612.50
Nov-13	50,000.00	10,000.00	40,000.00	490.00
Dec-13	40,000.00	10,000.00	30,000.00	367.50
Jan-14	30,000.00	10,000.00	20,000.00	245.00
Feb-14	20,000.00	10,000.00	10,000.00	122.50
Mar-14	10,000.00	10,000.00	–
Total		100,000.00		6737.50

** Perquisite value = Maximum Outstanding Monthly Balance (Closing Balance) x 14.7% / 12

The total perquisite value of Rs 6,737.50 should be included in the gross taxable salary for the purpose of taxing the employee’s salary for the year.

Some more thoughts..

1. In Illustration 3 (and 5), if the SBI interest rate is 14.7% and if the company charges an interest rate of 14.7%, the perquisite value shall be zero since the concession (difference between SBI interest rate and the rate charged by the company) is zero.
2. In Illustration 3 (and 5), if the SBI interest rate is 14.7% and if the company charges an interest rate of 4.7%, the perquisite value shall be calculated on 10% since the concession (difference between SBI interest rate and the rate charged by the company) is 10%.
3. Please prepare the loan repayment schedule for each month and calculate the perquisite value for each month. Please factor in scheduled loan repayment, premature loan repayment, non-repayment of one or more installment by the employee (for whatever reason) while calculating the perquisite value.
4. If the loan repayment schedule extends beyond one tax year into the second year, the perquisite value for the first year should be calculated on the basis of the SBI interest rate as on 01-Apr of the first year and the the perquisite value for the second year should be calculated on the basis of the SBI interest rate as on 01-Apr of the second year.

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We find many payroll managers being unaware that loans provided to employees (by the employer) are taxable in the hands of the employees. The typical reactions (from payroll managers) we come across when we talk about taxability of loans provided to employees are as follows.

1. A loan is something that an employee repays. Where is the question of salary here? If loan is not salary, how can it be taxed?

2. We give loan under the head ‘Salary Advance’ and hence we think it is not taxable.

Loans provided to employees are taxable as per Rule 3(7)(i) of the Income Tax rules.  However, the actual tax amount on loan provided will depend on the interest rate the employee pays. According to the income tax rules, if loans are provided at a rate which is less than the interest rate charged by the State Bank of India (SBI), then the employee who receives the loan is deemed to have received the loan at a concessional interest rate. The extent of “concession” is a benefit which is taxable.

For example, if an employee receives a personal loan at the rate of 0% (interest-free loan) from the company in which he is employed, and if the interest rate charged by SBI for personal loan is, say, 15% per annum, then the interest cost “saved” by the employee (to the extent of 15% in this case) is deemed to be a perquisite which is taxable in the hands of the employee. The payroll manager should calculate the interest saving (difference between 15% and 0%) in Rupee terms and add the total interest saving for the year to the taxable salary of the employee for the purpose of taxation.

Of course, in the above example, if the company provides the personal loan at the rate of 15% or more (equal to or greater than the interest rate charged by SBI) to its employees, then as per Rule 3(7)(i) the loan cannot be deemed to be a concessional loan and consequently the perquisite value of such a loan shall be zero.

Payroll managers will do well to make note of the following:

1. If any payment made to an employee is in the nature of loan, Rule 3(7)(i) will govern the taxability of the same. Just because the loan is called by some other name by the company, it cannot be left out from the ambit of taxation. After all, rose, called by any other name, would still smell the same.
2. Salary advance and loan are two different things. A salary advance is compensation paid to an employee ahead whenever it falls due – for example, salary for May 13 which is typically paid on 31-May is paid on, say, 15-May. Salary advance is taxable as per the Section 17 of the Income Tax Act. However, loan taxability is governed by Rule 3(7)(i).

Let us take a look at Rule 3(7)(i) in detail and examine the conditions which govern perquisite calculation on loan provided to employees. The text of Rule 3(7)(i) is as follows.

