How to Design a Tax-Friendly Salary Structure for a Small IT Team Without PF

Hi,

Our company is an IT software company and started operations only in the month of December 2009 as a subsidiary of our parent company in the US. Currently, we have only 5 employees - 2 permanent employees and 3 as consultants. We are planning to increase our employee size to 30+ by the 3rd quarter. Since PF is not applicable until an organization has 20 people, kindly let me know how to go about designing the salary structure.

Also, as we work on JAVA/.NET/QA technologies, we have employees in the salary range of 8+ lacs per annum. Please help me in designing a salary breakup structure without the PF component for the present scenario, along with components that ensure the employee does not end up paying much tax.

Regards,
Lakshmi
lakshmibright@gmail.com

Dear Lakshmi,

Please find below the details using the simple method:

8 Lacs (Divided by 12 = 66666)
Basic: 33333
HRA @50% of Basic: 16666
CCA @30% of Basic: 9999
Travel Allowance: 800
Total Gross: 60800
+ 1250 Medical Reimbursement (Tax-Free) Subject to the production of bills
+ 3300 Meal Vouchers (Already tax-exempt)
Grand total of CTC: 60800 + 1250 + 3300 = 66600
In case of a married person, Rs-200 as an education allowance or use the Personal Pay column in the gross salary structure to adjust the rest of the amount.

Regards,
Vishal Malik

Dear Lakshmi,

Greetings for the day!

Please check the below-mentioned percentages for designing the salary structure:
Basic = 50% of the salary in metro cities & 40% in non-metro cities
HRA = 50% of the Basic salary
Conveyance = 800 per month
Medical Allowance = 1250 per month
Education = It is based on the employee's grade
Performance commission = to balance the gross
You can include Special allowance in your salary structure, and PF becomes optional. If your basic salary is equal to or more than 6500/-, then it's at the discretion of the company to deduct the PF or not, as PF contribution includes an equal part from the company side.

Hi Kapil,

Good afternoon!

Thank you so much for your help. Kindly let me know what this Performance Commission is and whether it is taxable. Also, for senior software engineers drawing a CTC of 8-12 lakhs, is it feasible to mention an education allowance? How about the Food Coupons component? To what extent is it taxable? Special Allowance would be added.

Regards,
Lakshmi
lakshmibright@gmail.com

Dear Lakshmi,

Good Evening :)

Performance Commission is also known as a Performance Bonus/Incentive. The contents of the salary depend purely on your company policy; it should be clearly mentioned in the company policy how the salary shall be bifurcated.

Every income is taxable, and for exemptions, please refer to the latest IT laws and provisions.

Hi Kapil,

Thank you!!!

We cannot have this performance component as we are already considering implementing a Deferred Bonus structure, similar to what is in place in our US office.

If possible, could you please provide me with a link or document that clearly outlines the percentage and exemption details?

I also have a question - we are looking to include Telephone/mobile expenses, fuel expenses, car allowance, and driver salary. Is it feasible to allocate telephone/mobile or fuel expenses as 5% of the basic salary each?

Thanks & Regards,
Lakshmi
lakshmibright@gmail.com

Dear Lakshmi,

Good Evening :)

Performance Commission is also known as Performance Bonus/Incentive. The contents of the salary depend purely on your company's policy, meaning it should be clearly outlined in the company policy how the salary will be divided into different categories.

Every income is taxable, and for exemption details, please refer to the latest IT laws and provisions.

Dear Sirs,

Is there any restriction on the amount for Conveyance allowance, Medical Allowance, and Education allowance when structuring the salary? Please suggest.

Raj Pandey

Hi Vishal,

Thank you!!

What is CCA? Is it City Compensatory Allowance, and what is this allowance all about? Maybe we can have a Special Allowance instead of CCA.

Up to what extent are Meal vouchers or Food Coupons exempted? Are they totally exempted?

Sorry to bother you, but as I am new to this compensation part, I am asking you all kinds of questions.

Thanks & Regards
Lakshmi
lakshmibright@gmail.com

Hey Lakshmi,

I guess you would need to sit with your CA or accountant to close on this. It's best advised to have them in the loop, as finally they are who will allow any such rebate. Please visit the Income Tax website for information. Attached is a sheet that will be helpful in your study for designing your compensation and benefit planning. Do send my charges for consulting by posting more information and sharing your knowledge at Citehr. All the best.

Regards, Ukmitra

Dear Lakshmi,

What is CCA? Is it City Compensatory Allowance - Yes, it is.

City Compensatory Allowance is paid to compensate for the cost of living in the city. The amount of CCA to be paid depends on the company's policy, and there is no legislative ruling in this regard except for the taxability.

Maybe we can have Special Allowance instead of CCA. When recruiting a person for a particular position (Executive), the annual CTC agreed upon is 1 lakh. Now, considering all allowances, perquisites along with the salary for an Executive in your company comes to 90,000. Now, this extra 10,000 can be given by way of Special Allowance.

Up to what extent are meal vouchers or food coupons exempted? Is it totally exempted? You have to justify the level, e.g., Executive - Rs. 100/- per day, Manager - Rs. 150/- per day, VP - Rs. 700/- per day. There is no specific ruling available from the government. (But for the safer side, justify the amount by grade wise)

Sorry to bother you, but as I am new to this compensation part, I am asking you all kinds of questions. No need to worry - we are all here to seek help on different topics by various people.

Vishal Malik

Hi Raj,

As per my knowledge, we should keep the Conveyance allowance fixed at 800 pm and the Medical allowance at 1250 pm, as 15K is exempted from tax annually for the medical reimbursement part. I believe the Education allowance is fixed up to 200 pm.

Regards,
Lakshmi

Hi Raj/Lakshmi,

Lakshmi, you are right, except for education allowance. Conveyance allowance is exempted from tax up to Rs. 800 per month subject to actual spending on official purposes. Education Allowance is exempt up to Rs. 100 per month per child, up to a maximum of 2 children. Medical allowance is exempted up to Rs. 15,000 per annum subject to actual expenditure.

I have a query: there is a difference between medical reimbursement and medical allowance. I went through posts on citeHR but didn't quite understand. SENIORS, can you shed some light on this?

Regards,
Satarupa

Dear Laxmi,

Thank you for your good suggestion. I am aware of the norms regarding income tax exemption, but my question is if there are any restrictions on the amount. For example, if we allocate more amount across all heads like Conveyance allowance is Rs. 1200/-, with Rs. 400/- being taxable income, are we allowed to create this type of salary structure?

Regards,

RAJ PANDEY

Dear Lakshmi,

Regarding the Meal Voucher, there is a limit as prescribed by the IT Act. Please involve the Finance accountant in your final decision; otherwise, your company may face issues with the IT authorities.

Regards,
Ukmitra