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Will the proposed FBT change reduce your take home pay?

Fringe Benefit Tax (FBT) was introduced in 2005 to be charged on the value of certain benefits offered by employers to their employees. The employer had to pay taxes on benefits that were received by the employee. Under the 2009-10 Budget, FBT has been abolished and companies will no longer have to pay this tax on the benefits offered to their employees. However, now the entire tax burden has been shifted to the employee. Anything that is a personal liability of yours and for which your company is compensating you (for instance, club membership fees, domestic help, furnishings at home) will be treated as taxable in your hands.

The benefits will be treated as perquisites in the hands of the employee, and will be taxed accordingly at the tax rate applicable to the employee. It is very likely that if you are employed by a company, your take home pay will go down as a result of this.

Watch the video

The following is an illustrative example that demonstrates the impact of the existing rules, and the new one proposed by the budget. Please ask your company on how the rule change affects you as the below example is highly general and might not fully apply to you.

Illustrative Example of Impact of Change in FBT Rules

* Gift upto Rs. 5,000 P.A. is exempt.
** This is paid by the employer, but the charge is passed on to the employee

As you will see in the graphic, we have considered the case of an employee earning an annual CTC (Cost to Company) of Rs 750,000 under the existing scenario and the proposed scenario. The annual fringe benefits offered to the employee are just under Rs 200,000.

Assuming that under both scenarios the taxpayer is using their full Rs 1 lakh 80C deduction, the net annual taxable salary under the existing scenario is Rs 368,000 and under the proposed scenario is Rs 560,996.

You will see that under the existing scenario, the take home salary (i.e., the CTC less the income tax and FBT on fringe benefits provided) is Rs 616,418 (93% of CTC) whereas under the proposed scenario it will be Rs 591,532 (89% of CTC). This is because in the proposed scenario, the employee will pay taxes on the benefits that are being offered as perquisites to the employee.

As this highly stylized example demonstrates, your personal taxation might be worse off under the proposed FBT rules where the entire tax burden is shifted from the employer to the employee.

What can you do about your take home pay being potentially reduced?

A lot depends upon the rules and scope of which perquisites will be taxable versus those that will be treated as being non-taxable.

So that you are not economically worse off, and that you take home pay is the same as under the old rules, you could ask your company to increase your CTC. However, this might be impractical from the company's point of view if it is not keen on giving you an increase, especially in the current economic context.

In the past, before the FBT rules came into play, some companies accommodated requests from employees to offer reimbursements for personal expenses disguised as office related expenses. Whether this will once again become popular is hard to say.

Comments

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Rahul Tewari said : 15/07/2009	Nice News letter n a very Informative Video Kartik...thanx
GK Gupta said : 14/07/2009	I think the entire amount will not be taxable but will be taxed marginally. In the illustration you have shown full amount as taxable. I think the FM would be too naive to understand that none of the tax payers would know this reduction and they will be happy with the 10% reduction in surcharge. We shoudl wait for the clarification from the govt. on this. Even before the FBT was introduced thes eperks were taxed marginally.