– Rule 3(7)(i)

The value of the benefit to the assessee resulting from the provision of interest-free or concessional loan for any purpose made available to the employee or any member of his household during the relevant previous year by the employer or any person on his behalf shall be determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India, constituted under the State Bank of India Act, 1955, as on the 1st day of the relevant previous year in respect of loans for the same purpose advanced by it on the maximum outstanding monthly balance as reduced by the interest, if any, actually paid by him or any such member of his household:

Provided that no value would be charged if such loans are made available for medical treatment in respect of diseases specified in rule 3A of these Rules or where the amount of loans are petty not exceeding in the aggregate twenty thousand rupees:

Provided further that where the benefit relates to the loans made available for medical treatment referred to above, the exemption so provided shall not apply to so much of the loan as has been reimbursed to the employee under any medical insurance scheme.

From the above, the key conditions are as follows:

1. Loan provided by a company to any member of its employee’s household is deemed to be loan provided to employee for the purpose of taxation. “Household” in this regard includes the employee’s spouse(s), employee’s children and their spouse(s), employee’s parents and employee’s servants and dependents.
2. For loan to be taxable, the total amount of loan given to an employee in a tax year should be more than Rs 20,000. If the loan amount provided to an employee is less than Rs 20,000 in a year, the same shall be non-taxable.
3. Please note that if an employee receives more than one loan (with each loan amount less than Rs 20,000) in a tax year, the aggregate of all loan amounts he receives should be looked at for the purpose of taxation. If the aggregate amount is more than Rs 20,000, the loan amounts shall be taxed.
4. If any loan is provided to an employee for the purpose of meeting his medical expenses towards the treatment of  a disease specified in rule 3A of income tax rules, such a loan shall be non-taxable. However, if an employee receives payment under any medical insurance scheme for the treatment of a disease specified in Rule 3A, the loan to that extent shall be taxable.
5. For the purpose of loan perquisite calculation, interest rest rate charged by SBI for a similar loan as on first of April in the year in which the loan is provided to the employee should be considered. For example:
   • If the loan is provided for the purpose of buying a car, SBI’s car loan rate should be looked at as the reference rate.
   • If the loan is a personal loan, SBI’s personal loan interest rate should be considered as the reference rate.
6. The interest rate charged by SBI as on 01-Apr should be considered as the reference rate. SBI publishes the interest rate (as on 01-Apr) each year on its website.
7. The interest benefit to the employee (difference between the SBI interest rate and the interest rate charged by the employee’s organization) should be calculated on the “maximum outstanding balance” of the loan each month. According the income tax rules, “maximum outstanding balance” means the aggregate outstanding balance for each loan as on the last day of each month. For example, if an employee receives a loan of Rs 1 lakh and repays Rs 10,000 each month by way of deduction from his salary, the maximum outstanding balance at the end of the first month of his loan repayment schedule shall be Rs 90,000 (Rs 1,00,000 minus Rs 10,000 repaid at the end of the first month). The interest benefit should be calculated on Rs 90,000 at the end of the first month. Likewise, the interest benefit should be calculated on Rs 80,000 at the end of the second month and so on.

We will look at some illustrations on calculation of perquisite value on loan provided to employees in the next post.

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If an organization reimburses telephone expenses to its employees, is the reimbursement non-taxable?

Yes, telephone reimbursement provided to employees is not taxable. This is as per Rule 3(7)(ix) (reproduced below) of the Income Tax Rules.

The value of any other benefit or amenity, service, right or privilege provided by the employer shall be determined on the basis of cost to the employer under an arm’s length transaction as reduced by the employee’s contribution, if any:

Provided that nothing contained in this clause shall apply to the expenses on telephones including a mobile phone actually incurred on behalf of the employee by the employer.

Rule 3(7)(ix) states that telephone reimbursement is non-taxable in the hands of the employee. However, the following conditions are to be considered in this regard.

1. Telephone connection includes both land line and mobile connections. While there is no explicit reference to data card connection in Rule 3(7)(ix), some experts opine that data card falls under the mobile phone category since a data card is just a SIM card.

