Taxability of employee benefits may decide which tax regime makes more sense for you

• Understanding the different employee benefits and their taxability can help employees make an informed decision between choosing the old or new tax regime.
• Employees should carefully review their employment contract, company policies and any communication related to employee benefits.
• One has the option of approaching the company HR department to obtain information regarding the employee benefits available and their taxation status.

When deciding between the old and the new tax regimes, most of us will consider the most common deductions like those under section 80C, 80D, or also the deduction available on principal and interest on home loans, before taking a call. However, one must not forget that employee benefits are also treated differently under the old and new tax regimes, and this will also need to be considered before making your choice.

“For FY24, the tax slab rates have been reduced to make the new regime more attractive. Standard deduction of ₹50,000 from salary income has been made available, the basic exemption has been increased to ₹3 lakh and surcharge rate has been reduced to 25% for high net worth individuals (HNI's) having annual income exceeding ₹5 crore. With a clear intention of implementing a simplified tax model, the government has taken considerable efforts to make the new regime of taxation lucrative and appealing,” says Sneha Pai, senior director at Nexdigm, a professional services group.

Given taxpayers have the choice to opt for the beneficial regime every year, it is imperative to evaluate and compare the tax liability under both regimes and then decide which regime to opt for.

How employee benefits are taxed under the two regimes

“In India, employee benefits can vary depending on the organisation and the specific terms of employment,” says Sanjiv Bajaj, joint chairman and managing director, Bajaj Capital, an investment services group.

Here are some of the key employee benefits offered and their taxation.

Leave Travel Allowance (LTA): Under the old tax regime, LTA was exempt from tax up to a certain limit for two domestic trips in a block of four years. However, under the new tax regime, LTA is not exempt from tax.

Conveyance Allowance: Conveyance allowance, which is provided to employees to cover transportation expenses related to work, was exempt up to a certain limit under the old tax regime. In the new tax regime, conveyance allowance continues to be eligible for tax exemption.

Allowances for Travel or Transfer: Allowances provided to cover travel costs or transfers of an employee were eligible for tax exemption under the old tax regime, subject to certain conditions. These allowances continue to be eligible for tax exemption under the new tax regime as well.

Perquisites: Perquisites refer to the benefits or facilities provided by an employer to an employee. Under the old tax regime, certain perquisites such as rent-free accommodation, company car, etc., were taxable as perquisites based on their value. The same treatment applies under the new tax regime.

Daily Allowances: Daily allowances, which are provided to employees for covering expenses during official travel, were eligible for tax exemption under the old tax regime. These allowances remain eligible for tax exemption under the new tax regime.

How to make an informed decision

Understanding the different employee benefits and their taxability can help employees make an informed decision between choosing the old or new tax regime.

“Employees should carefully review their employment contract, company policies and any communication related to employee benefits. These documents often outline the details of the benefits provided by the employer,” says Bajaj.

Employees can approach their company's human resources department to obtain information regarding the employee benefits available and their taxation status. HR professionals are generally well-versed in the benefits provided by the company and can offer assistance regarding the tax consequences associated with them.

“Familiarise yourself with the provisions of the Income Tax Act relevant to employee benefits. The Act provides details on taxability, exemptions and conditions for various benefits. Refer to the specific sections related to the benefits you receive or anticipate receiving,” says Bajaj.

If you have any doubts or uncertainties regarding the tax implications of your employee benefits, it is recommended to seek guidance from a tax professional or a certified chartered accountant. These experts can offer personalised advice based on your individual circumstances and assist you in making informed decisions.