Fringe Benefit Tax: A Detailed Guide
- Nimisha Panda
- Aug 6
- 4 min read
The Income Tax Act has eliminated several clauses, citing the complexity and the difficulty of compliance for taxpayers. Among the provisions eliminated was the notion of a fringe benefit tax. The company was required to pay the Fringe Benefits Tax (FBT) in exchange for the benefits that the employees received. The value of benefits not covered by employees' salaries determines this. Despite preventing some benefits from being taxed, it ended in 2009 due to administrative difficulties and increased employer compliance load. This article discusses the concept of fringe benefits tax in detail.
Table of Contents
What are Fringe Benefits?
Extra compensation that firms pay their workers apart from their base pay is known as fringe benefits. Fringe perks include health insurance, retirement plans, childcare, paid time off, tuition assistance, entertainment, and transportation. Fringe benefits enable to attract and retain skilled workers as well as to motivate and reward them for their efforts. Depending on their form and value, fringe benefits may have tax implications for both the company and the employee.
Types of Fringe Benefits
Two categories of fringe benefits exist:
Legal requirements for fringe benefits: The law requires businesses to provide their employees with fringe benefits, which are non-cash benefits. Social Security, unemployment insurance, workers' compensation, health insurance, and paid time off are a few examples of these benefits. All employees must be eligible for these perks from their employers.
Fringe benefits not mandated by law: Some perks are offered at the employer's discretion and not required by law. These include free or inexpensive equity shares, tuition help, gym memberships, and cash prizes. Qualified workers are drawn to and kept by these benefits, which also encourage improved performance.
Benefits Regarded as Fringe Benefits
The Act gives a thorough definition of fringe benefits. Section 115WB defines fringe benefits as
Any service, whether or not it is paid for
Free or discounted tickets offered by the employer outside of formal events
Employer's contribution to authorized superannuation funds
Sweat equity shares, employee stock option plans, and other similar allocations of shares made by employers to employees at no cost or a reduced rate
It offers perks like club memberships, entertainment, hospitality, gifts, scholarships, and more.
What is Fringe Benefit Tax?
The Fringe Benefits Tax imposes financial obligations on firms for specific advantages they offer to their staff. Health insurance, loans, entertainment, and parking are examples of fringe benefits. Calculated on the taxable value of the fringe benefits, the fringe benefits tax is distinct from income tax. Its goal was to bring benefits that were previously exempt from taxes under the tax net and set at 30% of the cost of benefits the corporation paid.
Illustration: Assume that A Ltd. offers the following benefits to an employee B:
1.B's family complimentary tickets for a trip package worth Rs. 2,000,000
GST: 36,000 rupees.
The invoice's total value is Rs. 2,36,000.
2.Rs. 50,000 was contributed to the golf club's membership.
Of the aforementioned perks, (1) is not regarded as a component of pay, but (2) is.
Fringe Benefit Tax does not occur in the hands of the employer since (2) is regarded as a salary and would be subject to taxation in the employee's hands under the head salary. Since (1) is not regarded as a salary, the employee will not be taxed on it as salary income. As a result, the employer in this instance faces FBT ramifications. Employer A Ltd. is required to pay FBT of Rs. 60,000 (with relevant surcharge and cess) (Rs. 2,00,000 * 30%). Notably, the GST component of the benefit is not taken into account when calculating taxes. It would have a cascading effect if it were added, meaning that taxes would be paid again on the tax component.
Intent Behind Fringe Benefit Tax
Per the terms of the Income Tax Act, an employee's salary, allowances, perquisites, and other benefits are taxable.
The business was able to recoup the costs by declaring some employee benefit spending as non-salary in the books. Since the identical sum is not a salary, it was likewise not taxable in the employee's hands.
As a result, neither the company nor the employee had to pay taxes on the costs of employee benefits.
The idea of a fringe benefit tax was to prevent these perks from being untaxed.
Exemptions from Fringe Benefit Tax
According to the act's exclusions, several perks fail to qualify as fringe benefits for income tax purposes. Among them are:
Benefits given to workers to satisfy any legal requirements
Costs associated with mitigating potential risks at work
Providing first aid supplies in the hospital or dispensary run by the employer
Provide childcare services to the employee's kids;
Supporting an athlete, working as an employee,
Plan sporting events for staff members,
Give away free or heavily discounted samples.
Conclusion
Despite the removal of the fringe benefits tax, the basic concept of safeguarding against untaxed benefits remains relevant to the existing provisions of the law. Shares granted under the Employee Stock Option Scheme or Sweat Equity Shares, for example, were formerly regarded as fringe benefits and subject to employer-imposed taxes to avoid non-taxation. The bonus is now taxable in the employees' hands as a prerequisite to avoid non-taxation. Nonetheless, a number of these cases demonstrate the government's determination to ensure these benefits are not exempt from taxes and eradicate any chance of tax fraud.
Frequently Asked Questions
Is Fringe Benefit Tax still applicable?
In India, fringe benefits are exempt from taxes. However, the benefits' value is added to the workers' income and then recouped as income tax. Income tax, however, is determined by the salary slab, if applicable.
What is the tax rate for fringe benefits?
Even though these benefits are now tax-free, the value of the benefits that companies offered was subject to a 30% tax rate when the fringe benefits tax was in place.
Should employees pay Fringe Benefit Tax?
No, the employer must pay the fringe benefit tax.
Does FBT result in Double Taxation?
No. Only a few benefits are exempt from taxes due to FBT. Double taxation is not the outcome.
To whom fringe benefit taxes are applicable?
For these perks provided to employees, the company is subject to taxes.
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