1. Optimum salary structure is a tool to attract the right talent or good employees for the Company. Good Companies always try to structure their CTC in such a way that their employees have option to claim maximum Tax benefits.
2. Component of salary should be structured in such a way that it becomes symbiotic deal or a win-win scenario from Tax Perspective. Salary should be structure in such a way that Employees can claim maximum benefits and simultaneously the process of verification on the part of company is also smooth. Before joining the organisation, every employee will look into the fact that how attractive is the Company’s salary structure?
3. We are highlighting certain important points which may be considered by the Company while structuring salary with an objective to give an option to employee for claiming maximum benefits of Tax.
3.1 House Rent Allowance: HRA is the most beneficial and most important of CTC Structure. The reason it is most important part of CTC structure is because it is applicable to majority of salaried employees and therefore they can claim Tax deduction. If person is receiving House rent allowance, he will be eligible to claim exemption in this regard if he is staying in rented premise, however there is no need to furnish rent receipts to the employer i.e. even if it is not furnished he will still be eligible to claim exemption in income tax return. Exemption available to employees will be lower of: –
a) House rent allowance received during the year from employer
b) Rent paid less 10% of Salary (Salary for this purpose means Basic + Dearness allowance whether in term of retirement benefit or not).
c) 40% of Salary in case of Non-Metro City and 50% of Salary in case of Metro City.
Since rent component may constitute significant amount, the suggestive HRA component of CTC should be 25% of CTC.
3.2 Vehicle Operating and Conveyance Expenses: Vehicle Expense and Conveyance Expenses is again most important part of CTC as it is applicable to majority of employees. As per Income Tax Provisions.
Vehicle Operating Expenses
When employee claim for vehicle operating expenses (which includes driver’s salary and fuel cost only) for official use as well as private use then the employee should submit the relevant voucher/bills and log book. Therefore, when employee use their own car for official as well as private use then the below mentioned limit is prescribed by Government which can be claimed by Employees. If employees are willing to claim limit which is more than below mentioned prescribed limit, then they are required to submit the log book and the detailed verification of log book should be carried out by HR department and the portion of expense incurred for official purpose shall be calculated in order to avail the exemption above the prescribed rate. Log book should contain details of date of travel, distance travelled and journey undertaken. For the sake convenience and to implement the process effectively log book may be approved by respective senior authority in the hierarchy of employees.
The Government has provided the following limits as exemption under Vehicle Operating and maintenance expense provided the employee own a vehicle and use partly for official and partly for personal purpose.
|New Perquisite Rules – Prescribed Limited||Without Driver||With Driver|
|Engine Capacity is less than or equal to 1.6 litre||Engine Capacity above 1.6 litre||Engine Capacity is less than or equal to 1.6 litre||Engine Capacity above 1.6 litre|
|Exemption limit P.m.||Rs 1800/-||Rs 2400/-||Rs 2700/-||Rs 3300/-|
|Any other automotive Conveyance|
|Exemption Limit P.m.||Rs 900/-|
The following is the suggestive format of logbook which employees are required to maintain: –
|Date||Name of Car||Name of Driver, if any||Engine Capacity – above 1.6 liter / less than 1.6 liter||Travelled from||Travelled to||Kms|
3.3 Meal Coupon: Another benefit that employer may provide you with meal coupons. Such food coupons are considered as perquisite and it is taxable in the hands of the employee. However, such meal coupons are tax exempt up to Rs 50 per meal. If we calculate considering 5 days a week then in that case 20 days and 2 meals a day results in a monthly benefit of Rs 2,000 (20*100). Consequently, the yearly exemption works up to Rs 24,000.
3.4 Provision of Laptop or Computer /Mobile Phones, Payment of Mobile bills: If employer is providing mobile phone to its employee or he is reimbursing to employee in respect of mobile recharge then in both the cases it will not be treated as perquisite. Also such reimbursement will also be allowed as deduction on expense to the employer and on mobile phone employer will be eligible to claim depreciation. If employer is providing laptop to employee then cost of such laptop or computer will not be treated as perquisite. Further employer will also be eligible to claim depreciation on such asset.
