Employee expenses are a part and parcel of every business. When employees spend on behalf of a business, the company needs to reimburse these expenses. 

What is employee expense reimbursement?

Employee expense reimbursement refers to the method in which a company repays its employees who spend money to complete official tasks. The reimbursement can happen in many ways. It is a very important process and every employee must reimburse the employee who pays money on the former’s behalf to get a job done.

Different companies have different categories for employee reimbursement. Some companies pay the expenses on behalf of the employees directly while others reimburse the expenses. It might also vary on the type of expense and the grade of the employee. All reasonable expenses are reimbursed after approval, either in part or in totality.

Types of employee expense reimbursements

There are three types of employee expense reimbursement commonly

  1. Travel and Mileage Reimbursement
  2. Medical Expense Reimbursement
  3. Business Expense Reimbursement

Lets have a look at each of these employee expense reimbursement categories.

1. Travel and mileage reimbursement

Both Travel and Mileage reimbursement pertains to the expenses incurred while travelling but is calculated separately, which can be categorized as follows:

a) Travel Reimbursement

If an employee travels on work, he or she can get her air tickets or cab fares reimbursed. Also, if an employee needs to travel within the city for meetings, etc he can choose to use his own vehicle and then get his fuel costs reimbursed.

Travel expenses that are reimbursed include expenses like accommodation, visa, flight or train tickets or any other form of transport via bills and receipts like a rental car, etc., local transportation like car hire as well as day-to-day minor expenses like food and other business expenses, as approved by the company. It also includes emergency health concerns while on a business trip.

leave travel allowance

Personal expenses like unauthorized upgrades, shopping, loss of personal property, unapproved expenses of family members, etc. are usually not included.

b) Mileage reimbursements

These are categorized as Per Diem Travel and Standard Mileage.

fuel allowance

i) Per Diem Travel

Per Diem method of travel reimbursement is a method wherein a fixed daily allowance is paid to the employees for the expenses occurring for the business. The employee is paid a fixed amount for the business travel, meals, etc.

ii) Standard Mileage Rates

This method includes reimbursing the employees for using their own vehicle for travelling. There are standard rates decided by the IRS. The standard mileage rate is deducted for tax calculation and is the rate that is reimbursed for per miles driven, to the employees.

Frequently asked questions related to travel & mileage reimbursements
Is the commuting time reimbursed in India?

Let’s first understand what is commuting time. In simple words, commuting time is the time spent by the employees to reach the office and return back home. Traffic has made commuting to the office a task and thus commuting time is considered an important part of the daily struggle. There are no legal provisions for paying or reimbursing for commuting time in India. Even though Central government and railway employees are paid conveyance allowance but there is no mileage given to the commuting time of the employees. Similarly, with the private sector, commuting time hasn’t yet been implied. Irrespective of the huge time taken to reach office, reimbursements, and allowances are paid as fuel expenses and no commuting time is taken into consideration.

What are the strategies or benefits provided to the employees to avoid time loss of commuting time?

Many companies have started acknowledging their employee’s efforts and have begun to provide their employees with benefits like work from home options, flexible timings, part-time working options, telecommuting, etc. if you are an employee-friendly company then these options work wonder to keep your employees happy at work. These options also help in achieving organizational goals and individual goals as well. Though work from home and other options took some time to be accepted in India, the idea gained acceptance after it improved the work expectation and employee retention.

2. Medical expense reimbursement

Companies these days provide various facilities to their employees. Due to the long working hours, stress, the employees expect you to take care of their basic needs including health care. Medical reimbursement is one such way, wherein you reimburse a part of the medical expenses incurred by the employee on the treatment of self, spouse, and children. There is an exemption of INR 15000 on the Income Tax as well on the medical reimbursements for the employees.

healthcare reimbursement

There are some specifications under the Income Tax Act for reimbursements, which are:

  • The expenses should specifically be of and for the medical treatments
  • The amount should be spent only on family members which include spouse, children, dependent parents, and siblings
  • The amount should be reimbursed by the company
  • The maximum amount reimbursed by the company should not exceed INR 15,000 in the current financial year
Frequently asked questions about healthcare and medical reimbursements
What is the total amount that can be claimed as a medical reimbursement?

If an employee fulfills the above-mentioned eligibility conditions, the employee can claim an exemption on the reimbursement up to the total limit of INR 15,000 per annum. The exemption is given on the amount reimbursed by the company upon producing the medical bills.

What is the process to claim medical reimbursements?

The medical expenses can be claimed by the employee by submitting all the original bills to the organization. The company would verify and then then will reimburse the amount up to the limit of INR 15,000 without any tax deducted on the same, as this is reimbursement of the expenses already made and is not an income.

What is the difference between medical reimbursement vis-a-vis medical allowance

There is a stark difference between medical reimbursements and medical allowance.
a. Medical allowance is a part of the salary paid to the employees, irrespective of any bills submitted.

Medical reimbursements are paid to the employees upon submission of the original bills of the medical expenses, only if the expenses have occurred.

b. Medical allowances are the fixed part of the salary which is paid to the employees and is taxable. There is no requirement for the employees to submit any original bills for receiving the allowances.

On the other hand, medical reimbursements, are tax-free up to a limit of INR 15,000 and are paid to the employees when they produce the original bills of the medical expenses.

Let us understand with an example:

Medical reimbursement

For example, an employee incurs INR 10,000 on the medical expenses of his/her children. Upon submission of the bills, the employee will get full reimbursement of INR 10,000 for this financial year and this reimbursement will not be taxable in the hands of the employee.