2. There is no explicit reference to the maximum number of connections allowed, in the rule. Organizations typically allow one land line and one mobile connection under Telephone Reimbursement for each employee.

3. The connections have to be in the name of the employee.

4. Employees should submit telephone bills to their organization while seeking telephone reimbursement.

5. Expenses incurred towards both pre-paid and post-paid mobile connections are admissible for tax exemption.

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The income tax department has introduced changes to the Form No. 16 format for 2012-13 by way of its recent circular (Circular No. 4/2013 [F.No.275/34/2011-IT(B)]). As you may be aware, the Form No. 16 comprises two sections – Part A, which presents information on the income tax deducted and remitted across four quarters in a year and Part B, which presents information on the salary paid, rebates and exemption and the total tax payable.

So far, employers have been issuing Form No. 16 with both Part A and Part B.

What does the circular say?

As per the tax department circular referred to above, employers, for tax deducted on salary on or after 01-Apr-2012 (Form 16 for 2012-13 and later), should download Part A of Form No. 16 from the “TDS Reconciliation Analysis and Correction Enabling System” site (commonly referred to as the Traces website – www.tdscpc.gov.in), attach Part A to Part B (to be prepared by the employer), and issue Form 16 (with both Part A and Part B) to the employee. Part A of Form No. 16 downloaded from the Traces site contains a unique TDS certificate number. Employers have to necessarily use only the Part A downloaded from the Traces site and can no longer create Part A of Form 16 on their own.

The income tax department by way of an earlier notification (dated 19-Feb-2013) has prescribed changes to the format for Part A and Part B of Form No. 16.

Employers should verify the data in Part A before issuing Form No. 16 to employees. The Part A of Form 16, as generated from the Traces site, contains the following information.

1. Employee name, employee PAN, employer name, employer PAN and TAN.
2. Salary paid, tax deducted, tax remitted, Form 24Q acknowledgement number for the 4 quarters.
3. Details of tax remitted (BSR code, date of remittance, and challan serial number).
4. Status of challan matching with OLTAS (Final, Unmatched, etc.).

The income tax department has enabled generation of Part A of Form 16 in the Traces website on the basis of the quarterly filings (Form 24Q) made by employers. Organizations are already downloading TDS certificates for tax deducted on non-salary payments (Form No. 16A) from the Traces website. From tax year 2012-13 onwards, salary TDS certificate (Part A of Form No. 16) too has been brought into the Traces site.

Steps for preparing Form No. 16

The Traces website presents screenshots on how Part A of Form No. 16 can be downloaded. Click here to take a look at an e-tutorial for downloading Part A of Form No. 16 from the Traces site.

1. File Form 24Q for the last (and earlier) quarter(s) of 2012-13.
2. Login to the Traces website with your company login information and download Form 16 (for 2012-13) for all your employees – a single zip file containing Form 16 data for all employees in a password-protected text file.
3. You can open the text file in an Excel sheet and check the employee-level data with regard to salary paid, tax deducted and remitted, etc. You can do a comparison with Form 24Q information in an Excel sheet using Excel Lookup functions.
4. Please ensure that challan status for all challans across employees is “F” which means that the challans are matched. In case any of the challans in “unmatched,” please check whether challan details have been correctly stated in the quarterly (Form 24Q) filings.
5. You can create individual PDF files for employee Form No. 16 by using the PDF generation utility which can be downloaded from the Traces site.
6. If you wish to use the digital signature of the authorised signatory in your organization to sign Form No. 16, you can upload the digital signature in the PDF generation utility available on the Traces site. You can also choose not to use digital signature and issue a hard copy of Form No. 16 to employees with the physical signature of the authorised signatory.
7. Please create Part B of Form No. 16 and merge it with Part A downloaded from the Traces site.
8. Submit Form No. 16 to employees in your organization.

