TDS on Travelling Expenses: A Practical Guide for Businesses

In the 2025 financial year, global business travel spending is projected to reach USD 1.57 trillion, showing the growing scale of corporate mobility across various industries. As organisations reimburse employees for travel and other professional outlays, questions surrounding taxation become increasingly relevant.

 

One key area of concern is TDS on reimbursement of expenses, especially TDS on travelling expenses. Many businesses remain unclear about whether such reimbursements are subject to tax deduction at source (TDS) and, if so, under what circumstances. 

 

Read on to get clarity on whether TDS applies to travelling expenses or reimbursement of expenses and the compliance framework necessary to manage these obligations responsibly.

Understanding Reimbursement and Tax Deduction at Source (TDS)

Reimbursement of expenses refers to the repayment of costs incurred by an employee or service provider on behalf of the business. Common reimbursable items include travel, accommodation, meals, fuel, and other business-related expenses.
 

While these may seem straightforward, Indian tax law requires companies to assess whether Tax Deducted at Source (TDS) is applicable on such reimbursements, based on who incurs the cost, the contractual terms, and the nature of the underlying service.

 

Is TDS Applicable on Travelling Expenses?

 

If travel expenses are directly incurred by an employee and reimbursed at actuals with proper documentation, TDS on travelling expenses is generally not applicable. This is because the employee is not providing a service but is being compensated for official duty.

 

However, if the payment is made to a vendor (such as a consultant, contractor, or agency) and travel expenses are included in the invoice or paid separately, TDS may apply depending on the section of the Income Tax Act under which the payment is classified.

 

When is TDS Applicable on Reimbursement of Expenses?

 

Let’s consider three key scenarios to determine when TDS is applicable to reimbursement of expenses:

 

Reimbursement to Employees

 

• Not taxable if expenses are incurred in the course of employment.
• Must be supported with valid bills, tickets, or invoices.
• Payments should be made at actuals, without markup or profit.

 

For example, if an employee travels for a conference and submits bills for flights and hotel stays, TDS on reimbursement of expenses is not required.

 

Reimbursement to Vendors/Contractors

 

• If the invoice includes both service fees and out-of-pocket expenses, TDS is applicable on the total amount, unless the reimbursement is clearly bifurcated and supported with evidence.
• As per Section 194C of the Income Tax Act, payments to contractors attract TDS.

 

Thus, TDS on reimbursement of expenses under Section 194C may apply when reimbursing vendors such as consultants or event managers.

 

Reimbursement Without Supporting Bills

 

• If no bills or supporting documents are submitted, the entire amount may be treated as income, and TDS will be applicable.
• This scenario often arises when fixed or lump-sum reimbursements are made.

 

Special Cases: Non-Residents and Agents

 

TDS on Reimbursement of Expenses to Non-Resident

 

• As per Section 195 of the Income Tax Act, TDS on reimbursement of expenses to non-residents is applicable, regardless of whether the amount is profit or reimbursement.
• Companies must deduct tax before making such remittances, unless a certificate of exemption is obtained.

 

TDS on Reimbursement of Expenses to Clearing & Forwarding Agent 

 

• If the agent submits a consolidated invoice for services and actual expenses, TDS is deducted under Section 194C on the entire amount unless proper segregation and evidence are provided.
• Failure to bifurcate could result in excess tax deduction or even legal scrutiny.

 

Best Practices to Follow

 

To ensure proper compliance and avoid disputes with the Income Tax Department:

 

Document Everything

 

Maintain bills, invoices, air tickets, hotel receipts, and approval notes for all reimbursed amounts.

 

Distinguish Clearly

 

Always bifurcate service charges and reimbursable expenses in vendor agreements and invoices.

 

Apply Correct TDS Section

 

Depending on the payee (employee, resident vendor, non-resident), use the appropriate section, 194C, 195, etc. to determine applicability.

 

Use Actuals Over Estimates

 

Avoid paying lump-sum or estimated reimbursements. Stick to actual costs supported by documentation.

 

Conduct Periodic Audits

 

Quarterly checks can help ensure that travel and expense reimbursements follow proper tax treatment.

 

Conclusion

 

Managing TDS on expenses, especially TDS on reimbursement and TDS on travelling expenses, requires a detailed understanding of tax rules, documentation protocols, and payment structures. As business travel continues to grow, HR and finance teams must collaborate to establish compliant reimbursement frameworks.

 

By ensuring accuracy in records, following section-wise deductions like TDS on reimbursement of expenses under Section 194C, and staying vigilant with non-resident transactions, organisations can safeguard themselves against unnecessary penalties and build a stronger compliance culture.

To make this even easier, modern platforms like myBiz offer AI-powered bookings, predictive travel suggestions, and smart dashboards that bring efficiency and visibility to the entire travel plan.

 

FAQs About TDS on Reimbursement of Expenses

 

Q1. Is TDS Applicable on Reimbursement of Expenses to Non-Resident Vendors?

Ans. Yes, TDS may apply if the reimbursement includes a profit element or lacks proper supporting documents.

Q2. What is TDS 194R on Reimbursement of Expenses?

Ans. Section 194R requires TDS at 10% on benefits or perquisites provided to a resident, including reimbursed expenses, unless bills are in the name of the recipient.

Q3. Is Reimbursement of Expenses Under Income Tax Act Taxable?

Ans. Reimbursement is not taxable if paid on actuals with proper documentation. Otherwise, it may be subject to TDS.

Q4. What is the CBDT Circular on TDS on Reimbursement of Expenses?

Ans. CBDT clarified that TDS is not needed on reimbursements made on actuals with third-party invoices in the payer’s name. Otherwise, TDS applies.