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Payroll rules for food coupon/meal voucher
We examined issues pertaining to taxation of food coupon/meal voucher in the previous post. Let us take a look at the business rules payroll managers need to consider while administering meal vouchers.
1. When to issue meal vouchers–beginning or end of the month?
Some organizations issue meal vouchers at the end of the month while others issue meal vouchers at the beginning of the month. We have come across a company which issues meal vouchers in advance for each quarter. You may choose to issue meal vouchers whenever you wish. However, in order to claim tax exemption, employees are supposed to use meal vouchers for consuming food during working hours. If an organization issues meal vouchers at the end of a month, it could be argued that the total amount of meal vouchers issued in that month shall be taxable in that month since there is no way the meal vouchers can be used by employees for consumption in that month. In such a case, tax exemption to the extent of Rs. 50 per meal, if applicable, can be claimed only in the next month.
2. Display in payslip.
Some organizations show the value of meal vouchers on both the pay and the deduction side of payslip while some do not. We are of the view that meal voucher–given that it is a non-cash perquisite–is to be kept out of the payslip. After all, we do not show the value of perquisites such as accommodation and car in the payslip.
3. Impact of loss of pay.
Whether or not the value of meal vouchers issued to employees gets impacted by loss of pay shall be determined by the business rules in your organization. But please note that the value of meal vouchers should be adjusted for loss of pay in order to calculate the perquisite value of meal vouchers for taxation.
4. Issuance of meal vouchers in the first and last months of service.
In the first and last months of an employee’s service, if the employee works less than full month, many organizations pay the corresponding value of meal vouchers by cash and tax it fully. This is because the amount payable to employee under the meal voucher head many not correspond to the meal voucher denominations available. For example, if an employee is entitled to get meal voucher to the extent of Rs. 2,000 per month and in the first/last month (a 30-day month) of service he works only for 7 days, then the value of meal vouchers to be issued to the employee for the first/last month shall be Rs. 467 after rounding off. Given that meal vouchers may not add up to Rs. 467 on account of the available denominations, you may consider paying it out as cash in the first/last month of service.
The alternative is to issue meal vouchers for the whole month, irrespective of when an employee joins or leaves the organization, and make a cash deduction in the payroll/final settlement to the extent the employee has not worked for the month.
If you decide to issue meal vouchers in advance each month, you will have to recover the cash value, if applicable, of meal vouchers from an employee who leaves your organization before the end of month during the final settlement calculation.
5. Meal vouchers as a flexi-pay component.
Some organizations allow employees to switch between meal vouchers and cash as and when employees wish. While there is nothing wrong in giving the flexibility to employees, payroll managers need to take cognizance of the additional administrative effort in managing issuance of meal vouchers and keeping track of the pay structure changes when employees switch from meal vouchers to cash and vice versa.
6. Meal vouchers in case of arrear pay.
Your organization may decide to include meal vouchers when there is a pay hike with retrospective effect. You may issue additional meal vouchers towards “meal voucher arrear” in case of a retrospective hike. But please note that the tax exemption can be availed only to the extent of Rs. 50 per meal.
Taxability of food coupon/meal voucher
We find a number of organizations that issue food coupons/meal vouchers to employees each month not adhering to perquisite valuation rules issued by the Income Tax Department. Let us examine the text of the perquisite valuation rule governing issuance of meal vouchers and study the underlying conditions that are to be satisfied for availing tax exemption on meal vouchers.
The perquisite valuation rule governing issuance of meal vouchers is as follows. You can take a look at the source by clicking here.
(iii) The value of free food and non-alcoholic beverages provided by the employer to an employee shall be the amount of expenditure incurred by such employer. The amount so determined shall be reduced by the amount, if any, paid or recovered from the employee for such benefit or amenity:
Provided that nothing contained in this clause shall apply to free food and non-alcoholic beverages provided by such employer during working hours at office or business premises or through paid vouchers which are not transferable and usable only at eating joints, to the extent the value thereof either case does not exceed fifty rupees per meal or to tea or snacks provided during working hours or to free food and non-alcoholic beverages during working hours provided in a remote area or an off-shore installation.
