tYPES OF ALLOWANCES
Reimbursements are a special class of components which form part of the payroll. Usually, these elements are incorporated into payroll to derive full value from the salary received. There are arrangements which are rendered as incentives for the employee within the pay structure.
As the word indicates, reimbursements are money paid out to the employee for any money already expended by the employee.
All reimbursements are subject to the upper limits set by the company or the appropriate body of government. That means the employee may only demand reimbursements (payment request) up to a certain amount.
Reimbursements are of two types: for out-of-pocket money spent on business expenses - An employee seeking reimbursement for money spent on a business trip or for some work-related item would bear a 100% tax exemption because the reimbursement is not an employee's 'earnings.' For this reimbursement one should normally file a claim for expenses.
For out-of-pocket money spent on the employee-Employee receiving reimbursement for money spent on his own expenses such as housing, adjustment to inflation [Dearness Allowance (DA)], medical bills, house rent and travel during leave may or may not be taxable as provided for in the Income Tax Act.
This blog series will discuss only the second form of reimbursement, i.e., money spent out of pocket for the employee.
What is a levy?
An bonus is the employer's financial contribution to the employee, over and above the normal wage. Such benefits are given to cover expenses which may be incurred to promote duty discharge. Conveyance Allowance, for example, is charged to cover costs incurred for commuting to workplace.
In addition to the Conveyance Allowance, the most common allowances in the Indian payroll system are: Medical Allowance Dearness Allowance Leave Travel Allowance; also referred to as the Leave Travel Concession House Rent Allowance In some organizations, these allowances may form part of their Flexible Benefits Plan (FBP) package. Let's take a closer look at these allowances ... Conveyance Allowance Conveyance Allowance, also known as Transport Allowance, is a form of compensation given to the employee to compensate for their regular travel between residence and place of work.
In general, the employer will only pay the Conveyance Allowance if the employer does not provide transport. If an employer provides office transportation otherwise their workers do not receive this allowance.
Limits and Exemption Rules: There is no cap to the volume of the Conveyance Allowance that an company can give to its employees. However, the amount of exemption under the Income Tax Act is reduced, which is up to INR 19,200 per financial year or INR 1,600 per month.
The employee does not have to supply any documentation or evidence that the employer earns the Conveyance Allowance. Under Transport or Conveyance Allowance, the maximum amount of INR 1600 pm can be stated as tax exemption.
Medical Allowance The Medical Allowance states that if an employee spends some money on medical expenses (purchasing medicines, paying doctor's consultation fees, etc.), then the organization will reimburse (pay) the employee for the amount he / she spends when submitting the original bills.
Exemption rules: An employee can demand an exemption in respect of sums spent on medical expenses for members of the self and dependent families. Typically at the start of the financial year the employee will report to the employer the list of dependents.
The medical allowance / exemption for each financial year is currently set at INR 15,000. To assert this privilege the employee would need to submit original medical bills.
Dearness Allowance (DA) The DA is a part of an employee's pay, which is some fixed percentage of the basic salary, intended to hedge the inflationary effect. The DA is basically a 'cost of living' allowance that the government pays to its employees (both central and state), PSU employees, and retirees.
Because DA is directly related to the cost of living, the aspect of DA is different for different workers depending on their position.
There is no compulsion to pay DA to its employees for private limited or public limited companies. And if they pay, they can quantify this in whatever way they want. And it'll be a deduction from the company's overall sales.
Please notice the DA is a portion which is completely taxable.
You knew it?
After the Second World War, the DA concept was introduced in India and was initially known as the 'Dear Food Allowance.' DA was initially given to workers by the government because of a requirement for pay revision. This was, however, later linked to the Consumer Price Index (CPI). A number of Central Government committees have over the years now been revising and reforming the percentage of DA.
Leave Travel Allowance (LTA) The LTA is an allowance provided by the employer to the employee when the former submits original travel tickets / invoices used to fly with the employee 's family or on leave alone.
