Tax Saving Components in Salary Structures
June 18th 2024
Tax Saving Components in Salary Structures
The Webinar on optimising employee compensation was held on 7th June 2024 with Anuram Vajrapu, the Founder and CEO of ReviseTax as the lead speaker.
Introduction
Having an optimised pay structure is crucial for startups and SMEs to attract and keep top talent. In this article, we share tips from a recent webinar on how businesses can improve their pay structures and maximise benefits for employees. Below is the video recording from the webinar with timestamps, so you can watch it as it happened. We’ve added more details from other sources to create a basic content guide. Please note, the content below is not legal advice. We strongly recommend consulting a professional to ensure you comply with current regulations.
Webinar video with timestamps
00:00:05 - Introduction and Webinar Structure
00:01:56 - Salary Optimization and Employee Categorization
00:04:40 - Allowances, Perks, and Tax Implications
00:12:00 - Detailed Explanation of Leave Travel Allowance (LTA)
00:18:00 - Discussion on Components in the Gray Area
00:23:13 - Attire Allowance and Helper Allowance Details
00:26:00 - Ideal Compensation Structure and Car Leasing Benefits
00:33:00 - Corporate National Pension Scheme (NPS) Details and Employee Contributions
00:38:40 - Flexible Benefit Plans and Their Management
00:42:00 - Most Beneficial Flexible Benefits for Employees
00:44:00 - Helper Allowance Tax Implications and Precautions
00:46:00 - Performance-Based Compensation for Sales Roles
00:47:00 - Managing Interns and Full-Time Salary Conversions
00:49:00 - Addressing PF Issues with Consultants and Interns
00:50:30 - Managing Employee Flexible Benefit Claims
01:02:50 - Handling Contractors and Interns with TDS and Other Deductions
01:07:00 - Conclusion and Final Q&A
Categorisation of Employees
Overview of Employee Levels Based on Salary Brackets
Categorising employees into different levels based on salary brackets is essential for efficient finance management. Anuram has categorised employees into four salary brackets for the ease of salary structuring:
Up to 10 lakhs
10 to 25 lakhs
25 to 50 lakhs
Above 50 lakhs
Allowance and Perks
Breakdown of Basic Salary Structure and Housing Rent Allowance (HRA)
The basic salary structure is a critical component of overall compensation. In metro areas, it typically consists of:
Basic Salary: 50% of CTC
HRA: 50% of Basic
In non-metro areas, the structure includes:
Basic Salary: 50% of CTC
HRA: 40% of Basic
Flexible Allowances
Flexible allowances offer additional benefits to employees, which can include:
Allowance Type
Books & Periodicals
Internet & Communication Allowance
Uniform Allowance
Fuel Allowance
Travel Allowance
Health & Wellbeing Allowance
Food/ Meal Allowance
WFH Allowance
Daily Allowance
Description
This includes all your subscriptions to Newspapers, Magazines whether offline or online
This includes all your internet and telephone recharges
Uniform allowance includes buying of dress and shoes for yourself
All the fuel top-up bills for your vehicle that you are using for office travel
This includes all your travel bills from your home to your office
This includes all the expenses that you incur on your well-being such as Gym Subscription, Medicals or Health Supplements
This is a standard allowance given to all employees for food coupons
WFH Allowance will include all such expenses that are necessary to continue your work from your residence such as External Keyboard/Mouse, Table or Chair purchased
Daily Allowance is a general category that includes all your miscellaneous expenses such as dairy, vegetables etc.
Tax Implications of Various Allowances and Perks
Rent-free accommodation: Rent-free accommodation provided by an employer is taxed as a perquisite under the Income Tax Act. The taxable value is calculated based on factors such as the type of accommodation (owned or leased by the employer), its furnishing status, and the population of the city. For instance, in cities with a population over 40 lakhs, the taxable value is 10% of the employee’s salary if the accommodation is owned by the employer
Similarly, company-provided cars are taxed as a perquisite. The tax liability depends on whether the car is used solely for official purposes, solely for personal use, or both. If used for both personal and business purposes, the taxable perquisite value is calculated based on the car’s engine capacity and the extent of personal use
Tax Considerations and Compliance
Strategies for Tax Savings Through Structured Compensation
Properly structuring compensation can lead to significant tax savings for the company and its employees. By categorising different components of the salary package, businesses can optimise tax benefits. Key strategies include:
Allocating portions of the salary to tax-exempt allowances.
Utilising tax-saving benefits such as house rent allowance (HRA) and leave travel allowance (LTA).
Key Risk Areas in Tax Laws
Certain areas of tax laws require careful handling to avoid legal pitfalls. For example, helper allowances and attire allowances have specific guidelines that must be followed.
For helper allowances, the exemption applies only to the extent that the expenses are incurred, meaning that the actual amount spent by the employee on helper services is non-taxable if it does not exceed the allowance provided
Similarly, the attire allowance is exempt only if it is used for purchasing and maintaining a uniform that is mandatory for performing official duties.
