Tax treatment of per diem allowances

Taxability of ‘ per diem' allowances has always been an exasperating issue. Per Diem is a muse over concept not only in consultancy but is also a very frequent focus in the industry.

On and off, several employees are sent on secondment, training and deputation and are provided Per Diem to spend in the host State, to cover living and travelling expenses in connection with work.

It is paid to employees in the form of relocation cost, insurance costs, living allowances, conveyance, travelling, driving lessons cost, accommodation, medical, destination costs etc.

TAXED OR NOT?

The taxability of per diem is provided in the Income Tax Act, 1961 where in case if the same is paid as part of salary then it would be treated as income unless it is paid to meet the expenses exclusively incurred in the performance of the duties of an office.

Based on the judicial interpretation, the word “exclusive” means the expenses should be incurred only for the purpose of performance of duties of an office or employment and not for any other purpose.

Such per diem expenses were subject to tax in the hands of the employer as fringe benefit tax till the same was abolished by the Finance Act of 2009. Subsequent to that it is now taxable in the hands of the employees according to the provisions of the Act.

The per diem allowance should not be any benefit or facility in the nature of “Perquisite” and should be granted for meeting ordinary daily charges incurred on account of absence from normal place of duty i.e. you temporarily move to a new place.

Furthermore, the exemption would be available to the extent of actual expenditure incurred. Per Diem allowance should not be liable to tax in India to the extent actual bills are submitted by the employees. However, any allowance that is paid in excess of actual bills submitted would be considered as taxable in India.

CONCEPT OF TOUR

Another essential point is that the allowance is granted on tour or for the period of journey in connection with the transfer. What constitutes the term ‘tour' has not been legally defined.

But according to the Webster dictionary, it is “a journey for business, pleasure, or education often involving a series of stops and ending at the starting point”. From the general definition and trade practice, a tour would be temporarily away from home and would be for a short duration.

Thus, where the employee is on deputation for longer period, the exemption may be challenged by the tax authorities on the ground that the employee concerned is not on tour but is actually transferred overseas.

The reasonableness of the expenditure incurred at an overseas location is another important facet that needs to be established for making claim equipped for exemption.

In the absence of the same, there is a possibility that the tax authorities may either tax the entire amount of such payments or determine what in their opinion is a reasonable amount that should be exempt and tax the balance amount.

While the possibility of scrutiny by the tax authorities cannot be ruled out, should the tax department ask for justification on the basis on which such claims are made by the company, it is advisable that the employer company maintains adequate documentation to support its claim.

(The author is with Tax & regulatory Services, PwC India.)

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