The Income Tax Act 1961 has defined specified employees as individuals who hold a certain level of voting power in the company or equity shareholding. Apart from this, there are a lot more criteria for determining ‘Specified Employees.’ The rules for the taxation of specified employees are also different from those of non-specified employees. In this guide, we dive deeper into the concept of specified employees and the taxability of specified employees under the Income Tax Act.
Any individual who falls under any of these categories is known as a specified employee in Income Tax -
Section 2(32) defines substantial interest as an individual who is the beneficial owner of the shares not being entitled to the (excluding shares with a fixed dividend rate), whether they have the right to participate in profits or not. However, the individual must carry at least 20% voting rights in the company under consideration.
A beneficial owner means that even if a person does not hold shares of the company but has a beneficial interest in the shares, he will be known as a beneficial owner. Similarly, if the person is a registered owner of the shares but doesn’t have any beneficial interest in the company, he/she will not be covered under the definition of specified employees.
Income for this purpose is calculated by including the following taxable monetary payments -
Any allowances/perquisites that are not received in monetary form shall not be included.
Deduct the following from the salary for calculating the Rs.50,000 threshold -
Before we go ahead and try to understand the taxability of the salary/wages of specified employees, let us first understand the meaning of salary and wages. While salary is the fixed monthly payment given by the employer to the employee, wages refer to variable pay, generally paid hourly by the employer to the employee.
As per the Income Tax Act 1961, the salary/wages are taxed in the hands of specified employees. However, there are a few exceptions to this rule. Given below are the exceptions -
The bonuses and other type of compensation paid to specified employees is chargeable to tax under the Income Tax Act 1961. As per the Income Tax Act, 1961, a specified employee is an individual who works either in a public sector company or in a non-public sector company but has an annual income exceeding Rs.1,00,000.
If the compensation is paid in cash, the employee has to pay the tax on the amount received at the applicable rates. However, if the bonus or other compensation is paid in the form of any other asset like property, then the employee has to pay tax on the value of that asset at the applicable tax rates.
The taxability of stock options can vary depending on the type of option, holding period, exercise period, and the employee tax bracket.
Type of Stock Option: The type of stock option has a significant impact on its taxability. For example, for non-qualified stock options, the employee has to pay income tax on the difference between the fair value of the stock and the exercise price. Similarly, for qualified stocks, the employee has to pay capital gains tax on the difference between the stock’s market price and the exercise price.
Exercise Price: Exercise price refers to the price at which an employee can purchase stock. If the exercise price does not exceed the market price of stock, the difference is taxed at the normal slab rates. If the exercise price is more than the market price, then the difference is taxed as capital gains.
Holding Period: If the stock option is held for less than 1 year, it is taxed as short-term capital gain/loss. Similarly, if it is held for more than a year, it is charged to tax as a long-term capital gain/loss.
Employee’s Tax Bracket: If the employee belongs to a higher tax bracket, the tax amount on income will also be more and vice versa.
Gas, electricity, or water:
If the employer purchases this from an outside supplier, then
Taxable value = Actual amount paid by the employer - amount recovered from the employee.
Free domestic servant:
Taxable Value = Salary paid/payable to the servant - Amount recovered from the employee
Free or concessional education:
If the employer incurs any expense towards education, then
Taxable Value = Amount spent by the employer - Amount reimbursed by the employee.
If education is provided in an institution owned by the employer, then
Taxable value = Cost of education at a similar facility in that area - 1000 (per month, per child) - Expense incurred by the employee.
Not taxable if used for official purposes.
Taxable Value = The actual cost incurred by the employer - Amount reimbursed by the employee (if used for personal purposes)
Non-taxable if used for official purposes only.
If the car is exclusively used for personal purposes, then,
Taxable Value = Actual costs by employer + 10% of the actual cost of car (if the car is owned by employer)/Hiring Fees + chauffeur compensation (if applicable) - Amount repaid by the employee.
Being classified as a specified employee in income tax entails specific criteria, including holding a substantial interest in the company and meeting certain income thresholds. Specified employees face distinct tax rules concerning their salaries, bonuses, stock options, and various perquisites. It is integral to stay updated about these tax provisions as it will help you stay compliant with the tax laws. However, navigating the complex landscape of tax laws can be difficult. Seeking professional advice is the best way to sort your taxes.