While we appreciate the tax department’s initiative to enhance the accuracy of salary TDS certificate, we are concerned that the department has not given us adequate time for understanding and adopting the new Form 16 process, given the deadline of 31-May-2013 for Form 16 issuance for 2012-13. Organizations that employ thousands of employees may find it tedious to do a physical check of information presented in Part A in PDF format. The only easy and efficient way of checking the data in Part A of Form No. 16 is by way of a software checking the accuracy of Part A information. The department does provide Part A data in the text format which could be perused by software programmes to do the accuracy check against the data stored at the company’s end. However, whenever  a new system is developed, it would be useful to take adequate time to verify if everything is in order before taking the system live.

A suggestion to the income tax department

Given that organizations submit the Part B information (to a large extent) to the income tax department in Annexure II of the 4th quarter Form 24Q, the department could consider creating both Part A and Part B from the Traces website. Better still, the income tax department can even do away with the practice of employers issuing Form No. 16 to employees if employees can download Form No. 16 in full from the Traces site.

In addition, if the tax department has all information required for tax return filing, particularly for salaried employees many of whom may not have income from other sources, the tax department can also consider creating pre-filled tax return (say, ITR-I) which can simply be signed and filed by salaried assessees who do not have other sources of income. Pre-filled income tax return is already a reality in a number of countries including Denmark, Sweden and Spain.

And finally..

HRWorks, our online payroll platform, handles requirements related to generating and transmitting Form No. 16 as per the recent circular from the income tax department. If you think your organization may have a need for our online payroll software or our payroll services, please do get in touch with us.

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The Government of Andhra Pradesh, by way of a government order (G.O.Ms.No. 82), has ordered changes to Profession Tax. The revised tax slabs for salaried employees in Andhra Pradesh are as follows.

Salary for the month in Rs	Profession Tax for the month in Rs
Less than or equal to 15,000	Nil
15,001 – 20,000	150
20,001 and above	200

You can download the government order here.

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In the previous post, we saw why deducting Profession Tax (PT) equally across six months in locations like Chennai (where PT is calculated for a period of six months) is a bad idea. Let us examine a better method of PT deduction for employees located in places like Chennai. The method should ensure that there is no over or under deduction of PT for employees who do not work the entire 6 months during a half-year PT period.

You could deduct PT in a manner where the PT deduction moves in lockstep with the earned pay of an employee. This will ensure that there is never over or under deduction of PT. Let us explain this with the help of illustrations.

Currently (Feb 2013), Profession Tax for employees based in Chennai is calculated as per the below slabs.

Salary for the half year in Rs	Profession Tax for the half year in Rs
Less than or equal to 21,000	Nil
21,001 – 30,000	100
30,001 – 45,000	235
45,001 – 60,000	510
60,001 – 75,000	760
75,001 and above	1095

Illustration 1
Assume that a person earns Rs 25,000 every month, amounting to Rs 150,000 per half year. You could deduct PT as follows for the first half (Apr to Sep) of the year.

Month	Salary (Rs)	Cumulative Income (Rs)	PT slab the cumulative income falls in (Rs)	PT liability until the month	PT deducted in the month** (Rs)	Cumulative PT deducted (Rs)
April	25,000	25,000	20,001 – 30,000	100	100	100
May	25,000	50,000	45,001 – 60,000	510	510-100=410	510
June	25,000	75,000	60,001 – 75,000	760	760-510=250	760
July	25,000	100,000	75,001 and above	1095	1095-760=335	1095
Aug	25,000	125,000	75,001 and above	1095	0	1095
Sep	25,000	150,000	75,001 and above	1095	0	1095

**The amount to be deducted under PT each month is presented in the “PT Deducted in the month” column. Each month, we take a look at the PT slab in which the cumulative salary (from the start of the six month period until that month) falls and then determine the PT liability until that month. From the PT liability figure we deduct the already deducted PT (until that month) in order to arrive at the PT deduction amount for that month.

