Income tax Grossing up & TDS Gross up calculator

Income tax Grossing up & TDS Gross up calculator

Definition of 'Gross Up'

Practice usually in reference to an employer reimbursing a worker for the taxes paid on some portion of their income, usually from a one-time payment such as relocation expenses. In other words, if an employee is promised 50,000 for relocation expenses, the actual check might be issued for 65,000. This would leave the promised 15,000 after the required taxes had been deducted (this is just an example). Term also includes the process by which corporation add credits (e.g. imputation credits or foreign tax credits) received to net income received before calculating their tax liabilities.

(Source: investopedia.com)

Why Grossing Up?

Expatriates coming into India and working in various companies are generally tax equalised i.e., the tax payable in India on their salary and perquisites is borne by the employer. This is to ensure that they remain tax neutral in respect of their Indian assignment. In other words, the expatriate employees are assured net-of-tax salary income. Consequently, their income is grossed up for determining the tax payable in India.

Whether such tax paid by the employer is in the nature of perquisites. If yes then whether it constitutes a monetary payment or is to be considered as a non-monetary perquisite.

Yes, depending upon the position, the tax paid by the employer is added once to the taxable income or is subject to multiple grossing.

For example, if the employer agrees to pay INR 100 net-of-tax salary to the employee in India, the tax rate is 34%. Then, if such tax payment by the employer is considered to be a "non-monetary perquisite" then only INR 34 shall be added to the taxable income of the employee. Whereas if such tax payment by the employer is considered a "monetary payment" then INR 34 will be subject to multiple grossing up and INR 52 will be added in the taxable income of the employee such that after paying tax of 34% on INR 152, the employee receives INR 100 (approx) net of tax salary.

This issue has been subject matter of litigation between the taxpayers and the income-tax authorities. In two of the earlier decisions, the Delhi Tribunal had held that tax paid by employer is a monetary payment and hence outside the purview of Section 10(10CC). Consequently such tax needs to be subject to multiple grossing up.

Recently, the special bench of Delhi Tribunal has overruled the aforesaid two judgments and has held that tax paid by the employer on behalf of the employee would constitute a 'perquisite'. Further, even though such tax payment may be considered a monetary gain, a monetary benefit or a monetary allowance, it cannot be considered a monetary payment to the employee. (Source ET/KPMG)

Step by Step calculation Gross up amount

Step 1: Here we will first calculate TDS liability in normal way.

Step 2: Calculated Tax % as per existing Tax Slab, let us assume it is 20.6%

Step 3: Find out Gross up % i.e. 100 – Tax Rate i.e. 100- 20.6=79.40%

Step 4: Calculate Gross up Tax amount, it is Tax amt in Step 1 divide by Gross up rate in Step 3

Step 5: Add Tax calculated in Step 4 to as Taxable Perquisite to Income given in Step -1

Step 6: Now Re-Calculate tax liability & net Income, now you can see net income is same as Gross Income

Refer attach file for reference, excel formula won’t give accurate result when there is jump in slab as since it requires iteration, you can use Macro given in Macro sheet to calculate the same.