Tax Friendly CTC Structure for Salaried Employees | H&R Block

How to design a Tax Friendly CTC for employees

Leave Travel Allowance
Leave Travel Allowance (LTA)
April 28, 2016
NRI Tax Filing
Reasons Why NRI Tax Filing is Important!
May 2, 2016
Show all

How to design a Tax Friendly CTC for employees

Tax Friendly CTC for employees

Every year there is appraisal season in all companies and employees are rewarded for their hard work and good performances. Some people switch jobs for change in work profiles and higher pay packages. In either case you must pay attention to the compensation structure being offered. A higher package does not always mean that employee take-home salary will increase by the same margin.

If your current or prospective employer lets you decide the compensation structure, here are some tricks to make you pay more tax-efficient. Pay less taxes and take home more salary.

Salary Structure includes various components like:

  1. Fixed Salary: This includes basic, DA, HRA, conveyance allowances, city compensatory allowance, special allowances etc.
  2. Variable Salary: It includes performance based incentive, sale based incentive and profit based bonus.
  3. Reimbursements: It includes reimbursement of conveyance, medical, telephone, etc.
  4. Contributions: It includes the benefits offered by the company like Provident Fund, ESI, Statutory Bonus, etc.

Salary Structure on the basis of level of employee

  1. Salary structure for a junior-level employee: Employees at the junior levels need a higher take-home salary. They try to add more fixed allowances in the salary structures such as food coupons, conveyance and telephone etc. These allowances are fixed and payable monthly to the employee. However, employees get taxed on these to a certain extent.
  2. Salary structure for a senior-level employee: Here, the employee anyway comes in a higher tax bracket. The concern here is not only to maintain a higher take-home salary but also to reduce one’s tax burden. Hence, there is a need to add more benefits in the salary structures of employees at senior levels.

However, the aim for all the levels of employees is more allowances, less taxes and more take home salary.

Tax Impacts of the salary components 

  1. Fixed Salary is that part of the salary which is fixed and is the basis on which other components of the salary are calculated.
    1. Basic Salary: Generally, it is 40% to 50% of CTC (Cost to Company). Basic salary is fully taxable. Statutory components like PF, bonus, gratuity and other benefits like LTA are calculated based on this amount. Hence increase or decrease in basic salary may impact CTC of employee.
    2. Dearness Allowance: Very few private companies use it as salary component. It is mostly given to government employees. This component is also fully taxable.
    3. HRA- House Rent Allowance: HRA is paid to employee to meet expenses against paying rent of a home. Normally companies keep it 40% to 50% of basic salary depending upon where you live. In case you stay in metro cities then HRA will be kept 50% of basic salary and in case you stay in non-metro cities then HRA will be 40% of basic salary. It is due to the fact that HRA is non-taxable salary component and its taxability depends upon where you live.
    4. Conveyance Allowance: Conveyance allowance is paid to employee against expense to commute between office and home. Conveyance allowance is non-taxable up to Rs 1600/- per month
    5. Special Allowance: This allowance component is mainly used to adjust rest of the amount which is to be given to an employee. It is fully taxable allowance.
  2. Variable Salary: As the name implies variable salary varies depending upon the performance of an employee. Now a days, many companies are keeping this as part of their employee CTC. Earlier, only employees related to sales or profit making department used to have variable component in their salary but now even employee from support functions like HR, admin, QA, Training etc have variable components in their salary. Companies are not willing to pay more fixed but open to pay higher variable pay as variable is related to sales and profitability of organization. Company has no problem in paying money to employees if the company is making profits. This is the reason that fixed salary is decreasing and variable pay percentage is increasing day by day.
  3. Other Allowances / Reimbursement: These are also taxable but can get tax deductions upon actual bills. This component is added to both junior- and senior-level employees’ salary structures, as it gives tax-free income and helps increase the net salary. Reimbursement is paid to employees against expenses made and bills submitted. Examples of reimbursement or allowances are;
    1. Medical Reimbursement: Medical reimbursement non-taxable up to 15000 per annum. Company may pay it monthly, quarterly, half yearly or annually. Employees need to submit medical bills in support of medical expenses. Medical expenses bills for spouse, child and dependent parents are also acceptable.
    2. LTA – Leave Travel Allowance: Leave Travel Allowance or Leave Travel Concession (LTC) is paid for travel cost incurred by employee on travel. Every company has its own rule to decide on amount of LTA to be given to an employee. A company may prefer to keep it equal to monthly basic salary of employee or make it fixed depending upon grade and native place of employee. It is a non-taxable income to the extent bills of travel are submitted but there are some rules which should be kept in mind while taking benefit of LTA for tax.
    3. Training Reimbursement: It is provided to employee for expense incurred on professional training related to their job profile. Each employee needs to provide bills for same.
    4. Mobile/ Telephone Reimbursement: Mobile reimbursement is paid to employees against expense incurred for use of mobile / telephone for official purpose. Employees need to submit bill for same. Employer can fix an amount for such reimbursement. Such amount should be logical and linked with employee’s profile
    5. Books and Periodicals: This is paid to employee to reimburse expense made on purchase of books and periodicals related to their job profile. It is non-taxable if bills are submitted.
    6. Children Education Allowance: It is exempted from tax up to Rs 100 per month per child for two children.
    7. Children Hostel Allowance: It is paid to meet expenses for children’s hostel allowance. It is exempted from tax up to Rs 300 per month per child for two children.
    8. Uniform Allowance: It is fully exempted from income tax on actuals. Employee has to produce bills to claim the same. This allowance is given to meet the expenditure on the purchase and maintenance of office uniform or office formal wear worn while performing office duties. Generally all offices have dress code i.e. employee should be smartly dressed in formals. In this case, according to dress code of the office, an employee can claim uniform reimbursement for formal clothes purchased for office wear.
    9. Daily Allowance:If your normal place of duty is not fixed and you have to travel to different places, your employer can include daily allowance to meet ordinary daily charges incurred, if you are absent from normal place of duty. Reimbursement received is fully exempt from income tax against actual bills. It can be granted either on tour or period of journey in connection with transfer.
    10. Tour Allowance:Though there is no formal name for this but any allowance granted to meet the cost of travel on tour or being transferred from one place to another is called tour allowance. Reimbursement is fully exempted from income tax against actual expenditure incurred. It also includes cost towards moving your belongings to another city.
    11. Food coupons or Meal Pass: It is given to employees for meals during working hours. Rs 50/- per meal up to 2 meals per day is tax free.
  4. Contributions: Contribution means contribution made by employer for employee’s long term saving schemes or social benefits scheme as per statutory compliance.
    1. Employee Provident Fund: It is the contribution made by employer (12% of Basic salary) against EPF. It is statutory obligation on part of the employer. Employee gets benefit of PF deduction (12% of basic) at his part under Section 80C of income tax.
    2. ESIC (Employee State Insurance Corporation): Employer needs to deposit 4.75% of gross salary of employee in case employee’s gross salary is less than 15000. Hence employer keeps it as part of Employee CTC.
    3. Statutory Bonus: It is statutory bonus which is paid to employees whose basic is less than or equal to Rs 10000/-. Minimum bonus payable is 8.33% of basic capped at Rs 3500/- i.e. Rs 292/- and maximum 20% of Basic capped at Rs 3500/-. Employer keeps it as part of CTC and is fully taxable.

