Working from home is the new normal post COVID. Employees are able to save more when working remotely as there is no travel or eating out required. However, how many of you are aware that it may feel heavy on your pockets when it is time to file your taxes or how work from home impacts tax outgo?
The salary paid by the employer to the employee is split into varied components. It consists of Conveyance Allowance, House Rent Allowance, and Leave Travel Allowance as the major constituents. Employee pay structures are designed based on the premise that there will be a group of employees working from within an office environment. Tax regulations relating to employee taxation have also evolved based on this premise. There exists a chance for all of these to become taxable and work from home impacts tax outgo of a salaried employee.
LTA and HRA
Conveyance allowance cannot be made tax-free when employees are not traveling to the office on a daily basis. In some cases, the conveyance allowance is availed as reimbursement, if you are able to produce the proof of expense. In the current scenario, when commuting to and from work is virtually nil, the conveyance allowance may be taxable.
As most transportation modes are non-functional from the start of the lockdown, Leave Travel Allowance (can be claimed twice in a block of four years) for the current financial year may also become taxable.
Section 10 (13A) of Income Tax Act states that, HRA is a part of salary if the employee stays in a rented house and the employee can claim the rent paid as an exemption. The allowed amount will depend on the actual rent paid or HRA paid and the city where the employee living in. One can claim the minimum of actual HRA received, 50% or 40% of the salary in case of metro or non-metro cities, and excess of rent paid over 10% of basic salary as HRA exemption. HRA cannot be saved, if you are living in a rented place and choose to move back to your native place, stay in your own house and work from there. If you are unable to produce the rent receipts, it makes you liable to pay more tax.
In case a person has vacated his rented house and doesn’t pay rent now, his tax liability will increase as the HRA component of his salary will also be taxable as income. However, the cash outflow pertaining to the rent component will also proportionately decrease.
A lot of other benefits provided when working from an office, such as subsidized meals, snacks, beverages, recreational facilities, club memberships, shuttle services, etc, may no longer hold any relevance.
Work From Home Allownace
As a work from home allowance, most of the organizations are giving their employees a fixed amount to meet expenses like internet bills, electricity charges, cost of buying laptop computers, and office furniture for creating an office space at home. However, in case you are unable to produce bills for the same, that amount will also be taxable.
Allowances are taxable except in cases where clearly exempt. Allowances such as daily allowances, conveyance allowance are exempt from tax to the extent spent by the employee. They are taxable in case it is not spent.
While fresh benefits in lieu of the work from home situation extended by the employer hold good, they may not result in a tax exemption for the employee with the existing rules. While phone bills and internet bills’ reimbursement can already be exempted, most of the other support extended to work from home employees, such as gadgets, ergonomic furniture, and other similar acts may be taxable as per the current prerequisite rules. Most companies are thus making arrangements to purchase the assets on their account and distributing them to employees depending upon their needs.
Multiple practical questions need to be addressed to determine the taxability of the reimbursement.
Am I required to pay advance tax if the salary is due but not paid?
The employer is liable to deduct tax on the salary paid to the employee at the time of payment. The salary that is due is taxable for the employee even if it is not paid. Hence, even if the employer has not paid the TDS, it is the employee’s responsibility to pay advance tax on that. There would be a refund possibility in case the employer makes the salary payment later during the financial year and deducts taxes then. In that case, it is preferable to delay the advance tax till the end of the year by estimating the TDS. If TDS is not deducted, then interest will be payable.
There is now an urgent need to change the way we work, and how we perceive the future of work. Many organizations are undergoing a complete work policy restructuring. This involves perspectives on employee reparation and tax, as well as data security aspects and maintenance of confidentiality when working from home.
For any guidance on how you can help your employees reduce their tax burden, please feel free to get in touch with GKM’s experienced tax planning & advisory professionals at firstname.lastname@example.org.