The above rule (Rule 3(7)(iii)) states that value of free food and non-alcoholic beverages or meal vouchers provided by the employer is exempt from income tax to the extent of Rs. 50 per meal. Please note that the tax exemption is to be calculated on a per-meal basis and not on a per-month basis. We find many organizations providing meal vouchers to the extent of Rs. 3,000 per month and not calculating any tax on the same. Some payroll managers argue that Rs. 50 per meal translates into Rs. 100 per day (assuming two meals per day) and finally into Rs. 3,000 per month (for 30 days) and hence meal vouchers are exempt to the extent of Rs. 3,000 per month.
For a meal voucher to be tax exempt to the extent of Rs. 50 per meal, the meal voucher should be used only during working hours. If an employee consumes two meals a day using meal vouchers in a working day and works for 22 days in a month (excluding holidays on Saturdays and Sundays), then meal vouchers can be tax exempt only to the extent of Rs. 2,200 per month (Rs. 50 per meal x 2 x 22 days). If the organization provides meal vouchers worth Rs. 3,000 for the month, then Rs. 800 (Rs. 3,000 – Rs. 2,200) shall be taxable in the hands of the employee.
“Meal” in this case should be understood to refer to breakfast, lunch, and dinner.
Please note that there is no restriction in Rule 3(7)(iii) on how many “meals” can be consumed each day for availing the Rs. 50 per meal exemption limit. One or two “meals” per day during working hours could be considered as reasonable.
In addition, the meal vouchers issued to employees should be non-transferable and used only in eating joints. Since tax exemption is restricted to Rs. 50 per meal, payroll managers would do well to issue meal vouchers only in Rs. 50 (or less) denomination. Issuance of meal vouchers of higher denomination (say, Rs. 100) may attract tax.
At the end of each month, payroll managers should make note of loss of pay and other leave days (Casual Leave etc.) of employees and correspondingly calculate the perquisite value for the meal vouchers issued.
While employers cannot keep track of whether food coupons/meal vouchers are used only during working hours and only in eating joints, payroll managers should inform employees regarding the tax rule governing meal vouchers, and ask employees to adhere to the rules from their end.
Section 206AA: Calculation of TDS on salary
In the previous post, we talked about Section 206AA and its applicability to TDS on salary. Let us examine how to calculate TDS on salary as per this section.
According to Section 206AA, if a deductee (employee) does not furnish a valid Permanent Account Number to the deductor (employer) then:
tax shall be deducted at the higher of the following rates, namely:—
(i) at the rate specified in the relevant provision of this Act; or
(ii) at the rate or rates in force; or
(iii) at the rate of twenty per cent.
Calculation of TDS on non-salary payments as per Section 206AA is quite straightforward; if the prevailing TDS rate is less than 20% then deduct TDS at 20% else deduct TDS at the prevailing rate.
With regard to TDS on salary, there is more than one way of calculating TDS on account of Section 206AA. This is because TDS on salary is calculated not at a flat rate but on the basis of a combination of tax rates in different income slabs. The question is what slab rate should 20% be compared with. Unfortunately, the Income Tax Department has not specified the method of TDS deduction under Section 206AA. It would be useful if the Income Tax department provides supporting text and numerical examples every time a notification, which has an impact on tax calculation, is issued.
Here is a method, which according to us, goes well with the letter and spirit of Section 206AA.
1. Determine the amount of taxable income after all exemptions and deductions for the year.
2. Apply tax rates as per the following income slabs and calculate the annual tax.
| Annual taxable salary (Rs.) | Rate (%) |
| Up to 160,000 (Male employee) | 0 |
| Up to 190,000 (Female employee) | 0 |
| 1,60,001 – 5,00,000 | 20 |
| 5,00,001 – 8,00,000 | 20 |
| 8,00,001 upwards | 30 |
You may have noticed that we have replaced 10% with 20% for the Rs. 1,60,001 – Rs. 5,00,000 income slab in the above table.
By applying the above rates, we can ensure that the TDS on salary is calculated at 20% or higher–as mandated by Section 206AA.
