The salaried class will be left with less disposable incomes. BIJU GOVIND hears that this may reduce its investing appetite.
Any modification in income tax rules finds resonance in the real estate sector.
Property developers are confused how the new rule taxing employees for perquisites will have an impact, as this will eat into the disposable incomes now available with the salaried class and hence, reduce investments such as those in property.
With the notification issued by the Central Board of Direct Taxes on December 18, the salaried class will have to pay more in personal income tax based on the fringe benefits they get. Earlier, the employers used to pay the tax on the perks, including residential accommodation and conveyance facility, as fringe benefit tax (FBT). This tax was abolished with the Union Budget for 2009-10. This has been revived now, but the onus is on the employees to make the payment.
The new rule means that the salaried class will not have as much disposable income as they previously had and had utilised for investments. Usually, private companies provide huge fringe benefits in the form of cash to the employees, apart from the salary.
Now, all these benefits and those such as accommodation and conveyance will be taxed.
The new rule comes into force with retrospective effect from April 1, 2009. Thus, employees will have to pay the tax for 12 months in the remaining four months of the financial year.
Maybe, information technology professionals, doctors, engineers, architects and chartered accounts who draw huge salaries can continue investments as they will have substantial disposable incomes even after the outgo on income tax based on the new computing.
Bulk of borrowers
The salaried class who form the bulk of the home loan borrowers will be affected, says Sasidharan Nair, Senior Manager (Retail), Federal Bank. The new computing will be based on the income chargeable under the head ‘salaries’ and the value of perquisites provided by the employer directly or indirectly to the assessee (employee) or to any member of his or her household by reason of employment. There are specific rules if the accommodation is provided by any other employer, if the accommodation is owned by the employer, or if the accommodation is taken on lease or rent by the employer.
If the accommodation is unfurnished, the tax will be 15 per cent of the salary in cities having populations exceeding 25 lakh as per the 2001 census; 10 per cent in cities having populations exceeding 10 lakh but not exceeding 25 lakh; and 7.5 per cent of salary in other areas in respect of the period during which the said accommodation was occupied by the employee during the previous year as reduced by the rent, if any, actually paid by the employee.
A furnished accommodation attracts 10 per cent more tax.
The tax will not be applicable if the accommodation is provided by the employer in an unfurnished hotel (except when the employee is provided such accommodation for a period not exceeding 15 days in aggregate on his transfer).
However, the employee will have to pay 24 per cent of the salary paid or payable for the previous year or the actual charges paid or payable to such hotel, which is lower, for the period during which such accommodation is provided as reduced by the rent, if any, actually paid or payable by the employee.
The amended rules have been notified at a time when the salaried class is likely lose the existing income tax exemption for housing loan interest payments up to Rs.1.5 lakh annually with the implementation of the new direct tax code from April 2011. Loan borrowers will be forced to spend more on tax payment and equated monthly instalments.
Professionals may have to think twice before taking a housing loan to get income tax exemption, bankers say.