When Your Employer Pays Your Tax: Can There Be Tax on Tax on Tax?

Direct Tax · 5 min read

Suppose your employer promises you ₹100 after tax and agrees to bear the tax for you. At a 30% tax rate, the tax on that salary is ₹30. Normally, that ₹30 would have been your obligation, but because your employer pays it for you, section 17(2)(iv) comes into play. It says that a perquisite includes:

“any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee.”

Section 17(2)(iv)

The ₹30 your employer pays on your behalf therefore itself becomes a perquisite in your hands. That raises an obvious question: if the ₹30 is a perquisite, should there now be tax on it? And if the employer bears that tax too, should there again be tax on that tax? This is where section 10(10CC) becomes relevant.

When does section 10(10CC) apply?

The Delhi Special Bench in RBF Rig Corporation LLC v. ACIT, 297 ITR (AT) 228 explained that three conditions must be satisfied:

1. The employee must receive income in the nature of a perquisite under section 17(2);
2. That perquisite must not be provided by way of monetary payment; and
3. The tax on that perquisite must actually be paid by the employer, at its option, on behalf of the employee.

If these conditions are met, the tax paid by the employer on that non-monetary perquisite is exempt under section 10(10CC). The mechanics are easiest to follow in two stages.

Stage 1: The employer pays tax on the original salary

The employee receives a salary of ₹100. Tax at 30% is ₹30, which the employer pays directly to the Government on the employee’s behalf.

This first ₹30 is tax on the employee’s monetary salary of ₹100, so section 10(10CC) does not exempt it merely because the employer has paid it. Instead, because the employer has discharged an obligation the employee would otherwise have had to meet, the ₹30 itself becomes a perquisite under section 17(2)(iv).

Importantly, though, the ₹30 is not paid to the employee; it goes directly to the Government. The Special Bench in RBF Rig therefore held that, although this employer-paid tax is a perquisite, it is not a perquisite provided by way of monetary payment. The employee gets the benefit of ₹30 but never receives it in cash, so it is a non-monetary perquisite and is added to salary once:

Salary	₹100
Employer-paid tax (perquisite)	₹30
Total taxable salary	₹130

Stage 2: What happens to the tax on that ₹30?

Tax is now calculated on ₹130. At 30%, that comes to ₹39, which breaks down as follows:

Tax on the original salary of ₹100	₹30
Tax on the ₹30 perquisite	₹9
Total tax borne by the employer	₹39

This is where section 10(10CC) does its real work. Because the ₹30 is a non-monetary perquisite, the additional ₹9 is tax on a non-monetary perquisite. If the employer pays that ₹9 on the employee’s behalf, section 10(10CC) exempts it, so it is not added back to salary as yet another perquisite. The calculation stops at ₹130: the employer pays total tax of ₹39, with no further grossing-up.

Without this exemption, the calculation would continue endlessly:

₹100 → ₹30 → ₹9 → ₹2.70 → ₹0.81 → …

What RBF Rig held

The Special Bench drew a clear distinction. Tax paid by the employer on the employee’s behalf is a perquisite under section 17(2), because the employer is discharging the employee’s obligation. But where that tax is paid to the Government rather than to the employee, it is not a monetary payment to the employee, and is therefore a non-monetary perquisite. As the Special Bench put it:

“taxes paid by the employer can be added only once in the salary of the employee. Thereafter, tax on such perquisite is not to be added again.”

RBF Rig Corporation LLC v. ACIT (Delhi Special Bench)

The Delhi High Court affirmed this approach

In Yoshio Kubo v. CIT, 357 ITR 452 (Delhi), the Delhi High Court approved the same principle, using the same illustration of a ₹100 salary and a 30% tax rate. Where the employer agrees to bear the employee’s tax, it ultimately pays ₹39, being 30% of ₹130, and the process ends there. There is no repeated addition of tax on ₹39, then tax on that tax, and so on. The Court recognised that section 10(10CC) was intended to prevent exactly this multiple-stage grossing-up.

The rulings discussed were rendered under the Income-tax Act, 1961, and section references are to that Act. This article is for general information only and does not constitute professional advice.