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Who are the Specified Employees? Are They Taxed Differently?

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The Income-tax Act, 1961 (‘the Act’) provides for the taxability of income of specified employees in India. The term ‘specified employee is defined in section 2(24)(ii) of the Act. The term ‘specified employee’ means an individual (not being a citizen of India) who is:

(A) a director of an Indian company or a foreign company having a place of business in India; or

(B) an employee of:

  • a foreign company having a place of business in India; or
  • an office or a branch located in India, of a foreign company; or
  • any other employer, a resident in India, in respect of any services rendered in India.

To be taxable in India, the income should be earned in India. The term ‘earned in India’ is defined in section 9 of the Act. The expression ‘earned in India’ concerning any income accruing or arising outside India shall mean the income which is received or is deemed to be received in India in convertible foreign exchange if it is received or is deemed to be received:

(a) in India; or

(b) by or through the transfer of a capital asset situated in India.

Accordingly, any income accruing or arising to a specified employee outside India shall be taxable in India if the income is received in India or is deemed to be received in India.

Did You Know? If you are a specified employee, you may have to pay an additional tax on bonuses, commissions, and other forms of deferred compensation. The additional tax is 20%, in addition to the regular income tax you would otherwise pay on these items.

Who are the Specified Employees?

A “Specified Employee” in India refers to an individual who:

  • Is a director of the company, or
  • Holds a key managerial position in the company, or
  • Is a member of the company’s Board of Directors, or
  • Holds a specified position in the company and earns a salary of ₹60,000 or more per month.

The term “Specified Employee” is also defined under the Companies Act 2013 and the Income Tax Act 1961.

Under the Companies Act 2013, a “Specified Employee” includes any individual who is employed by a company and who:

  • Is a director of the company, or
  • Holds a key managerial position in the company, or
  • Is a member of the company’s Board of Directors, or
  • Holds a specified position in the company and earns a salary of 60,000 or more per month.

Under the Income Tax Act of 1961, a “Specified Employee” includes any individual who a company employs and who:

  • Holds a key managerial position in the company, or
  • Is a member of the company’s Board of Directors, or
  • Holds a specified place in the company and earns a salary of 60,000 or more per month.

Also Read: How To File ITR (Income Tax Returns) Online – Income Tax E-filing Guide For FY 2020-21

Taxability of Salary and Wages for Specified Employees

To understand the taxability of salary and wages for specified employees in India, it is essential first to understand the concept of ‘salary’ and ‘wages’. Salary is a fixed amount of money paid to an employee by an employer, typically monthly. On the other hand, wages are defined as a variable amount of money paid to an employee by an employer, typically hourly.

Now, let us understand the taxability of salary and wages for specified employees in India. The Income Tax Act of 1961 provides the taxability of salary and wages for specified employees in India. Under the Income Tax Act of 1961, salary and wages earned by an employee from a specified employer are taxable in India.

Some exceptions to rules:

  • Salary and wages earned by an employee from a foreign employer are not taxable in India. Similarly, salary and wages earned by an employee who is a resident of India but is working outside India are also not taxable in India.
  • Salary and wages earned by an employee who is a resident of India but is working in India for fewer than 60 days are also not taxable in India.
  • Salary and wages earned by an employee who is a citizen of India but is working outside India are also not taxable in India.

Taxability of Bonuses and Other Compensation for Specified Employees

In India, bonuses and other compensation paid to certain employees are subject to tax. The taxability of bonuses and additional compensation paid to specified employees is governed by the Income Tax Act of 1961. The Income Tax Act, of 1961 defines a “specified employee” as an employee who is employed in a public sector company or in a company that is not a public sector company and who receives compensation from the employer in excess of 1,00,000 per annum. 

If the bonus or other compensation is paid in the form of cash, the employee is liable to pay income tax on the amount at the applicable income tax rate. If the bonus or other compensation is paid in the form of property, the employee is liable to pay income tax on the fair market value of the property at the applicable income tax rate.

Also Read: Step-by-Step Guide for E-Verifying Your Income Tax Return

Determining the Taxability of Stock Options for Specified Employees

The taxability of stock options for specified employees is a complex issue that requires careful analysis. A number of factors need to be considered to determine the taxability of stock options, including the type of option, the exercise price, the holding period, and the employee’s tax bracket.

The option type is important because it will determine how the option is taxed. Suppose the option is a non-qualified stock option. In that case, the employee will be subject to ordinary income tax on the difference between the exercise price and the stock’s fair market value at the time of exercise. If the option is a qualified stock option, then the employee will be subject to capital gains tax on the difference between the exercise price and the stock’s fair market value at the time of sale.

The exercise price is also essential in determining stock options’ taxability. The exercise price is the price at which the employee can purchase the stock. If the exercise price is below the stock’s fair market value at the time of exercise, then the difference between the exercise price and the fair market value will be taxed as ordinary income. If the exercise price is above the stock’s fair market value at the time of exercise, then the difference between the exercise price and the fair market value will be taxed as a capital gain.

The holding period is the length of time that the employee holds the stock before selling it. If the reserve is held for less than one year, the gain or loss will be taxed as a short-term capital gain or loss. If the stock is held for more than one year, then the gain or loss will be taxed as a long-term capital gain or loss.

The employee’s tax bracket is also a factor in determining the taxability of stock options. The higher the tax bracket, the higher the tax rate, and the tax rate on ordinary income is higher than on capital gains. Therefore, if the option is taxed as regular income, the employee will pay a higher tax rate than if the option is taxed as a capital gain.

Also Read: Income tax Calculator – Calculate Your Taxes For FY 2021-22 Use Tax Calculator Online

Conclusion

This article aims to provide information about the taxability of wages for certain types of employees. The report includes information about when an employee is considered a specified employee and how that affects the taxability of their salaries. The taxability of wages for selected employees is different than for other employees.

This article provides general information about the taxability of wages for specified employees. It is not intended to be used as tax advice. For specific information about your own tax situation, you should consult a tax advisor.

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