Understanding CBDT Notification : Changes to Perquisite Valuation Rules

Overview of CBDT Notification No. 94/2009

This article provides a concise summary of Notification No. 94/2009/F. No. 142/25/2009-SO(TPL), dated 18 December 2009 (Notification), issued by the Central Board of Direct Taxes (CBDT). The Notification introduces amendments to Rule 3 (Rule), which governs the valuation of perquisites arising from employment. Effective from 1 April 2009, the new Rule applies to all employers, including those previously subject to Fringe Benefits Tax (FBT) prior to its repeal. All employers must compute the taxable value of perquisites provided to employees in accordance with this new Rule from the specified date.

Background

Before the amendments made by the Finance (No. 2) Act 2009 (FA 2009), the taxation of perquisites provided to employees was divided into FBT (taxable in the employer's hands) and the erstwhile Rule (taxable in the employee's hands) as follows:

• FBT Liable Employers: Perquisites such as Employee Stock Option Plans (ESOPs), contributions to approved superannuation funds, motor vehicle expenses, club dues, gifts, scholarships, etc., were taxable to the employer under FBT.

• Non-FBT Liable Employers: For entities such as individuals, charities, and political parties, the perquisites listed above remained taxable in the hands of employees under the erstwhile Rule.

• Certain perquisites, including employer-provided accommodation, provision of domestic help, and utility payments, continued to be taxable in employees' hands.

The FA 2009, enacted on 19 August 2009, abolished FBT and reinstated the taxation of perquisites following the erstwhile Rule from 1 April 2009. The erstwhile Rule required amendments to ensure its full applicability, prompting anticipation for the revised Rules. Ultimately, the new Rule was notified on 18 December 2009, with retrospective effect from 1 April 2009.

Comparison of Perquisite Valuation Norms

Below is a comparative overview of the valuation norms that existed prior to the implementation of FBT versus the new norms following its removal:

Employer-Provision of Accommodation

Category	Valuation as per erstwhile Rule	Valuation as per New Rule
Central & State Government employees on deputation	No specific norms prescribed	7.5-15% of salary based on city population (plus 10% of furnishing cost, if applicable)

Employer-Provision of Motor Car

Usage Type	Valuation as per erstwhile Rule	Valuation as per New Rule
Mixed personal and official use, expenses reimbursed by employer	INR 1200 (plus INR 600 if a driver is provided) per month for cubic capacity < 1.6L	INR 1800 (plus INR 900 if a driver is provided) per month for cubic capacity < 1.6L
	INR 1600 (plus INR 600 if a driver is provided) per month for cubic capacity > 1.6L	INR 2400 (plus INR 900 if a driver is provided) per month for cubic capacity > 1.6L
Full private use, expenses covered by the employee	INR 400 (plus INR 600 if a driver is provided) per month for cubic capacity < 1.6L	INR 600 (plus INR 600 if a driver is provided) per month for cubic capacity < 1.6L
	INR 600 (plus INR 600 if a driver is provided) per month for cubic capacity > 1.6L	INR 900 (plus INR 900 if a driver is provided) per month for cubic capacity > 1.6L

Note: If documented evidence shows higher official usage, valuations can adjust downwards.

Employee Stock Option Plans (ESOPs)

Before the FA 2009 amendments, shares or securities given to employees at a discount were taxable under FBT upon option exercise or share allotment. The taxable value was the Fair Market Value (FMV) at vesting, minus any payments from the employee. Post-FA 2009, effective 1 April 2009, this benefit is now taxed at the employee level during option exercise or share allotment. The FMV is computed as of the exercise date, with the same timing for taxation, but the valuation calculation has shifted from vesting to exercise.

Definition of 'Salary' in the New Rule

The previous definition of "salary" in the erstwhile Rule did not explicitly exclude terminal benefits like gratuity or leave encashment from taxable calculations. The new Rule clarifies that these terminal benefits are excluded from the salary definition, ensuring that the perquisite valuation of employer-provided accommodation does not include such benefits during the employment termination year.

Conclusion

The valuation methodology established in the new Rule bears resemblance to the erstwhile Rule. However, certain issues stemming from the brief FBT period warrant further review:

• Meals provided during work hours were exempt under FBT, whereas the new Rule imposes a Rs. 50 limit per meal.
• Employers who had paid FBT prior to FA 2009's enactment lack clarity on whether to reclaim these amounts.
• Expenses for festival celebrations were subject to FBT but are not mentioned in the new Rule, leaving their tax status ambiguous.
• Employers must recalculate the value of perquisites provided from 1 April 2009 and recover shortfalls in TDS. This raises questions about the obligations towards employees who have left prior to the new Rule's issuance and how the employer should manage tax deductions.

Overall, while the new Rule does not represent a significant shift in perquisite taxation for the current financial year, adherence to TDS requirements remains crucial for employers to ensure compliance.