Struggling to Create a Fair Compensation Policy for My New Company – Any Advice?

Dear Seniors,

Recently, I have joined a new company; it's an electronic company. Before I joined, they had their own policy of compensation and benefits. Now, I have been asked to design a new HR manual. I have to design everything, and I am facing too many problems in designing the compensation policy because they don't have a proper way of providing the salary. It means they provide the salary and the deductions as per the CTC.

So now, how can I design the compensation policy? Can anybody help me in designing the policy? The points which I want to include in the policy are:

1) We provide salary on the 10th of every month in the salary account.
2) We provide half-yearly allowances:
- Medical Allowance
- Baggage Allowance
- Education Allowance
- Uniform Allowance

And leave encashment at the end of the year.

Awaiting your reply.

Swati Devnani
HR Executive.

Hi Swati,

I think you are very new to the industry. I will list out some points, and you can also seek help from your finance person.

First of all, HR should be a caretaker for the employees. When you are preparing the compensation, you have to be very careful about the taxes.

When you are structuring the salary, the amount of taxes should not be too high. You have to consider the employee's benefits.

Instead of saying medical allowance, it should be medical reimbursement. When you say allowance, it becomes taxable. You can provide reimbursement for medical expenses, but the government provides an exemption up to 15k per year, and receipts should be produced.

Educational allowance is also taxable, but there are exemptions for child education based on norms.

Uniform allowance is taxable income. If the company provides uniforms, these expenses should be considered under FBT for the company, which means no tax for the employee.

Regarding statutory compliance, earned leave should be provided. After 20 working days, 1 day off should be given. These days should be calculated at the end of the year before issuing the amount, considering whether it is taxable or not.

Employee welfare falls under FBT, including uniforms, insurance policies, transport for employees, food (except Sodexo), mobile bills, petrol allowances for employee cars, etc. Some of these are perks or perquisites, so the company has to pay taxes.

I suggest you bifurcate like:
1. Basic
2. HRA (tax exemption if receipt provided)
3. Medical Reimbursement (tax exemption if bill provided)
4. Conveyance (9800Rs, don't require a bill, but there is an exemption)
5. Books and periodicals (taxable)
6. Special allowance (taxable)
7. LTA (twice in four years with a bill, tax exemption)

Apart from these, any allowance as per your company policy is taxable, but you can also bifurcate within that.

From the CTC, exclude Employee contribution to PF, PT contribution of the employee to prepare the taxable income. Include insurance premium, medical premium, FD, PPF by the employee up to one lakh under 80C. Then prepare TDS.

For any queries, email me at vishakaguru@gmail.com.

Hi Visakha,

It's really good information you have shared! In fact, many of us who work in HR but do not have depth... Can you suggest some books or sites that can provide us with detailed information on compensation, in terms of components in structure, flexibility of structure, and how we can make the structure non-taxable or taxable income in structure... Rules for the same, etc.

My email id is [Login to view] :)

Bhakti

Hi Bhakti,

You can refer to the book "Income Tax Ready Reckoner" by VG Mehta for information on salaries, compensation, and taxation. Both will simplify the laws, but you need to compare the salary structures of various companies and draw conclusions.

May I ask which state you belong to?

After a week, I will send you some data on the same because it needs to be typed. This week, I am fully booked.

All the best...

Hi Vishakha,

Thanks Vishakha, I belong to Maharashtra.

Vishakha, I have done that!!! But many companies allow new joiners to design their compensation structure or it's flexible. How can one design such a structure? What are fixed and flexible components in a salary structure, and which are taxable and non-taxable parts of the salary sheet?

Bhakti