Employee Benefits Which Are Taxable

Introduction

Being an employee is no mean feat. They receive many benefits and allowances, such as HRA and group mediclaim insurance, from their employees. A handful are non-taxable, some are partially taxable, and the others are fully taxable. Such perquisites are fringe benefits and are often paid in cash or kind.

An individual who lacks financial knowledge would struggle to concur with the tax treatment of these fringe benefits. We try to clear all the uncertainties surrounding employee benefits and point out the taxable ones through this article.

List of Mandatory Employee Benefits in India

While many employee benefits are supplementary, there are six of them which are statutory and must be provided to employees:

  • Group medical insurance/ individual health insurance: Most employers are required to provide compulsory medical insurance to their employees. So, employers prefer subscribing to a group medical insurance plan on behalf of their workforce. In some cases, candidates get individual insurance policies that can be provided to some key employees.
  • Gratuity: Gratuity is a gratuitous payment due to an employee after working for an organization for five years continuously. It can be paid on retirement, termination, resignation, or death earlier.
  • Maternity leave: The employer is liable to pay a maternity leave of 26 weeks to their employees under the Maternity Benefits (Amendment) Act, 2017.
  • Unemployment insurance: The unemployment insurance benefit provides compulsory compensation to workers laid off by the organization. It is managed by the state and federal governments, who collect the amount from the organization and disburse them among the eligible workers.
  • Provident fund and pension: The Employees’ Provident Fund, Employees’ Pension Scheme, and Employees Deposit Linked Insurance Scheme fall under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. In most cases, every organization must register its employees under this act.
  • Leaves and holidays: Employees are eligible to get a certain number of paid and sick leaves for every financial year. While they cannot encash sick leaves, many organizations carry forward or allow their workforce to encash their overdue paid leaves.
  • In addition to the abovementioned perks, organizations also offer a series of supplementary benefits to their employees.

Taxable Employee Benefits

Here is the list of taxable employee benefits for salaried individuals:

1. Dearness Allowance (DA)

  • Dearness allowance is a way for employers to compensate for the increased cost of living of employees.
  • In most cases, it is paid as a percentage of the basic salary and is fully taxable for the beneficiary.

2. Overtime Allowance

  • Overtime allowance is paid to the employees for the additional work hours beyond their regular work schedule.
  • The minimum overtime rate is twice the standard wage rate, and any amount received as overtime allowance is fully taxable for the beneficiary.

3. Entertainment Allowance

  • Entertainment allowance is a sum paid by the employer to the employees to take care of clients’ needs.
  • Such an amount is fully taxable for private-sector employees. As for government employees, they can claim tax exemption of the least under Section 16(ii):
  1. Actual allowance received.
  2. 20% of the basic salary.
  3. INR 5,000.

4. House Rent Allowance (HRA)

  • HRA is paid to employees living on rent to compensate for the expenses borne by them as a rental outflow.
  • Section 10(13A) allows the least of the following to be claimed as tax exemption:
  1. Actual HRA received
  2. Rent paid less 10% of the (basic salary + DA)
  3. 50% of the basic salary for metropolitan areas (Delhi, Kolkata, Mumbai, and Chennai) or 40% for other cities.

Are benefits in kind taxable?

5. Children Education Allowance

  • Children education allowance is forwarded as a token to cover the education of the employees’ children.
  • The income tax allows a maximum deduction of INR 1200 per annum per child for a maximum of two children against the total amount received.
  • However, the Seventh Pay Commission has suggested increasing the deduction to INR 2250 per child for a maximum of two children.

6. Hostel Expenditure Allowance

  • The employer forwards a hostel expenditure allowance to cover the hostel expense of the employee’s children.
  • The maximum deduction allowed is INR 3600 per annum for a maximum of two children.
  • However, the Seventh Pay Commission has recommended increasing the amount by 50% to INR 6,750 per child for a maximum of two children.

7. Fixed Medical Allowance and Transport Allowance

  • As per the provisions of the Income Tax Act, 1961, any amount received as medical allowance is fully taxable in the hands of the employee.
  • Transport allowance is given by the employer to cover the expenses incurred for commuting between the place of residence and office/place of work of the employee.
  • Those working in the transport industry can claim the lowest of 70% of the total allowance or INR 10,000 per month as a tax deduction.
  • For others, they can claim a deduction of INR 1,600 per month. If the employee is physically disabled, they can claim a deduction of INR 3,200 per month.
  • The tax department has merged medical allowance and transport allowance and has increased the standard deduction to INR 50,000 starting from FY 2019-20.

Other Taxable Employee Benefits

  • Daily allowance: Deductible to the extent of actual expenses.
  • Helper Allowance: Deductible as per actual expense.
  • Tribal area allowance: Deduction of INR 200 per month allowed.

Wrap up

An employee gets a lot of benefits from their employers. These are provided to cover the necessities of an individual and help them save more. Their taxability depends on their nature and is a vital part of the income tax return of every salaried individual. Allowances like group medical insurance, HRA, and others are standard. In contrast, others depend from one employer to another and require you to know the tax treatment before submitting your tax returns to prevent discrepancy.