As presented in the above table, you shall deduct the Profession Tax for the first half by July payroll itself. If an employee leaves at any point in time before September, this method would ensure accurate deduction of Profession tax on the basis of the employee’s earned pay till that point in time.

Illustration 2

Assume that a person earns Rs 13,000 every month amounting to Rs 78,000 per half year. The PT calculation will be as follows for the first half.

Month	Salary (Rs)	Cumulative Income (Rs)	PT slab the cumulative income falls in (Rs)	PT liability until the month	PT deducted (Rs)	Cumulative PT deducted (Rs)
April	13,000	13,000	Less than 20,000	0	0	0
May	13,000	26,000	20,001 – 30,000	100	100-0=100	100
June	13,000	39,000	30,001 – 45,000	235	235-100=135	235
July	13,000	52,000	45,001 – 60,000	510	510-235=275	510
Aug	13,000	65,000	60,001 – 75,000	760	760-510=250	760
Sep	13,000	78,000	75,001 and above	1095	1095-760=335	1095

If an employee leaves at any point in time before September, this method would ensure accurate deduction of Profession tax on the basis of his earned pay till that point.

Illustration 3

Assume that a person earns Rs 13,000 every month amounting to Rs 78,000 per half year. The person leaves the company on 15-Jul.

Month	Salary (Rs)	Cumulative Income (Rs)	PT slab the cumulative income falls in (Rs)	PT liability until the month	PT deducted (Rs)	Cumulative PT deducted (Rs)
April	13,000	13,000	Less than 20,000	0	0	0
May	13,000	26,000	20,001 – 30,000	100	100-0=100	100
June	13,000	39,000	30,001 – 45,000	235	235-100=135	235
July (Until July 15)	6,290**	45,290	45,001 – 60,000	510	510-235=275	510

**The monthly pay of Rs 13,000 calculated for 15 days (until the last working day).

In the above illustration it may be noted that the PT deduction has happened for the exact salary the employee earned during the six month period.

In summary, the PT deduction logic described above is efficient since the PT deduction moves in lockstep with an employee’s earned pay and the deduction happens only after the PT liability arises. This ensures that there is never a case of over or under-deduction of PT.

This deduction method could be followed (instead of the equal installment method) for all locations where PT remittance happens once every 6 months — locations such as Chennai and other places in Tamil Nadu, Pondicherry, and locations in Kerala.

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Profession tax (PT) is levied by local authorities such as city corporations and municipalities on employees and employers. PT is calculated on the basis of the earned gross salary of employees. In some states (such as Maharashtra and Andhra Pradesh), PT is to be deducted from employee salary and remitted each month to the local authorities while in states such as Kerala and Tamil Nadu PT should be remitted once every 6 months while deduction of PT from employee salary may happen each month or once every six months.

In this post we will focus on issues pertaining to deducting and remitting PT in Chennai where PT remittance should be made to the Chennai Corporation once every six months — typically in October for the first half of the year ending September and in April for the second half of the year ending March. “Year” refers to period starting April 1 of a calendar year to March 31 of the next calendar year.

Currently (Feb 2013), Profession Tax for employees based in Chennai is calculated as per the below slabs.

Salary for the half year in Rs	Profession Tax for the half year in Rs
Less than or equal to 21,000	Nil
21,001 – 30,000	100
30,001 – 45,000	235
45,001 – 60,000	510
60,001 – 75,000	760
75,001 and above	1095

During a half-year (Apr – Sep or Oct – Mar) if an employee works for an organization in Chennai, the organization should deduct and remit PT as per the above slabs.

Equated monthly PT deduction – a popular but flawed PT deduction logic

Many organizations deduct PT on a monthly basis by way of equal installments across a half –year period. For example, if an employee earns more Rs 15,000 each month (more than Rs 75,000 in a half-year), a sum of Rs 1095 should be deducted towards PT (please see the PT rate table above). Organizations following the equated monthly PT deduction method deduct Rs 182 (Rs 1095/6) each month towards PT in the monthly payroll. At the end of 6 months the organization will have deducted Rs 1095** for PT remittance. All is well.

