Tax paid by co on employee’s behalf a non-monetary perquisite

Paying income tax on salary is an obligation for an employee. Can an employer pay taxes on behalf of the employee? Are there any restrictions on doing so?

Well, the Indian Companies Act, 1956 (ICA), by means of Section 200 restricts companies registered under it from paying its employees tax-free salaries. The Indian Income Tax Act, 1961, as per Section 10(10CC) provides that the tax on ‘non-monetary perquisite’ paid by the employer on behalf of the employee is exempt in the hands of the employee. This is despite the restriction under the ICA.

The ITA does not specifically clarify whether the tax can be paid by the employer on salary and monetary perquisites.

This issue has been a matter of active debate. In a recent ruling by the Uttarakhand High Court in the case of director of income tax vs Sedco Forex International Drilling Inc, the court examined the definition of ‘perquisite’, which is defined very widely to include any obligation of the employee met by the employer. The court held that since the taxes are paid by the employer, it would be a perquisite in the first place. As the taxes are paid directly to the revenue authorities by the employer, this would be a non-monetary perquisite. The court has distinguished between paying tax-free salary and paying salary as well as the taxes on such salary. As per the ruling, tax paid by the company on employee’s behalf could be considered as a non-monetary perquisite.

For example,

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