However, if, an employee incurs, INR 18,000 on the medical expenses on the treatment of his/her children. Upon submission of the original bills, the employee will get reimbursement of INR 18,000 but at the time of tax calculation, exemption on INR 15,000 can be claimed by the employee.

Medical allowance

To receive an allowance of INR 20,000 for a year, the employee does not need to submit any original bills and he would receive the entire amount, even if he doesn’t submit any bills. However, for income tax calculation, if he submits medical bills towards the allowance received, the same would be deducted from his taxable income, else an income tax, as per slab, needs to be paid for the same.

Can medical expenses for the previous year be claimed by an employee?

No, the company will only reimburse the expenses incurred during the current financial year and not for any of the previous years.

Does mediclaim expenditure qualify for medical reimbursement?

Health Insurance premium or mediclaim premiums are not considered as medical expenses and do not qualify for medical reimbursements. These can only be claimed under section 80D separately which has a different set of provisions.

Is there any limit for the medical expenditure incurred under certain specific circumstances?

No upper limit for employee reimbursement process has been set for medical expenses, hospital bills, and medicines by the Employer Company, government organizations, etc. However, the upper limit for claiming exemption has been limited to INR 15000 according to the Income Tax Act.

You might want to read: Employee allowances – Taxable & non-taxable allowances for salaried employees in India

3. Business expense reimbursement

Like all other reimbursements, business expense reimbursement is paying back the employees for the business expenses they have paid for. The expenses that occur during travelling for work, or for the purchase of business-related materials, or entertaining the clients, for their food and drinks, etc. This also includes education and training, business supplies and tools, and other miscellaneous expenses.

Amount of Business Expense that can be claimed:

  • The business expenses reimbursed by you are not a part of the wage that you pay to your employee and is thus not taxed when the employee files income tax returns.
  • Though for businesses, many business expenses can be claimed while filing tax returns. Good companies have efficient tax liabilities management systems which maximize the allowable deductions. Thus, taking advantage of these deductions is beneficial for professionals and small business owners.
Process to claim for Business Expenses

To claim any business expenses, a business must fall under an accountable plan and fulfill these requirements

  1. The expenses should be paid actually by the employee for adding value to the business and the expense should be connected to business only.
  2. The employee should bring the expenses into account within the given time period as the receipts provided will be verified for the time, date, amount and expense made for.
  3. The employees must return any access amount reimbursed by the company.

According to a survey by PeopleMatters, 65% of companies record employee expenses manually.

If you are an employer, you can process employee claims and reimbursements with Koppr

How can employers limit business expenses?

Small businesses need to control their expenses and reimbursed expenses. Proper identification and classifying the employee’s expenses is very important to make sure that reimbursements benefit the business for tax. Thus, limiting the business expenses is very important.

Any company who reimburses the business expenses must clearly identify which expense to reimburse. Jobs that need the employee to pay for completing the job should always be reimbursed. However, below mentioned ways might help you in capping business expenses.

a) Setting per diem rate for out of town meals which will set a limit for the employees as to how much they can spend on their meals. The extra cost above the per diem rate will not be reimbursed by the company

b) Tuition or course fee reimbursement should also be limited to a certain limit by the company

c) Capping the cell phone expenses can be done in two ways. One by providing the employees, who require to make calls on behalf of the company, with a company phone and two, by reimbursing a set amount to the employees for the phone bill they pay every month.

How to handle employee expense reimbursements?

Here are the steps that a company should follow for handling employee reimbursements and business expenses:

a) Form a policy for reimbursement

Always frame an easy reimbursement process that clearly explains the reimbursements to your employees. A policy will help in disseminating the details and define what expenses can be reimbursed and what cannot. The policy should specify if the employees need to take approval for any expense they make on behalf of the company. A policy will maintain a clarity among employees about what qualifies for reimbursement and also will set their expectations right.

b) Clearly determine the expenses for reimbursement

Clearly specify what falls under reimbursed expenses and whatnot. For example, business travels and trips, entertainment costs spent on clients, office supplies, cell phones, the amount spent on skill enhancement, etc. qualify for reimbursement. Communicating the list beforehand to the employees is always advised.

c) Create a robust system for claims

Create a system that allows the employees to file the reimbursements for approval after incurring the expenses. Clearly specify what information is required by your company while submitting the reimbursement claims. For example, date, place, descriptions of the expense, product or services, etc. Another important thing to mention for reimbursement claim is to make proof of payment mandatory for a record like receipts, invoices, bank statements, etc. of the expense made by the employee.

Always maintain a digitized or online system for reimbursement to keep the process transparent.

If you are a business owner, you can manage employee claims and reimbursements with Koppr

d) Verify the expenses

Always set deadlines for submitting the reimbursement claims. This will help you to verify the expenses before the payday. Setting the deadline and verifying will also help you to review and discuss with employees in case of any confusion, any missing information regarding the expenses and for explaining the rejection of the reimbursement claim made by the employees.

e) Pay reimbursement in a set time

Keep the system of employee claim processing transparent and inform the employees when and how they will receive the reimbursement. Since the employees paid on behalf of the company and for the benefit of the company, delay in payment of reimbursement can cause frustration among the employees.

You can create a positive impact on your employees by making the reimbursement process easy and fast for your employees as this will reflect that you care for your employees as equally as your employees care for the benefit of the company.

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