Income Tax paid by the employer - multiple grossing up method

By Vijay Kumar

If your employer is paying your income tax, how is the income calculated? The tax paid by your employer has to be added to your income. But this is not all that easy.

Suppose the salary is Rs. 1,000/-

The tax is 30% ie Rs. 300/-

Now if this 300 is paid by the employer, the income becomes 1300 and the tax payable is 390 and if this is also paid by the employer, the income is 1390 and the tax is 417 and if this is paid by the employer, the income is 1417 and the tax is 425. And how far do you go? It can go up to infinity. But where do you stop and how do you calculate it?

Look at it another way:

1^st gross up = 1000x0.3 = 300

2^nd gross up = 1000x0.3x0.3 = 90

3^rd Gross up = 1000x0.3x0.3x0.3 = 27

4^th Gross up = 1000x0.3x0.3x0.3x0.3 = 8.1

Total = 300+90+27+8 = 425

See the tax liability is the same as above = Rs. 425.

There is an easy way, something akin to the formula given in the celebrated MRF judgement in respect of Central Excise. The formula is

X/ 1-R,

Where X is the salary and R is the rate of tax. So the calculation works like this:

1000/ 1-0.3 = 1000/0.7 = 1429

So if the salary is Rs. 1000/- and the tax is paid by the employer, the salary is taken to be Rs. 1429 and on this tax @30% is Rs. 429/- . So the employee gets his Rs. 1000/-, the Tax Department gets a higher tax of 429 instead of 300 and everybody is happy.

My friend Jai Kumar tells me that all tax laws are all about LHS = RHS and that I add is QED.

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