**Rs 182 x 6 is actually Rs 1092 and not Rs 1095. This rounding-off problem can be easily solved by simply adding Rs 3 to the PT deduction amount during payroll in any of the months during the half-year period.

What happens if the employee does not work for the entire half-year period but leaves the organization at the end of say, 3 months? For example, let us assume that the employee works from 01-Apr-2012 to 30-Jun-2012 during the half-year period.

The company will have deducted Rs 546 (Rs 182 x 3) for the 3 months as per the equated monthly PT deduction logic. For the 3 months, the employee earned Rs 45,000 (this is the half-yearly salary since the employee leaves the organization), and for Rs 45,000 the organization should have deducted only Rs 235 as PT (please see the PT rate table above). In addition, Rs 546, the deducted PT amount, does not fall in any PT slab as specified by the Chennai Corporation. Ideally, the organization should refund Rs 311 (PT deducted in excess) to the employee. In practice, most organizations just remit whatever PT is deducted from employee salary. We have come across instances where PT authorities have questioned the basis of PT deduction when PT amounts do not fall under any PT slab.

There can also be instances when the equated PT deduction logic can lead to under-deduction of PT.

Let us assume that an employee earns Rs 7,000 per month (Rs 42,000 in a half-year period). The PT deduction for a half-year period should be Rs 235 (as per the PT slabs). As per the equated PT deduction logic, the organization will deduct Rs 39 per month (Rs 235/6). If the employee leaves the organization at the end of 5 months, the organization will have deducted Rs 195 as PT. However for an employee salary of Rs 35,000 (Rs 7,000 x 5 months), the organization should have deducted Rs 235. This is a case of under-deduction of PT.

The flaws of the equated PT deduction logic will come to the fore for any employee who does not work the entire six months in a half-year period.

If you are in favour of the equated PT deduction method and argue that you can always adjust the excess or short PT in the final settlement processing if an employee quits before the end of the half-year period, we will simply say that this will not be possible in case an employee absconds or does not have adequate settlement salary to recover the short PT in full.

In other words, the equated PT deduction logic is flawed and is better not followed. Of course, if an organization does not deduct PT each month but deducts PT only once every half year, this problem will not occur. With regard to organizations which follow monthly deduction of PT, we will examine how we can deduct PT in a more scientific manner in each month’s payroll in the next post.

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We are into the last quarter of the current tax year (Apr 2012 to Mar 2013) and you, as a payroll manager, must be getting ready to collecting and scrutinizing investment proof submitted by your employees for claiming tax rebates for the current year. We send out a guidelines document to all employees in our customer organizations in this regard each year. The document specifies what all proof employees should be submitting in support of their investment declaration.

You can download the guidelines document by clicking here. Please feel free to make modifications to this document and use it for your organization.

Note:

1. This document covers all typically used tax rebate sections but is not comprehensive. For example, we have not included declarations under Section 80CCD since it is not a widely used section for claiming tax rebates. If you think we have missed out any particular section, please let us know.

2. The document contains screenshots of HRWorks, our online payroll platform. If you are not our customer, please disregard the sections containing references to HRWorks.

3. This document is intended to provide broad guidelines to employees. This document is not a substitute for either the bare act of the Income Tax Act 1961, circulars and other communication issued by the income tax department. If you have any doubts pertaining to the law governing income tax, please seek advice from the Income Tax department. Hinote assumes no liability regarding any use of the information in the guidelines document or anywhere within our site.

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In our previous post we talked about the why PF should be calculated on gross salary and not on Basic head of pay.

Since employees and employers are not mandated to contribute PF on PF Gross (please read our previous post for the definition of PF Gross) over and above Rs 6,500 per month, the employees whose PF gross is over Rs 6,500 per month will not be impacted on account of calculation of PF on gross salary. The employees who will be impacted are those who receive PF Gross of less than Rs 6,500 per month.

