Every year when the Union Budget is presented, salaried individuals wait with bated breath to find out what’s in store for them per se. Will I have to pay more taxes? Has the government revised tax slabs? These are some stirring questions that come to their minds. When the Budget 2018-19 was announced on 1st February, the buzz was about the reintroduction of ‘Standard Deduction’, and as always, employees had questions. However, the million-dollar question was: “Will my in-hand grow or shrink?”
It’s a fact that corporates have to alter their policies in order to sync up with the Budget and these policies directly impact employees. This FY2018-19, there’s something corporates can do that can ensure more take home for employees. Let’s find out.
Everything you need to know about the bittersweet standard deduction
Standard deduction offers employees a flat deduction of Rs 40,000 on their taxable salary in lieu of the medical reimbursements and conveyance allowance exemption they have been getting. No proof is required for claiming standard deductions and this reduces the taxable income of salaried individuals by Rs 5,800 yearly.
Standard deduction was available for salaried individuals previously, till it was scrapped off w.e.f. Assessment Year 2006-07. The earlier standard deduction allowed salaried individuals to claim a flat deduction from his or her salary income of Rs 30,000 or 40% of salary whichever is less for gross salary Rs 5 lakh or below. If the gross salary exceeded Rs 5 lakh, a standard deduction of Rs 20,000 was allowed.
How do employees feel about the Budget 2018-19?
Technically speaking, employees really don’t have much to rejoice about! Why? Their take-home has not really increased, thanks to the additional 1% education cess. While the standard deduction adds Rs 5,800 every year to an employee’s tax-exempt salary component, it translates to a yearly savings of at most Rs 290 for the 5% salary bracket, which is further diluted by the increase in education cess.
The net benefit of an employee who falls under the 5% tax slab and earns Rs 5 lakh bags a net benefit of Rs 194 annually, whereas someone who falls under the 30% salary slab and earns Rs 15 lakh has to pay Rs 713 more to the government. Let’s face it. All taxpayers in the higher tax bracket will end up paying more tax. This is the one critical impact Budget 2018 will have on employee pay structure.
|Particulars||5% Slab||20% Slab||30% Slab|
|Before Budget||After Budget||Before Budget||After Budget||Before Budget||After Budget|
|Gross Salary Income||5,00,000||5,00,000||10,00,000||10,00,000||15,00,000||15,00,000|
|Less : Exemption|
|– Medical Reimbursement||-15000||-15000||-15000|
|– Standard Deduction||-40000||-40000||-40000|
|Tax on Income||10790||10500||1,05,660||1,04,500||2,52,240||2,50,500|
|Add : Edu Cess @3%||324||3170||7567|
|Add : Edu Cess @4%||420||4180||10020|
The silver lining in the Budget for HR managers
The one silver lining in the Budget 2018 is that the government has finally acknowledged the need to reduce paperwork in administering claims. Taxpayers will be spared the hassle of filling up forms for claiming the deduction of medical and transport expenses and HR managers get to stop fretting over the documentation, storage and verification of paper bills.
How can corporates offer employees a higher in-hand salary?
The only way corporates can help their employees save taxes and get a higher in-hand is by restructuring their pay package.
Essentially, two of the most popular and well-received components of the salary structure — medical reimbursements and conveyance allowance — have been scrapped by the government. This means all corporates will need to redesign salary components so as to ensure that tax-saving benefits can help employees save their hard-earned money, in turn increasing their take-home. It is important for corporates to understand which of these employee benefits — communication reimbursements, LTA, fuel reimbursements, meal benefits, gadgets, gift vouchers and more — can successfully replace medical reimbursements and conveyance allowance.
The government has clearly indicated its intention to introduce digital means of assessment, thereby reducing the need of physical paperwork and compliance. Many corporates have shied away from providing employee benefits like gift vouchers, meal benefits and other reimbursements, mainly because they are cumbersome to administer and manage. However, it’s high time we realise that adding employee benefits and going digital is the key. Digitisation ensures greater efficiency, transparency and saves you a lot of time. So, it’s time to explore the best options that can make employees happy at a time when the government has reintroduced the standard deduction.
(By Ramki Gaddipati, CTO at Zeta)