PROFIT SHARE PAID TO EMPLOYEES
This query is : Resolved
18 November 2010
Hi All,
Our company pays some amount out of salary as share of profit to employees. I need clarification about tax implications to the company as well as to the employee. Can anybody clarify this?
Our company pays some amount out of salary as share of profit to employees. I need clarification about tax implications to the company as well as to the employee. Can anybody clarify this?
18 November 2010
Dear G Saravana Kannan
I think you are talking about bonus. It is fully taxable in hands of employees.
Co. can claim deduction.
I think you are talking about bonus. It is fully taxable in hands of employees.
Co. can claim deduction.
19 November 2010
Thanks Mr Tilak
They pay Bonus separately once in a year during diwali festival. This share of profit is paid for the staff who contributes excellent work for the profit of the company. Each month an employee can receive his share separately with reference to profit & Loss statement as reported by accounts. only High level officials are eligible for this. can i treat it as bonus and do TDS under salary?
They pay Bonus separately once in a year during diwali festival. This share of profit is paid for the staff who contributes excellent work for the profit of the company. Each month an employee can receive his share separately with reference to profit & Loss statement as reported by accounts. only High level officials are eligible for this. can i treat it as bonus and do TDS under salary?
10 August 2024
**Profit Share Paid to Employees: Tax Implications**
### **Tax Treatment for the Company**
1. **Classification and Treatment:**
- **Profit Share Payment:** Payments made to employees as a share of profit are generally classified as part of the employee's salary. These payments are made based on the company's profitability and the employee’s contribution to that profit.
2. **Accounting Treatment:**
- **Expense Deduction:** The amount paid as a share of profit to employees is considered an expense for the company and can be claimed as a deduction under **Section 37** of the Income Tax Act. It should be recorded as a part of employee remuneration in the financial statements.
3. **TDS Deduction:**
- **Under Salary:** Since the share of profit is part of the salary, it is subject to Tax Deducted at Source (TDS) under the head "Salaries" as per **Section 192** of the Income Tax Act. The company needs to calculate TDS on this amount just like regular salary payments and deposit it accordingly.
### **Tax Treatment for the Employee**
1. **Income Classification:**
- **Salary Income:** The profit share received by employees is treated as part of their salary income. It is taxable under the head "Salaries" in the employee's income tax return.
2. **Tax Calculation:**
- **Taxable Income:** The share of profit is added to the employee’s total salary income for the financial year and taxed according to the applicable income tax slab rates.
3. **TDS by Employer:**
- **Employer’s Responsibility:** The employer is responsible for deducting TDS on the profit share paid to employees and depositing it with the government. The employee will receive a Form 16 reflecting the total TDS deducted from their salary, including the profit share.
### **Bonus vs. Profit Share**
1. **Bonus:**
- **Definition:** A bonus is an additional payment made to employees usually once a year, often based on performance or company profits.
- **Tax Treatment:** Bonus is also considered salary and is subject to TDS under **Section 192**.
2. **Profit Share:**
- **Definition:** Profit sharing involves distributing a portion of the company’s profits to employees, which may be based on the company's performance and individual contributions.
- **Tax Treatment:** Like bonus, profit share is treated as salary and taxed accordingly.
### **Steps for Compliance**
1. **Determine Amount:**
- Ensure that the amount paid as profit share is correctly calculated based on the profit and performance criteria.
2. **Deduct TDS:**
- Deduct TDS at applicable rates under **Section 192** on the profit share amount and deposit it with the government.
3. **File Returns:**
- Report the profit share payments and TDS deductions in the company’s TDS returns (Form 24Q) and issue Form 16 to employees showing the total TDS deducted.
4. **Record in Financials:**
- Record the profit share payments in the company's financial statements as part of employee remuneration expenses.
### **Conclusion**
- **For the Company:** Profit share paid to employees is treated as part of salary, deductible as an expense under **Section 37**, and TDS must be deducted under **Section 192**.
- **For the Employee:** The profit share is taxable under "Salaries," and the amount is added to the employee's total salary for tax calculation purposes.
This treatment ensures compliance with income tax regulations and proper handling of employee remuneration. Always consult with a tax professional or advisor for specific cases and the latest regulations.
### **Tax Treatment for the Company**
1. **Classification and Treatment:**
- **Profit Share Payment:** Payments made to employees as a share of profit are generally classified as part of the employee's salary. These payments are made based on the company's profitability and the employee’s contribution to that profit.
2. **Accounting Treatment:**
- **Expense Deduction:** The amount paid as a share of profit to employees is considered an expense for the company and can be claimed as a deduction under **Section 37** of the Income Tax Act. It should be recorded as a part of employee remuneration in the financial statements.
3. **TDS Deduction:**
- **Under Salary:** Since the share of profit is part of the salary, it is subject to Tax Deducted at Source (TDS) under the head "Salaries" as per **Section 192** of the Income Tax Act. The company needs to calculate TDS on this amount just like regular salary payments and deposit it accordingly.
### **Tax Treatment for the Employee**
1. **Income Classification:**
- **Salary Income:** The profit share received by employees is treated as part of their salary income. It is taxable under the head "Salaries" in the employee's income tax return.
2. **Tax Calculation:**
- **Taxable Income:** The share of profit is added to the employee’s total salary income for the financial year and taxed according to the applicable income tax slab rates.
3. **TDS by Employer:**
- **Employer’s Responsibility:** The employer is responsible for deducting TDS on the profit share paid to employees and depositing it with the government. The employee will receive a Form 16 reflecting the total TDS deducted from their salary, including the profit share.
### **Bonus vs. Profit Share**
1. **Bonus:**
- **Definition:** A bonus is an additional payment made to employees usually once a year, often based on performance or company profits.
- **Tax Treatment:** Bonus is also considered salary and is subject to TDS under **Section 192**.
2. **Profit Share:**
- **Definition:** Profit sharing involves distributing a portion of the company’s profits to employees, which may be based on the company's performance and individual contributions.
- **Tax Treatment:** Like bonus, profit share is treated as salary and taxed accordingly.
### **Steps for Compliance**
1. **Determine Amount:**
- Ensure that the amount paid as profit share is correctly calculated based on the profit and performance criteria.
2. **Deduct TDS:**
- Deduct TDS at applicable rates under **Section 192** on the profit share amount and deposit it with the government.
3. **File Returns:**
- Report the profit share payments and TDS deductions in the company’s TDS returns (Form 24Q) and issue Form 16 to employees showing the total TDS deducted.
4. **Record in Financials:**
- Record the profit share payments in the company's financial statements as part of employee remuneration expenses.
### **Conclusion**
- **For the Company:** Profit share paid to employees is treated as part of salary, deductible as an expense under **Section 37**, and TDS must be deducted under **Section 192**.
- **For the Employee:** The profit share is taxable under "Salaries," and the amount is added to the employee's total salary for tax calculation purposes.
This treatment ensures compliance with income tax regulations and proper handling of employee remuneration. Always consult with a tax professional or advisor for specific cases and the latest regulations.
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