Can Indian Employers Cover Employee Income Tax? Exploring Legal Options and Implications

Hi!

Is there any provision under the current Income Tax laws that allows the company/employer to pay the income tax on behalf of the employee who is also an Indian?

In short, can an employee negotiate a salary package which quotes a net amount and ask his income tax liabilities to be taken care of by the company? Also, if this is possible, can I know under which clause or section this is permissible? Additionally, in such a case, does the employee have to pay fringe benefit tax, considering the company taking care of his income tax liability becomes a fringe benefit for the employee?

Kindly enlighten!

Dear Gentleman,

It is very simple. I negotiate my salary with my new employer for net. I tell them I need to get, say, 50,000 rupees in hand after deductions for PF and tax. The organization then works out a package and gives it to me. The company does not pay my income tax. The package is worked out in such a manner that the employee gets their net alright.

Having said this, this can be applicable for the first year only. Then as his income increases and he crosses the tax slabs, government increasing the rates cannot be compensated. That is why the companies, after working out, put a clause that the employee is liable to pay tax as applicable.

Siva

Thank you for the reply!

Actually, confusion has set in after a Supreme Court judgment which says - "Tax paid by the employer for staff is a non-monetary perquisite."

There was also a report on this - http://www.financialexpress.com/news...uisite/259777/

After this news, there is a certain confusion, so I want to know if the company can actually pay tax on behalf of the employee and if so, under what conditions/sections of the IT Act.

Thanks for all your help and assistance!

There is no problem in paying the Income Tax by the employer except that it shall be added to the income of the employee concerned.

Anand

Dear Employer,

Employers can deduct income tax from employees, and the same can be remitted to the government. However, the company cannot pay taxes on behalf of any individual as it is not allowed according to the Companies Act. Income tax should be paid by the person who receives the income.

Regards,
Mahesh D.S.

Dear All,

Thank you so much for the help! However, the confusion still remains. There are a few who believe that the company can pay tax on behalf of the employee, while others think it goes against the Companies Act. Any more views on this issue?

I keep finding myself in the midst of the controversy and haven't yet managed to get a very clear picture on this. All views will be appreciated. Thanks for all the help in advance!

Regards,
Dan

Friends,

There is no restriction in the Income Tax Act, as well as in the Companies Act of 1956, regarding the payment of Income Tax by an Employee.

Now the question of allowability -

1. In the hands of the Company - As per the Companies Act of 1956,
the company can get a deduction on account of Salary + Income Tax because the income tax of the employee paid by the company is part of the salary, i.e., compensation.

2. In the hands of the Company - As per the Income Tax Act of 1961,
Yes, the expenditure Salary + Tax is a deductible expenditure as per the Income Tax Act in the hands of the Company.

3. Taxability for the Recipient -

For the Recipient, the total salary will be Salary + Tax paid by the company on behalf of the employee.

For example, if your salary is 5 lakhs & Income Tax paid by the company on behalf of you is 1.25 lakhs, in that case, your total income is -
5 + 1.25 = 6.25 lakhs.
Also, the company can get the deduction for the same under the head salary.

As you asked for the reference of the Section -

If the employer pays without a contract, the tax paid by him would form part of perquisites within the meaning of section 17(2)(iv) and will be taxable under this head.
However, as per section 10(10CC), tax on non-monetary perquisites paid by the employee shall be exempted.

Having regard to section 200 of the Companies Act of 1956, an Indian company cannot pay any salary that is tax-free or that varies with the tax payable by the employee.

However, tax paid by the company in contravention of section 200 of the Companies Act would nevertheless be part of the salary.

Regards,
Deepak Singh

Hi all!

Just wanted to know if in the case of Trusts or Organizations managed by Trusts, which do not fall under the Companies Act 1956, can the employer still pay tax on the employers' income.

Please clarify. Any help on the same will be highly appreciated.

Regards,
Dan

You can see the following link for tax paid by the employer on behalf of the employee: [PwC News Alert - Sedco Forex International Drilling Inc.](https://www.pwc.in/services/tax/news_alert/2012/pdf/pwc_news_alert_14_august_2012_sedco_forex_internat ional_driling_inc.pdf)