Nature of payment to offer differential tax treatment
By Arnav Pandya
Salaried individuals can witness different tax treatments for their income based upon the details under which the income has been paid to them. There are several examples of this but one of the most common ones that they will experience is that relating to conveyance. The small difference of whether the amount is being paid as an allowance or whether it is being reimbursed will make a large difference to the extent to which this will be considered as taxable in their hands and also the extent to which it will be taxable. Here is a closer look at the details and the manner in which this will work out.
One of the easiest ways to provide for a particular facility is through an allowance. This is mentioned as a part of the salary package and will be considered as a part of the total remuneration that will be available to the salaried individual. However once the amount is provided as an allowance then for the purpose of determining the amount that is allowed as a tax free amount then the exact conditions for that specific term in the Income Tax Act needs to be considered.
So if there is a conveyance allowance that is provided then the overall conditions for this particular allowance will be applicable for the individual. If the conditions for the conveyance allowance are considered then an amount upto Rs 800 per month is tax free in the hands of the individual. This is a figure that has been fixed so the benefit cannot exceed this limit as far as the individual is concerned.
If there is a higher amount that is given as an allowance then the figure upto Rs 800 per month is tax free and the remaining amount would be added to the income of the individual and then taxed as per the applicable rates. This can make the situation a bit difficult for the individual because the limit that is available as tax free is far too less as compared to what the company might provide them or what they would actually need for the purpose of getting to the work place.
The other route that is adopted for the purpose of actually providing for the benefit that will be incurred for the purpose of conveyance is actually a reimbursement of the amount that has actually been spent by the individual.
There is usually a limit specified upto which the expenses will be reimbursed. When it comes to the question of the tax treatment for this kind of spends then it will be different as compared to an allowance. The reimbursement of the expenses for the individual is tax free in their hands because this is not an income but is just the amount being given back for the figure that has been spent in the process of completion of the work.
There are different ways in which the reimbursement will be made by the employer but a key factor that is present is that there has to be details of the expense spent and the proof provided for the spends wherever possible. This is essential to ensure that the reimbursement is genuine. It could be that the employer reimburses conveyance expenses spent upto a certain limit for the employee depending upon their designation and work.
The other thing could be that there is a limit that is set for the purpose of the reimbursement and if the employee spends the entire amount then they are paid for the same and there will not be any tax implication for this. However in case the actual spends for the employee during the year is less then the employer will deduct tax on the unspent amount and then pay the net figure to the individual for the purpose of completion of the process.
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