Tax Planning and Employee Remuneration
Tax Planning and Employee Remuneration
Tax Planning and Employee Remuneration
Employee Remuneration
Employee Remuneration is an important
topic to be considered for corporate tax
planning.
Remuneration is regularly payable to
employees in all the type of
organizations hence, its consideration for
tax effectiveness becomes important.
Two Important Considerations
1. Tax Deductibility of Remuneration
Employee Remuneration is tax deductible
hence, all the possible forms of remuneration
should be paid in order to reduce the tax
liability.
2. Minimum Tax Liability to Employees
Remuneration paid to employees should be
taxed at minimum.
Remuneration Break-Up
1. Remuneration should be paid should consist
of Basic Pay, different allowances and
perquisites.
2. There is no hard and fast Rule. Yet It is
worked out that the basic pay should be 25 to
30% in case of new employees and 30 to 40%
in case of senior employees. Remaining part
of remuneration should be in the form of
allowances and perquisites.
Allowances and Perquisites
Following allowances and perquisites may be paid to employees in an
organization:
A. Allowances
1. Dearness Allowance
This allowance is given to employees against the rising inflation.
2. House Rent Allowance
This allowance is given to employees living in rented accommodation.
3. Education Allowance
Education for two children can be given wherever it is possible
4. Transport Allowance
This allowance is given to commute between office and the employee
residence subject to a limit.
5. Uniform Allowance
This allowance given to employees if there is some uniform code in the
organization.
6. Helper Allowance
This allowance is given to employee to complete the official work at
home after office hours.
Allowances and Perquisites (Cont..)
B. Perquisites
Some important perquisites may be given as follows:
1. Rent free furnished accommodation
2. Tea, coffee, snacks, lunch/dinner in factory or office
3. Conference participation fee
4. Computer/laptop for office and private use
5. Medical reimbursement
6. Medi-claim insurance premium for employee and family members
7. Motor car along with driver for office and private use
8. Telephone or and mobile phone
9. Staff welfare expenses
10. Free holiday home
11. Gift in kind
12. Club including health club facility
13. Scholarship for children
Other Important Considerations
1. Perquisites should be preferred
It would be advantageous if the employees go for perquisite rather than
taxable allowances in order to reduce valuation of rent free accommodation.
2. Benefits u/s 80
Maximum benefit should be drawn by the employees under section 80
3. Benefit u/s 10
Employee should take these benefits such as gratuity, encashment leave,
recognized provident fund, superannuation schemes etc.
4. Employer Contribution towards recognized Provident Fund
employer contribution towards recognized provident fund is exempt up to
12% of salary hence, the employer should ensure that this limit is fully
exercised.
5. Free Medical Facilities
Employer should go for free medical facilities to their employees rather than
cash payment of medical allowance which is taxable in the hand of
employees.
Case Study on Employees’ Remuneration and
Corporate Tax Planning
Case Study 1:
Mr. X, aged 31 years, has been offered an employment on monthly salary
of ₹90,000. If ₹ 90,000 is received by Mr. X as salary, his tax liability
would be as under, taken as Option I: