Ask your boss for a tax friendly salary package

The importance of friendly salary package is seen now especially after the introduction of Fringe Benefit Tax. All those employers who are interested to make available friendly salary package for their employees should prepare special salary package based on tax planning theme especially in the context of Fringe Benefit Tax payable by the employer.

 

In the first place, the HR friendly modules in the present scenario for employees and directors should cover the theme of

(1) Think and then ink the salary package of an employee

(2) Scrap superannuation fund contributions

(3) Pass on FBT to employees based on CTC concept

(4) Tailor-made different proposals. 

 

The following guidelines will help every corporate taxpayer plan salary and perquisite packages for its employees;

 

A - Salary module for junior employees  

1. For all junior employees, the salary and perquisites module should be very simple and easy to implement.
2. Except transport allowance, just add all payments to salary income. Do not give medical reimbursements - let it be added with salary or grant theme medical allowance so as to save FBT.
3. Pay zero FBT in respect of payments to junior employees and thus let 'gross salary' be taxed in their hands - still most of them will not pay any income-tax because their taxable income will be below Rs.1 to 1.35 lakhs (after tax deduction under section 80C).

B - Salary module for middle level executives

The theme: Mix and match FBT

1. Instead of making payment of 'salary', the total emoluments can be bifurcated so as to suffer a little tax by the employee on perquisites but very less FBT.
2. Consider the following in drafting this module 

            (a) Transport allowance

            (b) House rent allowance

            (c) Food coupons

            (d) Medical reimbursement up to Rs.15,000 per annum

            (e) LTA as per law

 

C- Salary module for senior level executives

1. The theme: A little more pain to bring lower perquisite taxation and increase FBT payout which may be considered in CTC
2. Consider the following:
   (a) Transport Allowance
   (b) Food Coupons
   (c) Reimbursement of food expenses in club/hotel
   (d) HRA or rent-free accommodation
   (e) LTA as per law
   (f) Uniform allowance          
   (g) Reimbursement of car expenses or conveyance allowance

D- Salary module for topmost executives

1. The theme: Lease or no tax on various perquisites granted to them.  Continue to pay them all those items on which FBT payable but no tax to the employee.
2. Consider the following:

(a)    Transport allowance

(b)    Reimbursement of hotel and club bills

(c)    HRA or a rent free accommodation

(d)    Reimbursement of expenses for personal office at residence

(e)    Group insurance policy

(f)      Car to be provided for office and personal use

(g)    Reimbursement of expenses on repairs and petrol for the car

(h)    Reimbursement of driver's salary

(i)    Medical expenses reimbursement up to Rs.15,000 per annum 

(j)      Uniform allowance

(k)    Attendant allowance

(l)      Reimbursement of books and periodicals

(m)  Car lease from family member

(n)    Gifts on festival and non-festival occasions

(o)    Reimbursement on foreign travel of spouse.

 

E- The Finale

1. When planning a salary package do consider preparation of different modules depending upon different income slabs of the employees.
2. For best results, in the first stage, calculate the gross tax payable by an employee on gross income.  Simultaneously calculate the FBT on payments made to employee.
3. The next step would be the balancing act whereby it is time to increase FBT payment and reduce the tax burden on the employee.
4. Plan to recover FBT from the employee through a seminar on concept discussion with employees with reference to CTC and net tax home money.           

Finally, to prepare the best designer package for your executives please study the provisions of the fringe benefit tax, the exhaustive circular on FBT, the new Income Tax rules governing taxation of perquisites and finally you will be ready to prepare your own designer salary package for the executives of your organization.  Thus strategic compensation and benefits management can be achieved for all corporate tax payers by planning a designer package for top executives in particular.

 

The author, Subhash Lakhotia, is a tax and investment consultant at New Delhi for over 35 years.  He may be reached at subhash.lakhotia@moneycontrol.com .