Flexible Allowance Pay – Rentention of Salary- A Right Practice?

April 1, 2010

In my company, The Flexible Allowance Pay (FAP) is allocated by the employee in the beginning of the financial year ( April – March) for tax exemption on TDS on eligible limits of Medical Expenses, & LTA. Meaning, these components of salary (CTC) are exempted from tax. However, until such time the relevant proof of documents ( Medical Bills/Travel Documents etc) are produced, part of this salary is not paid to the employee; the company withholds this on pro-rata basis, till such time the bill is submitted. To explain:
Illustration
X allocates INR 15000 towards Medical reimbursement at the beginning of the
Financial Year i.e. April 2010.
This amount will be set a side from X’s FAP component.
X submits the Medical reimbursement claim for an amount of INR 15000 in the month of
June 2010.

The unclaimed accrued amount till June 2010 i.e,
INR 15000 (Your Allocation)
————————————- X 3(months completed at the time of payment)=INR 3750 will be paid in June
12 (Months in a Financial year)
* The remaining amount will be paid @ 1250/-per month till the end of the financial year i.e.
March.
Same logic will be applied for payment of all other reimbursement payouts.
Residual FAP amount
The balance amount available after allocating under the various heads will be taken as
supplementary allowance and paid as part of monthly payroll. This amount will be subject to
Income tax.
This is done on the premise that :

Tax Deducted at Source (TDS)
Income tax guidelines clearly stipulate that TDS can not be refunded or readjusted by
employer, for what so ever may be the reason. As such organization will not be able to refund
or adjust TDS once deducted.

The question is, why is it not possible for the employer to consider these as taxable and show TDS in salary till such time the bills are submitted rather than retaining the employee’s (part of) the salary, causing financial inconvenience. This also means undue retention of funds when say about 8000 to 10000 employees work in a location, benefiting the company’s resources?

Is this a correct practice?