The sum payable as LTA is tax-free. The LTA is one of the best tax-saving components which an employee can make use of. It can only be claimed twice in a four year row.
LTA's Multifold Benefits Availing the LTA is beneficial to the mental well-being of workers because it allows them to take leave and spend more time for rejuvenation and work-life harmony with their families.
RELATED POST: Leave Travel Allowance: Through a magnifying glass Encouraging employees to take advantage of earned / privilege leaves also helps organizations because they don't have to encash leaves when an employee leaves or retires, which can be significantly high in cases where employees have very few leaves!
Looking at the bigger picture, LTAs indirectly support the tourism and travel industry as more and more salaried individuals and their families travel during their annual leaves / holidays!
Maximum Claim Limit Although the income tax authorities do not establish an upper limit for LTA, most organisations are capable of efficient administration. The most common fixed upper limit for LTA is the monthly minimum salary of an employee.
House Rent Allowance (HRA) HRA is given to workers to offset / balance living costs as a function of the city / region in which they live. Living costs in a particular city / region can be higher or lower than other cities / regions of the country depending on various factors such as taxes, food prices, grocery costs and house rentals.
Employees staying in rented houses may demand HRA to get their taxable income reduced. HRA can be partly or entirely tax-free. The HRA is for lodging related expenses.
This allowance is entirely taxable for workers, who do not live in leased dwellings.
The calculation of HRA depends on the following four factors: the employee's salary The HRA component of the salary The rent paid by the employee The location (city) of the rented residence rules of exemption The HRA tax exemption is equal to the lowest of the following four amounts: Actual HRA received Actual rent paid reduced by 10 per cent of the salary 50 per cent of the lowest of the four amounts. Hence the percentage of exemptions for metro cities is higher.
Closing notes Allowances such as Conveyance and Medical Expenses, DA, LTA, and HRA are benefits that government or company donates to employees. Such deductions can be taxable in compliance with the Income Tax Act, or not.
If there is a defined salary structure that includes most of these allowances (Transport and Medical Allowances are mandatory), then employees can reduce their tax burden and increase their net pay.
As the word indicates, reimbursements are money paid out to the employee for any money already expended by the employee.
All reimbursements are subject to the upper limits set by the company or the appropriate body of government. That means the employee may only demand reimbursements (payment request) up to a certain amount.
Reimbursements are of two types: for out-of-pocket money spent on business expenses - An employee seeking reimbursement for money spent on a business trip or for some work-related item would bear a 100% tax exemption because the reimbursement is not an employee's 'earnings.' For this reimbursement one should normally file a claim for expenses.
For out-of-pocket money spent on the employee-Employee receiving reimbursement for money spent on his own expenses such as housing, adjustment to inflation [Dearness Allowance (DA)], medical bills, house rent and travel during leave may or may not be taxable as provided for in the Income Tax Act.
This blog series will discuss only the second form of reimbursement, i.e., money spent out of pocket for the employee.
What is a levy?
An bonus is the employer's financial contribution to the employee, over and above the normal wage. Such benefits are given to cover expenses which may be incurred to promote duty discharge. Conveyance Allowance, for example, is charged to cover costs incurred for commuting to workplace.
In addition to the Conveyance Allowance, the most common allowances in the Indian payroll system are: Medical Allowance Dearness Allowance Leave Travel Allowance; also referred to as the Leave Travel Concession House Rent Allowance In some organizations, these allowances may form part of their Flexible Benefits Plan (FBP) package. Let's take a closer look at these allowances ... Conveyance Allowance Conveyance Allowance, also known as Transport Allowance, is a form of compensation given to the employee to compensate for their regular travel between residence and place of work.
In general, the employer will only pay the Conveyance Allowance if the employer does not provide transport. If an employer provides office transportation otherwise their workers do not receive this allowance.
Limits and Exemption Rules: There is no cap to the volume of the Conveyance Allowance that an company can give to its employees. However, the amount of exemption under the Income Tax Act is reduced, which is up to INR 19,200 per financial year or INR 1,600 per month.
