Fringe Benefits Tax Meaning, Rules, & More

Key Takeaways: 
 

• Fringe Benefits Tax is a tax applied to the extra benefits provided by employers to their employees. 
   
• It is treated as a direct tax, which is paid by the employers and not the employee. However, it is not applicable in India anymore. 
   
• Fringe benefits tax India covers perks like travel, gifts, and other employee welfare expenses. 

If you are a corporate or government office worker, you will be aware of the extra perks that the company provides its employees. Such perks include travel allowances, gifts on occasions, and other accommodations. But are you aware what these perks are provided for and what they are called? 

The benefits that you receive and forget about the very next day used to be a huge thing for a company. Buying so many presents for the employees, and on top of that, the government used to apply tax on such benefits. It is for sure unbelievable. Instead of taxing the employees individually, the company itself used to pay taxes for providing extra benefits to the workers. 

Have you noticed how I am talking about it in the past tense? Yes, I am talking about it in the past tense, so is fringe benefit tax still applicable in India? No, this rule does not apply anymore in India. A few years back, the government decided to stop this process, as it created confusion in tax collection for the businesses. However, this was widely used in the past and still exists in some countries. You need to scroll a bit to see what I am talking about here. 

Learning About Fringe Benefits Tax India

In simple words, a fringe tax is a tax applied to employers for providing non-cash benefits/perks to their employees other than salary. These perks may include benefits like free shuttle car service, health insurance, gifts, sponsored vacations, or even a gym membership. This process was designed to prevent tax avoidance and is paid by the company for the value of these perks. So, is fringe benefit tax direct or indirect? The answer is they are indeed direct. 

Basically, a fringe benefits tax was introduced for companies to avoid a tax loophole that was seen very commonly earlier. Previously, companies used to provide benefits to the employees and show them as a business expense and not a salary. This action led to claiming tax deductions on these benefits. As a result, they were completely avoided, and the tax on these perks was not paid by the company or the employee. To fix this issue, the government introduced FBT so the perks don’t escape taxation completely. 

What are the Benefits Considered as Fringe Benefits?

Fringe benefits include extra perks that an employer offers its employees, either paid directly or in the form of a gift. According to Section 115WB, benefits like these have a wide range of employee-related expenses. Below are some of the benefits: 

Other than these, companies also provided everyday perks such as entertainment, hospitality, club memberships, gifts, and eve scholarships. In simple words, anything offered other than a salary is considered a fringe benefit. 

Meaning Of Novated Lease Fringe Benefits Tax

This method of fringe benefit is a bit different from others. A novated lease benefit is a three-way agreement between the employer, employee, and the financier. Here, the employer promises to pay a car loan with the help of the employee’s pre-taxed salary by considering a salary sacrifice arrangement. This method helps employees by reducing their taxable income, and the car still remains in the name of the employee. 

However, the conditions may change under certain circumstances. If the employee leaves the job or gets terminated, the responsibility automatically shifts to them. The employer can still claim a lease payment as a deduction, but the car will be treated as a fringe benefit. The FBT amount is adjusted in the employee’s salary package, so it does not affect the employer’s finances. 

Before May 2011, this followed a different system where the tax depended on how much the car was used. Check specifications below:

This may seem a bit crazy, but this actually happened back then. Higher use meant lower taxes, which actually encouraged people to use the vehicle more. This is why the government later shifted to a flat rate system. 

Bonus Tip: A fun fact about fringe benefits tax: When It was introduced in India, the charge was around 30% of the value of employee benefits. This percentage was applied even when the company had no income-tax liability at all. 

What Is In The Fringe Benefits Tax Assessment Act 1986? 

We have already understood all the information we need to learn about fringe benefits. But the most important part here is to understand the Tax Assessment Act 1986. Below, we have provided a summarised form of the original act. If you want to read the official information, you can click on the link provided below: 

Fringe Tax Assessment Act 1986

Here is what is inside the PDF and the table above: 

1. The act is divided into 7 parts.
2. The most important section of all of these is the fringe benefits 
3. While other parts focus on liabilities, filing, tax recovery, and calculations 
4. This also helps understand the taxable benefits and exempt benefits. 

Most people can get confused about how to calculate the fringe benefits tax. I have some good news, you can actually use a fringe benefits tax calculator to do the needful. 

Conclusion 

Fringe benefits may no longer be a part of India’s tax system, but they are an interesting story that we tell. The story can actually be about how the tax system in India has evolved over the years and how people adapted to it. Even though it was cancelled by the government, it played an important role in the company’s financial stability. As of now, it is included as a taxed part of the salary, which has made the taxation clearer and more accountable for people. If you take a closer look, you will understand that FBT is all about offering fairness in the tax system. 

FAQs 
 

Is fringe benefit tax still applicable in India?

As per the last regime, the fringe benefit tax is not applicable in India anymore. This method of taxation was abolished in 2009, and till now it is not considered during filing. 

How do these fringe benefits get taxed?

Previously, the employer was responsible for filing the fringe benefits tax; however, now, they are calculated along with the employee's salary.

Are exempt fringe benefits tax-deductible?

The answer to this question is no. Exempt benefits are not taxed; similarly, the deductions will not be applied to exempt fringe benefits.

What is included in fringe benefit tax?

The fringe benefits tax includes perks such as sponsored travel, gifts, entertainment, club/gym membership, and expenses for the welfare of the employees.

Fringe benefit tax is direct or indirect?

Fringe benefits are a direct tax, meaning, it will be directly paid by the employer to the government. It is not passed on like an indirect tax and is linked to the taxable obligations.