Hi, I am in the process of setting up a startup and am about to hire a couple of people. Their salaries are 10 lakh and 14 lakh. Now, I don't want that even when they are getting such good packages, their take-home is peanuts. Can anyone please design a package for me that can ensure the maximum take-home salary for the 10 lakh and 14 lakh packages, keeping in mind Indian taxation laws? I shall be grateful to you as this will be a great help to a startup.
Thanks again,
Regards, Vishal
From United States, Saint Louis
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1Thanks again,
Regards, Vishal
From United States, Saint Louis
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Hi Roshni, I am attaching one salary breakup in which i have also taken example of Gross salary:INR 14,00,000 lacs. Kindly see to it. Hope it helps !!
From India, Delhi
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From India, Delhi
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Thank you very much for your prompt response. I would appreciate it if you could provide some details on how to divide the salary of Rs. 10 lakh and Rs. 14 lakh.
@ Ekta - The Excel sheet is highly informative. I am curious to know what falls under the city compensatory allowance. I am planning to set up my office in Noida. Will there be any special considerations for that? After going through other discussions, I did not come across any mentions of a city allowance. Is it tax-deductible, or will we be required to pay FBT (Fringe Benefit Tax) on this?
From United States, Saint Louis
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@ Ekta - The Excel sheet is highly informative. I am curious to know what falls under the city compensatory allowance. I am planning to set up my office in Noida. Will there be any special considerations for that? After going through other discussions, I did not come across any mentions of a city allowance. Is it tax-deductible, or will we be required to pay FBT (Fringe Benefit Tax) on this?
From United States, Saint Louis
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Salary Structure Planning for Tax Efficiency
Plan your components of salary in such a way that it consists of some allowance which is paid for some difficult job or involves some risk elements, then it will be non-taxable.
Regards,
Pabitra
From India, Durgapur
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Plan your components of salary in such a way that it consists of some allowance which is paid for some difficult job or involves some risk elements, then it will be non-taxable.
Regards,
Pabitra
From India, Durgapur
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Thanks for your responses. But somehow I am still confused. I wish to know about the Fringe Benefit Tax (FBT). Is this tax still applicable?
If yes, then what I think is that keeping the special allowance will help me put a lesser tax burden on my employee. As I understand, the FBT is to be paid by the employer, but I can always make it a part of the employee's CTC. This way, the employee, in broad terms, is paying FBT instead of income tax, so he is saving a lot of money.
Can you elaborate on this? I have read so many approaches to break up the salary. Some keep the basic salary as 50% of CTC, some 40%, and some 30%. What is the fundamental behind all this? I know EXACTLY what I want. I want my employee to pay a minimum on taxes so that he can take home the maximum. In a nutshell, I want the actual payout close to the CTC.
I will appreciate it if anyone can explain this to me. Thanks in anticipation.
Some info: My company is in Noida. I don't know if it comes under metro or not, and if there are any state taxes too.
Regards, Vishal
From United States, Saint Louis
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If yes, then what I think is that keeping the special allowance will help me put a lesser tax burden on my employee. As I understand, the FBT is to be paid by the employer, but I can always make it a part of the employee's CTC. This way, the employee, in broad terms, is paying FBT instead of income tax, so he is saving a lot of money.
Can you elaborate on this? I have read so many approaches to break up the salary. Some keep the basic salary as 50% of CTC, some 40%, and some 30%. What is the fundamental behind all this? I know EXACTLY what I want. I want my employee to pay a minimum on taxes so that he can take home the maximum. In a nutshell, I want the actual payout close to the CTC.
I will appreciate it if anyone can explain this to me. Thanks in anticipation.
Some info: My company is in Noida. I don't know if it comes under metro or not, and if there are any state taxes too.
Regards, Vishal
From United States, Saint Louis
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Hi Roshni, the salary breakup given in the attachment by Ekta is not correct. There are some components mentioned that do not match, such as HRA. It should be 40% of Basic or 50% of Basic in the case of A1 Cities. Additionally, some components should be included for their tax benefits. I suggest you kindly go through the income tax act and then frame a breakup of the salary. The salary must be structured in a way that benefits both the employer and employees in all aspects. I will provide you with more information about it later as I am currently busy.
Regards,
Yash
From India, Delhi
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Regards,
Yash
From India, Delhi
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There is no FBT now. There are no big tax concessions, be it Metro or non-metro. Do not worry too much about tax saving for the employee. He must plan his tax, not you.
Salary Structure Considerations
Salary Structure must take into consideration the following:
- His/Her skill and experience level and market conditions.
- Motivate him to perform.
- Certain elements to ensure that he stays with you.
- Social responsibility like PF, medical, etc.
Basic Pay
30 to 35% of CTC might be assigned to Basic. 50% is okay at lower salary levels, but at higher levels, keeping it at 30 to 35% will help an organization maintain parity.
Monthly Allowances
30% of CTC could be assigned towards this. Some organizations give this as Flexi allowance. The amount is constant but gives flexibility for an employee to assign the amount as per his tax-saving plans. If you want to plan and give, then you can give under HRA, Education Allowance, Conveyance.
