As a company owner or recruitment manager of a prestigious company, you may have employees asking you why their cost to company or CTC is lower than what was promised during the placement or interview rounds. While this might throw you off guard, be assured that it is a genuine doubt and one that you need to know how to respond to. You need to know how you can help them increase in hand salary.
Also, in some other cases, you probably offered the best salary package to a new candidate, but it may still turn out that they choose to join your competitor’s organisation. Do you think it is just the salary that turns them off or are there other benefits that you are missing out on? Do you help your existing employees or new recruits optimise long-term savings?
As it turns out, you control 95% of your employees’ in-hand salary and salary packaging. The Indian government doesn’t have a structured regulation system when computing one’s wages. Also, it doesn’t identify with the idea of CTC, or cost to company in the HR lingo. The government only recognizes bonus, gratuity, employees’ state insurance (ESI), employee provident fund (EPF), and voluntary provident fund, where the statutes demand minimum contributions. Other than this, it does not prescribe any set rules for structuring an employee’s CTC. Hence, apart from ensuring your workforce of an increased net take home salary, also show them the benefits of investments tax rebate.
The CTC break-up is an organization’s prerogative. Some generic norms exist that mention basic pay is set at 30-40% of an employee’s salary and HRA or house rent allowance is a certain % of the total basic. But, none of these norms is set in stone or paper.
So, what causes the CTC to vary from one company to another. CTC structures, per se, include 3 principal components — basic, reimbursements and allowances (like conveyance allowance, telephone allowance, medical allowance, travel allowance, and food coupons), and retiral benefits. The other components are optional and vary depending on the company and an employee’s position within the said company. Companies have the option to offer variable payouts or not do so. These variable payouts may consist of gratuity and performance bonus. Also, for senior management, other benefits like car, house, and furniture may be offered in kind. Some organizations may also include premium-based paid benefits like life, accident, and health insurance in the employees’ CTC.
Therefore, as a company, when you are asked that why the salary packaging seems low and if there is a way to increase net take home salary, you must, if not already done so, revamp salary package to increase net pay and explain the break-up to them by possibly customising their CTC restructure.
The CTC break-up can include the following:
Restructure basic pay
Salaried employees, who live in rented homes, can claim the house rent allowance or HRA in order to lower their tax liability. This allowance is eligible for partial tax exemption. Employees can also claim tax benefit on home loan and house rent allowance. Additionally, if they pay rent while also paying a home loan for a different property in one city, they are eligible to claim tax benefit on home loan as well as the HRA.
As if that’s not enough, they can show as paying rent even to their parents and, therefore, claim HRA tax deduction for living on a property belonging to their parents. They must, however, position the rent like an income from the said property.
Increase in hand salary
If LTA or leave travel allowance can be offered as part of the salary, an employee can avail this allowance to reduce the tax outgoing. LTA, however, is only applicable when travelling within India. It’s also available for two journeys undertaken during a rolling period of 4 calendar years. LTA is different from conveyance allowance and travel allowance.
In the corporate scenario, an employer can contribute towards the National Pension System or NPS, which falls under tax saving investments and is, thus, eligible for a tax deduction. An employer’s contribution towards the NPS of up to 10% of basic and DA is permitted for deduction under Section 80CCD(2). This deduction is an add-on to the INR 1.5 lakhs limit under Section 80C, along with an exemption of up to INR 50,000 accommodating self contributions towards the NPS under Section 80CCD(1B).
Optimise long-term savings
If an employee seems well off, educate them they can opt for a little less take home pay (without affecting their basic pay), decrease their other allowances and, instead, increase their retiral benefits in order to reduce their tax liability. A restructure in basic pay can lead to added tax saving investments. Your contribution to the employee’s PF or EPF is linked to their basic of 12% and will not be altered or affected.
If they agree for increased retiral benefits, you can raise the outgoing towards their voluntary provident fund (VPF). VPF is a much better option than PPF. While both get similar returns, the PPF cannot be touched for 15 years. The EPF and VPF contributions are allowed to be withdrawn, with absolutely no tax implications, after 5 years of retirement.
Although the NPS is also a good option, it doesn’t enjoy liquidity as the PFs do. In the case of NPS, withdrawal is permitted strictly after retirement or only under extremely special circumstances.
Bonuses are fully taxable. Despite that, many employers deduct taxes on the bonuses before releasing it to employees. If you practice this, educate the employees that they can share the details of their tax saving investments in order to receive an optimum bonus instead of a deducted one. If employees don’t do so, they will need to claim a tax refund when they file their returns.
In cases where employees choose salary components like reimbursement for food coupons, periodicals and books, telephone allowance, driver and fuel expenses, and other such expenses and/or allowances, their tax outgoing can decrease significantly.
An advance salary or loan is taxable. Companies sometimes provide concessional or interest-free loans. In such cases, the benefit of the concession or of it being interest-free is acknowledged as a prerequisite and is, therefore, payable as tax. This interest is calculated using SBI rates with the interest benefit being included in the employee’s salary. Tax exemption is possible in case the amount is lower than INR 20,000 or is it is meant for specific medical purposes or as medical allowance.
ESOPs are another great option. A lot of companies are offering ESOPs or employee stock option plans as a retention or appreciation tactic. ESOPs, however, are wholly taxable. Once the ESOPs are deployed, employees can purchase the stocks at a rate that is lesser than the stock’s FMV or fair market value. The tax on ESOPs is calculated on the difference amid the shares’ FMV on the date of purchase and the decreased price offered to the employee. With this information, employees can choose to purchase the stocks when their FMV dips or decreases. The perfect time to buy the stock options may, however, be difficult to predict accurately.
Investing the savings
Some loans are better paid off. For example, if an employee has a running education loan, advise them that they should pay it back on priority. If they do so, under Section 80E, they can claim tax benefit for paying the interest back. If this is their first job since the education loan and their basic salary packaging is set at over INR 15,000, advise them that it would be worthwhile to consider giving up EPF and pay the education loan off instead. It would be far more wise to pay off a loan that’s incurring 12-13% interest instead of investing in an option that gives only 8.7% returns. Prepaying loans off in the initial years itself is a tactful and tax-efficient move. Especially because there isn’t a cap on the PF tax benefits one can claim under Section 80E. But, there sure is an 8-year limit to claim the educational loan benefit.
Yet another benefit, because of unawareness, employees miss out on while living with her or his family is the HRA. As mentioned in the HRA section, even if they live with their parents, they can claim tax exemption on the house rent, as long as the property is on their parents’ name. Although salary break-up and increased in hand salary remains the organization’s prerogative, a lot many companies allow their employees to choose their salary structure and restructure basic pay. Salary restructuring can help employees increase investments tax rebate and decrease tax liability. It is, therefore, good practise to educate your workforce about investing the savings.