Dear Vishal,
While designing a compensation structure for your start up, you may like to keep in mind the following simplified considerations :
1. Maximum take home pay with least taxation (as you have mentioned) as a bait to attract and retain employees/talent.
2. Least amount of clerical work in claims processing various components of pay and reimbursements to make it least unwieldy.
3. Lower pay components (to keep the comp. structure simple) such that intricacies of taxation, claims and subjective interpretation on taxable components is minimized.
4. Make the comp. structure such that the same is scalable in future.
In present times, most of all loopholes in pay components have been plugged, meaning that it is more difficult to skip tax. The earlier large basket of cafeteria items have been consciously done away with by even large corporations since most component heads are taxable these days.
In designing, the more important aspect is what all components will you introduce, i.e. a basic pay, HRA ( House Rent Allowance can be claimed if one lives in a rented premises and the rent exceeds 10% of the salary. The actual HRA exempted from tax is considered as least of the following: The actual amount of HRA received; 40% of salary. This increases to 50% if you are renting out the house in Delhi, Mumbai, Chennai or Kolkata; Rent paid minus 10% of salary (basic component + dearness allowance) Note that salary for the purpose of HRA means: Basic + D.A (only if it is forming part of salary for retirement benefits) + commission (if it’s a fixed % of sales turnover); Conveyance (Allowance upto INR 800/- or a fuel reimbursement), Special Allowance, CEA (upto 2,400/- p.a.), CCA (if you so desire), Medical (upto 15K p.a.), Prof. mags/journal reimbursement (say, INR 1000 p.m.), Qualification Allowance (upto 24K p.a.), Training Allowance (upto INR 14K p.a. on production of bills), Telephone Allowance (upto 12K p.a. for official use & production of bills), LTA (availed twice in block of 2 years - this is a sort of deferred pay component), PF (voluntary contribution if applicable), Gratuity, etc. to avail maximum benefits under the IT Act, 1961, prominently under sections: 80C, 80D, 80G and Sec 24.
The choice is yours and you need to take a call on what all components to include in your pay structuring from a short/medium/long term perspective. The percentage apportionment of pay amongst different components will depend on few factors such as the city/town classification and pay balancing requirements. Moreover, from a taxation perspective, a lot will also depend on the employees' investments in tax saving instruments during the course of a fiscal year.
Salary structuring needs to be done carefully considering that it has far reaching implications on your business and an employee's career and pay. For instance, performance increments, bonuses, ex-gratia payments, etc. (whether paid on basic/gross/CTC or any other consideration will depend on your pay structure that you had initially designed. Changing the structure can become a nightmare later, should you see an ambitious growth in your business and larger headcount & hierarchies of employees. It becomes quite complex later. It is good to start and remain professional in all aspects of business including the C&B rather than think of according sporadic pay offers/increments, thus disturbing pay differentials and pay parity as you move along.
The fringe benefits tax imposed on employers vide the India's Finance Act 2005 was introduced for the financial year commencing April 1, 2005 now stands abolished in the 2009 Union budget of India by the current Finance Minister.
Hope this accords some clarity.
Rahul
9968270580