Salary exemption

Tax queries 128 views 2 replies

Manish Nair

Articled Assistant

16 Points Joined October 2015

A foreign national, Mr. A, is a resident in India and has entered into an agreement with his employer wherein he is entitled to a net (in-hand) salary of ₹3 lakhs per month. As per the terms of the agreement, any statutory tax obligations arising over and above this amount are to be borne by the employer. Accordingly, the employer has grossed up Mr. A's income and discharged the applicable tax liabilities under the relevant income tax slabs. Mr. A has been paid net salary only, and the employer has paid the corresponding taxes on his behalf. His total salary income, after grossing up, amounts to ₹10 lakhs (since he joined in January).

In addition to his salary, Mr. A has earned other non-salary income of Rs.20 lacs on which no tax has been deducted at source (TDS). Mr. A contends that since the tax on his salary income has already been borne and paid by the employer, the same salary income should be excluded from the computation of his total tax liability, and only the tax on his other income should be considered.

Is Mr. A’s contention valid? Are there any judicial precedents, CBDT circulars, or relevant case laws clarifying this position?

Replies (2)

Rama chary Rachakonda

Master in Accounts & high court Advocate

9101 Points Joined December 2011

Mr. A's contention that his salary income should be excluded from the computation of his total tax liability is not valid. Here's why:

Tax Liability Calculation When an employer pays taxes on behalf of an employee, it's considered a perquisite and is added to the employee's income.

In Mr. A's case, his employer has grossed up his income and paid the applicable taxes.

This means the tax paid by the employer is part of Mr. A's total income.

Relevant Case Laws and Circulars According to the Income Tax Act, 1961, and various judicial precedents, circulars issued by the Central Board of Direct Taxes (CBDT) are binding on the revenue authorities.

However, these circulars cannot override the provisions of the Act.

In the case of K.P. Varghese vs. Income Tax Officer, the Supreme Court held that circulars issued by the CBDT are binding on the revenue authorities, but they must be consistent with the Act.

In Navnitlal Javeri vs. K.K. Sen, the court ruled that beneficial circulars can relax the rigors of the law, but they cannot contradict the statute.

Tax Implications for Mr. A Given the above, Mr. A's total income includes both his salary and non-salary income. The tax paid by his employer on his salary income is considered part of his total income.

When calculating his total tax liability, Mr. A's salary income, including the tax paid by his employer, will be considered along with his other income. Steps for Mr. A To comply with tax regulations, Mr. A should: -

*File his tax return*: Mr. A should file his tax return, including both his salary and non-salary income. -

*Calculate tax liability*: He should calculate his total tax liability based on his total income, including the tax paid by his employer. -

*Claim credit for taxes paid*: Mr. A can claim credit for the taxes already paid by his employer on his salary income.

Jayasurya B

CA Finalist

111 Points Joined July 2022

There is no clarifications, notifications in this regard. How ever, as per the general law of understanding while filing the income tax return we need shown income eaned and accrued in India ( since global income is taxable for resident ), whether tax paid by employer on behalf of employee or not. Hence, any tax paid by employer on behalf of employee, employee can claim benefit as a perquisites under section 40(a)(v) and balance tax liability to be paid in cash.

Further if any query, feel free to ask it.