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Relocation Allowance – Definition, Policy Guidelines, and Employer Benefits

What is Relocation Allowance?

Relocation allowance is a financial benefit an employer gives to employees to meet expenses incurred when moving from one place to another as granted by the employer for work purposes. Relocation allowance typically includes employees who are transferred from one branch of the company to another, moving to a new company in a new location, or finding a new place of work that requires relocation to another place. The purpose of this allowance is to relieve the financial burden of moving and help the employee adjust to a new living and work environment.

What Expenses are Covered Under Relocation Allowance?

Relocation allowance can include various reimbursable or pre-approved expenses that fall under the employer’s policy:

Transportation Cost: This normally includes travel costs for the employee and their family, airfare, train tickets, or costs for using someone’s own vehicle.
Rental Deposit and Brokerage Fees: Security deposit, broker commission and sometimes first month fares can also be covered.
Utility Connection Charges: Covers expenses for connecting electricity, water, internet, and gas.
Vehicle Transportation: Moves personal property to the new city or country.
School Admission Fees: Associated costs that the employee needs for enrolling their children in a new school.
Visa and Immigration Costs: The international transfers entail the work permit, visa application fees, and legal processing.

Types of Relocation Allowance Models

There are generally three models of relocation allowance and their application:

Lump Sum Payment: This payment method involves release of a certain one-time amount, which must be spent on transfer expenses. The employee manages and uses the amount of its conveniently. This provides flexibility but does not meet most actual expenses.
Reimbursement Model: The employee pays for the expense upfront and subsequently submits his or her receipts to get reimbursed. This ensures actual expense-based reimbursement, but it could lead to temporary cash flow issues for the employee.
Direct Billing: The employer would directly pay vendors (movers, travel companies, hotels) for the services provided. This reduces the amount of out-of-pocket costs, while the employee ends up losing control and flexibility over the choice of service provider.
Hybrid Model: A combination of a lump sum for incidental expenses and direct payment for major costs like household relocation or travel. This balances flexibility and control for both sides.

Tax Implications of Relocation Allowances

The tax treatment of relocation allowances differs from jurisdiction to jurisdiction and by the nature of the expenses covered:

India: As per the Income Tax Act, travel and transportation of goods and hotel expenses are tax-free for such allowances when reimbursed or paid directly by the employer. A lump sum payment for relocation without proof, however, would be taxable.
United States: As a result of the tax reforms after 2018, moving expenses are generally considered to be taxable income unless a member of the Armed Forces is moving under orders.
Other Countries: Every country has its own specific provisions. In some places, employer-paid relocation may become entirely or partly exempt from taxation if documented with bills.

Eligibility Requirements for Relocation Allowance

There is no universal relocation allowance, and specific eligibility criteria are attached:

Employee Role and Grade: Such allowances are usually made available to mid and senior-level employees or to roles important to business continuity. Entry-level hires may or may not receive relocation support.
Type of Transfer: For permanent transfers, deputy or long-term assignments. Short-term travel usually does not qualify.
Company Policy: Policies differ across organizations. Formal relocation policies are common in multinational companies and public sector units, whereas startups and small firms may deal with it on a case-by-case basis.

Common Problems in the Implementation of Relocation Allowances:

Having adequately documented policies, however, makes it insufficient to take care of operational and staff-related difficulties. Here are some of the common challenges related to relocation allowance:

Mismatch between Estimated and Actual Expenses: Employees incur higher on-account expenses, which are not reimbursed by the entity at times as the market around is different, leading to dissatisfaction when allowances are inadequate.
Insufficient Documentation: In most reimbursement models, claim rejections and disputes arise from missing or invalid receipts.
Taxation Compliance Issues: Wrong classification or an absence of tax planning can lead to additional tax liabilities for the employee or non-compliance penalties levied against the employer.
Delayed Allocations: Administrative delays often lead to the delayed release of allowance payments, which can create a burden on the employee’s financial status during a critical change period.