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Are Per Diem Allowances Taxable in India?

Many of our clients come to us with questions about expense reimbursement, allowances and use of per diem.  Per diems in particular can be problematic depending on the host country tax laws.

What is a Per Diem?

Briefly, a per diem is a fixed daily amount that a company may pay to an employee when they travel on business.  The per diem is paid instead of submitting expense reports for items such as meals, laundry, transportation and other miscellaneous expenses.  It is simply paid according to the location of travel, and no receipts or other itemization is needed.

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How are Per Diem Allowances Viewed in India?

Last year, India’s High Court issued a ruling specifically on per diem payments and taxability.  Essentially, the Court said that per diem amounts only need to be ‘reasonable and justifiable’ in relation to the employee salary, and in that case, would not be taxable to the employee.

Further, the Court said that the employee does not even need to verify if the amount was actually spent, and that is would be too much of a burden to collect receipts for every small expense.

How to Handle Per Diem Payments in India?

Our client had a very specific question on how to handle per diem payments made for travel prior to initiating the GEO service.  First, the pre-employment travel per diems can be paid as ‘pre-joining’ expenses, and processed by the current GEO employer of record.

Although the per diem is not taxable, the amount has to be reviewed so that it does not seem unreasonable.  In this case, it was 50 GBP (INR 4198) per day, a reasonable amount in the opinion of the client manager. That amount is listed on the expense report as a flat per diem paid per day, and then the amount is still run through payroll even though it is not taxable to the employee.

In other words, the per diem payments cannot be given directly to the employee off books or outside payroll, to ensure full compliance with Indian tax law.  Other employee expenses such as airfare or hotel for business travel are also non-taxable, but those amounts need to be itemized with actual receipts for reimbursement.   Those travel expenses can be paid separately and do not have to be included in payroll.

Shield GEO Advises Clients on All Aspects of Local Taxation and Reimbursement

Our clients have frequent questions and concerns about host country taxation, and through our GEO employer of record service we are able to guide them with payroll and tax concerns and even help handle expense reimbursement for travel expenses.  This is all done through the local payroll (when required) and ensures local compliance with tax rules for employees on assignment.  Tax compliance is only one aspect of our full employment and payroll service, but illustrates the value of the Shield GEO solution.

Get in touch to find out how an Employer of Record Solution can help with your employment needs in India

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