PROSPERR.IO

The transfer of movable assets from an employer to an employee or their household members can offer substantial benefits. However, such transfers are subject to the determination of perquisite in the case of an employee for the purpose of computing income under the heading “Salaries," which needs to be carefully understood.

In this article, we’ll learn about the perquisite value of these transferred assets for taxation purposes and provide examples to elucidate the process.

Valuation Method

The value of the benefit arising from the transfer of movable assets from an employer to an employee or their household members is determined using a standardised method under 3(7)(viii) of the Income Tax Rules .The computation of perquisite value in respect of such a transfer of assets involves calculating the actual cost of the asset to the employer and then adjusting it for normal wear and tear.

• Actual Cost: The initial step is to ascertain the actual cost of the asset to the employer.
• Normal Wear and Tear: The cost of normal wear and tear is then deducted from the actual cost. This deduction for each completed year -
• For computers and electronic items, it is calculated at 50% of the actual cost by the reducing balance method.
• For motor cars, it is calculated at 20% of the actual cost by the reducing balance method.
• For other assets, it is calculated at a rate of 10% of the actual cost by the reducing balance method.
• Further Deduction: The further deduction is made for any consideration paid or recovered from the employee for the transfer of the asset.

Examples

Let's consider some of the examples to illustrate this valuation method:

Example 1: Transfer of a Laptop

Suppose an employer transfers a laptop to an employee after two years of use. The laptop was initially purchased for ₹50,000. The normal wear and tear rate for laptops is 50% per annum.

• Actual cost to the employer: ₹50,000
• Wear and tear deduction for first year: 50% of ₹50,000 = ₹25,000
• Wear and tear for second year on reduced balance: 50% of ₹25,000 (₹50,000 -₹25,000) = ₹ 12,500/-
• Reduced cost for transfer = ₹50,000 - (₹25,000 + ₹ 12,500) = ₹ 12,500/-
• Consideration paid by the employee: ₹5,000

Therefore, the taxable benefit arising from the transfer of the laptop would be ₹7,500 (₹12,500 - ₹5,000).

Example 2: Transfer of a Car

Now, let's consider the transfer of a motor car from an employer to an employee after three years of use. The car was initially purchased for ₹8,00,000. The normal wear and tear rate for cars is 20% per annum.

• Actual cost to the employer: ₹8,00,000
• Wear and tear deduction for the first years: 20% of ₹8,00,000 = ₹1,60,000
• Wear and tear deduction for second years on ₹6,40,000 (₹8,00,000-₹1,60,000) = 20% of ₹6,40,000 = ₹1,28,000
• Wear and tear deduction for third years on ₹5,12,000 (₹6,40,000 - ₹1,28,000 ) : 20% of ₹5,12,000 = ₹1,02,400
• Reduced cost for transfer =
• ₹5,12,000 -₹1,02,400= ₹4,09,600
• Consideration paid by the employee: ₹1,50,000

Therefore, the perquisite value would be ₹2,59,600 (₹4,09,600 - ₹1,50,000)

Conclusion

The valuation of movable assets transferred from employers to employees involves a prescribed method that accounts for the asset's actual cost, normal wear and tear, and any consideration paid by the employee. By understanding this valuation process and applying it accurately, both employers and employees can navigate the tax implications of asset transfers effectively. It is essential to maintain accurate records and seek professional advice if necessary to ensure compliance with tax regulations. Explore Flexi Benefits with a Free Demo! 

[Disclaimer: The article is only for educational purposes and is not to be construed as tax advice. The relevant provisions of the Income-tax Act may be referred to, for complete understanding.]