Switching to calculating PF on gross salary

If your organization currently calculates PF as 12% of Basic head of pay, please consider changing the basis of your PF calculation at the earliest. Here are the steps towards changing the basis of PF calculation.

1. Define PF Gross for the purpose of PF calculation.

Please examine the heads of pay in the pay structure used in your organization and determine (as per the PF Act) what all heads of pay should be considered and left out for the purpose of PF calculation.

Heads of pay to be included in PF Gross are Basic, DA, cash value of food concession, all allowances (Conveyance, Transport Allowance, Other Allowance, Special Allowance etc.) except House Rent Allowance (HRA). Please exclude HRA, Overtime Allowance, Bonus, Commission and such other similar pay from PF Gross. If you pay any performance based pay (say, incentives calculated on sales, production and other performance parameters) which are similar to bonus and commission, please exclude such heads of pay. Both statutory and performance-based bonus should be excluded from PF Gross.

2. Employees whose Basic (plus DA) is more than Rs 6,500 per month.

For employees whose earned Basic (plus DA) is more than Rs 6,500 per month, you could continue deducting PF on Basic pay (plus DA). Of course, if you do not mind the additional cost, you can switch to calculating PF on their PF Gross even though you are not required to do the same.

3. Employees whose Basic (plus DA) is less than Rs 6,500 per month.

Please determine the PF Gross and calculate PF as 12% of PF Gross. In case 12% of PF Gross is more than Rs 780 (i.e. 12% of Rs 6,500), you can choose to restrict PF to Rs 780 per month.

Here are some illustrations for PF calculation.

Illustration 1

Salary: An employee receives Basic pay of Rs 10,000 per month.

PF calculation: Since the employee’s Basic is above Rs 6,500, the stipulated ceiling for mandatory PF Gross, his PF  contribution can be calculated as 12% of Basic i.e. Rs 1,200 in this case.

Illustration 2

Salary: An employee receives Basic pay of Rs 3,000 per month and Rs 3,000 under Special Allowance.

PF calculation: Since the employee receives Rs 3,000 under Basic and Rs 3,000 under Special Allowance, a head of pay which should be in PF Gross, the PF contribution cannot be calculated as 12% of Rs 3,000 but should be calculated as 12% of Rs 6,000 (the PF Gross), which is Rs 720.

Illustration 3

Salary: An employee receives Basic pay of Rs 3,000 per month and Rs 3,000 each under Special Allowance and Other Allowance.

PF calculation: Since the employee receives Rs 3,000 under Basic and Rs 3,000 each under Special Allowance and Other Allowance, heads of pay which should be in PF Gross, the PF contribution cannot be calculated as 12% of Rs 3,000 but should be calculated as 12% of Rs 9,000 (the PF Gross), which is Rs 1080. In this case, since the PF Gross is greater than Rs 6,500, you have the option of restricting the PF Gross to Rs 6,500 for calculation of PF. In other words, you can calculate PF as 12% of Rs 6,500 instead of Rs 9,000.

3. PF calculation in the first and last month of service and in case of loss of pay.

It should be noted that PF calculation is on earned pay (the actual pay made to an employee after adjusting for loss of pay) and not fixed pay stated in the appointment letter. Even if the fixed Basic pay is above Rs 6,500, if an employee does not work the whole month in his first or last month of service or has loss of pay, his earned Basic pay could fall below Rs 6,500 in a month. In such a month, PF should be calculated on PF Gross instead of just Basic pay.

Illustration 4

Salary: an employee receives Rs 10,000 per month under the Basic head of pay and Rs 10,000 under Special Allowance (a head of pay to be included for PF calculation). He joins the company in the middle of a 30-day month and gets paid only for 15 days.

