Designing a Tax-Efficient Salary Structure in India

There’s so much fuss about the new Code on Wages implementation and how to restructure the compensation to be compliant. While the general guideline is to have at least 50% of the salary as Basic Pay, what if you do not keep it so?

Well, while it is recommended that you keep 50% of the total pay as Basic Pay, even if you do not keep it that way, it should not bother you much. In cases where Basic Pay is less than 50%, then the Basic Pay for calculation of other benefits (such as leave encashments, Gratuity, etc.) should be based on the 50% of the salary. This would mean, effectively, allowances cannot be more than 50%, technically or practically—even if you do not restructure the compensation.

However, with that preface, let’s look at some salary structures that one can probably include while making an offer to a prospective candidate (beware: if you are making changes to an existing employee’s compensation, there are things to be careful about) so that there are tax-efficient components:

Tax-avoidance or tax-escaping is not the way; but tax-efficiency is the one.
  1. House Rent Allowance is IT-exempt subject to the Income Tax rules, upto 40% of the Basic Pay in non-metro cities and up to 50% of the Basic Pay (+DA) in Metro Cities. The exact amount of exemption is the minimum of the following three (though you are welcome to have an even higher amount being shown as HRA in the salary structure, it won’t have any impact on the tax exemption):

    a) Actual HRA received from employer (that is shown on the payslip)
    b) 40% or 50% of Basic Pay (+DA) depending on the nature of the city
    c) Actual rent paid minus 10% of Basic Salary (+DA)
  1. Leave Travel Allowance is IT-exempt subject to the Income Tax rules, and subject to production of proofs as mandated by the Income Tax department. For the exemption to be effective, the payslip should have a component “LTA”. There is no specified limit on the % of LTA, but typically companies follow 5%-8.33% of Basic Pay (+DA) as the LTA amount. List of accepted expenses as LTA proof; note that LTA exemptions are not financial-year based, but based on a block of four calendar years (current block year: 2022-25).
  2. Books & Periodicals Reimbursements: Companies are welcome to include this as a reimbursement component of their total compensation and show it on payslips. They are welcome to provide reimbursement for the books and periodicals that are pertinent to the nature of jobs of the employees, against submission of relevant proofs. While there are no specified limits on this, companies usually tend to keep it in the range of Rs. 1000—2500 per month; senior professionals may be given a higher amount of reimbursement depending up on their role.
  3. Telephone & Internet Reimbursements: Similar on the lines of Books & Periodicals Reimbursements
  4. Fuel and Vehicle Maintenance Reimbursements: This is typically provided to senior leaders in companies, who may have to utilise their cars for business-related intents. Up to Rs. 2400/- per month against proper records of travels and fuel/maintenance receipts.
  5. Professional Development Allowance: Companies can reimburse the cost of courses/training/certification/professional memberships whose expenses are met from the pocket of the employee, against sufficient proofs. Such expenses could be mandated to be directly related to their role at the organistaion and have sane guidelines for which expenses can be considered.
  6. Annual Gift Voucher: Digital or physical gift coupons to the tune of Rs. 5000/- can be given to employees per a financial year, which is income tax-exempt. No proofs are usually required.
  7. Food Coupons: they can be paid in the form of physical or digital coupons/card and are exempt from Income Tax (usually not paid through payroll since cash as such is not being disbursed). No proofs are usually required. Maximum limit per month: Rs. 2500/- depending on the number of days your office operates.
  8. Children Education Allowance: Upto Rs. 100/- per month per child (for a maximum of 2 children per employee) is tax exempt under this category. This benefit can be provided for employees with children only. This does NOT limit employee’s 80C exemption of Children’s Tuition Fees.
  9. Hostel Expenditure Allowance: Up to Rs. 300/- per month per child (for a maximum of 2 children per employee) is tax-exempt under this category.
  10. Uniform Allowance: Applicable if there is a uniform at work.
  11. Include employee/employer contributions such as Corporate NPS
  12. Other means of executive compensation: Executive compensations are another realm, which may include more “benefits” than in the form of “pay components” and hence not delving into those areas now.
Slicing the total compensation at the right measures is the key to a tax-efficient salary structure

Word of caution: While designing the salary structure, the intent should NOT be tax avoidance or tax evasion, but utilising the existing legal provisions to form a tax-efficient structure. In the cases where it is mentioned above that proofs are required, you are still welcome to disburse that part of compensation if the employees do not have proof, but that will attract income tax.

