If you are a salaried employee working in any organisation, then most probably you would have by now received a mail from the HR department of your company that with the recent changes in the Finance Act, both medical reimbursement and transport allowance have become taxable with effect from 1st April 2018, and accordingly, both these allowances have been merged with your special allowance. This has left many employees wondering, will they now have to pay tax on these two allowances? If yes, then what about standard deduction? Has this already been taken into account by their employers while computing taxes or will they have to claim the tax so deducted by filing their income tax return?
However, before knowing the impact of these changes on you and your salary income, let us first take a look at what has changed.
What has changed?
According to tax experts, the recently-notified Finance Act 2018, which is applicable from 1st April 2018, has done away with exemption for transport allowance and medical reimbursement for salaried employees. In lieu of these, a standard deduction of Rs 40,000 has been introduced.
What does this mean?
Up to the preceding financial year (FY), an employee was allowed to structure his/her salary for claiming exemption for transport allowance of Rs 1,600 per month (Rs 19,200 per annum) and a medical expense reimbursement of Rs 15,000 per annum by selecting these components in the salary structuring sheet. Further, to claim medical reimbursement as non-taxable benefit, the employee had to submit original medical bills as proof to the HR department.
However, “with the introduction of amendments made in the Finance Act, 2018, transport allowance and medical reimbursement exemption are no more available. Hence, an employee would no longer be able to select these components as part of his/her salary structure,” says Akhil Chandna, Director, Grant Thornton India LLP.
Now a total of Rs 34,200 (i.e. Rs 19,200 and Rs 15,000) would be added to the special allowance component of the employee. This amount would be paid to the employee on monthly basis after deduction of applicable taxes.
“It should, however, be noted that while computing the payroll taxes, standard deduction of Rs 40,000, which has been introduced from FY 2018-19, would be given effect for. Hence, it will provide a relief of income up to Rs 5,800 per annum,” says Chandna.
Thus, it is wrong to believe that employers will deduct taxes on these two allowances now, which may have to be claimed later by the employees.
In fact, “the introduction of standard deduction has provided the salaried class additional benefit in tax by reducing their taxable income by Rs 5,800 besides reducing administrative hassles in maintaining documentary records to claim medical reimbursements,” says Ashok Shah, Partner, N.A. Shah Associates LLP.
What is more, differently-abled employees can claim both standard deduction of Rs 40,000 as well as transport allowance of Rs 38,400.
Organisations implement new provisions
These new provisions have already been implemented by most organisations across the country. For instance, Edelman India has merged these two allowances into the special allowance as, it says, retaining them without any corresponding tax benefits may create confusion in the minds of its employees. And the tax impact of the same has been fully offset by the standard deduction which has been brought back into the Finance Act.
As a result of this, there is no action required from the employees. Further, employees do not need to submit any claims under the medical reimbursement as they did earlier. “So far as standard deduction is concerned, it will be applied automatically on their taxable income by the Payroll System to the extent that they have taxable income. The employee does not need to take any action for the same. This has already been applied from April 2018 payroll in their Tax Computation for the Financial Year 2018-19,” says Pankaj Suri, Director of Human Resources, Edelman India.
What if organisations don’t follow this practice?
There are still apprehensions in the mind of some employees that excess tax will be deducted from their income now if their organisation deducts taxes without allowing the benefit of standard deduction.
Tax experts, therefore, say that employers need to understand the mechanism of tax deduction at source while providing the benefit of standard deduction to the employees. “The erstwhile transport allowance was a monthly allowance while exemption in respect of medical bills reimbursement was allowable subject to necessary documents being furnished to the employer. However, as the name suggests, the entire amount of the ‘standard deduction’ is required to be deducted from the estimated gross salary of the employee and TDS liability is to be worked out on the basis of the taxable income,” says Shah.
However, if employers were to deduct taxes without allowing the benefit of the entire standard deduction, a situation may arise where there is higher deduction of tax at source in earlier months, resulting in lower take home salary or in some cases, it might result in excess deduction of tax at source.
Also, “if any employer is still giving conveyance allowance or medical reimbursement – this will get taxable in the hands of the employee as per his income tax slab rates. Even if the employee submits proofs for this – it would still get taxable as the exemption has been removed with effect from Financial Year 2018-19 onwards,” says Karan Batra, Founder & CEO of CharteredClub.com.
Hopefully, employers will keep all these things in mind before deducting taxes from the salary income of their employees.