3. Calculate the monthly tax amount and deduct the same from the employee’s pay.
Example: A male employee without a valid PAN has a taxable income of Rs. 190,000 after all exemptions and deductions.
Total annual TDS on account of Section 206AA: Rs. 6,000 (i.e. Rs. 30,000 x 20%).
In this case the employee is in the 10% slab. Please disregard the 10% rate and apply tax at 20%. Use the resulting annual tax amount to determine the monthly tax to be deducted.
Presentation of the TDS amount in Form 16
Please note that Section 206AA pertains only to TDS to be deducted and not the actual tax liability of an employee. The Form 16 issued to employees should present both the actual tax liability (calculated by applying the tax rates as per income slabs) of the employees and the (higher) TDS amount deducted on account of applying the 20% rate.
If the employee in the example (stated above) does not furnish PAN till the end of the year, his Form 16 shall present a tax refund as follows.
1. Total taxable income: Rs. 190,000
2. Total tax for the year: Rs. 3,000
3. TDS deducted: Rs. 6,000
4. Refund: Rs. 3,000
What if an employee has income from previous employment and other income?
Income from previous employment and other income should be considered for calculation of taxable income. However, the rate of 20%, if applicable, should be used for the sake of TDS calculation.
What if an employee submits a valid PAN in the middle of the year?
Whenever an employee submits a valid PAN, stop applying Section 206AA for calculating TDS on salary for the employee.
Section 206AA: Higher TDS on salary
The Income Tax Department, by introducing Section 206AA, has mandated that TDS deductors should deduct TDS at 20% or the actual TDS rate(s), whichever is higher, in the event of the assessee (deductee) not submitting a valid Permanent Account Number (PAN).
You can take a look at the text of Section 206AA by clicking here. This section is effective April 01, 2010.
The idea behind Section 206AA is to penalize assessees who do not have a valid PAN. Given that the 20% TDS rate could be higher than the TDS rate prescribed by law in many instances, assessees who do not have a valid PAN will be forced to get themselves a PAN in order to avoid the possibility of seeking refund.
The question for payroll managers is whether Section 206AA is applicable to TDS on salary payments.
We hear from some tax practitioners that the tax department intends to bring only non-salary payments under Section 206AA, and hence salary payments are excluded from this section.
While the text of Section 206AA does not make any explicit reference to TDS on salary, nowhere in the text it is mentioned that Section 206AA is not applicable to salary payments. In fact, the text states that all payments under Chapter XVII-B (Chapter 17B) are to be considered for the applicability of Section 206AA. Since chapter XVII-B includes payments under Section 192 (salary payments) of the Income Tax Act, payroll managers should assume that Section 206AA covers salary payments.
Things to do for the payroll manager with regard to conforming to Section 206AA
| 1. | Check the validity of PAN of your employees |
A payroll manager should deduct TDS on salary as per Section 206AA for employees:
- who have not submitted PAN
- who have submitted invalid PAN
- who have submitted PAN which is not theirs
Please collect PAN information from employees who are yet to submit the PAN information. With regard to employees who have provided the PAN information, please check the validity of PAN of both existing and new employees in your organization ahead of monthly payroll.
You could do an online check on the PAN of employees in your organization by using the NSDL site. For information in this regard, please take a look at the following link.
http://tin.nsdl.com/onlinepanintro.asp
In case any of your employees do not have PAN, please inform them you may deduct TDS at a higher rate in case they do not submit a valid PAN. Ideally, PAN should be included in the employee master data which is collected at the time of an employee joining your organization.
| 2. | Include PAN in all salary related communication to employees. |
According to Section 206AA,
The deductee shall furnish his Permanent Account Number to the deductor and both shall indicate the same in all the correspondence, bills, vouchers and other documents which are sent to each other.
Hence, in payslips and other documents pertaining to compensation, please state the employee PAN.
| 3. | Deduct TDS as per Section 206AA, where applicable |
Please note that Section 206AA is applicable only if the deductee has an incidence of income tax. In case of salary payments, if an employee has a taxable income which is below the minimum taxable income i.e. less than Rs. 160,000 per annum for male and less than Rs. 190,000 for female employees, then Section 206AA will not be applicable even if the employee does not furnish PAN. Please take care to exclude such employees from the purview of Section 206AA.
