Calculation of Assessable income from employment

In this lesson, we cover how to calculate assessable income from employment and what are the
different types of employee benefits liable to tax.

Benefits taxable under employment income

The assessable income of an individual from employment includes all the benefits received,
whether in cash or otherwise, by such individual in consideration for the services rendered by
him during any year of assessment.

As per the Inland Revenue Act, “Employment” means:

i. A position of an individual in the employee of another person,

ii. A position of an individual as manager of an entity
iii. A position of an individual entitling the individual to a fixed or ascertainable
remuneration in respect of services performed,
iv. A public office held by an individual,
v. A position of an individual to whom any payment is made or due by or from an employer
or who receives any other benefit as an employee or in a similar capacity,
vi. A position as a corporation or company director and Includes a past, present or
prospective employment “Employee” means an individual engaged in employment.

Any payment is received in respect of past or future employment is also considered as

employment income. Employment income should be accounted on cash basis.

Employment Income

Cash Benefits Non - Cash Benefits

We can analyses the cash and non-cash benefits as follows.
Cash benefits

• Payment of salary, wages, leave pay, overtime pay, fees, pensions, commissions, gratuities,
bonuses and other similar payments

• Payment of personal allowances, including any cost of living, subsistence, rent, entertainment
or travel allowance;

• Payments providing discharge or reimbursement of expenses incurred by the individual or an

associate of the individual; However, if such discharge or reimbursement of expenses incurred
by the individual on behalf of the employer is not subject to tax.

 Payments for the individual’s agreement to conditions of employment.

 Payments for redundancy or loss of termination of employment.

 Payment or transfers to another person for the benefit of the individual or an associate person
of an individual.

 Other payments, including gifts received in respect of employment.

Non Cash benefits

Value of non-cash benefits

The fair market value of benefits received or derived by virtue of the employment by an
individual or an associate person of an individual is considered as noncash benefit under the
employment income.

Commissioner General has issued circular giving values for certain non- cash benefits.

 The taxable value of the provision of hotel facilities for expatriates, Provision of servants etc.,
provision of electricity and gas etc. provision of medical benefits, provision of free meals, air
tickets (other than official purposes), is 100% of the cost.

 The taxable value of telephone bills is only 50% of the amount paid.

 Payment of tax by the employer is the amount of tax paid.

 When the concessionary loans are given by the employer, it needs to be taken as 50% of
difference between concessionary rate and the market rate specified annually by CGIR. For the
year of assessment 2018/2019, market rate specified by CGIR is 9.08%.
 The taxable value of payment of dental, medical or health insurance is 100% of the cost.
However, if such discharge or reimbursement is with regard to dental, medical or health
insurance expenses which is applicable to all full-time employees on equal terms, then it is
excluded from employment income;

 Payments made to or benefit accruing to employees on a non- discriminatory basis that, by

reason of their size, type and frequency, are unreasonable or administratively impracticable for
the employer to account for, or to allocate to the individual, then it is to be excluded from the
employment income.

For example, tea provided by the employer.

 Value of Shares

The market value of shares at the time allotted under an employee share scheme, including
shares allotted as a result of the exercise of an option or right to acquire the shares, reduced by
the employee’s contribution for the shares are considered as employment income.

However, the value of a right or option to acquire shares at the time granted to an employee
under an employee share scheme is not taxable.

 Value of Residence provided by the Employer

The Commissioner General has specified the value of this benefit by issuing a circular.

It says that the “Value” of any benefit of any place of residence provided by the employer should
be the market value or the value specified in the circular where the market value is not
ascertainable. The following is the value specified on certain situations

If the monthly remuneration is less than or equal to Rs. 200,000, and the residence is in a

Rated Area Rs.20,000 or 12.5% of the remuneration whichever is less

Unrated Area Rs.15,000 or 10% of the remuneration whichever is less

Estate Bungalow Rs.10,000 or 7.5% of the remuneration whichever is less

If the monthly remuneration is more than Rs. 200,000, and the residence is in a

Rated Area Rs.40,000 or 12.5% of the remuneration whichever is less

Unrated Area Rs.30,000 or 10% of the remuneration whichever is less

Estate Bungalow Rs.20,000 or 7.5% of the remuneration whichever is less

 If the residence is provided with furniture, 2.5% of the remuneration or

Rs.5,000 whichever is less should be taken in to account.
Value of transport facilities provided by the employer.

