When the Indian tax laws were amended in April 2005, the effect was that any benefits usually enjoyed collectively by employees that could not be attributed to individuals were now taxed in the hands of the employer as a fringe benefit tax (FBT). The rate applicable was 30% plus a surcharge of 10%, aggregating to 33% of a defined base.
Tax on contributions to superannuation funds
The benefits taxed as a fringe benefit were defined as:
- any privilege, service, facility or amenity, directly or indirectly provided by an employer, whether by way of reimbursement or otherwise, to employees (including former employees);
- any free or concessionary tickets provided by an employer for private journeys by employees or their family members; and
- any contributions made by an employer to an approved superannuation fund for employees.Prior to this amendment, contributions made by an employer to an approved superannuation fund for the benefit of employees were exempt from Indian income tax up to a limit of 15% per year of the employee’s salary.

Contributions to superannuation funds stopped
As a consequence of the above, most employers discontin-ued this benefit to their employees. Instead, benefits were given directly to employees as part of their CTC package (Cost to Company package), as there was no longer any tax exemption for contributions to a superannuation fund.

Tax relief restored with a threshold limit from April 2006
In February 2006, tax relief on superannuation benefit was restored with a threshold limit, so that only contributions in excess of INR 100,000 per year per employee paid by an employer to an approved superannuation fund would attract FBT.

As the contribution rate is generally 15% of an employee’s salary, most employees will be covered within this threshold limit. Even if contributions are in excess of INR 100,000, only the excess will be taxed at the prescribed rate.

This amendment is effective from April 2006. For the current financial year 2006 to 2007 (April 1, 2006 to March 31, 2007), it is therefore anticipated that employers will reinstate payment of superannuation contributions.Total group superannuation funds under management by Indian insurers are estimated to be in the region of INR 200 billion (USD 4 billion).

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