Through intelligent tax planning, employees can also save tax by making investments that are tax deductible. Depending on the job profile and nature of job, one can discuss the things with his/her employer to include above mentioned allowances in their salary structure. It can help to reduce their tax outflow.

Pushpanjali Raina
Pushpanjali Raina
Pushpanjali is a Chartered Accountant by profession and has more than 7 years of post-qualification experience in audits, preparation of financial statements, taxation matters (Direct & indirect Tax) and has been representing clients before tax authorities. She has been working with H&R block as a Senior Tax Advisor since October 2015 in the retail channel at Gurgaon. She specialises in handling clients with complex tax issues and NRI tax related matters.

14 Comments

  1. HRD says:

    PR

    there are cetain changes in the bonus and also you have not differentiated between Allowance and reimburements and also the tax limits / provisions under various heads

  2. Sangeeta Kumari says:

    Hi Pushpanjali,

    I heard Uniform Allowance is applicable only on uniform specified by companies; it is not applicable on formal dress worn by salaried employees.
    If Uniform Allowance is fully exempted from tax (even for formal dress code), what is upper limit of this allowances, what is a practice in a market.

    Thanks and Regards
    Sangeeta Kumari

  3. Shubhangi says:

    Dear Pushpanjali,

    I want your help in CTC breakup . If I am adding annual bonus in monthly CTC then is that ESIC applicable on bonus amount or not? Our company comes under the Factories Act. Please guide.

    Thanks & Regards,
    Shubhangi
    shubhangiranaware002@gmail.com

  4. Akhil says:

    Hello

    I have make salary breakup for CTC 4.5Lac pa… and i want to make sure no tax to be deducted and want to imclude HRA(not more than 8000pm) , Medical, conveyance, Basic ,PF etc .. what other thing i should include so that tax is dedcuted least

  5. kapil says:

    Please provide CTC structure where 70% is fixed which would include deductions, Retirals etc and rest 30% as performance based incentive

  6. ASHOK PATIL says:

    pl let me know about Best player Bonus(Incentive) exempted from ESIC, i want gave to my employee who is best of month, so i want pay to gift in salary, thats mean best player incentive, pl suggest me about this part is exempted or not

    Ashok Patil
    88888874678
    9421309415

  7. Karan says:

    Hi

    Can we fill two rented home details under rented home option, actually i am paying rent for two properties, one for myself and one for parents.

  8. raja says:

    it would be nice to see an updated blog as of March 31st 2017

  9. Mayank Shorey says:

    It may not be updated, however this is so far the best source of information I came across while doing my taxes. Thanks, really appreciate your efforts.

  10. krishna mohan says:

    We have started CTC our company in this time bonus also mentioned in the CTC i.e deduct from employee salary monthly as a part of bonus every month can give detail regarding this

  11. shubham Singhal says:

    Do IT Company cover under ESIC ?

Leave a Reply

Your email address will not be published. Required fields are marked *