WIN WIN SALARY STRUCTURE
It is possible for employers and employees to draw up tax-efficient, win-win compensation packages even in the FBT regime. Consider the case of an employee who was drawing Rs 7.2 lakh p.a. (cost-to-company), including reimbursements as below, in the pre-FBT regime. Companies may respond to the FBT in two ways. Salary Structure 1 below is drawn up by merging all these reimbursements into the employee's salary structureas some employers have done. In this case, the employee's tax liability is over Rs 97,000, but the company pays no FBT on these employee-specific reimbursements. Salary Structure 2 shows the smarter way for companies to do it: by retaining these as reimbursements (and not building them into the employee's salary, which would be taxed at 33.66 per cent), and paying an FBT (in most cases 6.7 per cent). Even if this tax on the employer is passed on to the employee (by, for instance, lowering the cost-to-company package to the extent of the FBT payable on these reimbursements), the employee's tax liability is lower by about Rs 47,000 a year than in Scenario 1. And here too the employer does not effectively bear the FBT on these employee-specific reimbursements. It's a win-win strategy.
SALARY STRUCTURE 1 SALARY STRUCTURE 2
Actual (Rs) Taxable (Rs) Actual (Rs) Taxable (Rs)
Basic 41,295 41,295 28,429 28,429
Employer's contribution to PF 4,955 - 3,411 -
Rent-free accommodation 10,500 8,259 10,500 5,686
Medical (p.a. expressed in p.m.) 1,250 - 1,250 -
LTA entitlement (p.a. expressed in p.m.) 2,000 - 2,000 -
FBT Employer's car, employer's expenses - - 3,000 -
A
P
P
L Chauffeur reimbursement - - 3,500 -
I Entertainment reimbursement - - 1,000 -
E Other reimbursements - - 3,000 -
S Books & periodicals reimbursement - - 3,000 -
Fringe benefits tax (FBT) - - 910 -
Total salary income p.m. 60,000 49,554 60,000 34,115
Gross total income 5,94,648 4,09,380
Less: Deduction u/s 80C, 80CCC & 80D 1,10,000 1,10,000
Taxable income 4,84,648 2,99,380
Tax 95,395 39,814
Add: Education cess 1,908 796
Tax payable (as TDS) 97,303 40,610
Add: FBT paid by employer - 10,920
Total tax cost to the employee 97,303 51,530a
Difference 45,773
Take-home post tax (Rs p.m.) 29,481 35,474
Take-home as a percentage of gross compensation 49.10% 59.10%
The tax structure is for a male below age 65
aAssuming that the employer pays FBT, and lowers the employee's cost-to-company (CTC) to that extent