FBT gone? Your take-home pay may be less now

Fringe Benefit Tax was introduced in 2005 to be charged on the value of certain benefits offered by employers to their employees.

However, it turned out that the amount of tax collected by the government was not enough and the pain caused to corporates by way of compliance and paperwork was enormous. Under the 2009-10 Budget, FBT has been abolished.

Announcing the decision of the government to do away with FBT, Finance Minister Pranab Mukherjee said in his Budget speech that "this tax has been perceived as imposing considerable compliance burden. Empathising with these sentiments, I propose to abolish the fringe benefit tax."

While the abolition of FBT is going to be received very favourably by the finance departments at companies, the impact on your personal finances might not be the most optimal for you.

The removal of the FBT means that perquisites will be taxed in the hands of employees at the marginal rate of tax applicable to them...we will have to await the valuation rules applicable to perquisites.

All about tax proposals

Here's some analysis to show you why.

As you will see in the table below, we have considered the case of an employee -- earning an annual CTC (cost to company) of Rs 750,000 -- under the current scenario and the proposed scenario. The annual fringe benefits offered to the employee are just under Rs 300,000.

Assuming that under both scenarios the taxpayer is using their full Rs 1 lakh (Rs 100,000) 80C deduction, the net annual taxable salary under the existing scenario is Rs 368,000 and under the proposed scenario is Rs 644,996.

The new tax slabs

You will see that under the existing scenario, the take-home salary (i.e., CTC less income tax and FBT on fringe benefits provided) is Rs 700,418 (93% of CTC) whereas under the proposed scenario it will be Rs 649,576 (87% of CTC).

As this highly stylised example demonstrates, your personal taxation might be worse off under the proposed rules.

	EXISTING		PROPOSED UNDER BUDGET
	ACTUAL (Rs.)	TAXABLE	ACTUAL (Rs.)	TAXABLE
Basic Salary	25,000	25,000	25,000	25,000
House Rent Allowance	10,000	10,000	10,000	10,000
Special Allowance	4,000	4,000	4,000	4,000
Fringe Benefits from Employer
Club Membership	4,000	-	4,000	4,000
Tour and Travel Reimbursement	5,000	-	5,000	5,000
Hotel / Logding Reimbursement	2,000	-	2,000	2,000
Personal Conveyance Reimbursement	10,000	-	10,000	10,000
Gift Vouchers	2,500	-	2,500	2,083*
Monthly CTC	62,500		62,500
Annual CTC	750,000		750,000
Taxable Salary Per Month		39,000		62,083
Income Tax Computation
Total Annual Taxable Salary (Per Month x 12)		468,000		744,996
Less: 80C Deduction		100,000		100,000
Net Taxable Salary		368,000		644,996
Tax on Above (assuming applicable tax slabs)		22,454		100,424
Take-home Salary
CTC		750,000		750,000
Less: Deductions by payroll
Income Tax		22,454		100,424
FBT on Fringe Benefits Provided**		27,128
Take-home salary		700,418		649,576
Take-home pay as a percentage of CTC		93%		87%
* Gifts up to Rs 5,000 P.A. is exempt.
** This is paid by the employer, but the charge is passed on to the employee

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