The employee does not have to supply any documentation or evidence that the employer earns the Conveyance Allowance. Under Transport or Conveyance Allowance, the maximum amount of INR 1600 pm can be stated as tax exemption.
Medical Allowance The Medical Allowance states that if an employee spends some money on medical expenses (purchasing medicines, paying doctor's consultation fees, etc.), then the organization will reimburse (pay) the employee for the amount he / she spends when submitting the original bills.
Exemption rules: An employee can demand an exemption in respect of sums spent on medical expenses for members of the self and dependent families. Typically at the start of the financial year the employee will report to the employer the list of dependents.
The medical allowance / exemption for each financial year is currently set at INR 15,000. To assert this privilege the employee would need to submit original medical bills.
Dearness Allowance (DA) The DA is a part of an employee's pay, which is some fixed percentage of the basic salary, intended to hedge the inflationary effect. The DA is basically a 'cost of living' allowance that the government pays to its employees (both central and state), PSU employees, and retirees.
Because DA is directly related to the cost of living, the aspect of DA is different for different workers depending on their position.
There is no compulsion to pay DA to its employees for private limited or public limited companies. And if they pay, they can quantify this in whatever way they want. And it'll be a deduction from the company's overall sales.
Please notice the DA is a portion which is completely taxable.
You knew it?
After the Second World War, the DA concept was introduced in India and was initially known as the 'Dear Food Allowance.' DA was initially given to workers by the government because of a requirement for pay revision. This was, however, later linked to the Consumer Price Index (CPI). A number of Central Government committees have over the years now been revising and reforming the percentage of DA.
Leave Travel Allowance (LTA) The LTA is an allowance provided by the employer to the employee when the former submits original travel tickets / invoices used to fly with the employee 's family or on leave alone.
The sum payable as LTA is tax-free. The LTA is one of the best tax-saving components which an employee can make use of. It can only be claimed twice in a four year row.
LTA's Multifold Benefits Availing the LTA is beneficial to the mental well-being of workers because it allows them to take leave and spend more time for rejuvenation and work-life harmony with their families.
RELATED POST: Leave Travel Allowance: Through a magnifying glass Encouraging employees to take advantage of earned / privilege leaves also helps organizations because they don't have to encash leaves when an employee leaves or retires, which can be significantly high in cases where employees have very few leaves!
Looking at the bigger picture, LTAs indirectly support the tourism and travel industry as more and more salaried individuals and their families travel during their annual leaves / holidays!
Maximum Claim Limit Although the income tax authorities do not establish an upper limit for LTA, most organisations are capable of efficient administration. The most common fixed upper limit for LTA is the monthly minimum salary of an employee.
House Rent Allowance (HRA) HRA is given to workers to offset / balance living costs as a function of the city / region in which they live. Living costs in a particular city / region can be higher or lower than other cities / regions of the country depending on various factors such as taxes, food prices, grocery costs and house rentals.
Employees staying in rented houses may demand HRA to get their taxable income reduced. HRA can be partly or entirely tax-free. The HRA is for lodging related expenses.
This allowance is entirely taxable for workers, who do not live in leased dwellings.
The calculation of HRA depends on the following four factors: the employee's salary The HRA component of the salary The rent paid by the employee The location (city) of the rented residence rules of exemption The HRA tax exemption is equal to the lowest of the following four amounts: Actual HRA received Actual rent paid reduced by 10 per cent of the salary 50 per cent of the lowest of the four amounts. Hence the percentage of exemptions for metro cities is higher.
Closing notes Allowances such as Conveyance and Medical Expenses, DA, LTA, and HRA are benefits that government or company donates to employees. Such deductions can be taxable in compliance with the Income Tax Act, or not.
If there is a defined salary structure that includes most of these allowances (Transport and Medical Allowances are mandatory), then employees can reduce their tax burden and increase their net pay.
