Payroll Processing in India: Allowances and Outsourcing
By Dezan Shira & Associates, Delhi Office
Apr. 30 – Payroll , or employee compensation management, is a multifaceted process. As part of payroll, businesses generally compute and withhold government taxes like social security and individual income taxes from an employee’s salary. Many companies also have benefit plans like health insurance, which include deductions of premiums from its employees’ salaries according to employee customization, adding another layer of activity for payroll processing.
To help shed some light on this complicated process, in this article we discuss allowances (including housing and leave travel assistance) and the benefits of outsourcing payroll.
Allowances
Allowances are categories of expenditures in India that are not taxable, provided they match certain specifications and do not exceed a certain amount.
Allowances in India include those for:
- House rent;
- Transport;
- Medical;
- Meals;
- Leave travel;
- Education; and
- Special allowance.
House Rent
If a company chooses to provide House Rent Allowance (HRA) to its employees, the amount of this allowance that is exempt from taxes is the lowest of the following three options:
1. 50 percent of salary in metropolitan areas (40 percent in non-metropolitan);
2. Total rent paid over 10 percent of salary; or
3. HRA received.
Transport
Transport payments of up to INR800 (US$14.22) per month for an employee commuting between their residence and place of work are exempt from taxes.
In the case of blind or orthopedically handicapped employees, INR1,600 (US$28.61) per month is exempt from taxes.
Medical
An exemption for medical expenses is allowed for:
- Reimbursement up to INR15,000 (US$266.66) for medical treatment of the employee and family members;
- Reimbursement of expenses sustained by an employee and family members in approved hospitals;
- Premiums paid by the employer towards medical insurance forthe health of an employee;
- Reimbursement by the employer of premiums paid by the employee towards insurance for his/her health or of that of his/her family;
- Expenditures incurred by the employer on medical treatment of the employee whose family is outside of India;
- Travel and housing abroad for the employee or his family (including one attendant accompanying the patient for medical treatment); and
- Group medical insurance for an employee and family members or reimbursement of premiums paid by an employee for medical insurance.
For medical treatment abroad, the actual expenditures incurred includes the travel and accomodation expenses of the patient and one attendant (if permitted by the Reserve Bank of India). The ceiling for the gross total income excluding the amount to be reimbursed is INR200,000 (US$3,898).
The following medical facilities provided to an employee are exempt from income taxes:
- Treatment of an employee or his/her family in any hospital maintained by the employer;
- Reimbursement of any medical expenditures actually incurred by the employee for himself/herself or his/her family; and
- Treatment in any hospital maintained or approved by the government.
Meal Coupons
Lunch and refreshments that the employer provides to the employee at free or concessional rates are not taxable.
Leave Travel
Leave travel is remunerated for meeting travelling expenses incurred by an individual and family members (this includes only the spouse, two children and dependent parents, brothers and sisters) while on holiday in India. The amount excluded depends upon the mode of travel.
Two journeys in a block of four calendar years (current block runs from 2010-2013) are exempt. If an individual does not use their exemption, said exemption can be carried over to the next block and used in the calendar year immediately following that block.
Education
Education payment of INR50 (US$0.97) per month per child (INR150 (US$2.92) in special cases) for up to two children of the employee is exempt from tax.
Other Allowances
In addition to those listed above, the subsequent allowances are exempt from tax:
- Uniforms;
- Books and periodicals;
- Work-related transportation expenses;
- Cost of travel on tour or on transfer;
- Daily ordinary charges incurred by the employee on account of absence from his/her normal place of duty during a tour;
- Expenditures of a helper engaged in office duties;
- Allowances granted to encourage academic research and training in educational and research institutions; and
- Expenditures incurred on the purchase or maintenance of uniforms necessary for in-office duties.
The Benefits of Outsourcing Payroll
Some companies create a separate department for payroll, others make it part of the human resources department, while others outsource payroll to a third-party payroll processing service.
This final option fits small businesses that may not have the proficiency or time to administer payroll or larger businesses that see outsourcing as a cost-saving technique. Benefits of outsourcing payroll include increased efficiency, accuracy, transparency and confidentiality, with decreased liability and cost. The complete range of benefits can be found in the table below:
This article was originally published in the India Briefing Magazine, titled “Payroll Processing in India.” In this issue, we aim to help expatriate managers and business owners grasp the overall picture of how payroll works in India. We also discuss how outsourcing payroll can benefit all types of companies, particularly those of small and medium-size.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
For further details or to contact the firm, please email india@dezshira.com, visit www.dezshira.com, or download the company brochure.
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