Reimbursed Work Expenses: Do They Impact Your Tax Deductions?

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

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

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.

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 for 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.

Regards

I assume you have a payroll system in place and that accounts do a reconciliation between the salary sheet and bank transfers. If the above is in place, in case of scrutiny or inquiry, 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.

Understanding Salary Account Transactions

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

Expenses incurred for company work are treated as reimbursements.

Regards,
Pon

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 as all readers, will agree with the views expressed by Mr. A K Jain, which have great clarity. It is 100 percent correct that these reimbursements are not taxable. However, I think Vishal has different thoughts in his mind. Everything is fine until the reimbursement is done and no tax is deducted by the employer. But when an IT officer goes through his bank passbook and sees credits to his account paid by the employer as reimbursements, it is not always possible to show that these are indeed reimbursements. The IT officer may insist that this is your additional income, apart from salary, such as incentives, etc. This query will be raised after two or three years of the actual transaction. At that time, the company's accounts or salary department may not cooperate with the employee, and he will be in trouble.

Example Scenario

I have an example: A field executive working in Calcutta offers a prestigious gift to his client or organizes a business lunch for his client worth Rs. 10,000. His Head Office, located in Gujarat, reimburses these expenses to his bank account. After 2 to 3 years, how can the said employee prove to the IT officer that this credit to his account is not his income but a 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 a copy of the approvals taken for each month's 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 a huge salary and income.

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

To answer your point, the onus lies with the person who is making/crediting the payment, and it is his/their responsibility to deduct applicable TDS, if any, but not the recipient as per I.T. rules.

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 his worry lies elsewhere. What if the file of the employee is taken up for scrutiny by the income tax authority? That would probably happen two 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 explanations 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.

Can't help it. Normally, I.T. authorities are not behind salaried people who pay the income tax correctly without any deceit, and they show some leniency to salaried individuals. When I was in a reputed organization some time back, the employer facilitated opening two different bank accounts, one for crediting salary and the other for crediting the reimbursements.

Regards,
Pon

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 100 percent true that reimbursements are not anybody's income. If anyone honestly shows all bank credits in their IT return, there must be some official ways to claim deductions for these reimbursed amounts. Also, by not disclosing these amounts at all in the 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.