Tax on Incentives in India: Everything You Need to Know

Syed Maaz -

The Indian tax laws are made for the upliftment of the economy and individuals alike. There are approximately 24 million salaried employees in India (The World Bank), many of whom have commissions, bonuses, and incentives as an added perk in their paychecks. These added numbers work as the perfect carrot to motivate an organization’s workforce so that it’s aligned to the organization’s objective. But the question which comes to our mind is whether there is a tax on incentives, bonuses, gifts and if there is a tax on rewards.

Managing incentives is a whole other ballgame as spreadsheet management is still used the most in their calculation. The funny thing is that users are least satisfied with spreadsheet management as a way to calculate incentives (IBM). This led to a transformation in the field, and various sales and channel incentive automation platforms have emerged since. Not only do they make the job easier and reduce errors, but bring in new dynamics with gamification and data analytics.

However, both the employer and the employees have a question mark in their minds when it comes to how much is incentive pay taxed, and how sales commission(s), bonuses, and incentives are treated under the Indian tax laws when transacted through automated incentive payout. Let’s look at a couple of cases that might bring clarity to it.

Incentive Payout Taxation in India: Use Cases

Sales Teams

As the relationship between the sales team and the organization is that of an employee and employer, no Good and Service Tax (GST) is charged.

Schedule III to the CGST Act provides that “services by an employee to the employer in the course of or in relation to his employment” will not be considered as a supply of goods or services. Hence, GST does not apply to services rendered by employees to the employer, provided they are in the course of/in relation to employment.

Agents, Dealers & Distributors

Motivating dealers, distributors, wholesalers, and agents to perform better requires practical incentivization. Their tax laws are a bit different, however, as these parties are externally related to the organization, and there isn’t an employer-employee relationship between them.

As dealers, distributors, wholesalers, and agents are helping the organization with their services as third parties, the GST of 18% would be applied to their incentives. Along with the GST, TDS of 5%** would still be applied under Section 194H of the Income Tax Act (1961-2019) only if the commission goes over Rs. 30,000 per financial year.

Blue Collar & Gig Workforce

As for people working on ground zero, fleet-on-street also has to consider their tax deductions. According to the Income Tax authority, if blue-collar workers are officially the employees of the organization, then their income tax on incentive pay/gift would only be taxable if the amount goes over Rs. 5,000 P/A. As per Schedule III to the CGST Act, there won’t be any GST applicable as per their employer-employee relationship.

In case, however, they are commission agents and are attached to the organization as a third party, there won’t be a TDS compulsion of 5%** as per Section 194H of the Income Tax Act (1961-2019) as long as the commission amount is below Rs. 30,000 per financial year.

NOTE: Due to COVID-19 relaxations in the Income Tax Act, the TDS has been reduced by twenty-five per cent on all fronts, which brings down the TDS to 3.75% till 31.03.2021

How Xoxoday makes Taxation on Incentives seamless

Here’s a six-step guide on how Compass—the gamification platform makes it easy for the organization to take care of its tax duties towards the stakeholders above.

  1. The users (sales teams, partners, and gig workers) can download the Compass app from iOS or Android stores. The App will be connected with the CRM, and data will be manually uploaded at a regular frequency
  2. The users receive incentives based on different schemes set by the organization. Their aggregate earnings are visible in the Compass App along with other widgets and scheme achievement details
  3. The user is authenticated via email, phone number, PAN, and Aadhar details using the Compass App. An e-KYC of the user's bank account is needed for bank transfers which are facilitated by Xoxoday and its payment affiliate. The authenticated user can now redeem the earned incentives across various gift cards or get them in their bank account.
  4. Users will be able to see the calculations, earning credits, and taxation components in the Compass App itself
  5. Xoxoday manages the incentives workflow for the organization and its users end-to-end.
  6. The Tax Calculation as per Indian Financial Guidelines and all incentive payout conditions are kept in consideration while calculating.

With Xoxoday Compass, stakeholders will get a comfortable grip on their tax duties when it comes to incentives. At the same time, the organization can make the most of its incentive program with valuable insights.

Here's a sample of how taxation incentive payout works with Xoxoday

Some things to keep in mind

  • It’s an assumption that the organization’s users are Individuals and Non-GST registered. Hence, Xoxoday will pay the GST liability on an RCM basis.
  • Xoxoday levies a service fee of 5% for enabling incentive payouts.
  • The filing of TDS requires users’ PAN. The TDS would increase to 20% in case there isn’t PAN that isn’t available.
  • The organization will be able to take the GST input, and hence there isn’t an increase in cost.‍

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