The exemption and disallowance belong to different taxpayers
When a company elects to pay tax on a qualifying non-monetary employee perquisite and the payment falls within section 10(10CC), the tax actually paid is exempt for the employee but disallowed for the employer under section 40(a)(v). Keep the perquisite value, ordinary payroll withholding, employee recoveries and the employer-funded tax in different columns. This article covers FY 2025–26 and AY 2026–27, which use the Income-tax Act, 1961 and the notified AY 2026–27 ITR-6 despite the transition to the 2025 Act.
Read the applicable text: Income Tax Department, section 192 Income Tax Department, section 10(10CC) Income Tax Department, section 40(a)(v) CBDT Notification 49/2026, notified ITR-6 Income Tax Department, AY and old-law transition guidance.
Determine the qualifying portion employee by employee
Read sections 17(2), 192(1A) and 10(10CC) together. The option can cover all or part of the qualifying non-monetary perquisite. The employer pays the covered tax when it would otherwise be deductible, without deducting that amount from the covered benefit. Section 192(1B) treats the employer-paid amount as tax deducted at source. An employer-provided facility and a cash allowance cannot simply be placed in one category because they serve the same employee need. Confirm the actual transaction, salary valuation basis and whether the payment is funded by the employer or withheld from the employee. A cash reimbursement or a net-pay promise needs separate analysis; the label in payroll is not enough.
Use the salary average-rate working
Section 192(1B) uses the average rate of income tax computed on income chargeable under Salaries, including the covered perquisite, applying the rates in force for the financial year. Use the employee's supported annual salary and applicable regime and compute the salary tax before deriving the rate. Document annual estimates, revisions and deposits. The first two examples compute the average rate using the default regime and ordinary salary rates for AY 2026–27, assuming no special rate income, rebate or surcharge. The salary figures are already taxable amounts after applicable deductions; do not subtract the standard deduction again.
Map the debit once into ITR-6
Reconcile the employer-funded amount actually paid to its salary expense journal and challans. In the notified form, Part A-OI item 8A(i), field Ai, is the residual section 40 disallowance for a P&L debit of this nature. It forms part of 8Aj, which feeds Schedule BP item 16. Do not enter it again as a separate business adjustment, corporate income tax or vendor withholding default. A journal that contains both the underlying benefit and the optional tax needs splitting before the add-back; test the underlying expense on its own facts and avoid treating the payroll taxable value as the book cost.
Review cut-off and trace evidence
Tie the approved election, salary tax computation, relevant salary statements and deposited amount to the employee-wise payroll register. If a book provision is unpaid at close, separately review whether and when it can be deducted under the applicable provisions and trace the later payment to the earlier position. A provision is not proof of actual payment under section 10(10CC), and a later deposit is not a later-allowance rule under section 40(a)(v). Keep the company return computation separate from any payroll corrections.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Derive and apply the average rate
Assume annual taxable salary of ₹20 lakh, including a ₹1 lakh qualifying benefit. Tax at slab rates is ₹2 lakh, plus ₹8,000 health and education cess, giving ₹2.08 lakh and an average rate of 10.40%. If the company covers the whole benefit, the employer-paid amount is ₹10,400. Add it back if actually paid and debited, as assumed.
Illustrative example 2: Cover only part of the benefit
Assume annual taxable salary of ₹30 lakh, including a ₹1.20 lakh qualifying benefit. Slab tax is ₹4.80 lakh; 4% cess adds ₹19,200, giving ₹4,99,200 and a 16.64% average rate. If the company elects to cover ₹75,000 of benefit value, covered tax is ₹12,480. The remaining ₹45,000 corresponds to ₹7,488 at the same rate and is outside this election.
Illustrative example 3: Do not add back employee withholding
A payroll deposit is ₹2.40 lakh, comprising ₹2 lakh withheld from employees and ₹40,000 actually borne by the company under the option. Only ₹40,000 is the employer-funded section 40(a)(v) candidate on these facts.
