Tax Column

I am a senior employee with a closely held private company having high net worth. In view of the pandemic, the employer has decided to give certain allowances to the employees of the company. The company will reimburse the expenses on grocery and children’s education. It will also give house rent allowance and fixed medical allowance. Conveyance allowance and transport allowance will also be given. In addition to that, the company will also provide ex-gratia amount to support some of the employees. Are all these allowances taxable as perquisite in the hands of the employees? 

Expenses on grocery and children’s education are definitely in the nature of perquisites and therefore will be considered as taxable salary. Similarly, medical allowance is fixed allowance paid to employees of a company on a monthly basis and irrespective of whether they submit the bills to substantiate the expenditure or not, it is fully taxable in the hands of the employee. Conveyance allowance will also be considered as a perquisite. However, it is exempt to the extent of amount actually spent. Exemption of transport allowance of Rs 1,600 per month granted to an employee is discontinued from assessment year 2019-20.

Therefore, transport allowance will also be considered as taxable perquisite. Ex-gratia payment made to employees is definitely part of salary and accordingly it is taxable. The house rent allowance is also a perquisite but employees will be entitled to some exemption as specified in the Income Tax Act. However, all the employees would be entitled to standard deduction of Rs 50,000 from their total salary income.

Conveyance allowance will also be considered as a perquisite. However, it is exempt to the extent of amount actually spent

I am an individual and have received a gift from a relative in view of the pandemic situation and lockdown. I have also received a gift on the occasion of my birthday during the lockdown period. Please let me know whether all these gifts received from relatives and on the occasion of my birthday are taxable in my hand.

Gifts received from relatives are exempt from tax by virtue of Section 56(2)(x) of the Income Tax Act. The following person would be considered as a relative: 1. Spouse of the individual 2. Brother or sister of the individual 3. Brother or sister of the spouse of the individual 4. Brother or sister of either of the parents of the individual 5. Any lineal ascendant or descendant of the individual 6. Any lineal ascendant or descendant of the spouse of the individual 7. Spouse of the person referred to in Clauses 2 to 6.

Therefore, if you have received a gift from any person who does not fall in the definition of a relative given above and the aggregate value of the gift received is Rs 50,000 then it is taxable as income from other sources. Gift received only on the occasion of marriage is not chargeable to tax. Hence, gift received on an occasion like birthday, anniversary, etc. will be charged to tax in your hand under Section 56(2)(x) of the Income Tax Act.

I am the managing director of a closely held company which is owned fully by myself and my wife. One of the old employees who has been with the company for more than 20 years died due to the corona virus. The management has decided to pay Rs 21 lakhs as compensation to the legal heirs of the employee. I want to know whether the company is liable to deduct TDS while making payment of compensation and also whether the compensation received is taxable in the hands of the legal heirs.

Voluntary payment of compensation to the widow or other legal heirs of the employee is not taxable under the Income Tax Act. The Central Board of Direct Taxes vide Circular No. 573 dated August 21, 1990 has clarified that lump sum payment made gratuitously or by way of compensation or otherwise to the widow or other legal heirs of the employees who dies while still in active service is not taxable under the Income Tax Act.

In your case, the employee was in active service before his death and payment is also voluntary; accordingly, lump sum payment will fall within the purview of Circular No. 573. Since the voluntary compensation paid is not taxable under the Income Tax Act, the company need not deduct any TDS while making payment of compensation to the legal heirs. At the same time, the amount will also not be taxed in the hands of the legal heirs under provision of the Income Tax Act.