Income tax Exemption on Relocation allowance

Transfer of Employee from one location to another

With the globalization and economic growth, business are continuously expanding into multi geographic locations. There is wider reach because of e-commerce connectivity, boom in technology and digitization.

Employees working for a company from one location, have now multiple opportunities to work, grow and learn in different locations within the country by working for the same organization without having to switch jobs.

Due to Business restructuring many times employees are relocated or transferred from one city to another city. Sometimes the employee is transferred due to a project or an assignment, they have an option of moving with the family, and other times an entire department/ office is shifted out from one city to another city for business reasons.

Such relocation for employees leads to additional expenses including shifting in a new house, moving your furniture, car transportation cost, car registration charges, expenses incurred on finding a new school for your children, etc.

These expenses are reimbursed by the company or at times paid directly by the employer on your behalf. We will help you understand the taxability of these allowances/ reimbursements paid by the company to employees who are transferred from one city to another:

  1. Packing, Car Transportation cost: The cost incurred on car transportation should have direct relation with the travel due to transfer.Petrol/ Diesel charges and driver charges paid for transportation of car on relocation can be considered as personal effect of the employee, therefore exempt from tax.For example, expenses incurred on movers and packers, whether reimbursed to the employee against actual bills submitted by the employee or whether paid directly to the transporter, would not be taxable.
  2. Car Registration charges: If the car is in the name of the employee and is used in travel on transfer, then it could be considered as part of packing, transportation cost. Most of the states within India charge car registration charges for entry of the vehicle in their state.Therefore, such reimbursement received by employee can be tax exempt if these conditions are met.
  3. School admission fees of children: Reimbursement of school admission fees of children would be treated as a monetary benefit of employee, therefore will be taxable as salary income.
  4. Expenses incurred at shifting of new residence: Any allowance or amount paid by employer that in terms of money/ in nature of perquisite, then the same would be taxable as salary income for the employee. Therefore, if such expenses are reimbursed by the employer, they will be taxable.
  5. Brokerage paid on house taken on rent: Upon relocation to another place, the employee is required to pay brokerage to the broker for the new house taken. This expense is a personal obligation of the employee, therefore if met by employer would be taxable as salary income for the employee.
  6. Train/ Air tickets fee for shifting of family members: These are expenses that are incurred on transfer of an employee. Therefore, these are expenses reimbursed by employer from earlier place of residence to place of new employment would be exempt from tax.
  7. Accommodation provided in a hotel for the initial period of 15 days on joining the employment: Expenses reimbursed by employer or paid by employer to the hotel, for initial 15 days would also be exempt from tax for the employee. These expenses would also include boarding and lodging expenses including any meals forming part of such expenses.

Note any expenses incurred beyond 15 days would become taxable as salary income for the employee.

 

How to claim relocation allowance?

Employee should maintain the documents, proof of payments, any other agreement signed with employer substantiating the claim and payment of expenses incurred on transfer. These documents can be asked by the employer for their records. Also, employer would need to claim these expenses in its books of account as business expenditure.

If the employer pays more relocation allowance to the employee than the actual expenses incurred then the difference would become taxable as salary income for the employee.

Accordingly, employer should plan the re-location of the employee and reimburse expenses basis the tax benefit, it can partake with employee and claim such expenses as business expenditure.

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