Taxation of Employment Income – Study Notes

Taxation of Employment Income

Definition of Employment

Employment, as defined under Section 3 of the Income Tax Act (ITA), refers to various positions and relationships where an individual provides services in exchange for remuneration. This includes current, past, and prospective employment relationships.

• Employment includes:

  • A position in the employment of another person

  • A managerial position in an entity (excluding partnership)

  • A position entitling periodic remuneration for services performed

  • A public office held by an individual

Definition of Employment Income

According to Section 7 of the ITA, employment income encompasses all gains and profits obtained by an individual during the year of income from conducting employment.

• Employment income includes both direct and indirect benefits, whether paid to the individual or on their behalf.

Amounts to be Included in Employment Income

When calculating an individual's income from employment, the following gains or profits must be included:

• Wages – Payment based on piece work

• Salary – Payment on a monthly basis

• Payment in lieu of leave – Compensation for not taking leave

• Bonus – Based on performance or company profitability

• Gratuity – Severance pay, often determined by company policy or labor law (e.g., one month’s salary per year of service)

• Commission – Based on agreement or performance

• Fees – Such as school fees paid for the employee or their children (unless a full-time scholarship, this is non-deductible)

• Allowances – All allowances are taxable unless specifically exempted under subsection 3

• Reimbursements – Any amount received as reimbursement for expenditure not related to work is taxable.

• Payments for Employment Conditions – Payments received for agreeing to employment conditions or restrictions are taxable.

• Retirement Contributions and Payments – Includes periodic contributions to pension funds and payments received from pension funds.

• Redundancy or Termination Payments – Payments due to loss or termination of employment are included as per subsections 4 & 5 of Section 7.

Benefits in Kind

Benefits in kind are non-cash benefits provided to employees, which are taxable unless specifically exempted.

• Motor Vehicle Benefit in Kind

• Loan Benefit in Kind

• Housing Benefit in Kind

• Other Benefits in Kind

Motor Vehicle Benefit in Kind

There are two main cases for motor vehicle benefits:

• Case 1: Vehicle Belongs to Employee

  • Benefit is quantified by apportioning private and official use.

  • Employer’s contribution to running costs for private use is taxable.

  • Official use portion is non-taxable.

• Case 2: Vehicle Belongs to Employer

  • Benefit is quantified if the car is available for both private and official use, and the employer claims repair, maintenance, and ownership costs.

  • Quantification is based on the 5th Schedule (see table below).

Engine Size (CC)	Less than 5 years	More than 5 years
CC ≤ 1000	250,000	125,000
1000 < CC ≤ 2000	500,000	250,000
2000 < CC ≤ 3000	1,000,000	500,000
CC > 3000	1,500,000	750,000

Note: These figures are annual and should be included in the employee’s taxable income. If the car is exactly 5 years old, use the 'less than 5 years' column.

Loan Benefit in Kind

This arises when an employee receives a loan from the employer or an associate at an interest rate below the Bank of Tanzania (BOT) rate, and the loan amount exceeds three months’ basic salary or is repayable over 12 months or more.

• Taxable if:

  • Interest rate is below BOT rate

  • Loan amount is more than 3 months’ basic salary or repayable in 12 months or more

• Not taxable if:

  • Interest rate is above BOT rate

  • Loan amount is less than or equal to 3 months’ basic salary and repayable in less than 12 months

Housing Benefit in Kind

Occurs when an employer provides a house (including furniture and equipment) to an employee. If the employer pays a housing allowance or rent but the lease is between the employee and employer, it is considered a housing allowance, not a benefit in kind.

Quantification of Housing Benefits

The taxable housing benefit is the lesser of:

1. The market value of renting the house (including furniture and equipment)

2. The higher of:

   • 15% of total income before housing benefit (apportioned for months occupied)

   • Amount claimed by employer for repair, maintenance, and ownership

From this, subtract any rent paid by the employee during the year.

Amounts to be Excluded from Employment Income

Certain amounts are specifically excluded from taxable employment income:

• Exempt amounts (2nd Schedule) and final withholding payments (Section 86)

• Reimbursements for expenditures incurred wholly and exclusively in generating employment income

• In-premises cafeteria services available to all employees on a non-discriminatory basis

• Payments for medical services or insurance for the employee, spouse, and up to four children, provided on a non-discriminatory basis

• Actual travel costs for the employee, spouse, and up to four children (for leave, relocation, etc.), provided the individual works for only one employer and domicile is more than 20 miles (30–33 km) away

• Motor vehicle benefit in kind where the employer does not claim repair, maintenance, and ownership

• Retirement contributions paid by employer to an approved retirement fund

• Housing benefits for employees of government or institutions substantially funded by the government (more than 50%)

• Amounts considered administratively impracticable to include (e.g., telephone vouchers for mixed use)

• Allowances (housing, transport, extra duty, overtime, honoraria) for employees of government or institutions substantially funded by the government

• Allowances for private intermural service provided to patients in a public hospital

Amounts to be Deducted from Employment Income

Two main deductions are allowed when computing taxable employment income:

• Donations to Education Fund – Cash or material donations to an education fund under Section 12 of the Education Fund Act are deductible (Section 16(3) ITA).

• Retirement Contributions to Approved Retirement Fund – Under Section 61(1) ITA, an individual may deduct the lesser of the actual contribution or the statutory amount.

Statutory Amount for Retirement Contributions

• If total contribution required by statute exceeds Tshs 2,400,000 per annum, the statutory amount is 20% of basic salary.

• Otherwise, the statutory amount is Tshs 2,400,000.

Formula:

$\text{Deductible Retirement Contribution} = \min(\text{Actual Contribution}, \text{Statutory Amount})$

Where statutory amount is either 20% of basic salary (if total required contribution > Tshs 2,400,000) or Tshs 2,400,000.