We will discuss the methodology for deduction of higher TDS under Section 206AA in the next post.
Changes to Form 16 format
The Income Tax Department has announced modifications to the format of Form 16 in its notification dated May 31, 2010. You can take a look at the notification and the new Form 16 format by clicking here. The highlights pertaining to the new Form 16 format are as follows.
| 1. | The new format should used for tax on salary, deducted on or after April 01, 2010. |
| 2. | Employers should issue Form 16 to employees by May 31 of the financial year, immediately following the financial year in which the salary was paid and tax was deducted. |
| 3. | There are two parts in the new Form 16 format:
Part A: Presents information such as PAN of the employer, employee etc., and a summary of the tax deducted at source with information such as Form 24Q receipt numbers, amounts of tax deducted and remitted. Part B: Presents salary, exemption, and deduction information for the employee along with the signature of the person responsible for deducting tax in the organization. |
| 4. | Unlike the earlier Form 16 format the new one does not include details of tax remittance. Information pertaining to tax remittance including information such as challan identification number and bank BSR code should be presented in what is called Annexure B for non-government deductors and Annexure A for government deductors. Non-government employers should enclose Annexure B along with Form 16. |
According to the notification,
If an assessee is employed under more than one employer during the year, each of the employers shall issue Part A of the certificate in Form No. 16 pertaining to the period for which such assessee was employed with each of the employers. Part B may be issued by each of the employers or the last employer at the option of the assessee.
The purport of the above text in the notification is not very clear. We wonder why any employee would not want to have Part B of the Form 16 from any of their employers if they change jobs during a year. If anything, employees should insist on receiving the Form 16 in full from all their employers in a year in order to have adequate information for filling in their tax return. Also, in case of tax refund, only when employees have complete information in their Form 16 will they be able to claim their refund correctly.
From the point of view of employers, it would be cumbersome to check with their employees whether they want Part B of the Form 16 before issuing Form 16.
Form 16 – Salary and TDS pertaining to previous employment
When employees change their job, they have the option of declaring their salary and tax on salary — pertaining to their previous employment — to their current employer for the sake of tax deduction.
When the current employer issues Form 16 for an employee, can information on salary and TDS pertaining to previous employment of the employee be shown in the Form 16?
Some tax practitioners opine that salary and TDS pertaining to the previous employment should be added to salary and TDS pertaining to the current employment, and the total amounts of salary and TDS should be shown in the Form 16 issued by the current employer.
We disagree with the above view.
We believe that salary and TDS pertaining to previous employer should not be presented in the later employer’s Form 16 for the following reasons.
| 1. | There is no place in the current Form 16 format (as prescribed by the tax authorities) to present salary and TDS amounts pertaining to previous employment of an employee. |
| 2. | A company, while it can consider salary and TDS pertaining to another employer for the purpose of tax calculation on salary, cannot certify salary and TDS pertaining to the other company in its TDS certificate (Form 16). |
| 3. | If the previous employer salary and TDS are presented in Form 16, there will be a mismatch between data in the annexure of the fourth quarter Form 24Q and Form 16. This is because a company cannot present salary and TDS data pertaining to previous employer in its Form 24Q. The Annexure 2 of the fourth quarter Form 24Q contains nothing but details of an employee’s Form 16. |
| 4. | If TDS pertaining to the previous employment is added to the tax deducted by the current employer, the Form 16 will show a shortfall in tax remittance by the employer.
For example, let us consider the following: If in Form 16 the above two are added, the total tax deducted will be shown as Rs. 15,000 for the year, while the total tax amount remitted (by way of TDS challan payments across months) will only be Rs. 5,000 since the current company can only present the tax amount remitted by it. This gives an incorrect picture that the employer has not remitted fully the tax amount deducted. |
In short, our view is: “Consider previous employer salary and TDS for tax calculation, but not for display in Form 16.”
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