Salary Package Dilemma: Balancing Employee Tax Benefits and Employer FBT Implications

What are the ideal salary components in a salary package, taking into consideration FBT implications on each salary component? Which salary components should be beneficial to both the employee from a tax perspective and for the employer from FBT implications?

Hi Sara,

"What are the ideal salary components in a salary package, taking into consideration FBT implications on each salary component? What salary components should be beneficial to both the employee from a tax perspective and for the employer from FBT implications?"

It depends on the philosophy and design of the company regarding the structural components of the salary for the staff. Post FBT has been a blow for companies that used to give employees cash salary as part of the salary to evade taxes. FBT has not entirely corrected the situation as yet; it has done more damage than rectifying the same.

Structure suggested:

Monthly:
- Basic: 50% of the CTC
- HRA: 50% of Basic in 4 metro towns; otherwise, 40%
- Conveyance allowance: Rs 800/month

Annuals:
- Medical Allowance: Rs 15k per annum
- LTA: one month's basic
- Sodexo Meal coupons: Rs 18k per annum
- PF
Total of the above: CTC

Additionally, you can provide selected employees in higher tax brackets with benefits like transport reimbursement/allowance, on which the company would have to bear the FBT of 1.64%. This can be a part of the salary structure to ensure a higher take-home pay.

Cheers,
Rajat

Hi Rajat, thanks for the reply, but please can you help me with the following areas.

If we have only basic, HRA, conveyance, won't the basic salary be very high? It affects the total CTC. Secondly, is it possible to include medical and LTA as part of the monthly salary to increase the net take-home salary? For tax benefits, an employee reimburses it at the end of the year for LTA (as per IT rules) and quarterly for medical. Can we reimburse medical on an annual basis as well? How do we treat Sodexo coupons in salary components? Is only lunch allowance in terms of monthly salary not exempted from FBT? Please advise as I have to revise the salary components for the company.

Thanks

Hi Sara,

"Hi Rajat, thanks for the reply, but please can you help me with the following areas."

Welcome... 😃

"If we have only basic, HRA, conveyance, won't the basic salary be very high, affecting the total CTC?"

Yes...

"Secondly, is it possible to include medical and LTA as part of the monthly salary to increase the net take-home salary? For tax benefits, an employee reimburses it at the end of the year for LTA (as per IT rules) and quarterly for medical. Can we also reimburse medical expenses on an annual basis?"

Don't do that! Since they are reimbursements, they are out of tax limits, as long as you don't exceed the limits permissible by the IT Act. You can show them as annual reimbursements subject to the production of bills. It can be given on a monthly basis as well.

"How do we treat Sodexo coupons in salary components? Is only the lunch allowance in terms of monthly salary exempted from FBT?"

Sodexo coupons are shown as part of the salary annexure, and coupons are provided to the employees every month. Sodexo/Accor are exempted from the purview of FBT.

Hope this helps you. If you have further doubts, do let me know.

Cheers,
Rajat

Hi Rajat,

Thanks for helping me once again. Our main aim in restructuring the salary components was to lower down basic and FBT implications. We have decided the following salary structure:

- Basic
- HRA
- Conveyance (up to 800 pm)
- Edu Allowance (tax exempted Rs 200 per child)
- Special Allowance
- Medical Allowance (up to 1250 pm)
- LTA Allowance (one month gross salary p.a.)
- Monthly Salary
- PF contribution
- Annual CTC

I am aware FBT is applicable to Edu Allowance, Special Allowance, Medical Allowance, and LTA. Could you please guide me on the FBT percentage for each of the above-mentioned salary components? Also, what should be the course of action? Please advise.

Thank you,
Sara

Hi Sara,

I am aware FBT is applicable to Education Allowance, Special Allowance, Medical Reimbursement, and LTA. Could you please guide me on the FBT percentage for each of the above-mentioned salary components? Also, what should be the course of action? Please advise. FBT is applicable only on medical reimbursement.

The applicable rate is 6.73%, which is paid by the company. Education allowance (Rs 200 per month) is included. Special allowance is out of the purview of FBT. LTA does not fall under the ambit of FBT as it is covered under the Income Tax Act.

I hope this information helps.

Cheers,
Rajat

Hi Sara,

I am aware FBT is applicable to edu All, Spe All, med, and LTA. Can you please guide me on the FBT percentage for each of the above-mentioned salary components and what the course of action should be? Please advise. FBT is applicable only on medical reimbursement.

The applicable rate is 6.73%, which is paid by the company. Education allowance (Rs 200 per month) is subject to FBT, while special allowance is not. LTA is not under the ambit of FBT as it is covered by a section of the IT Act.

Hope this helps.

Cheers, Rajat

Hello Rajat,

Thank you for your reply.

