Navigating Taxation on Reimbursed Employee Expenses: Insights on Income Tax Scrutiny and Compliance

Hi,

If an employee spends some amount for official work and the same amount is reimbursed by the employer and transferred to the employee's salary account, will it affect any tax deductions?

Regards,
Vishal

Dear Parabvishal,

Why is that amount connected to his salary account? Whatever he spent, it has to be reimbursed. Moreover, it is not eligible for tax.

Hi,

Any amount spent in the course of employment and reimbursed by the employer is not liable to tax, irrespective of whether it is credited to the salary account or otherwise. The employer will not incorporate such amounts in Form 16.

Hope this clarifies.

Thank you, but please let me know if the employee's file is returned and the income tax department finds a variation in the income mentioned in Form 16 and the employee's salary account.

Dear Mr. Vishal,

It is always suggested that any credit or debit in the bank statement should be noted in pencil or pen for future reference in case Assessing officers have queries. Under the IT Act, the employer is liable to TDS on salary. You may show such entries with a detailed explanation to satisfy the Income Tax officers. They will address any concerns with employers if they are not satisfied. Therefore, the individual need not worry.

I assume you have a payroll system in place and also that accounts do a reconciliation between the salary sheet and bank transfers. If the above is in place, in case of a scrutiny or enquiry, you need to show the workings, records, and reconciliation to prove that your Form 16 is correct. Further, check the possibility of doing separate credits for salary and expenses to minimize a problem.

Salary A/C does not mean only salary is to be credited. Other credits are also allowed, including his personal money, if any.

Expenses incurred for Company work are treated as reimbursements.

Pon

Dear all,

Many learned followers have given valid points. To sum up and add mine, please go through the following:

1. Income Tax is deducted on income and not on reimbursement of expenses connected with company affairs like TA/DA, repair & maintenance of office equipment, etc.

2. Initially, such reimbursements should not be paid through the salary slip. However, if it is a matter of the system, the amount should be shown under a separate head "Reimbursement of Expenses." This amount should not be included in income while preparing Form - 16. Instead, it can be shown in Form - 24 and subtracted from Total Income under a separate head, as detailed above.

3. In no case should the reimbursement for expenses related to the company's affairs be taxable.

Best wishes,
AK Jain
HR Personnel
NCL, CIL

I am sure Vishal Parab, as well all readers will agree to the views expressed by Mr A K Jain, which has great clarity. It is 100 per cent correct that these reimbursements are not taxable.

However, I think Vishal has different kind of thoughts, in his mind. Everything is fine, till reimbursement is done, and no tax is deducted, by the employer. But, when IT officer goes through his bank pass book, and there are credits to his account, paid by employer as reimbursements, it is not always possible to show that these are reimbursements. IT officer may insist that this is your additional income, apart from salary, say incentives etc. This query will be raised after two/three years of actual transaction. At that time, Company’s accounts/salary department, may not cooperate the employee, and he will be in trouble.

I have an example : A field executive, working in Calcutta, offers a prestigious Gift to his client, or organizes business lunch to his client, worth Rs.10000. His HO,located in Gujarat, reimburses these expenses to his bank a/c. After 2 to 3 years, how the said employee can prove to IT officer that this credit to his a/c is not his income, but reimbursement.

the question that comes up is : was the money spent or was the reimbursement taken without spending. Generally, a large part of the reimbursement today is against credit card expenses. That should be easy to explain.
Second, you can always take and keep copies of expense claims that you have filed and possibly copy of the approvals taken for each months claims which will be matched with the additional reimbursements.
Tax Officers will rarely bother with small salary accounts. It would be different if the employee has huge salary and income.

[QUOTE=abhaybandekar;2097692
However, I think Vishal has different kind of thoughts, in his mind. Everything is fine, till reimbursement is done, and no tax is deducted, by the employer. But, when IT officer goes through his bank pass book, and there are credits to his account, paid by employer as reimbursements, it is not always possible to show that these are reimbursements. IT officer may insist that this is your additional income, apart from salary, say incentives etc. This query will be raised after two/three years of actual transaction. At that time, Company’s accounts/salary department, may not cooperate the employee, and he will be in trouble.
.[/QUOTE]
To answer to your point, the onus lies with the person who is making/crediting the payment and it his/their responsibility for deducting applicable TDS , if any, but not the recipient as per I.T. rules

Hi Pom,

I think his worry lies elsewhere. What if the file of the employee is taken up for scrutiny by the income tax authority? That would happen probably 2 years later when he may not even be in the same company. But when the tax officer scrutinizes your file, he is going to ask for an explanation for every entry in the bank statement. He will then consider the additional payments (reimbursement) as income unless the employee has definite proof that it was a genuine reimbursement.

"To answer your point, the onus lies with the person who is making/crediting the payment, and it is their responsibility to deduct applicable TDS, if any, but not the recipient as per IT rules." - [QUOTE=pon1965;2097731]

I think opening two separate bank accounts will make the transactions more suspicious. Such a file will definitely be looked at in a negative light, and the ITO will likely add up payments made to the second account. It is important instead to keep details of amounts claimed and reimbursed with copies of bills submitted to the office. That will probably be a better solution.

We should not find any tricky way, to escape from the set system. It is a 100 percent truth that Reimbursements are not anybody’s income. If anyone honestly shows all bank credits in his IT return, there must be some official ways, to claim deduction also, for these reimbursed amounts. Also, by not disclosing these amounts, at all in IT return, but by signing an affidavit or declaration, which is to be attached to your Return, one can remain relaxed for the future. Only IT experts can throw some light on this.