PF calculation: The earned Basic for the month shall be Rs 5,000 while his earned PF Gross is Rs 10,000. If one were to calculate PF only on Basic pay, the employee’s PF shall be 12% of Rs 5000 for the first month. However, since the earned Basic amount is less than Rs 6,500 in the first month of service, you need to calculate PF on PF Gross (Rs 10,000) instead of just Basic head of pay for the first month. As stated in Illustration 3, even here since the PF Gross is greater than Rs 6,500, you have the option of restricting the PF Gross to Rs 6,500 for calculation of PF.

From the second month onwards, you can switch to calculating PF on earned Basic as long it remains above Rs 6,500 per month.

The basis of PF calculation should be PF Gross whenever Basic falls below Rs 6,500 in a month.

The above illustration holds even in an employee’s last month of service and when an employee has loss of pay — instances when the earned Basic could fall below Rs 6,500 in a month.

Please note that even if you are calculating PF only on restricted Basic (Rs 6,500) instead of full Basic (the actual Basic amount), the PF calculation should be on PF Gross instead of Basic head of pay in case PF contribution falls below Rs 780 per month.

For those of you who are mathematically inclined, here is a simple algorithm for PF calculation. This sums up the basis of PF calculation if you wish to continue calculating PF on Basic (when the earned Basic is greater tha Rs 6,500) and switch to PF Gross when the earned Basic falls below Rs 6,500 per month.

MAX (ROUND (IF (Earned Basic >= 6500, Earned Basic,  MIN (PF Gross, 6500))), 0) * 12%

Note:

1. The Min function ensures that PF Gross is restricted to Rs 6,500 when the Basic pay is less than Rs 6,500.

2. If you are calculating PF on restricted Basic (i.e. maximum of Rs 6,500) the above algorithm will not work. For PF calculation on restricted Basic, please modify the algorithm as follows.

MAX (ROUND (IF (Earned Basic >= 6500, 6500,  MIN (PF Gross, 6500))), 0) * 12%

3. The Max function compares the PF Gross with zero and chooses the higher of the two for PF calculation. What is the need for the Max function here? The answer is quite simple. In case you have figured it out, please post the answer in the comments section of this blog. If you need the answer, let us know.

4. Specify the PF Gross clearly in ECR and other PF records.

Please ensure that the salary amount on which PF is calculated is entered accurately in the online Electronic Challan Cum Receipt (ECR) and other records. In case of any inspection or notice from the PF department, you will need to explain the basis of PF calculation.

5. Salary for PF calculation should not be less than “minimum wages.”

The PF department, by way of a circular, has stated that the salary for the purpose of PF calculation should not be less than the minimum wages specified by the Minimum Wages Act. For example, if the PF Gross is Rs 2,000 per month and the minimum wages is Rs 3,000 the PF department may not accept the PF calculation and ask the organization to calculate PF on at least the minimum wages. If an organization is in full compliance with the Minimum Wages Act, it will automatically comply with this dictat of the PF department.

6. Assess the income tax liability.

As per the Fourth Schedule of the Income Tax Act, 1961, the employer contribution to PF is exempt from income tax only to the extent of 12% of Basic pay and DA. When PF calculation is based on PF Gross instead of Basic (plus DA), the employer contribution to PF could attract tax. The employer contribution over and above 12% of Basic head of pay and DA shall be taxable. Please ensure that the employer PF in excess of 12% of Basic (plus DA) is taxed in the hands of the employee while calculating tax on salary paid to employees.

Illustration 5

Employer PF contribution: An employee receives Rs 5,000 per month under the Basic head of pay and Rs 6,500 is the PF Gross. The employee has no DA. The employer contribution is calculated as 12% of PF Gross i.e. 12% of Rs 6,500 which is Rs 780.

Tax liability: The employer contribution which is exempt from tax is 12% of Basic, Rs 600 (12% of Rs 5,000). Since the employer contribution is Rs 780, the amount of Rs 180 (Rs 780 – Rs 600) should be added to taxable salary of the employee. The taxable employer PF amount should be presented in the Form 16 of the employee.

We welcome your point of view. Please leave your comment here or send an email to info@hinote.in if you wish to contact us in private.

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