The full amount of the market value is the benefit from the private use of vehicle (fully or
partly). If the market value is not ascertainable, any benefits from vehicle will be valued as
follows: (Value per month in rupees)

Engine Vehicle Driver Fuel

Not more than 1800cc - Fuel or 20,000 10,000 20,000
Hybrid(Petrol/Diesel)

Not more than 200KW Electrical

Vehicles

35,000 10,000 30,000

More than 1800cc - Fuel or
Hybrid(Petrol/Diesel)

Not more than 200KW Electrical

Vehicles

Motorcycle - with fuel –5,000

Motorcycle Without fuel - 3,000

 When the employer maintains accurate records in respect of vehicles or bicycles provided
to be used for field works, benefit is Rs.25 or Rs.5 per kilometer, as the case may be,
(irrespective of the engine capacity of the vehicle).
The following receipts and benefits do not form a part of the assessable
income from employment
• A discharge or reimbursement of expenses incurred by the individual on behalf of the
employer.

• A discharge or reimbursement of an individual's dental, medical or health insurance expenses

where the benefit is available to all full- time employees on equal terms. It is understood that
equal terms means not for all the employees, but for a set of employees under the same level.

• Payments made to or benefits accruing to employees on a non- discriminatory basis that by

reason of their size, type and frequency are unreasonable or administratively impracticable for
the employer to account for, or to allocate to the individual.

• The value of a right or option to acquire shares at the time granted to an employee under an
employee share scheme. It means at the point where the option is given, the benefit is not taxed,
but tax applies when the shares are allotted after exercising the option.

• Contributions made by an employer to an employee’s account with a pension, provident or

savings fund approved by the Commissioner- General.

Employment income exempt from income tax

As per the Third schedule of the Inland Revenue Act, the following receipts and benefits are
exempt from tax.

• Capital sums paid as a compensation or gratuity in relation to personal injuries or death.

• Pension received from the Sri Lankan Government or from a department of the Government.

• Amounts paid on retirement from any pension fund or the Employees’ Trust Fund, representing
investment income earned for any period commencing on or after 1 April 1987.

• Amounts paid on retirement from any provident fund approved by the Commissioner General
of Inland Revenue.

 Income derived by an individual entitled to privileges under the Diplomatic Immunities Law
and other specified conventions and Regulations.

 Benefits derived by a government employee, from a road vehicle permit granted to such
employee.
QUESTION NO 01

Mr. Gunasekara is a Senior Manager of a large mercantile organisation. He has given his primary
employment declaration to this organization. In addition, he serves as a Director of a subsidiary
company of the group. The following information has been provided for the Y/A 2018/2019 to
calculate his assessable income from employment.

He is entitled to a monthly salary of Rs.120,000, of which the company and Mr. Gunasekara
contribute 12% and 8% respectively to the Employees Provident Fund (EPF).

In addition, he received an entertainment allowance of Rs.15,000 per month, and a bonus

equivalent to three months’ salary from the profit for the Y/A2017/2018. Leave encashment paid
during the above year of assessment is Rs.36,000

He has been provided with an1800ccc for his official and private use, with fuel and a driver.

The following amounts were reimbursed by the company during the year: -

Reimbursement of food and lodging expenses on official visits to branches: Rs.42,000. –

Reimbursement of health insurance expenses (the benefit is available for all full time employees
in equal terms) :Rs.75,000.

His annual subscription to the Institute of Professional Managers: Rs.25,000.

Touring expenses of his daughter who was selected to represent the national netball team:
Rs.125,000.

Residential telephone bills:Rs.60,000.

He lives in a house provided by the company taken on a monthly rental of Rs.20,000.

The director’s fee received from the subsidiary company which is his second employment was
Rs.216,000, and it is net of withholding tax.

Required: to Calculate Assessable employment Income for the Y/A 2018/2019.

QUESTION NO 02

Mr. Samaraweera is a Chartered Accountant working for a bank since 2010. The following is the
information relating to his employment income for the Y/A 2018/19.

Basic salary- Rs.360,000 per month after deducting 10% to the provident fund. The employer’s
contribution to this fund is at 15%. The fund has been approved by the CGIR.

He is provided with a motor vehicle which has been hired from a company paying Rs.50,0000
per month. Fuel allowance is also paid amounting to Rs.50,000 per month.

Bonus paid based on the previous year profit, and it is one month of the basic salary.

Telephone allowance is Rs.8,000 per month.

Leave encashment paid is Rs.75,000.

Entertainment allowance is Rs.10,000 per month.

The residence provided to Mr. Samaraweera is owned by the employer and it is in a rated area.
Furniture has also been provided.

His daughter was admitted to a private hospital and the bill amount was Rs.200,000, and it was
settled by his employer from an insurance scheme which is applicable for all fulltime employees
on equal terms.

Life insurance premium of Rs. 10,000 per month is reimbursed by the employer.

An option has been given to purchase 1000 shares of the bank. However, this option can be
exercised only after 1 May of the year 2020.

Compute the income tax to be paid for the Y/A 2018/19.