As the finance minister presents the Union Budget on Sunday, young professionals should pay attention to proposals related to employee benefits, and compliance rules, as these directly affect salaried employees in the early years of their career.
Budget proposals are relevant for salaried employees, especially the first-time earners, to determine the actual take-home pay. The key areas to look at are income tax slab rates, the basic exemption limit, standard deduction, rebate under Sction 87A and tax on employee stock option plans and perks.
Choosing the tax regime
For individuals in their first job, the new tax regime (NTR) often works better for those living with their family or in their own house. For most first-time earners, the NTR is usually more beneficial due to lower tax rates, wider slabs, and a higher rebate threshold.
As a result, many entry level salaries may attract nil or minimal tax even without making tax-saving investments.
For those staying in rented accommodation, however, the old tax regime (OTR) may lead to a lower tax burden due to house rent allowance (HRA) exemption. In such cases, they must ensure that HRA is part of their cost-to-company breakup.
Sandeep Sehgal, partner, Tax, AKM Global, says the OTR may be preferable only where one is able to claim substantial deductions, such as on HRA, Section 80C investments, or home loan. “For many first-time earners, the new regime works well in the initial year, but the choice should be reviewed annually as income and commitments grow,” he says.
Employees who opt for the NTR should note that contribution made by the employer (10% of basic in case of a private sector employee) to employee’s National Pension System (NPS) is allowed deduction under Section 80CCD(2). Young earners should negotiate with their employers to include NPS in the salary structure.
House rent allowance
HRA is one of the most significant tax benefits available to salaried employees, as it does not have a fixed monetary ceiling. The exemption is calculated based on least of actual HRA received, rent paid minus 10% of basic salary, and a prescribed percentage of 50% /40% of basic salary depending on whether the employee resides in a metro or non-metro city.
“This makes the old tax regime especially beneficial for young professionals working in prescribed metro cities, where rental expenses form a substantial part of monthly income,” says Neeraj Agarwala, partner, Nangia & Company.
Tax on ESOPs
Employee stock option plans (ESOPs) are taxable as salary income at the time of allotment after the employee exercises the options. The perquisite value is the difference between the Fair Market Value on the date of allotment and the exercise price. Also, tax is deducted at source by the employer. Capital gains tax applies when such shares are sold.
Tax on perks
Employers often provide additional benefits such as accommodation, insurance premiums or medical benefits.
Though these may not increase take-home pay, they are taxable in certain cases. Perquisites provided free or at a concessional rate are taxable only if the employee’s salary exceeds Rs 4 lakh per year. First-time earners should look out for changes in the taxation rules for any of these.