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Check if new salary structure is income tax efficient
June, 14th 2018

Check how many reimbursement components and allowances are part of your salary structure at a new job and whether they offer income tax benefits

When changing jobs, one aspect that usually swings the deal is the salary being offered by the new company. While the cost-to-company (CTC) figure can tantalize you, the salary structure can have a huge bearing on what you actually take home. Here, reimbursement components can play a role as they offer tax benefits.

“Many employers do not utilise the maximum potential of these benefits. A vast majority of companies do not give flexi benefit options and just fix the benefits for employees,” said Bhavin Turakhia, chief executive officer, Zeta, an enterprise solutions company for payroll-related services.

According to Naveen Wadhwa, deputy general manager at tax services provider Taxmann.com, some companies are unable to offer these benefits due to poor access to tax professionals. “Generally smaller companies do not have proper HR practices and access to tax professionals to structure employee salaries in a way that minimises tax. Usually, big companies have a proper salary structure,” Wadhwa said.

Income tax benefits

It makes sense to check how many reimbursement components, allowances and perquisites are part of your salary and whether they offer tax breaks.

Turakhia said assuming the total CTC of an employee is Rs 15 lakh, she can save up to Rs 80,000-90,000 in taxes if she is able to avail 60-70% of the benefits covered under the Income-tax Act. Similarly, a person earning up to Rs 5 lakh can bring her tax liability to zero.

So, don’t let the initial reduction in your in-hand salary throw you out of gear, because they will ultimately be paid to you, and will also help save tax. According to a recent survey on employee tax benefits conducted by Nielsen India and commissioned by Zeta, 56% of employees who opt out of reimbursements do so for a higher in-hand salary.

Moreover, one in every four employees does not understand tax-saving possibilities through benefits offered.

A total of 1,233 employees and 194 employers were interviewed for the survey.

“Those who have opted out of employee benefits thinking they’ll get a higher in-hand salary are forgoing actual profit in the future for a notional benefit at present,” the study said.

Standard deduction: The study also highlights that companies will have to provide more avenues for tax saving to employees beyond just the standard deduction that’s available to all.

The budget for 2018-19 reintroduced standard deduction for salaried individuals—it had been abolished by the Finance Act, 2005. A standard deduction is an amount that reduces the income considered for taxation.

The challenges

Not all reimbursement components and allowance can be easy to access for employees. According to the survey, employees are comfortable with components that provide for communication (phone bills), fuel, gadgets and leave travel allowance, while tax-saving options like meal and gift coupons are among the least popular benefits.

Also, the paperwork involved and the processing time in claiming reimbursements is seen as a major hurdle. While 94% of the companies use a paper-based process for the same, every second employee surveyed believes that the process to claim reimbursements is complicated. Also, two out of three companies feel time and cost spent on administering tax benefits exceed actual benefits to employees, according to the survey.

Your salary structure depends largely on your employer. So choose well

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