A day after the budget, the fine print is throwing up surprises, some of them unpleasant. Employers may raise a toast to Pranab Mukherjee for abolishing the much-hated fringe benefits tax (FBT), but the change may end up stinging you, the employee.
Here’s why. When your employer was paying the FBT, even if this cost was passed on to you, the effective tax rate was often as low as 6.8%. Now, if these perquisites are added to your salary, you may end up paying at the level of your tax bracket. If you are in the top bracket, this means 30.9% plus. So, in all probability, you will pay 30.9% tax on perquisites earlier labelled as fringe benefits, unless the finance minister clarifies that this isn’t so.
Let’s take the case of an employee who was getting some specific reimbursements as part of his compensation package. Let’s further assume he gets Rs10,000 as conveyance reimbursement, Rs10,000 as business development expenses, Rs7,000 as touring travel allowance and Rs3,000 as entertainment per month. Together, that’s Rs30,000 a month, or Rs3.6 lakh per annum.
At the effective FBT tax rate of 6.8%, the tax paid is Rs22,922. Now, when the whole of the amount is treated as your personal perquisite, you could be taxed at the top rate, says Sandeep Shanbhag, director of Wonderland Consultants, a tax and financial planning firm. On Rs3.6 lakh, the tax works out to Rs1,11,240 at 30.9%. You lose over Rs88,000 (see detailed story, DNA Money, page 19) after FBT is abolished.
FBT isn’t the only sting in the budget’s tail. Another one relates to non-cash gifts. Non-cash items will henceforth come under the ambit of gift tax. “According to section 56 of the Income Tax Act, any sum above Rs50,000 in the aggregate received from non-relatives was taxable as income of the recipient. Since these provisions were applicable to ‘a sum of money’ so far, non-cash gifts were often used to escape the gift tax net.
Budget 2009 has effectively plugged this loophole,” adds Shanbhag.
“Now, the value of any non-cash property such as land or buildings, shares and securities, jewellery, drawings, paintings, sculptures or any works of art transferred without consideration will be subject to income tax in the hands of the recipient. For immovable property, the stamp duty valuation will be considered whereas for movable property the fair market value on the date of the gift will be considered for arriving at the assessable value,” he adds.
Yet another surprise element is tax deduction on rents received. But this one, though, has a remedy. If you are renting out your building to a company, the latter will deduct 20% of the moolah as tax at source (TDS). But flashing a PAN card can save you 10%. Says Ameet Patel, partner at audit firm Sudit K Parekh: “For payment of rents or payment to contractors, if the person deducting the tax doesn’t quote a permanent account number (PAN) of the deductee, then a TDS of 20% will be applicable. But if the PAN is quoted, only 2% TDS is applicable (for rentals of plant and machinery, 10% for buildings and land).” Also, if you paid extra TDS, there was no mechanism for obtaining a refund. Now the budget has made provisions for this, Patel says.
In fact, the 20% rate will apply to all cases where taxes have to be deducted at source and no PAN number is given by the income receiver. A pleasant surprise is the hike in the wealth tax exemption limit. The basic threshold limit for the levy of wealth tax has been doubled to Rs 30 lakh from Rs 15 lakh - a level fixed in 1992. A tax of 1% is applicable on your net taxable wealth (which should include wealth held in the name of minor children). Wealth includes assets such as farm house or second residence, car, jewellery, gold, silver or platinum bars, furniture, yacht or boat, cash in hand of more than Rs 50,000, non-workplace buildings or urban land.
If all the items owned by you add up to Rs 30 lakh, you won’t have to pay wealth tax. “This could result in a possible maximum wealth tax saving of Rs 15,450 (1% wealth tax of Rs 15,000, plus 3% education cess on Rs 15,000) for eligible individuals,” says cha rtered accountant Suresh Surana.