Taxes by far comprise half of a nation’s yearly revenue, which makes it a moral commitment for any citizen to pay his/her income tax. The idea is that when we live in a country, we use its facilities, infrastructure, enjoy the security, etc. which ultimately makes taxes a contribution towards funding for the public’s welfare. However, a lot of controversies revolves around this area, since it’s not an equal benefit equal sacrifice scenario.
That said, a salaried employee has a lot of exemptions under his disposal, which he could use to reduce the tax liability. I guess, we all could in the end agree that more-money in the take-home pocket is definitely a good thing.
Tax-Benefits to the Employees
The situation in India is quite unique, when compared to other countries regarding the availability of employment opportunities. Employers constantly keep coming up with innovative ways to win over 60% of the population that is under the age of 25.
Historically speaking, Indian companies have provided their employees with health benefits such as health coverage, leave benefits, and statutory retirement programs. It was all targeted towards a generation that believed and completely adhered to the concept of lifelong employment. It worked well with the old economic sector which was dominated by manufacturing firms, engineering companies, government-owned enterprises and others. However, as the economy grew, people and along with them the generation has changed. They have become more mobile and new employment avenues are opening for them. Now, limiting plans to the perspective of the old economy won’t be beneficial to the new generation, considering India’s innovatory growth in all sectors, especially the service sector.
With its growth, the services sector bought with its newer expectations and set the bar higher than ever before. This gave the Indian companies a sense that something more could be done that what was mandated to them by the labour unions or the government. Considering this, many new allowances and perquisites came into existence.
When you take a salary and add various perquisites and allowances, deduct exemptions and deductions, you arrive at the net taxable income. As a taxpayer, you are taxed on this net taxable income. The effect of allowance on salary income depends on what kind of allowances you are receiving from your employer.
While some are taxable such as dearness allowance, overtime allowance, there are few others that are partially taxable such as house rent allowance and leave travel allowance. And then, there are allowances that individuals working with NGOs receive, and some specific allowances for government employees.
If you wish to decrease tax liability of salary income, deductions and exemptions are your best bet. They help you take a legal and ethical course for reducing your tax liability. One of the best examples of exemptions applicable to salary income is gratuity. It is always over and above your cost to the company and is non-taxable. As is the case with allowances, the effect of perquisites on salary income largely depends on the type of perquisites that you receive. While there are tax-free perquisites such as rent-free accommodation, the supply of water or gas, taxable perquisites include education for children, domestic help’s service etc.
Salary, Allowances, Perquisites
Salary: Any amount received by the taxpayer from the employer is said to be taxable as Salary. It includes salary & wages, allowances, Non-monetary benefits, Gifts from the employer, Pension, Taxable portion of Gratuity, Leave encashment, Bonus/Incentives received, etc.
Allowances: Allowances are part of the salary given to employees to meet some requirements such as house rent, conveyance, etc. There are 26 allowances available in total. Allowances may be fully taxable, partially taxable or fully exempt.
These are benefits such as rent-free accommodation, the company’s car, etc. It could be provided in cash or in kind. Reimbursement of expenses incurred during office work, unauthorized benefits obtained are all not a part of perquisites. Perquisites may be fully taxable, partially taxable or fully exempt.
While the list of 51 is a piece you can refer to anytime you need more information, it’s the most common types of allowances and perks that are now virtually familiar names that employees have come to expect.
Popular Employee Tax Benefit Options
Over the years, Sodexo has come up with various solutions to make it an easier job for employers to provide tax benefit option to their employees. Some of the solutions include, Sodexo Meal Pass, Sodexo Multi-Benefit Pass, Sodexo Premium Pass, Sodexo Resto Pass, etc.
Some popular tax benefits options are as follows:
Fuel: A reimbursement for employees who need to meet petrol and diesel expenses of the car they drive on the job. Typically, this is offered to middle and senior management, and of course, sales teams as well. Fuel reimbursements can sometimes include a tax-exempt amount contributed towards a driver’s or chauffeur’s salary. This is one of the popular tax benefits, likely to be offered at most companies that have a benefits program.
Communication: Meant for employees who use their phones and their Internet connections to do their work, it’s frequently known as the telephone perquisite. Usually, the limits on these are determined by the employer, while the tax rules themselves don’t set the ceiling.
