How work from home can impact your tax outgo

The Covid-19 pandemic has triggered radical changes for all, especially for the employee workforce.

The combination of the pandemic fallout and the advances made in technology has led to a sharp rise in work-from-home arrangements for employees, employees working from residences near their office locations or from their home town, making work-from-home now the new normal.

With the new working arrangements come new processes, challenges and situations. Unfortunately, existing tax reliefs/exemptions are not inclusive enough to cover the new normal unless there are specific amendments or clarifications. Further, the current salary structures are also aligned to existing tax provisions to optimise tax breaks for employees. Thus, with the new normal having not been envisaged, there is the possibility of increased tax outflow for employees.

As per current tax laws, salary and allowances from the employer are taxable unless specifically exempted.

Certain allowances/reimbursements such as House Rent Allowance (HRA) and Leave Travel Allowance (LTA) are exempt from tax as per specified limits, subject to actual expenditure under the old tax regime.

With the new normal, employees are required to work from home, and it is difficult to go on vacations and there is also limited travel for commuting to work. Thus, it is not possible for them to expend money for the designated purposes, making it imperative to understand tax implications in such situations.

Impact on exemptions

In cases where employees pay rent and if specified conditions are met, HRA exemption can be claimed as per defined limits under the old tax regime. The HRA exemption is based on various limits — defined as a percentage of salary, HRA received, the actual rent paid and location of accommodation.

One of the defined limits is based on the place of the rented accommodation; for metro cities, the specified limit is 50 per cent of the basic salary and for other cities, it is 40 per cent.

Considering the new normal, to save on unnecessary expenses, employees have vacated their rented houses and moved to their home town or to another house with lower rent. Thus, if employees are no longer paying rent, HRA received will be fully taxable. Further, if employees are paying lower rent and/or there is a change in place of accommodation from metro to non-metro, the quantum of exemption available will substantially decrease.

Further, LTA shall be exempt to the extent of actual expenses incurred in respect of two journeys performed within India in a block of four calendar years under the old tax regime.

The current block runs from 2018-2021. If an employee does not use their exemption during any block, their exemption can be carried over to the next block and used in the calendar year immediately following that block.

However, as employees and their families are not able to travel due to the pandemic, any travel plans in the future looks limited.

Hence, some employees may need to claim LTA as a taxable allowance.

Some employers have extended additional support to make work-from-home arrangements conducive. Some of the common supports extended are furniture (table, ergonomic chairs), increased utility (electricity, internet), etc. However, in the absence of specific provisions, the tax implications of such extended support will also have to be evaluated basis the exact arrangement.

True-up

It is a normal practice for employers to deduct tax on salary every month based on estimates of rent and other investment details submitted by the employee at the start of the year (ie, in April 2020 for the current financial year).

Subsequently, towards the year end, the employer verifies the declarations made by the employee as supported by actual declarations and considers a true-up for excess/ short tax withholdings.

Therefore, it is important for employees to update the employer on any change in declaration given at the start of the year (such as changes in rent paid, city of accommodation, etc) so that necessary true-up adjustments in tax withholdings can be factored in the remaining months.

Else, there could be substantial cash flow challenges for employees.

The writer is Partner, Deloitte India. With inputs from Jimish Vakharia, Senior Manager, and Reena Poddar, Manager, Deloitte Haskins & Sells