Annual Allowances
5% of CTC could be under this head. This will include LTA (tax exemption), Medical (Tax exemption), Attire allowance (Tax exemption). This also helps you to defer your expenses to the next year and also helps you to release after the employee stays with you for a year. This may not be applicable in the case of medical, but certainly in attire and LTA, you can release the payment only if the employee stays with you for a year.
Performance Pay
At the CTC level indicated by you, plan for 15 to 20% towards performance pay.
Social Security
This will be closer to 10% of CTC. In this case, PF act is not applicable. However, I recommend the inclusion of all employees under PF. This helps in tax reduction and also future saving. Medical insurance for hospitalization needs to be planned, and the premium you pay towards medical insurance is exempted from tax.
With my experience, I estimate approximately 10 to 15% of CTC will be taxable subject to the employee's savings. Housing loan, HRA, and certain annual benefits, and it is everyone's responsibility to pay to that extent as a citizen.
Thanks,
Sivasankaran
From India, Chennai
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Salary Structure Considerations
Salary Structure must take into consideration the following:
- His/Her skill and experience level and market conditions.
- Motivate him to perform.
- Certain elements to ensure that he stays with you.
- Social responsibility like PF, medical, etc.
Basic Pay
30 to 35% of CTC might be assigned to Basic. 50% is okay at lower salary levels, but at higher levels, keeping it at 30 to 35% will help an organization maintain parity.
Monthly Allowances
30% of CTC could be assigned towards this. Some organizations give this as Flexi allowance. The amount is constant but gives flexibility for an employee to assign the amount as per his tax-saving plans. If you want to plan and give, then you can give under HRA, Education Allowance, Conveyance.
Annual Allowances
5% of CTC could be under this head. This will include LTA (tax exemption), Medical (Tax exemption), Attire allowance (Tax exemption). This also helps you to defer your expenses to the next year and also helps you to release after the employee stays with you for a year. This may not be applicable in the case of medical, but certainly in attire and LTA, you can release the payment only if the employee stays with you for a year.
Performance Pay
At the CTC level indicated by you, plan for 15 to 20% towards performance pay.
Social Security
This will be closer to 10% of CTC. In this case, PF act is not applicable. However, I recommend the inclusion of all employees under PF. This helps in tax reduction and also future saving. Medical insurance for hospitalization needs to be planned, and the premium you pay towards medical insurance is exempted from tax.
With my experience, I estimate approximately 10 to 15% of CTC will be taxable subject to the employee's savings. Housing loan, HRA, and certain annual benefits, and it is everyone's responsibility to pay to that extent as a citizen.
Thanks,
Sivasankaran
From India, Chennai
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While designing a compensation structure for your startup, you may like to keep in mind the following simplified considerations:
1. Maximum take-home pay with the 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 compensation structure simple) such that intricacies of taxation, claims, and subjective interpretation on taxable components are minimized.
4. Make the compensation structure such that it is scalable in the future.
In present times, most loopholes in pay components have been plugged, meaning that it is more difficult to skip tax. The earlier large basket of cafeteria items has been consciously done away with by even large corporations since most component heads are taxable these days.
Designing Compensation Components
In designing, the more important aspect is what components you will introduce, i.e., a basic pay, HRA (House Rent Allowance can be claimed if one lives in rented premises and the rent exceeds 10% of the salary. The actual HRA exempted from tax is considered as the 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 up to INR 800/- or a fuel reimbursement), Special Allowance, CEA (up to 2,400/- p.a.), CCA (if you so desire), Medical (up to 15K p.a.), Prof. mags/journal reimbursement (say, INR 1000 p.m.), Qualification Allowance (up to 24K p.a.), Training Allowance (up to INR 14K p.a. on production of bills), Telephone Allowance (up to 12K p.a. for official use & production of bills), LTA (availed twice in a 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 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 a 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 Considerations
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 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 via 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.
Regards, Rahul
[Phone Number Removed For Privacy Reasons]
From India, New Delhi
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1. Maximum take-home pay with the 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 compensation structure simple) such that intricacies of taxation, claims, and subjective interpretation on taxable components are minimized.
4. Make the compensation structure such that it is scalable in the future.
In present times, most loopholes in pay components have been plugged, meaning that it is more difficult to skip tax. The earlier large basket of cafeteria items has been consciously done away with by even large corporations since most component heads are taxable these days.
Designing Compensation Components
In designing, the more important aspect is what components you will introduce, i.e., a basic pay, HRA (House Rent Allowance can be claimed if one lives in rented premises and the rent exceeds 10% of the salary. The actual HRA exempted from tax is considered as the 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 up to INR 800/- or a fuel reimbursement), Special Allowance, CEA (up to 2,400/- p.a.), CCA (if you so desire), Medical (up to 15K p.a.), Prof. mags/journal reimbursement (say, INR 1000 p.m.), Qualification Allowance (up to 24K p.a.), Training Allowance (up to INR 14K p.a. on production of bills), Telephone Allowance (up to 12K p.a. for official use & production of bills), LTA (availed twice in a 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 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 a 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 Considerations
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 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 via 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.
Regards, Rahul
[Phone Number Removed For Privacy Reasons]
From India, New Delhi
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Salary breakup format.xls
Creating a Competitive Salary Structure.doc
Compensation Structure.ppt