Salary Splitting Without Tax Exemptions: Is It Worth It?

Dear, If not eligible for any tax exemption, is there any relevance in splitting the salary into various heads?

Thank you.

There is no direct benefit to it. However, in some cases, the employer can save money by lowering the basic wages.

The 'breakup' exercise
In most cases, the 'breakup' was an exercise that lost its benefit long ago but is carried on due to corporate inertia or because HR feels they need to do it to look professional.

Salary Structure in Our Country

In our country, the original salary structure consisted of Salary (referred to as Basic Salary) plus D.A. (Dearness Allowance). The payment of D.A. was directly linked to the Consumer Inflation Index and was variable. Therefore, all attendant benefits like Provident Fund, Employees Insurance, Gratuity, and Bonus were attached to the Basic Salary.

Adoption by the Private Sector

The same practice was adopted by the private sector, replacing D.A. (Dearness Allowance) with Special Pay.

Tax Exemptions and Allowances

Thereafter, HRA (House Rent Allowance) was made exempt under the Income Tax Act with certain conditions. HRA between 10% and 40% of Basic Salary (in the case of Metro Cities) and between 10% and 30% of Basic Salary (in the case of Other Cities) was made exempt if the employee is staying in rented accommodation and is paying rent equal to or more than that. Similarly, later on, a Conveyance Allowance of Rs. 1600/- per month was also made exempt under the Income Tax Act.

Therefore, the special pay was further split into HRA, Conveyance Allowance, and Special Pay.

Flexibility in the Private Sector

The private sector can devise any structure that helps them retain an employee, and there is nothing wrong with this as it creates a win-win situation for both the employee and employer.

Regards, Jawaharlal Moondra
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