Taxability in the hand of company and employee of free food
In today’s competitive environment the employers are constantly working hard with their Human resource department to lure their talented employees to retain them for future. For this purpose they use to give many perquisites and other amenities to their employees. One way is providing free food to the employees at the office premises. So that they do not require to carry the tiffin box with them and enjoy good hot food in the office. It will certainly improve their moral and they feel good about the organization. The one question arise is what is the tax treatment of this free food in the hands of organization and the employee? So we need to understand this taxability one by one.
Taxability in the hands of Employer
As the expense incurred by the company on providing free food is not covered under any other section of Income Tax Act 1961 (i.e, 30 to 36). This expense may be covered under section 37 of ITA. For this we must understand this section which reworded below:
37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".
Therefore If the expenses fulfill the below mention criteria then it will be allowable u/s 37 (1)
a. It is not covered under section 30 to 36
b. It is not a capital expenditure
c. It is not a personal expenditure
d. It is expanded wholly and exclusively for the purpose of business or profession
As the free food provided to the employee at the office premises is not covered under any of the other provisions of Income Tax Act and it is neither a capital nor a personal nature’s expenditure. It is also expended wholly and exclusively for the purpose of business or profession. Since by providing free food to employee the moral of the employee boosted and they will work hard and their productivity increases. Hence these expenses are fully allowed as deduction in the hands of employer under Income Tax Act. If the employer recovers any amount from the employee then the net amount will be taxable in the hands of employer.
Taxability in the hands of Employee
Section 17 of the Income tax Act defines the perquisites which is taxable in the hands of employee. The value of Free food is taxable in the hands of employee as per sub-clause (viii) of clause (2) of section 17 which reproduce below:
viii) the value of any other fringe benefit or amenity as may be prescribed
The prescribed method in discussed below:
Clause (iii) of Sub-Rule 7 of Rule 3 of Income Tax Rule is discussed below:
3. For the purpose of computing the income chargeable under the head "Salaries", the value of perquisites provided by the employer directly or indirectly to the assessee (hereinafter referred to as employee) or to any member of his household by reason of his employment shall be determined in accordance with the following sub-rules, namely:—
(7) In terms of provisions contained in sub-clause (viii) of clause (2) of section 17, the following other benefits or amenities and value thereof shall be determined in the manner provided hereunder:
(iii) The value of free food and non-alcoholic beverages provided by the employer to an employee shall be the amount of expenditure incurred by such employer. The amount so determined shall be reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity:
Provided that nothing contained in this clause shall apply to free food and non-alcoholic beverages provided by such employer during working hours at office or business premises or through paid vouchers which are not transferable and usable only at eating joints, to the extent the value thereof either case does not exceed fifty rupees per meal or to tea or snacks provided during working hours or to free food and non-alcoholic beverages during working hours provided in a remote area or an off-shore installation.
By analyzing this clause (particularly the red words) we can say that the Value of perquisite is equal to Amount of Expenditure incurred by employer minus Amount recovered from employee therefore we can conclude that:
Conclusion: Therefore the amount of Food allowance is taxable in the hands of employee if that part vis the expense per meal by the employer minus the amount recovered from employee exceeds Rs. 50/-. The excess amount over Rs. 50/- is taxable in the hands of employees.
Example 1: Free meal provided to employee amounting to Rs. 70 and Rs. 10 is recovered from employee then the Value of perquisite be = Rs. 70- Rs. 10 = Rs. 60/-
By application of the proviso to clause (iii) of Sub Rule 7 of Rule 3 the taxable amount in the hands of employee is = Rs. 60 - Rs 50 = Rs. 10/-
Example 2: Free meal provided to employee amounting to Rs. 70 and Rs. 30 is recovered from employee then the Value of perquisite be = Rs. 70- Rs. 30 = Rs. 40/-
By application of the proviso to clause (iii) of Sub Rule 7 of Rule 3 the taxable amount in the hands of employee is = Rs. 40 - Rs 50 = Rs. Nil/-
So it is very important to follow correct tax treatment of free food provided to employer to the employee by following the above mentioned analysis.