All You Need to Know About Income Tax Exemption on Relocation Allowance

If you’re unaware of how much tax is exempted on relocation allowance provided by the company, then here’s a quick read for you.

Income tax on relocation allowance is exempt from certain taxes arising due to additional expenses incurred by relocating to a new place. Read on to know more about this.

In today’s generation booming digitization and globalization has paved way to greater expansion of businesses into multi geographic locations. The extensive reach of connectivity has granted employees the benefit of working for a company through different locations within the country. And that too without having to switch the job or the company.

The culture of transferring or relocating employees due to business restructuring, wherein the reasons can be a new project/ assignment or better opportunities is more visible than ever. Some of these transfers provide an individual the option of moving with the family, or the entire team under a department or in an office to be relocated.

Transferring to a new city has its own cost of living and commuting. Therefore, the additional expenses that arise due to relocation are reimbursed by the employee, either directly to the concerned people or indirectly through salary.

Income tax exemption on relocation falls under Section 10 (4), 1961, and under Income-tax rules, Rule 2BB, 1962. It reads that any allowance that is granted to meet the cost of travel- packaging and transportation of personal effect, daily charges sustained on the duration of the journey due to the transfer can be claimed as tax exemptions.

The specified expenses incurred due to the transfer, i.e., the relocation allowance can be claimed as tax exemption, but only to the extent of the actual expenses as specified. Actual specified expenses mean the amount paid by the employer that covers the exact relocation allowance. On the other hand, amount paid more than the actual specified expenses incurred by the employer will be taxable as salary income. To claim tax exemption for relocation, necessary documents that validate the payment of expenses towards transfer have to be maintained. Moreover, these documents (comprising of receipts etc.) should be submitted to the employer and the income tax department. It is submitted to the employer so as to corroborate and compute the expense documents and tax to be deducted respectively from the relocation allowance.

Income tax on relocation allowance is exempt from certain taxes arising due to additional expenses incurred by relocating to a new place. Read on to know more about this.

Tax Exemptions

• Packing and moving cost: All directly related expenses to the transfer are exempted, packing and moving costs is reimbursed for the fuel used in the vehicle, driver charges etc. as they correlate to the relocation. They are considered as personal effect of the employee, and hence, are exempted from tax. These can either be reimbursed to the employee against the bills submitted or to the transporter directly.
• Registration of car cost: Registration of the car, if under the name of the employee, is used for travel on transfer falls under the packing and moving costs. Car registration cost for entry of the vehicle is charged across most parts of India. Such expenses are also tax exempted as it is reimbursed by the employee if requirements are met with.
• Accommodation for the initial period: This expense incurred during the initial period of relocation is accountable to the first 15 days of it. It includes the costs of boarding, lodging, dining in the entirety for those 15 days. It is not taxable in such a case.
• Airplane and train tickets for relocating: This expense falls under direct relation to the transfer, and are incurred during the shift of locations from earlier residence to the new location for employment is exempted from tax return payments.

Taxable Under Salary Income

• School admission fees: Fees for school admissions are considered a monetary benefit of the employee, and reimbursement of the same is taxable under the Income Act as salary income.
• New Residence: It is to be noted that allowances paid by the employer in terms of money or in the nature of the prerequisite is considered as salary income from the employee, therefore, is taxable.
• Brokerage on house rent: Relocating to a new place requires a new residence, which in turn incurs brokerage cost to the broker for the new residence taken. It is required of the employee to pay such expenses as a personal obligation. If met by the employer, it would be taxable as employee’s salary income.
• Accommodation: After 15 days, the accommodation provided will fall under salary income and is taxable.

As mentioned before, the expense documents have to be maintained for proof. Any agreement, receipt etc. signed by the employer counts as an expense document, as it substantiates the claim and that the payment of the expenses incurred to be valid. It is for the record of both the employee and the employer. In the case of the employer, these expenses to reimburse the relocation allowance will be claimed under business expenditure in its books of account.

The difference of the actual incurred amount and the paid amount shall be taxable. The employer plans accordingly for the re-location and the reimbursement on the basis of the tax-benefit, so as to claim these expenses as business expenditure.