Is FBT charged at 6.73% on all salary components? Is there no FBT on special allowance? What is the amount of LTA that can be paid to employees and what is the tax exemption on it? I understand that the maximum LTA for an employee should be approximately one month's basic salary, and the exemption will be according to the IT clauses of the journey conducted and the total expenditure incurred by the employee.

Please revert on the above. I am pretty new to this forum, but of late, I have been reading a lot of your articles and from a few others as well, and I would like to state that it's very informative.

This HR community forum is one of its kind and very beneficial to many HR professionals, where knowledge is shared and expanded to great heights.

Is there any other HR community forum where knowledge is shared across?

All in all, this forum is really good.

And last but not least, thanks Rajat for helping me out with HR issues.

Sara

Hi Sara,

I am extremely sorry for the delayed response as I was out of the station for a while. I hope I am not too late.

"Is FBT charged at 6.73% on all salary components?"

I apologize for not providing clarification on FBT. It would be applicable only to the Medical allowance; the rest of the components, as discussed, are out of the purview of FBT.

"No FBT on special allowance?"

No, this falls under taxable salary computation. After all, one can't be punished twice. 😄

"What is the amount of LTA that can be paid to employees, and what is the tax exemption on it? I understand the maximum LTA for an employee should be approximately one month's basic salary, and the exemption will be according to the IT clauses of the journey conducted and the total expenditure incurred by the employee."

Twice in a block of 4 years is exempted and is subject to certain clauses. This has been discussed in detail in this forum. Please use the search tool to find information on this.

"I am pretty new to this forum, but of late, I have been reading a lot of your articles and some from others as well. I would like to state that it's very informative. This HR community forum is one of its kind and very beneficial to many HR professionals, where knowledge is shared across and in the process expanded to great heights. Is there any other HR community forum where knowledge is shared?

All in all, this forum is really good. And last but not least, thanks, Rajat, for helping me out with HR issues."

Thanks to you and all the members of this forum who have made it a very special one.

Cheers,
Rajat

Dear all,

In response to requests from members for detailed clarification of the FBT impact on the salary structure, I am attaching the document which shows the impact of FBT on a salary of Rs 5 Lacs per annum with a comparison of pre-FBT and post-FBT.

Should you have any queries, please feel free to ask.

Cheers,
Rajat

Hi Rajat,

Thank you for providing the FBT comparison sheet; it was very informative. I am exploring the possibility of introducing an allowance in the salary structure to reduce the basic component and also for tax savings. I have found that an ad-hoc allowance can be given, forming a maximum portion of the salary, and it does not attract FBT. However, I believe it will be taxable in the hands of the employee.

Do you have any information on how ad-hoc allowance is treated in the monthly salary? Or do you know of any allowance that can lower the basic amount? Please guide me on this.

Thank you,
Sara

Hi Sara,

"Thanks, Rajat, for providing this informative FBT comparison sheet. I appreciate it."

Regarding exploring allowances for adjusting the salary structure to lower the basic component and save on taxes, I discovered that ad-hoc allowances can be included as a significant portion of the salary without attracting FBT. However, these allowances are taxable in the hands of the employee. Do you have information on how ad-hoc allowances are treated in the monthly salary or any other allowances that can reduce the basic amount?

Ad-hoc allowances are indeed taxed in the hands of the employee. It's important to remember that one cannot be taxed twice, so it's either Tax or FBT, not both. Maintaining a lower basic salary can decrease the company's liability for PF deductions, gratuity, and improve cash flow during resignations or when encashing leave. However, this may increase the tax burden on the employee as it reduces the PF contribution for tax savings up to Rs 1 lakh. Finding the right balance is crucial.

Sara, it would be challenging to explain everything here. Why don't you email me your specific intentions and a tentative salary breakup? My official email ID is rjoshi@amtodd.com. I will review the details and provide guidance accordingly.

Cheers,
Rajat

Hi Rajat,

Thank you for helping me and guiding me at all stages. I was planning to revise our old salary structure, which did not extend any tax benefits to employees. I was looking for a salary structure that would provide benefits to both employers and employees. Last week, I had a meeting with our company's CA, who explained that I cannot have the best of both worlds. I was aware that if any attribute or allowance (apart from what we discussed and agreed on earlier) is debited from the salary account, it is taxed in the hands of employees, and if debited from the P&L account of the company, it attracts FBT. Anything cannot be taxed twice. So, I needed to choose one course, taking the consensus of management.

Anyways, I have finally devised a salary structure trying to balance both. Thanks for all your help throughout the process. Interacting on this forum has helped me solve many of the HR queries. Thanks, and all the best, and let's stay in touch through this forum.

Sara

Hi Sara,

I am glad you found the solution for finding the right mix - a rather balanced between the two - which is a tough job! :)

You are welcome. If you need any further assistance, please feel free to ask.

Cheers,
Rajat