Tax benefits come with a complex rule book, and there are bound to be loopholes and workarounds. But it’s up to the HR Manager to guard compliance in those cases.
Income tax is a legal and, some would argue, a moral commitment. The idea is when we live in a country and use its facilities, its infrastructure and its security, we ought to make a contribution towards funding the public expenditure. It’s a simple enough idea to understand, albeit sometimes controversial.
Income tax is without quid pro quo. It means it’s not an equal benefit equal sacrifice scenario. Perhaps it’s that intrinsic nature of taxes that makes it controversial.
That said, there are provisions for tax-savings that are available through which tax liabilities could be reduced in many cases, quite considerably. More money in the take-home pocket is something everybody can agree is definitely a good thing.
Employee Tax Benefits
When salaries are subject to TDS (Tax Deducted At Source), employee tax benefits can reduce taxable income and quite obviously increase take-home salaries for employees.
The Income Tax Act provides for a total of 51 allowances and perquisites, many of which have tax-saving capabilities built in. Not all of them are created equal though; not all of them are applicable to every type of employee or job. That said, it’s in the variety of options that its utilitarian value shines through.
When a company’s HR Department sets out to create and put in place a salary structure, they can choose the options they feel are best suited to their set of needs: theirs and their employees’. Over time, certain benefits become more popular with the workforce than others, and so companies tend to regularise their salary structures based on what trends.
The History of Employee Benefits
Traditionally, Indian companies have always provided benefits like health insurance, leave and time-off benefits and mandatory benefits such as Employee Provident Fund and Gratuity etc. After Independence, and years before India’s Industrial Reforms in 1991, the majority of businesses providing employment here were manufacturing, engineering and public sector firms.
New businesses and new ventures brought fresh opportunity and companies started to move away from the conventional employment models. Human resources had to ponder outside the set framework. Limiting their plans to the older schemes alone no longer seemed such a good idea. They needed to get more progressive. India’s growth in business was breaking new ground in all sectors, especially services.
The services sector brought with it newer expectations and set the bar higher than before. Suddenly there was a sense that companies could do more than just what was mandated to them by the labour unions or governments.
The HR Manager had to device newer ideas for attracting and retaining talent.
Allowances & Perquisites
Today’s tax benefits are part of or directly derived from Section 10 and Section 17 of the Income-Tax Act, 1961.
Allowances: A financial benefit offered to an employee over and above their regular salary. These benefits are provided to cover expenses that employees may incur while on the job or because of it.
There are 26 allowances in total. Some are fully tax-exempt, some partially and some not at all.
Perquisites: A perquisite is a benefit offered to an employee on account of their job or position. They can be monetary, claimed as reimbursements or they can be non monetary, usually in the form of free facilities that they have access to.
While the list of 51 is a piece you can refer to anytime you need more information, it’s the most common types of allowances and perks that are now virtually familiar names that employees have come to expect.
Some popular employee tax benefits:
Fuel – A reimbursement for employees who need to meet petrol and diesel expenses of the car they drive on the job. Typically, this is offered to middle and senior management, and of course, sales teams as well. Fuel reimbursements can sometimes include a tax-exempt amount contributed towards a driver’s or chauffeur’s salary. This is one of the popular tax benefits, likely to be offered at most companies that have a benefits programme.
Communication – Meant for employees who use their phones and their Internet connections to do their work, it’s frequently known as the telephone perquisite. Usually, the limits on these are determined by the employer, while the tax rules themselves don’t set the ceiling.
Meal Voucher – Meal benefit that’s for helping employees save tax on their meals, typically during work hours. They’re sometimes called food coupons or meal vouchers.
LTA – Leave Travel Allowance is for claiming tax exemption on domestic travel expenses that employees make during their time off from work. The benefit is extended on the travel costs of the employee and their closest relatives, which includes children, spouse and parents. LTA can be applied to air travel, rail and road transport within the country.
Gift Voucher – The gift perquisite that companies can offer employees is tax-exempt for up to a total of Rs 5000 every year.
Book & Periodicals – It’s a tax exemption on the purchase of books, periodicals, newspapers and professional journals that employees may use to further develop skills in their chosen fields.
Tax exemption requires proof of expenditure. In most situations, employees will always need to submit bills of purchase to claim their benefits.
Income tax rules need compliance. But they aren’t the easiest to understand. Of course, that’s why we have chartered accountants, but that doesn’t mean HR can take their eyes of the ball. With best practices in mind, they need to ensure they always operate and maintain their employee benefit programmes within the lines.
Tax exemption requires proof of expenditure. Whether it’s an allowance (allowances are exempt of tax only once such expenditures are proved, else they become fully taxable) or a reimbursement, employees will always need to submit bills of purchase to claim their benefits.
These bills require to be verified as bonafide. A major part of this task rests with HR and possibly Finance and Payroll, as well.
Let’s delve a bit further to uncover how and what ways compliance affects tax-savings. To illustrate these points, meal and fuel benefits can serve as handy examples:
Meal: For a meal benefit to be tax-free, its use has to comply with the following conditions:
# They must be used for the purchase of food and non-alcoholic beverages only
# They must be spent on meals during the work hours
# They must be for a maximum of Rs 135 per day
Fuel: These are some of the factors that determine how much is taxable in the case of fuel reimbursements:
# Ownership of the car – Whether it’s owned by the employee or the company
# Usage – Is the car used for official purposes or personal, or a combination of the two?
# The cubic capacity of the engine
If we consider usage, for instance, the tax rules state that fuel expenses are fully tax-exempt if the car is used solely for official purposes. In this case, the company must maintain detailed records of dates of travel, destination, mileage and the expense incurred on fuel.
If the car is used partly for official and partly for personal, as the case may be if it’s an employee-owned car in question, then there are set values based on the cubic capacity of the car’s engine.
Tax benefits come with a complex rule book, and there are bound to be loopholes and workarounds. But it’s up to the HR Manager to guard compliance in those cases. It can tend to require some vigilance and effort. Compliance hinges on verification. These are all factors that need a well-defined process to be put in place before.
How much tax can employees save, anyway?
There’s no simple one answer suits all. That’s due in part to varying incomes and the kind of benefits programme on offer at a company. But with a little foresight and some clever number-crunching, we’ve got some answers to this yet.
How much tax an employee will save using benefits is dependent on 2 things:
* Which tax slab they fall under and: 5%, 20% or 30%
* How many benefits they sign on for (which means you’ve got to give them options to make the best out of it)
The most popular employee tax benefits that we’re considering for these calculations are also the most likely ones you’ll offer to your company:
* Communication benefit
* Fuel benefit
* Meal voucher
* Books & Periodicals benefit
* Leave Travel Allowance
Alright then. The numbers:
Employees in the 5% tax slab save: Rs 11,540 a year
Employees in the 20% tax slab save: Rs 46,160 a year
Employees in the 30% tax slab save: Rs 69,240 a year
There are more savings to be had when you include options like a tax-saving gift benefit and a gadget allowance. You can think about including those once your programme evolves.
(By Ramki Gaddipati, Co-founder and CTO, Zeta)