Additional Offerings
Car Leasing Benefits and Tax Savings
Car leasing in India offers financial benefits for both employees and employers. Employees can enjoy the convenience of a company-provided car, while employers can take advantage of tax benefits associated with leasing rather than purchasing vehicles outright.
Employers benefit as lease payments are deductible business expenses and they avoid costs associated with vehicle ownership such as depreciation and disposal. Leasing agreements often include maintenance, insurance, and easy vehicle replacement, which provides operational convenience and protects against obsolescence and additional expenses associated with older vehicle
Corporate National Pension Scheme (NPS)
The National Pension Scheme (NPS) is a voluntary retirement savings scheme that provides tax benefits to both employees and employers. Employees can invest up to 10% of their basic salary plus dearness allowance, while employers can contribute up to 7.5 lakhs. Benefits of the NPS include:
Long-term retirement savings.
Significant tax deductions under Section 80CCD(2).
Flexible Benefits and Claims Management
Demonstration of Craze Platform
Craze offers a comprehensive platform for managing flexible benefits and claims. The platform allows businesses to create and manage flexible components tailored to the needs of their employees. This includes handling requests for various allowances and ensuring compliance with company policies.
Creating Employee Structures and Managing Flexible Components
Craze enables businesses to create customised employee structures that align with their compensation strategies. This includes setting up flexible components not limited to:
Performance-based bonuses.
Health and wellness benefits.
Educational allowances.
Common Questions About Various Components
Leave Travel Allowance
Leave travel allowance (LTA) is a popular benefit that allows employees to claim tax exemptions on travel expenses. Common questions include:
What is covered under LTA?
Travel expenses for the employee and their family.
How often can LTA be claimed?
Twice in a block of four calendar years.
Clarifications on Managing Flexible Benefits and Maintaining Compliance
Managing flexible benefits requires understanding the associated tax implications and compliance requirements. Common clarifications include:
How to categorise flexible benefits?
Benefits should be categorised based on their tax treatment and relevance to the employee's role.
Ensuring compliance:
Regular audits and consultations with tax professionals are recommended to stay compliant.
Practical Demonstrations
Setting Up Salary Structures Using Craze
Craze simplifies the process of setting up salary structures by allowing HR and finance teams to create and assign components efficiently. The platform provides templates and customization options to fit various organisational needs.
Managing Benefit Requests
With Craze, employees can easily request benefits through a user-friendly interface. The platform enables administrators to review, approve, or reject requests, ensuring a streamlined process. Key features include:
Automated workflows:
Reduces manual intervention and speeds up the approval process.
Transparent tracking:
Employees can track the status of their benefit requests in real time.
Handling Payments for Consultants and Interns
Craze also supports managing payments for consultants and interns, including TDS deductions and compliance with tax regulations. The platform ensures accurate calculations and timely disbursements, which is crucial for maintaining good relationships with external partners.
Conclusion and Key Takeaways
Emphasis on the Importance of Optimised Employee Benefits
Optimising employee benefits is crucial for attracting and retaining talent in startups and SMEs. Structured compensation not only maximises tax savings but also enhances employee satisfaction, leading to a more motivated and productive workforce.
Recap of Compliance and Risk Management
Ensuring compliance with tax laws and regulations is essential to avoid legal issues and financial penalties. By understanding the risk areas and consulting with tax professionals, businesses can effectively manage their compensation structures and stay compliant.
Leveraging Craze for Efficient Employee Benefits and Claims Management
Craze - The People OS for Startups, offers a comprehensive solution for managing employee benefits and claims. Its user-friendly platform allows businesses to create customised salary structures, manage flexible benefits, and ensure compliance with ease. By leveraging Craze, startups and SMEs can optimize their employee compensation strategies and focus on growth and success.
FAQs
What are the benefits of using Craze for startups?
Craze offers a streamlined platform for managing employee compensation, flexible benefits, and claims, helping startups save time and ensure compliance.
How can structured compensation save taxes?
By categorising salary components into tax-exempt allowances and benefits, structured compensation helps in reducing taxable income, leading to significant tax savings.
What are the key tax considerations for employee benefits?
Key considerations include understanding the tax implications of different allowances and perks, staying compliant with tax laws, and consulting with tax professionals for accurate advice.
How does Craze manage flexible benefits and claims?
You can set up multiple salary structures conducive to flexi benefits and assign them to people
Craze also provides a user-friendly interface for employees to request benefits and for administrators to approve or reject them. The platform ensures transparency and efficiency in managing flexible benefits.
What additional offerings can enhance employee satisfaction?
Additional offerings like car leasing, corporate NPS, and performance-based bonuses can significantly enhance employee satisfaction and retention.
Vishruth N
Product and Growth guy at Craze. IITB Alum. Loves listening to podcasts
