Real-life Lessons: The Value of an Emergency Fund

There was a recent circular issued by the Central Board for Direct Taxes (CBDT) that reads:

The Finance Act, 2005 introduced a levy namely Fringe Benefit Tax (FBT) on the value of certain fringe benefits as contained in Chapter XII-H (sections 115W to 115WL) of Income-tax Act, 1961. By the Finance (No. 2) Act, 2009 a new section 115WM was inserted to abolish the FBT with effect from assessment year 2010-11. Consequently, benefits given to employees are taxed as perquisites in the hands of employees in terms of amendments to clause 2 of section 17 of Income-tax Act, 1961.

Note the highlighted words — benefits given to employees will now be taxed as perquisites in the hands of employees [in the current financial year]. This means you will now have to pay income tax on benefits such as vehicle fuel and maintenance, communication expenses, etc. — expense items for which you were so far not required to pay income tax since your employer was bearing the tax burden in the form of FBT.

Given that,

  • this change is applicable for the Financial Year 2009 – 10, and
  • there are hardly two months left in the Financial Year,

many of us might find ourselves in a situation where most of our salary would go towards paying this income tax deficit in the months of February, 2010 and March, 2010. That means you might potentially have negligible to no salary for the next couple of months.

This is where an emergency fund proves its worth. With an adequate emergency fund in place, you wouldn’t have to worry about such unforeseen situations. I am affected by this ruling — thankfully, I do have an emergency fund.

How about you? Are you affected by this ruling? If yes, how are you handling it?

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