How to design a tax-smart salary package

Corporate India is witnessing unprecedented growth. Consequently, the demand for savvy talent is also growing apace. In a bid to attract and retain the best people in their fold, companies are competing with one another in offering high salary with attractive perks.

Realising that the income tax takes away a good portion of the pay packet, and also that individual needs differ, companies often consult their employees in designing their own salary packages.

Here is a checklist to help you work out tax-smart salary and perk options:

Major tax-smarts

1. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property, and without any limit on a rented out house.

2. The repayment of housing loan from specified sources is also deductible, irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh (Rs 100,000) under Section 80C, taken together with contributions to other avenues under its umbrella.

3. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental, or 20% of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone, the family benefits. Yes, the maximum benefit accrues when the rent is over 20% of the salary.

4. Chauffeur-driven motorcar provided by the employer has no perk value. True, the company would pay FBT (fringe benefit tax). It is @30% on 20% of the value, thereby bringing down the effective rate to 6%. Better still, if the employee owns the car and the employer pays the cost of petrol and maintenance.

5. Contributions up to Rs 1 lakh per annum to a Superannuation Fund (SAF) of the employee are not taxed, either as fringe benefit in the hands of the employer or as perk in the hands of the employee.

6. Contributions to certain specified schemes (Company PF, PPF, NSC, life insurance, etc.) qualify for a deduction u/s 80C from gross total income with an overall ceiling of Rs 1 lakh. PPF has a ceiling of Rs 70,000 to contributions made to the accounts of self and minor children whereas the contributions to accounts of self, wife and children (major or minor) attract the deductions.

7. Employer's contribution to Company PF in excess of 12% of an employee's salary is taxable. Employee contributes an equal (or higher) amount to his PF account. Again, any excess over 27% of salary contributed by the employer to Company PF and SAF put together is to be treated as a taxable perk.

8. Any death-cum-retirement gratuity received up to Rs 3.5 lakh (Rs 350,000) -- subject to certain conditions -- is tax-exempt.

9. Leave Travel Allowance (LTA) given as reimbursement of expenses incurred by the employee and his family for travelling while on leave is exempt, once in two years.

10. Transport allowance for commuting between residence and place of duty is exempt up to Rs 800 per month.

11. Reimbursement, not exceeding Rs 15,000 in a year, for medical treatment from any doctor for himself and his family members is tax deductible.

12. Under Section 80D of the Income Tax Act, a deduction up to Rs 10,000 paid as medical insurance premiums on the health of an assessee, the assessee's spouse, dependent children or parents is allowed. Where an individual has insured a senior citizen (dependent parent), a higher ceiling of Rs 15,000 is available.

13. Professional tax paid by a salaried employee (around Rs 2,500 p.a.) is deductible under Section 16(iii).

14. As a tax-smart strategy, the salary (basic + DA) should be low, the rest should come by way of such allowances on which the employer pays FBT; the employee, then, does not have to pay any tax thereon.

15. ESOP has been brought under the purview of FBT by Budget-07.

Other tax-smarts

In respect of HRA, the least of the following is exempt from tax under Section 10(13A):

(a). 40% of salary (50% for Mumbai, Kolkata, Delhi and Chennai).

(b).

HRA for the period the house is occupied by the employee.

(c). The excess of rent paid over 10% of salary.

Please note that an employee who lives in his / her own house, or where s/he does not pay any rent, is not eligible for this exemption. If you are staying in a house belonging to your family members (preferably not your wife), start paying rent to the owner and ask for HRA from your employer.

• A helper engaged at home for the performance of the duties of an office or employment of profit is not considered as a perk.
• If the employer employs a gardener for the building premises belonging to the employer, it would not be treated as a perk. The possibility of it being extrapolated to other servants is logical.
• Perk value of concessional loan to the employee for purchase of house or motor cars shall be the difference between the interest payable calculated at the rate of interest for similar loans charged by SBI, and the actual interest charged.
• Loan for medical treatment specified in Rule-3A is exempt, provided it is not reimbursed under any medical insurance scheme. Where it is reimbursed, the perquisite value shall be charged from the date of reimbursement on the amount reimbursed but not repaid against the outstanding loan taken specifically for this purpose.
• Small loans from the employer up to Rs 20,000 in the aggregate are exempt.
• Expenses on meals provided to the employee during his hours of duty are not treated as perks.
• Employer pays FBT on the value of any gifts to an employee. Gifts up to Rs 50,000 in a year received without consideration by an individual from any person are tax-free in the hands of the donee. However, there is a risk that the IT Department may claim that such gifts are in lieu of salary.
• Employer pays FBT on the value of the facility of credit cards and expenses for the club.
• Where an employer transfers a movable asset to an employee directly or indirectly, the perquisite value shall be the actual cost to the employer minus the cost of normal wear and tear @10% for each completed year during which such asset was put to use. In the case of motor cars, the normal wear and tear would be @20% whereas in the case of computers, data storage and handling devices, digital diaries, printers, etc. it would be @ 60%. These do not include household appliances (i.e., white goods) such as washing machines, microwave ovens, mixers, hot plates, ovens, etc.
• Uniform allowance to meet the expenditure incurred on the purchase or maintenance of uniform for wearing during the performance of the duties of an office or employment of profit is exempt from tax.
• Expenses for soft furnishings (table linen, curtains, etc.), including their maintenance at the residence in the case of employees who entertain guests at home for official purpose are also exempt.
• Goods at concessional rates, membership of professional associations, subscriptions for technical and business journals and newspapers are not considered as taxable perks.
• Payment or reimbursement by the employer towards bills on telephones and cellular is not a perk.

Tailpiece

It is unlikely that good employers would add the FBT payable by them as a part and parcel of the pay package. For instance, take the case of chauffeur-driven car, which has a cost to the company of Rs 120,000. FBT has to be paid on 20% of this amount. The tax payable works out at Rs 7,416 (= 30.9% of 20% of Rs 120,000) only.

Excerpt from:

Taxpayer to Taxsaver (F.Y. 2007-08)

By A N Shanbhag

Publisher: Vision Books

Price: Rs 235.

A N Shanbhag is a best-selling author and a very widely syndicated columnist on personal finance and taxation.

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