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    Tax Planning and Employee Remuneration

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    abdulraqeeb alareqi
    This document discusses tax planning considerations for employee remuneration. It notes that remuneration is an important topic for corporate tax planning as it is regularly paid to employees. It outlines various allowances and perquisites that can be provided as part of remuneration to reduce tax liability for both employers and employees. A case study compares the tax implications of a salary solely as cash versus a remuneration package that includes allowances and perquisites, finding that the latter results in significantly lower tax liability for the employee. The document stresses the importance of cooperation between employers and employees to minimize taxes through proper structuring of remuneration.

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    Tax Planning and Employee Remuneration

    Uploaded by

    abdulraqeeb alareqi
    1K views10 pages
    This document discusses tax planning considerations for employee remuneration. It notes that remuneration is an important topic for corporate tax planning as it is regularly paid to employees. It outlines various allowances and perquisites that can be provided as part of remuneration to reduce tax liability for both employers and employees. A case study compares the tax implications of a salary solely as cash versus a remuneration package that includes allowances and perquisites, finding that the latter results in significantly lower tax liability for the employee. The document stresses the importance of cooperation between employers and employees to minimize taxes through proper structuring of remuneration.

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    This document discusses tax planning considerations for employee remuneration. It notes that remuneration is an important topic for corporate tax planning as it is regularly paid to employees. It outlines various allowances and perquisites that can be provided as part of remuneration to reduce tax liability for both employers and employees. A case study compares the tax implications of a salary solely as cash versus a remuneration package that includes allowances and perquisites, finding that the latter results in significantly lower tax liability for the employee. The document stresses the importance of cooperation between employers and employees to minimize taxes through proper structuring of remuneration.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    1K views10 pages

    Tax Planning and Employee Remuneration

    Uploaded by

    abdulraqeeb alareqi
    This document discusses tax planning considerations for employee remuneration. It notes that remuneration is an important topic for corporate tax planning as it is regularly paid to employees. It outlines various allowances and perquisites that can be provided as part of remuneration to reduce tax liability for both employers and employees. A case study compares the tax implications of a salary solely as cash versus a remuneration package that includes allowances and perquisites, finding that the latter results in significantly lower tax liability for the employee. The document stresses the importance of cooperation between employers and employees to minimize taxes through proper structuring of remuneration.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 10

    Tax Planning with reference to

    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:

    Annual Salary = ₹ 90,000x12 10,80,000


    Less: Tax Deductions NIL
    Net Taxable Income ₹10,80,000
    Tax Liability on Net Income:
    Up to ₹ 2,50,000 = NIL
    5% on next 2,50,000 = 12,500
    20% on next 5,00,000 =1,00,000
    30% beyond 10,00,000 = 24,000
    Total Tax = 1,36,500
    Add: 4% Cess on Total Tax = 5,440
    Net Tax Payable by Mr. X ₹1,41,940
    Case Study on Employees’ Remuneration and Corporate Tax
    Planning (Cont..)
    Alternatively if the same salary is drawn by Mr. X with a proper break up among
    basic salary, allowances and perquisites, see the tax incidences, taken as option 2:

    Remuneration Break in the form of Basic, Expenditure by Amount Taxable


    Allowances and Perquisites the Employer (₹) in the hands of
    Mr. X (₹)
    Basic Salary 4,00,000 4,00,000
    Employees’ Contribution towards recognized
    provident fund 48,000 Nil

    Transport Allowance 19,200 Nil


    Education Allowance for 2 children 2,400 Nil
    Academic Research allowance 5,000 Nil
    Uniform Allowance 6,000 Nil
    Rent free furnished accommodation in Mumbai 3,45,000 60,000
    Free car with driver for official and personal use 1,90,000 32,400
    Case Study on Employees’ Remuneration and Corporate Tax
    Planning (Cont..)
    Free Telephone and mobile Phone 30,400 Nil
    Leave Travel concession 34,000 Nil
    Total Expenditure/Gross Salary 10,80,000 4,92,400
    Less: Deduction u/s 80C (being employee’s
    contribution towards PF) -- (48,000)
    Net Income -- 4,44,400
    Tax on Net Income: --
    Up to Rs 2,50,000 = Nil
    5% on 2,5001 to 5,00,000 = 9,720
    Total Tax = 9,720
    Add: 4% Cess = 389
    Net Tax Payable by Mr. X -- 10,109
    Conclusion:
    Tax liability of Mr. X is much lower in option 2 because of inclusion of allowances
    and perquisites in the remuneration package. Hence, option no. 2 is preferable by
    the employer.
    Concluding Remark
    Every consideration should be given on
    the part of employer and the employees
    to minimize the tax liability of both
    employer and employees. Hence, it is
    the responsibility of both of these parties
    to cooperate each other in this respect
    and be fully aware of tax incentives and
    benefits available with the latest update
    in Income Tax Act Provisions.

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