A sample salary structure is provided below (not all of them could apply to you or to a specific employee), for illustration purposes only. Consult your legal team before you implement.

ComponentAmount per monthAmount per year
Basic Pay₹40,000₹480,000
HRA₹16,000₹192,000
LTA₹3,332₹39,984
Internet and Telephone Reim₹1,000₹12,000
Books and Periodicals Reim₹1,000₹12,000
Fuel and Vehicle Maintenance Reim₹2,400₹28,800
Professional Development Reim₹2,000₹24,000
Food Coupons₹2,500₹30,000
Annual Gift Coupon₹0₹5,000
Children Education Allowance₹100₹1,200
Hostel Expenditure Allowance₹300₹3,600
Special Allowance₹10,951₹131,412
Gross Salary₹959,996
Employer Contributions
Employer Contribution to EPF₹4,800₹57,600
Employer Contribution to LWF₹20.00₹240.00
Employer Contribution to NPS₹4,000.00₹48,000.00
Cost to Company (CTC)₹1,065,836
Tax-efficient Salary Structuring: An Example

Here’s the excel sheet with the above salary structure, for download.

Disclaimer: The views in this article are provided personal and for academic purposes only. They need not reflect the views of my employer/previous employer(s).

Images sourced from: unsplash.com

This article is also published on LinkedIn and Medium.

The Agony and Ecstasy of Working as HR Professionals in Organisations Today

‘You should not stop being people’s advocate! The day you end being one is the day the HR dies’.

These words which I happened to randomly listen to while working at Oracle as an Engineer, later became the cornerstone of my HR career. While I believe that any job has its own merits and fashions, there are certain jobs that have the capability to make impacts of higher gravities. HR is one, nevertheless, it goes a thankless job in some organisations.

HR, like any other job, is like a two-sided coin. You will have happy days; and then there will be days that give you a headache. Interestingly, the primitives on which the functions of an HR are based invariably embrace the ‘headaches’. What’s fun if things go as in the books; HRs come into play when things are not in line or if there’s no line at all. Thus, the headaches become opportunities. We cannot really see these as binaries—either yes or no—but grey. Let’s have a closer look:

Leaders with People Mindset

HR team’s vision will only be successful when your company has a management that believes in people. Forget your company’s revenue, business strategy and everything else; it’s the faith of the management in the people business and their mindset of treating people as the largest investment that drives the success of any HR team.

Starting from the CEO, every C-level and VPs should have a clear understanding and buy-in to the policies that the HR team parks on. This is the biggest factor of all which decide if an HR’s life is hell or heaven. This article on HBR says that during 2008 recession, only a  third of HR departments were consulted when layoffs happened, pointing to lesser influence HRs had in strategic business/people decisions—this is fast changing now.

It’s imperative for the modern day HR to work closely with the line managers as well, to make sure that the ‘people mindset’ envisaged at the top level trickled down appropriately at the length and breadth of the organisation. The organisation’s profitability comes only through the growth; and growth comes only through its employees and culture—not the C-officers alone! HR is certainly a partner in strategy execution, and hence they should have business acumen and understanding as well as the people mindset. 33% of execs believe that there’s ineffective HR leadership that drives their organisation to the unsolicited directions as per this HBR report. This can be tricky and painful for some of us, but definitely the need of the hour; it has always been, but clearer in the recent years.


Data and Opportunities for Analytics

With the advance of technology, data has come to play a major role for the HR as well. This has helped establish data-driven strategies. Since most HR operations have gone digital, HR gets instant access to the data and can run an analysis on it to reach faster and effective conclusions. Analytics has resulted in the greater impact of HR activities starting with talent acquisition through engagement to exit.

