Tax talk: Rejigging perks and allowances to meet remote working needs

By: |
November 3, 2020 12:30 AM

Employers can increase the variable pay component including allowances which you can claim on a reimbursement basis. While considering the options to restructure compensation packages, employers should consider the income-tax allowances available and the tax implications.

An allowance in the form of books, periodicals and self-learning may help employees recover expenses in a tax-exempt manner.

With work from home becoming the new normal, employees’ salary compensation needs restructuring to suit the work from home needs. Employees may not be able to claim allowances such as conveyance allowance and leave travel allowance. There is an increased focus on digitisation of the work environment. Employers can look to reimburse employees for their incremental costs of working from home.

Employers can increase the variable pay component including allowances which you can claim on a reimbursement basis. While considering the options to restructure compensation packages, employers should consider the income-tax allowances available and the tax implications.

Remote working
In a digitised setup, employees need to be remotely connected to their company and also need bandwidth to download data. Companies can provide a fixed allowance for internet and telephone expenses. In certain cases, employees may need to subscribe to magazines, periodicals, digital content, etc., to meet the needs of their employment. An allowance in the form of books, periodicals and self-learning may help employees recover expenses in a tax-exempt manner.

Employees may be in need of a desk and chair to operate from their home. They may also face power supply issues and need installation of a UPS to operate from home. Companies can look to provide a fixed allowance for purchasing a desk and chair. The asset purchase will be in the name of the company. The use of assets in the name of the company gets taxed as a ‘perquisite’ for the employee. It forms part of the taxable salary income. The value of the ‘perquisite’ is 10% of the actual cost of the asset.

Similarly, assets taken on rent in the name of the company are also liable to tax as ‘perquisite’ for the employee. The actual rent amount is the value of the ‘perquisite’.

An employee working from home may need domestic help and also need to take care of their health and fitness. An employer may provide a fixed allowance for domestic help and for any spending on health and fitness. The amount reimbursed by the employer gets taxed as ‘perquisite’ for the employee.

Tax on perquisite
The tax on ‘perquisite’ is only on the portion of cost reimbursed by the employer. The amount incurred by the employee themselves does not get taxed. While the perquisites discussed above get taxed, there are certain tax-free perquisites an employer can provide. Paid vouchers which are non-transferable are tax-free up to Rs 26,400 per financial year. The value of a gift or gift voucher given to an employee is tax-free up to Rs 5,000 per financial year.

A conveyance allowance granted to meet the duties of employment is a tax-free reimbursement. Companies can allocate a certain amount to conveyance allowance in the compensation structure of an employee.

The exemption for allowances depends on the actual claim of the employee. For example, if an employee claims nothing for leave travel allowance (LTA) expenses, then the exemption will be nil. Similarly, if the actual reimbursement for telephone and broadband is lesser than the allowance, the exemption is restricted to the actual amount.

The writer is founder and CEO, ClearTax

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