For any company, the real assets are its employees. While companies reward their hard working employees every year, they must pay attention to the compensation structure being offered. A higher package does not always mean that employee take-home salary will increase. To make a tax efficient salary structure, there is always a trade-off between higher take home pay and maximum tax benefits.
Though a higher CTC is an important aspect of salary negotiation, it is equally important to structure it well to maximise take home pay and minimise tax outgo. Even employees must consider long-term and short-term financial goals. Modifying the tax structure can impact an employee’s net take home and the retirement corpus as some components of the package may not come to him immediately and others may be either taxable or tax-free.
Fixed and variable
There are various components of salary structure like fixed salary and variable salary. Many organisations structure compensation in 60:40 ratio as fixed and variable. There the variable could be selected by the employee depending upon the instruments available with the employer.
In fixed salary, there are basic, DA, HRA, conveyance allowances, city compensatory allowance, special allowances, etc. In variable salary, there are components like performance based incentive, sale based incentive and profit based bonus. Under reimbursements, there are money paid for conveyance, medical, telephone, etc. Also contributions include the benefits offered by the company like Employees’ Provident Fund, ESI, statutory bonus, etc.
Salary and perquisites are the most important factors. At the mid and senior levels, the tax burden is 20-30%. However, it can be reduced if an organisation does proactive planning for their employees. First and foremost, employers must decide on the basis salary as it is fully taxable. If the basic is too high, your tax liability will shoot up.
A company can let an employee save up to Rs 1600 per month for conveyance which is absolutely tax free. Tax saving for education allowance is up to Rs 100 per child and maximum up to two children and Rs 300 in case of hostel and this is absolutely tax free. Housing and washing allowance could be structured in such a way that maximum benefits can be passed on to employees. A company can also invest part of the salary in superannuation benefits under Section 80 up to a maximum of Rs 1.50 lakh.
NPS and EPF
Part of the salary could be incorporated in the National Pension System (NPS). Employer’s contribution is exempt from tax, up to 10% of salary. The employee’s contribution of up to `50,000 is eligible for deduction over and above the limit of `1.5 lakh under Section 80C. If an employer contributes to an employee’s NPS account, he can claim deduction under Section 80CCD (2) of the Income Tax Act, 1961. Interestingly, there is no monetary limit on how much one can claim, but it should not exceed 10% of one’s salary.
The NPS is a defined contribution retirement plan. The primary objective is enabling systematic savings during the working life of the subscribers. The aim is to provide retirees with an option to achieve financial stability during their golden years.
In EPF, employer’s contribution is tax exempt up to 12% of salary and employee’s contribution gets tax deduction up to Rs 1.5 lakh under Section 80C. All central government employees and a number of private sector employers have moved to NPS. In fact, EPF is losing its glory because of the falling interest rates scenario.
Through intelligent tax planning, employers can reduce the tax burden of their employees.
RP Yadav is ·chairman & managing director, Genius Consultants