How to design Salary Package

The following are the points are worthy to note before designing the good salary package to an employee.

As said by someone, “tax evasion is a crime but tax planning is inevitable”

Let us proceed to know how to save your salary from the legal burglary! 

1. House Rent allowance [Sec 10(13A)]: HRA granted to an assessee by his employer is exempt to the  extent the least of the following:

a) Excess of rent paid over 10% of salary due for the relevant period; or

b) If the accommodation is in ,Mumbai, Calcutta, Delhi & Chennai – 50% of salary and in any other places – 40% of salary due for the relevant period; or

c) Actual allowance received for the relevant period.

Exemption is not available to an assessee who lives in his own house, or in a house for which he does not pay any rent.

Salary means, basic, DA if provided in terms of employment and commission as a percentage on turnover achieved by the employee.

Individual assessee those who does not have HRA component in his salary package but pays rent  can approach section 80GG of the Act, which gives least of the following as deduction under chapter VI-A

The Rent paid is allowable as deduction to the extent of the least of the following:

a) Excess of rent paid over 10% of total income

b) 25% of total income

c) Rs. 2000 per month

Total income means, gross total income as reduced by deductions under chapter VI-A except 80GG

Conditions to be fulfilled:

1) The assessee should not be in receipt of HRA

2) The assessee, his spouse, or minor child or the HUF in which he is a member should not own any residential accommodation at that place.

3) No claim for self-occupied property should be made in respect of any accommodation.

4) Assessee must file declaration in Form No.10BA wherein he confirms the details of rent paid and fulfillment of the other conditions.(Rule 11B)

2. Any contribution to an approved superannuation fund by the employer in respect of an employee to the extent if exceeds Rs. 1,00,000 taxable as perquisites.[Sec 17(2)]

3. Employer Contribution to Recognized Provident Fund in excess of 12% of salary is taxable as salary (Deductible for the employer). The employee’s Contributions also eligible u/s 80C for deductions. The interest credited in excess of 9.5% is taxable as salary. The amount received on retirement is fully exempted u/s 10(12).

4. The value of any gift, or voucher or token in lieu of which such gift may be received by the employee or by member of his household on ceremonial occasions or otherwise shall be the sum equal to the amount of such gift. If the value of such gift, voucher or token is belowRs. 5,000 in aggregate during the previous year, the value of perquisite shall be taken as “Nil”.

5. Reimbursement by employer of actual expenditure incurred by an employee for medical treatment in respect of the employee, or any member of the family of such employee, not exceeding Rs. 15,000 in the previous year.[Sec 17(2)]

6. Free or concessional meal (Rs.50 per meal).

Free meals provided by the employer during the office hours at office or business premises up to Rs. 50 per meal.

Free meals provided though paid vouchers which are not transferable and usable only at eating joints if the value thereof is up to Rs. 50 per meal.

7. Exempted allowances u/s 10(14)

The following allowances are prescribed by the CBDT under rule 2BB of the Income Tax rules as exempt to the extent spent or specified or specified here below:

A. Any allowance granted and spent to meet the cost of-

a) Travel on tour or on transfer

b) Ordinary daily charges incurred on account of absence from normal place of duty;

c) Conveyance allowance granted to meet the expenditure incurred on conveyance in performance of the duties provided free conveyance is not provided by the employer.

d) Expenditure incurred on a helper in the performance of duties.

e) The academic, research and training pursuits in educational and research institutions.

f)  Purchase or maintenance of uniform for wear during the performance of duties.

B. Any allowance granted to an employee working in any transport system to meet his personal expenses during his duty performed in the course of running of such transport from one place to another place is exempt to the extent of 70% of such allowances or Rs. 6,000 per month whichever less is.

C. Transport allowance granted to employee, who is blind or orthopedically handicapped with disability of lower extremities to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty to the extent of Rs. 1600/-per month.

D. Transport allowance granted to employee, other than above to meet his expenditure for the purpose of  commuting between the place of his residence and the place of his duty to the extent of Rs. 800/-per month

E. Children education allowance is exempt up to Rs. 100 per month per child up to a maximum of 2 children.

F. Any allowance granted to an employee to meet the Hostel Expenditure of his child is exempt up to Rs. 300 per month per child up to a maximum of 2 children.

G. Tribal area allowance at Rs. 200 per month is exempt if the place of employment is in Assam, Bihar, Karnataka, Madhya Pradesh, Orissa, Tripura, Tamilnadu, Uttar Pradesh and West Bengal.

H. Compensatory Field Area Allowance exempt to the extent of Rs. 2,600 per month.

I. Compensatory Modified Field Area Allowance exempt to the extent of Rs. 1,000 per month

8. There will be no taxable perquisite in respect of expenses incurred on telephones including mobile phones including mobile phone actually incurred on behalf of the employee by the employer. In other words, if an employer pays or reimburses telephone bills or mobile phone charges of employee, there will be no taxable perquisite.

9. Perquisite in respect of education facilities: Where the educational institution is maintained and owned by the employer or where such free education facilities are allowed in any other institution by reason on his being in that employment, the value of perquisite shall be determined with reference to the reasonable cost of such education in a similar institution in or near the locality.  However, if the cost of such education or the value of such benefit per child does not exceed Rs. 1,000 per month, nothing shall be taxed as a perquisite.

10.  Scholarship received by employee’s son from the employer is a perquisite in the hands of employee and the same is exempt u/s 10(16) if the same is not form part of the salary package – CIT vs. B.L.Garg (2007) 289 ITR 218 (All).

11. Usage of movable assets: If any movable assets owned or hired by the employer are used by the employee or any member of his household, 10% per annum of the actual cost of such asset or the amount of hire charges incurred by the employer shall be the value of perquisite. This does not apply to laptops and computers.

Transfer of movable assets- If the employer transfers any movable asset directly or indirectly to the employee or any member of his household, the amount of perquisite in respect of such assets shall be determined as follows:

Hence, the company may purchase and give the computer/laptop to his employees and then after one year it could be transferred to his name by adopting 50% depreciation rate.

There are certain other exemptions are available in income tax act but those are not worthy to note because those are all situation specific hence not discussed. Any queries please write to gsvselvakumar@gmail.com A model salary package is given in Annexure -I which will give a bird’s eye view of the above discussion.