3.5 Contribution to Employee Provident Fund: Firstly, any amount which is contributed by employee will be allowed as deduction to employee under section 80C under chapter VI-A of Income Tax Act, 1961 i.e. nothing will be deducted while calculatingIncome under the head salary. Second part that is relating to employer’s contribution in that case it will be exempted as follows:
|Particulars||Recognised Fund||Unrecognised Fund||Statutory Fund||Public Fund|
|Employers Contribution||Contribution to 12% of salary is exempt, above that is added to salary income of the employee.||Not taxable||Not taxable||Not taxable|
|Employees Contribution||Section 80C Deduction||No Section 80C deduction||Section 80C deduction||Section 80C deduction|
|Interest on PF||Any interest over and above 9.5% is added to Income from Salaries. Until 9.5% interest is exempt.||Not taxable||Exempt||Exempt|
|Amount received at time of Maturity||Exempt subject to certain conditions*.||Contribution from employer and interest on that is taxable under the head Income from Salaries; Contribution by an employee is not taxable, and employee’s contribution interest is taxable under the head Income from Other Sources.||Exempt||Exempt|
- Employee leaves the job after five years of employment; or
- Where the service period is less than five years, the reason for termination is discontinuance of employer’s business or ill health; or
- The balance in RPF is reassigned to RPF with the new employer on re-employment.
Further the various fund prescribe above are as follows:
- Recognised Provident Fund (RPF) as recognised by Commissioner of Income Tax under EPF and Miscellaneous Provision Act, 1952. It applies to enterprises employing at least 20 employees.
- Unrecognised Provident Fund (UPF) is not recognised by the Commissioner of Income Tax. The employers and employees start these schemes.
- Public Provident Fund (PPF) under Public Provident Fund Act, 1968 is another system of contributing to the provident fund. Self-employed people can also take part in this scheme. A minimum contributing limit of Rs. 500 per annum and a maximum of Rs. 150000 per annum are set.
- Statutory Provident Fund (SPF) is meant for employees of Government or Universities or Educational Institutes affiliated to University.
3.6 Transportation facility provided by employee: In case if transportation facility has been provided to employee from pick up of home to office and office to home, cost incurred by employer in relation to such facility will not be regarded as perquisite and such cost is allowed to employer as deduction of expense.
3.7 Leave Travel Concession/Allowance (LTC/LTA): The employer can also provide this facility to the employee. This exemption shall be limited to fare for going anywhere in India along with family twice in a block of four years:
- Where journey is performed by Air – Exemption up to Air fare of economy class in the National Carrier by the shortest route.
- Where journey is performed by Rail – Exemption up to air-conditioned first class rail fare by the shortest route.
- Further if places of origin of journey and destination are connected by rail but the journey is performed by any other mode of transport then exemption will be up to air-conditioned first class rail fare by the shortest route. Where the places of origin of journey and destination are not connected by rail and if a recognized public transport system exists then exemption will be up to first class or deluxe class fare by the shortest route. Where no recognized public transport system exists then exemption will be up to air-conditioned first-class rail fare by shortest route. Condition to avail this exemption by employee will be Two journeys in a block of 4 calendar years is exempt.
- Such allowance will be applicable only in case of domestic travel and not the cost of international travel.
- Such expenditure allowances are exempted only up to the amount which is actually spent.
3.8 Further employee will not be taxable for interest (as perquisite) on some types of Loans provided by employer, i.e. if loan provided in aggregate does not exceed Rs. 20,000/-; or b) Loan is provided for treatment of specified diseases (Rule 3A) like neurological diseases, Cancer, AIDS, Chronic renal failure, Hemophilia (specified diseases). However, exemption is not applicable to so much of the loan as has been reimbursed to the employee under any medical insurance scheme. This will be add on benefit to the employees and this can be describe as one of the terms in offer letter that we will provide such facility so that it can provide employee more satisfaction.
This are all the benefits that company can keep in mind while constituting CTC which will be most beneficial to the asseessee in form of tax benefits, such a structure of CTC will always encourage employee to think on addition benefits available to him in form of tax benefit.