By Pranay Bhatia and Deepashree Shetty
The pandemic has expanded the ‘Work from Home’ culture to several organisations, and given the circumstances, it may last longer. Consequently, the traditional office set-up has penetrated to home spaces resulting in multitasking between personal and office commitments.
Employers have ensured to extend help to employees to make the work environment conducive – flexible working hours, virtual meetings, reimbursement of certain expenses, grant of additional allowances or benefits, extended medical coverages, etc. These are essential during such critical times, affirming an employee’s loyalty in meeting business objectives. But such goodwill gestures may need careful consideration by employees from their income-tax perspective.
Taxation impact on employee emoluments
Salary and emoluments earned by an employee in India are taxable as per Indian tax laws. However, there are certain payments which are eligible as deductions for tax purposes. For instance, House Rent Allowance (HRA) is subject to deductions based on prescribed criteria. Some payments are also treated as tax-exempt up to prescribed limits such as children education allowance etc. However, some of the payments may need to be studied in detail to gain insight on the purpose of payment and claim appropriate tax position while being compliant with the methods and documentation suggested as per the IT laws.
Additional allowances to meet expenses such as mobile phone to take official calls and internet expenses shall be treated as tax-exempt for employees. These are provided to conduct office work from a place away from the usual place of work but is essential to function or render services under the contract of employment, which are explicitly exempted.
On the other hand, allowances provided to employees for working from home could be taxable. During the pandemic, several employees have received additional benefits in the form of furniture and allowances. Some of them are discussed below:
Reimbursement of expenses to employees in relation to purchase of furniture or chair at home for work-desk may be treated as taxable if such an allowance is provided by the employer only to a limited grade of employees. Alternatively, if any employee receives a capped allowance to purchase the asset on his own, the same may be taxable in his hands in absence of any specific exemption. In case of provision of furniture or chair by the employer to the employee, the same shall be treated as perquisite in the hands of the employee as per the IT laws. This would be on account of ‘use of an asset owned by the employer’. Hence, it becomes crucial to both employer and employee to understand the income tax ramifications beforehand.
Some employers have also extended their group medical insurance policies or have opted for a wider coverage to help employees with their medical emergencies. Such benefit, being a general benefit to all employees, could be treated as non-taxable for employees.
With the change in the work-culture, more clarity is also expected from the decision-making authorities (the Government and tax authorities), in terms of the taxability of such payments.
Factors to aid tax-determination:
Some decisive factors to help determine the taxability of the allowance or reimbursement are:
- What is the nature and purpose of payment of the allowance or reimbursement?
- Whether the payment is one-time in nature or a regular payment?
- Whether the allowance or reimbursement is provided to a group or band of employees or all employees in general?
- In case of assets, who is the owner of the asset and if there are any conditions on the use or maintenance or if at all there is any time limit attached to the usage of the asset by the employee?
While the above responses may not be conclusive, it helps with creating a base for understanding the payments and initiate deliberation between the employer and employees. It also helps in setting the base for any related compliances to be undertaken by the employer and/or employee.
These may include:
- Any documentation to be maintained by the employer such as communication letter(s) to the employees or changes in the organisation’s HR policies
- Documentary proofs to be maintained by employees such as asset-purchase receipts or expense details or log for claiming of reimbursements or tax exemption
- Compliances under IT laws in terms of tax withholding and reporting by the employer to the IT authorities
- Disclosures or reporting by the employees in their annual income-tax returns i.e. breakdown of allowances (exempt/non-exempt) or reimbursements taxable as perquisites.
Employers and employees are coping with the changes as they adapt to the ‘new normal’. However, adequate care and documentation must be maintained to mitigate any unintended tax implications, both for employees and employers (being tax withholding agent). They also hope to receive more clarity from the government and tax authorities, in order to ready their systems and ensure compliance.
(The authors are Pranay Bhatia, Partner and Leader – Tax & Regulatory Services and Deepashree Shetty, Director – Tax & Regulatory Services, BDO India)