Working from home? Take care to avoid tax trap

Working from home or telecommuting has for long been popular in western countries and has slowly gained ground in India as well.

A decade ago, not many employers even thought of offering such choices to their employees. But with advances in telecommunication making access to office mail far easier and more importantly, cheaper, a number of employers in Bangalore, especially in the IT sector, are encouraging their staff to choose this option.

Employers and employees both benefit from telecommuting - employers gain happier employees and if the employer uses hot-desking, it can provide huge costs savings in office space costs.

Hot-desking is often used by organisations where not all employees are required to be in the office either at the same time, or for very long, which means actual workspaces would often be vacant, consuming valuable space and resources. 

Employees, on the other hand, save on commute time and let’s face it; not having to squeeze one’s way through city traffic is good enough reason for one to want to work from home.

Gearing up for a work-from-home policy
While there are several aspects employers think of while designing such a policy, the one that usually gets the least attention is tax-related. Employers sometimes fail to take into account the impact of their work-from home policy while withholding taxes on salary. This could result in interest / penal costs for the employer as and when tax authorities conduct enquiries. Some of the factors that employers usually overlook while designing their work-from-home policy are:

Work-from-home allowance - Employers usually provide a lump-sum or a monthly allowance to employees who work from home to cover costs of working from home such as telephone and internet costs, electricity costs and for purchase of items that are required for creating an office in their home environment. The amount paid has to be analysed from a tax angle and it cannot be presumed that the entire amount is not taxable.

Company assets - A wide array of gadgets are made available to employees to encourage telecommuting.  The tax rules currently only permit employees the use of computers or laptops that are owned or hired by employers, without tax consequences.

Conveyance allowance - This is an allowance meant to compensate for the costs of commuting between the residence and the place of work. 

Most employers exempt this allowance in the case of all their employees, including those employees who work from home entirely.  However, the tax authorities may think otherwise.

With uncertainties in the economy sharpening the focus of tax authorities in various jurisdictions on compliance, it may be time employers reviewed their policies to avoid being pulled up for non-compliance.  

The writer is partner, KPMG