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Profit in Lieu of or in addition to Salary

Updated on October 11, 2009

Profit in Lieu of or in addition to Salary

            “In lieu of” means "instead of"

It includes the followings:

1)         Any consideration for a person's agreement to enter into an employment    relationship.

2)         Any consideration received due to change in terms and conditions of         employment.

3)         Any amount received on termination of employment or compensation for    redundancy or loss of employment and golden handshake payment.

4)         Any amount received from any fund constituted by employer (excluding the            employee's contribution in such fund)

Loan to Employee

Where a loan is given by employer to employee, it may have the following situations:

i)          Interest free loan is given to an employee:

Interest calculated at the Bench Mark Rate shall be taxable. Benchmark rate for the tax year 2009 is 11%.

Illustration:

Mr. Ahsan has received following amounts from his employer during the tax year, 2009:

            Basic salary                                                                                                200,000

            Interest free loan provided by employer                                                      300,000

            Qualifications pay                                                                                         50,000

Required: Compute his total income for the tax year, 2009.

Solution:

            Basic salary                                                                                                200,000

            Interest on interest free loan (300,000 @ 11%)                                            33,000

            Qualifications pay                                                                                         50,000

            Total income                                                                                               283,000

ii)         Interest rate is less than Bench Mark Rate:

Where, actual rate of interest is less than bench mark rate, difference between bench mark rate and actual rate of interest shall be included in total income as interest on loan received from employer.

Illustration:

Mr. Ahsan has received following amounts from his employer during the tax year 2009:

            Basic salary                                                                                                200,000

            Special allowance                                                                                         75,000

            Loan received from employer @ 6%                                                          300,000

Required: Compute his total income for the tax year 2009.

Solution:

            Basic salary                                                                                                200,000

            Special allowance (Fully exempt)                                                                        Nil

            Interest on loan (11%–6%=5%) 300,000 @ 5%                                                     

            (Difference between bench mark rate and actual rate)                                15,000

            Total income                                                                                               215,000

Note:   Bench mark rate for the tax year 2009 is 11%. So, actual rate of interest is            less than bench mark rate, difference between bench mark rate and actual rate     of interest shall be included in total income as interest on loan received from             employer.

iii)        Interest rate is equal to Bench Mark Rate:

            Where loan is given by an employer to an employee @ 11%. In other words,          interest rate is equal to Bench Mark Rate, nothing shall be included in respect of   interest on loan in the total income of an employee.

Illustration:

Mr. Ahsan has received following amounts from his employer during the tax year, 2009:

            Basic salary                                                                                                200,000

            Loan received from employer @ 11%                                                        300,000

            Efficiency honorarium                                                                                   90,000

Required: Compute his total income for the tax year 2009.

Solution:

            Basic salary                                                                                                200,000

            Interest on loan received from employer @ 11%                                                Nil

            Efficiency honorarium                                                                                   90,000

            Total income                                                                                               290,000

Note:   Benchmark rate for the tax year 2009 is 11%, if actual rate of interest is equal to bench mark rate, nothing shall be included in the total income in respect of interest on loan received from employer.

iv)        Interest rate is higher than Bench Mark Rate:

There is no tax treatment of such loan.

Illustration:

Mr. Ahsan has received following amounts from his employer during the tax year 2009:

            Basic salary                                                                                                200,000

            Interest on loan received from employer @ 12%                                       300,000

            Overseas allowance                                                                                   100,000

Required: Compute his total income for the tax year 2009.

Solution:

            Basic salary                                                                                                200,000

            Interest on loan received from employer @ 12% (N-1)                                       Nil

            Overseas allowance                                                                                   100,000

            Total income                                                                                               300,000

Note:   Benchmark rate for the tax year 2009 is 11%. So, actual rate of interest is greater than benchmark rate, nothing shall be included in the total income as interest on loan received from employer.

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    • profile image

      raju 5 years ago

      whoever wrote this ... I take my hats off to you. This is the right way to write an article on finance.

    • Sun-Girl profile image

      Sun-Girl 6 years ago from Nigeria

      Awesome and very informative article you actually shared in here which i enjoyed reading from.

    • loveofnight profile image

      loveofnight 7 years ago from Baltimore, Maryland

      all i can say is it looks good on paper

    • success79 profile image

      success79 8 years ago

      Informative article. Lots of good tips.

    • profile image

      keira7 8 years ago

      Thanks for the info, nice hub. Take care.