Taxability of Employee Rewards and Awards

This query is : Resolved

Gorksh Pawar (Querist)
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15 February 2022 Dear Expert,

Request you to please advise on below :

Company is paying certain amount as voucher to employees as rewards and recognition.

I would like to know the taxability of rewards and recognition. like long term service awards, performance awards (please provide some case study / reference).

In addition to that It would be helpful if you can also put some insight on Elective vehicle fuel reimbursement taxability. What proof's we have to collect from employee to provide the tax exemptions.

1) Car owned by employer
2) Car owned by employee.

Thank you,
Gorksh Pawar

Asha Kanta Sharma online

Asha Kanta Sharma

(Expert)
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11 July 2024 Certainly! Here's an overview of the taxability of rewards and recognition, as well as elective vehicle fuel reimbursements:

### 1. Taxability of Rewards and Recognition

Rewards and recognition provided by employers to employees can have different tax implications based on their nature and value. Here are some common scenarios:

- **Long Term Service Awards**: Awards given to employees for their long tenure with the company are generally taxable under the Income Tax Act, 1961. The value of such awards is considered as perquisites and added to the employee's taxable salary.

- **Performance Awards**: Awards based on employee performance, achievements, or targets can also be taxable. If these awards are given in cash or kind (like gift vouchers), they are taxable as perquisites. Non-cash awards may be valued at their fair market value for tax purposes.

- **Tax Treatment**: The tax treatment depends on whether the awards are monetary (cash or vouchers) or non-monetary (gifts, certificates, etc.). For non-monetary awards, the fair market value needs to be determined and included in the employee's income.

**Case Study / Reference**: One approach often taken by employers is to offer non-monetary rewards such as gift vouchers or merchandise up to a certain limit (e.g., Rs. 5,000 per annum per employee) to avoid tax implications under Section 10(10D) of the Income Tax Act.

### 2. Elective Vehicle Fuel Reimbursement Taxability

When it comes to vehicle fuel reimbursements, the tax treatment depends on whether the vehicle is owned by the employer or the employee:

- **Car Owned by Employer**: If the employer provides fuel for a company-owned car, the entire expense is treated as a perquisite for the employee. The taxable value is determined based on a prescribed rate per month for personal use and actual fuel expenses for official use.

- **Car Owned by Employee**: If the employer reimburses fuel expenses for a car owned by the employee, the reimbursement is treated as a perquisite. The taxable value is typically calculated based on actual fuel expenses incurred for official purposes, supported by relevant bills and receipts.

### Proof Required for Tax Exemption

To provide tax exemptions for elective vehicle fuel reimbursements, employers typically require the following proofs from employees:

- **Bills and Receipts**: Employees should submit original bills and receipts for fuel purchased. These documents should clearly show the amount spent on fuel and the vehicle registration number.

- **Travel Log**: A travel log or logbook may be required to differentiate between personal and official use of the vehicle. This log should record details of trips made for official purposes, including distance traveled, purpose of the trip, and odometer readings.

- **Declaration**: Employees may need to provide a declaration stating the purpose of the trips and confirming that the fuel expenses claimed are for official purposes only.

### Conclusion

In summary, rewards and recognition provided by employers are generally taxable unless specific exemptions or limits apply. Elective vehicle fuel reimbursements are also taxable unless supported by adequate documentation proving that the fuel expenses were incurred for official purposes. It's crucial for employers to maintain proper records and adhere to tax regulations to ensure compliance with income tax laws.

For precise guidance tailored to your specific situation and local tax regulations, it is recommended to consult with a qualified tax advisor or chartered accountant. They can provide detailed advice based on the latest tax laws and interpretations.