Illustrative example 4: Split the combined ledger debit
A ₹1.74 lakh cost entry includes ₹1.50 lakh underlying benefit cost and ₹24,000 qualifying employer-paid tax. The specific add-back is ₹24,000; the ₹1.50 lakh undergoes the ordinary expense review.
Illustrative example 5: Reconcile the section 40 total
The supported residual perquisite-tax addition is ₹32,000 and another distinct section 40 field contributes ₹18,000. With no other entries, Part A-OI 8Aj and BP 16 each show ₹50,000 through the transfer. A second ₹32,000 manual add-back would overstate business income by ₹32,000.
Illustrative example 6: Separate accrual from deposit evidence
A ₹54,000 book charge includes ₹36,000 actually paid under the qualifying option by year-end and an unpaid accrual of ₹18,000. Verify ₹36,000 as payment; route the ₹18,000 for a separate deduction and cut-off decision, and carry its history to the later payment review.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Fix FY and AY before mapping | Payroll annual close and ITR-6 assessment year |
| 2 | Identify qualifying perquisites | Employment terms, benefit evidence and valuation working |
| 3 | Establish employer choice and covered value | Approval and employee-wise election schedule |
| 4 | Reperform the salary average-rate calculation | Annual salary and tax computation |
| 5 | Split payment sources | Payroll deduction and employer-funding register |
| 6 | Match actual payment | Challans and salary-tax reporting |
| 7 | Tie the expense to the trial balance | Payroll journals and account mapping |
| 8 | Review unpaid or reclassified amounts | Provision and subsequent payment schedule |
| 9 | Check the ITR flow once | Part A-OI Ai to 8Aj to BP item 16 |
| 10 | Retain reviewer evidence | Signed reconciliation and exception decisions |
Sixteen practitioner FAQs
1. Does section 10(10CC) exempt the value of the benefit?
No. It addresses qualifying tax actually paid by the employer; separately assess the benefit under salary rules.
2. Is paying tax on the benefit compulsory for the employer?
Section 192(1A) gives the employer an option for qualifying income.
3. Can the company cover only part?
Yes. Identify the covered value and calculate the tax on that part.
4. Is the rate the employee's highest marginal rate?
The statutory method uses the average rate described in section 192(1B).
5. Is a cash allowance automatically a qualifying non-monetary benefit?
No. Identify how the benefit is actually provided.
6. Does a single salary challan establish the employer's expense?
No. Trace employee withholding and company funding to the payroll and ledger.
7. Is employee-funded TDS an employer-paid perquisite tax?
No. Mere remittance of employee withholding does not make it company-funded.
8. Is the entire welfare or perquisite cost disallowed under this clause?
No. Analyse the underlying cost separately from the qualifying tax.
9. What if the books contain an unpaid accrual?
Separate it from paid amounts and document its deduction and timing analysis.
10. Which return applies to FY 2025–26?
Use AY 2026–27 under the 1961 Act, with the applicable old-law ITR.
11. Which notified ITR-6 field captures the residual section 40 debit?
Part A-OI 8A(i), shown as Ai, feeds the total 8Aj.
12. Does Schedule BP require a second free-form adjustment?
No. BP item 16 brings in 8Aj; verify the transfer.
13. Is this tax the company's own tax on profits?
No. It is paid on behalf of the employee and has a separate disallowance basis.
14. Can vendor withholding-default fields be used here?
No. They address other statutory grounds; use the residual section 40 line for this item.
15. What if the annual salary estimate changes?
Rework the average-rate reconciliation and reconcile deposits and payroll evidence.
16. What is the simplest audit trail?
Keep one employee-level key connecting benefit valuation, covered share, average rate, funding, challan and expense.
Official sources
Income Tax Department, section 192 Income Tax Department, section 10(10CC) Income Tax Department, section 40(a)(v) CBDT Notification 49/2026, notified ITR-6 Income Tax Department, AY and old-law transition guidance Finance Act, 2025 (Gazette), rates and health and education cess Income Tax Department: salaried individuals, AY 2026–27 slabs and cess