Meal Voucher: Meal benefit that’s for helping employees save tax on their meals, typically during work hours. For example- Sodexo Meal Pass is a fully digital meal benefit option which comes with 5-year validity. It is widely accepted in over 1,00,000+ outlets such as Zomato, Swiggy, Reliance, BigBazaar etc.
LTA: Leave Travel Allowance is for claiming tax exemption on domestic travel expenses that employees make during their time off from work. The benefit is extended on the travel costs of the employee and their closest relatives, which includes children, spouse and parents. LTA can be applied to air travel, rail and road transport within the country.
Gift Voucher: The gift perquisite that companies can offer employees is tax-exempt for up to a total of ₹5,000 every year.
Book & Periodicals: It’s a tax exemption on the purchase of books, periodicals, newspapers and professional journals that employees may use to further develop skills in their chosen fields.
Employees claiming their benefits to reap tax exemptions, must comply to getting their bills verified as proof of expenditure.
There are many more allowances and perquisites. If you want to know about all 51 allowances and perquisites, we’ve got just the thing for you here.
"Tax exemption requires proof of expenditure. In most situations, employees will always need to submit bills of purchase to claim their benefits."
Income Tax Compliance
The rulebook of the Income Tax Act requests a salaried employee claiming benefits to submit documents as compliance. The rulebook is not very easy to understand. Of course, this is the reason why we have Chartered Accountants looking into our files. But this doesn’t mean that HR can take their eyes off the ball. With best practices in mind, they need to ensure they always operate and maintain their employee benefit programs within the lines.
Exemption from paying the taxes requires proof of expenditure. This is applicable for both allowances as well as reimbursements. Employees will need to submit bills of purchase as proof to claim their benefits. These bills will then be required to be verified as bonafide. A major part of this task rests with the HR and possibly the Finance departments and payroll.
Let’s delve a bit further to uncover how and what ways compliance affects tax-savings. To illustrate these points, meal and fuel benefits can serve as handy examples:
Meal: For a meal benefit to be tax-free, its use must comply with the following conditions:
- They must be used for the purchase of food and non-alcoholic beverages only
- They must be spent on meals during the work hours
- They must be for a maximum of Rs 50 per meal
Fuel: These are some of the factors that determine how much is taxable in the case of fuel reimbursements:
- Ownership of the car – Whether it’s owned by the employee or the company
- Usage – Is the car used for official purposes or personal, or a combination of the two?
- The cubic capacity of the engine
If we consider usage, for instance, the tax rules state that fuel expenses are fully tax-exempt if the car is used solely for official purposes. In this case, the company must maintain detailed records of dates of travel, destination, mileage and the expense incurred on fuel. If the car is used partly for official and partly for personal, if it’s an employee-owned car in question, then there are set values based on the cubic capacity of the car’s engine.
There are bound to be some loopholes or workarounds given the fact that tax benefits come with a complex rule book. It’s up to the HR Manager to build up the guard to have effective compliance in those cases. Constant vigilance and effort on this front are required to ensure the verification process.
The Million-dollar Question: "How much taxes can employees save?"
One simple answer will not do justice to this question. Considering varying incomes and different kinds of benefits programs available with different companies makes answering this question a little difficult. However, we’ll try to do justice this question with some clever number-crunching.
How much tax an employee will probably save using benefits is dependent on 2 factors:
- Which tax slab they fall under: 5%, 20% or 30%?
- How many benefits they sign on for (among the many benefits given in the company, how many benefits an employee has opted for)
The most popular employee tax benefits that we’re considering for these calculations are most likely the ones that many companies offer currently:
- Communication benefit
- Fuel benefit
- Meal voucher
- Books & Periodicals benefit
- Leave Travel Allowance
Alright then. Let's look at the numbers:
Employees in the 5% tax slab can save: ₹11,540 a year
Employees in the 20% tax slab can save: ₹46,160 a year
Employees in the 30% tax slab can save: ₹69,240 a year
Employees will have more savings when options like a tax-saver gift benefit and a gadget allowance are also included as a benefit.
Copyright © 2018 Sodexo