Tax Efficient Compensation Package
It is generally observed that in the first quarter of a new financial year (FY) many employers decide the salary of their employees for the upcoming financial year basis the performance appraisal of the last year. In many cases, employees are given the flexibility to structure different components of their salary within the broad contours of the company’s compensation policy. The employees are allowed to structure the salary as per their financial goals, personal requirements and requirement for retirement corpus.
Such structuring of the salary has a consequent bearing on the taxable salary income and net take-home pay of the employees. Hence, it is important that the employees are aware about the provisions of the Income-Tax Act, 1961 (the Act), read with Income-Tax Rules, 1962 (the Rules), for some commonly-used components:
House Rent Allowance (HRA): Employees staying in a rented accommodation can claim exemption from HRA in their salary structure based on their rental payments. “The tax exempt amount is least of (a) Actual HRA received or (b) 50 per cent of basic salary (40 per cent in case the employee is in a non-metro city) or (c) Rent paid – 10 per cent of basic salary. The exemption is subject to the verification of the prescribed supporting documents (such as the lease deed, rent receipts, etc.) to be furnished by an employee,” says Parizad Sirwalla, Partner and Head, Global Mobility Services, Tax, KPMG in India.
Leave Travel Allowance (LTA): Exemption can be claimed against LTA for the amount spent by the employee on personal travel within India for himself/herself and specified family members. “The exemption is subject to prescribed limits depending upon the mode of transport (air, train or road) and can only be claimed twice in a block of four calendar years (current block is from 2014 to 2017). Like HRA, the employees are required to furnish prescribed documents in support of the cost of travel,” informs Sirwalla,.
Medical reimbursement: An employee can claim a tax-free reimbursement up to Rs 15,000 per annum by furnishing proofs of the medical expenditure incurred by himself/herself and specified family members.
Conveyance Allowance: Conveyance allowance of Rs 1,600 per month can be claimed as exempt without furnishing any supporting proofs.
Food Coupons: Meal vouchers provided by the employer which are not transferable and usable only at eating joints up to Rs 50 per meal are not taxable in employees’ hands.
National Pension System (NPS): Employer’s contribution to NPS is exempt up to 10 per cent of the basic salary without any upper limit. Employee’s own contribution of up to Rs 50,000 is eligible for deduction against taxable income over and above the limit of Rs 1,50,000 under section 80C of the Income-Tax Act.
Other Tax-Efficient Reimbursements: Telephone reimbursement towards mobile and landline telephone connections can be structured as a component in the salary structure. Usually this is based on the actual bill amount and is required to be within a reasonable limit prescribed by the employer. There could be various other components (e.g. car, professional pursuits, etc.) which can be structured in the compensation structure.