Work From Home: Income Tax challenges for employees in times of Covid-19

Updated: Aug 21, 2020 2:22 PM

While employees have been quick to adapt and reorganise their ways of working and some employers have also been proactive to refresh and reset the employee compensation structure to suit the new normal, the tax laws, however, are yet to catch up.

Work From Home, Income Tax challenges for employees, Covid-19, taxability of allowance, reimbursement, lockdown, house rent allowance, HRA, conveyance allowance, leave travel assistance, uniform maintenance allowance, car fuel reimbursement, allowances fully taxable, The very premise on which businesses were run, employee compensation and benefits were structured and tax laws were written over the years, is now challenged.

Traditionally businesses had been structured on the premise that employees would be required to work from an office. Hence all policies, compensation structures and facilities for employees have been structured keeping in mind the office working environment. This is true for all labour regulations, including tax laws governing employee taxation that have also evolved on this basis.

However, the Covid-19 pandemic has replaced the traditional way with a new normal. Employees are now required to operate from their homes without coming to office. Thanks to advancements in technology, employees are able to work efficiently and effectively from their homes. Thus, the very premise on which businesses were run, employee compensation and benefits were structured and tax laws were written over the years, is challenged.

While employees have been quick to adapt and reorganise their ways of working and some employers have also been proactive to refresh and reset the employee compensation structure to suit the new normal, the tax laws, however, are yet to catch up.

Benefits that may no longer be relevant

A number of benefits provided by the employer when in office, such as free or subsidised meals, tea, snacks and beverages, use of the office gym and sports facilities or a car, chauffeur, shuttle service, crèche facilities, club memberships etc, may no longer be relevant for employees.

Separately conveyance allowance, leave travel assistance, uniform maintenance allowance, car fuel reimbursement are some allowances that become fully taxable, considering that the employee would either no longer be incurring the expense on account of remote working (and hence either these benefits are not availed if provided as a reimbursement as the employee has not incurred the expense and cannot provide supporting documents for the same) or would be taxable if paid by the employer. Even an allowance like house rent allowance (HRA) can be claimed exempt only if the employee pays home rentals. However, since most employees have relocated to their home towns, they may not incur rental costs and thus this allowance would be taxable impacting the employees’ take home pay.

Further, an office set-up assures the employee a comfortable work environment like a proper desk, ergonomic chairs, high speed internet and refreshments which can no longer be availed by the employee.

Benefits that may now be required

As against the above, the employees need to enhance their facilities at home to ensure a comfortable and efficient work environment given the long work hours at home. The employer needs to provide support to the employees to enhance their internet connectivity, ensure a proper work space at home and support the employee with enhanced health care support during the COVID times.

Today the employees have additional expenses like higher internet charges, steeper mobile phone bills and heftier electricity bills, for which, the tax laws may not provide tax breaks.

Many employers have taken steps to support the employee in replicating these facilities for the employees at their homes to ensure that employee health or efficiency does not suffer. Employers have extended their employee benefit policies to include reimbursement of costs of amenities such as working desks and ergonomic chairs, broadband internet subscriptions and gym memberships, books and periodicals and periodicals reimbursement closer to home. A few employers have gone to the extent of providing baby-sitting reimbursements in lieu of the crèche facility.

Taxation of new benefits

The definition of salary is wide to include all emoluments provided directly and indirectly to the employees in cash and kind unless a specific exemption is provided to the employees. Thus, these new benefits though extended by the employer considering business exigency, may not enjoy a tax exemption in the hands of the employee.

While there is a clear exemption called out for mobile expenses and this may be extended to broadband charges also, most of the other reimbursements especially the gadgets and furniture would attract a perquisite tax as per the current rules. Illustratively if the employer provides a chair and desk to the employee to work from home, then as per the current perquisite rules, the benefit may be liable to tax at 10% of the cost of the asset to the employer. Some companies are arranging to buy the assets for the employees based on the employee requisition and arranging for their supply to the employee’s home while others are reimbursing the employee for amounts expended by them. It is pertinent to note that the manner in which the benefit is provided would impact the perquisite taxation.

The tax impact of these benefits would need to be evaluated keeping in mind the policy drafted around ownership and usage of the asset and implemented by the employers and the narrow wordings of the perquisite rules.

Attention would also need to be provided to the administrative challenges in implementation (like whether the employers are taking back the asset on termination, how would the employer evaluate whether the asset is in working condition etc. addressing contingencies like resignations, redundancy etc.) as these would be crucial in determining the taxability of the allowance or reimbursement granted.

Way forward

The ‘future of work’, that was under discussion in HR forums and HR leadership meetings until recently, is suddenly upon us. We have been unexpectedly catapulted right into the ‘future of work’ and business leaders are pleasantly surprised at how efficiently the business runs in a work-from-home arrangement. Many organisations globally have announced their plans to allow a part of their workforce to work from home with some degree of permanency. However, realigning to a work-from-home model needs an HR policy redesign, from an employee compensation and tax perspective as well as from a wider perspective of data security and maintaining confidentiality of business data when the employee works from home.

While the industry eagerly awaits some relief measures for employees from the government, this would be one area where if relief granted, would certainly be appreciated and future litigation around this would be minimised.

(By Aarti Raote, Partner with Deloitte India. With inputs from Mousami Nagarsenkar, Director, Deloitte Haskins & Sells LLP)

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