Changing Workforce

Gen X is fast coming to the top of the ladders, and most ‘workforce’ now comprises of Gen Y and Z. The millennials tend to pose and trigger a change in the way most HR teams function. The factors that excited Gen X may no longer be valid/needed for the Gen Y/Z. This needs a larger discussion in all organisations, where HR takes the lead role.

Starting from how your recruit talent to keeping them engaged should change due to this workforce change. Your ‘food coupons’ or ‘telephone reimbursement’ may not be an attractive benefit as it used to be. Your vacation plans, office timings, attire requirements and health initiatives may need a thorough change keeping in mind the interest of the new workforce. This is one place where HR gets into agonies or ecstasies. This also points to changing your HR practices and policies to accommodate the new-styled workforce who love things to happen faster and easier.

Pay Gaps and Diversity

Gone are those days HR recruited the ‘protagonists’ alone. Ideologies and societal factors keep changing, and Diversity & Inclusion (D&I) has become another opportunity for HR. While this is seen as an ecstasy from a philosophical standpoint, various reports suggest that the pay gaps and men:women employee ratios are still really bad in numbers. The report from WeForum suggests that in 82 out of 142 countries, pay gaps based on gender is still increasing. This is alarming, and agonising for the HRs, for they have been trying to establish a reverse scenario through D&I and localisation initiatives.

KPMG reports that HRs around the world struggle to keep in line with the global workforce, which turns out to be an agony for the HR fraternity, yet. With globalisation, teams become more and more integrated and agile, which HRs must run fast to cope with. Increasing number of remote, and arguably virtual, employees demand that the HRs tighten their belts.

Attraction, Training and Retention

Organisations today want not job-seekers, but talents. For example, in IT, with the massive ‘attack’ of automation over the services sector has diminished the glitter of the old glossy, silky texture of the industry to a great extent. Companies today want to find talents (“attraction”) rather than applicants finding them for jobs (“acquisition”). The onus is on the HR team.

The new organisation have a diverse workforce that constantly looks for enhancing their skill set. The old school training curriculum is undergoing a thorough revamp, which is, yet again, equally agonizing and ecstatic for HRs. Starting from the training modes—virtual to gamification to anytime anywhere learning platforms—to the training content, organisations are thoroughly revamping their L&D strategies with the Gen Z in mind.

Another area of concern for the HR is retention. It’s way beyond creating a good brand; stories float about youngsters rejecting offers from big brands to choose what they want to do in small companies. Retention plans of the new age is another agony for HRs, planning of which needs a thorough analysis of their workforce as well as the industry trends. People don’t just stay back for money.

HR Tech: the future

As it goes without saying, HR Tech is already here. Yesteryears’ Personnel Manager changed to HR, and then got transformed into People Enablers over a period of time. The new role of HRs will be that of technology and business leaders enabling people functions with the help of cutting edge tech. Coming of tech into HR will certainly reduce the job opportunities of the existing HR workforce, but wait! It’s a two-sided coin again. While this is seen as an ‘oh-my-god-am-I-gonna-lose-it’ scenario, why don’t we look at the brighter side of it? It gives us room for learning technology and pouring it into what we have been doing, thereby making a yet greater, happier, better workplace! Ain’t it ecstatic?!

Disclaimer: Any of the discussions above does not reflect the views of my present or previous employers. Views are all personal.

Employee Engagement and College of Engineering Chengannur: An HR Case Study

There’s something between College of Engineering Chengannur and CECians—the students and alumni of the college that binds the duo together. That’s never-ending loyalty and affection of the students and alumni of the college for their alma-mater.

College of Engineering Chengannur is my undergraduate college where I did my Bachelor of Technology in Computer Science and Engineering, and graduated in 2010. During our time, there were less than 220 students in an entire batch all the streams put together. The college was the first Govt. self-financing engineering college in the State of Kerala. When it started in 1993, it was a much sought-after college in the state.

The unique feature of most of the CECians that I have noticed is their affection for the college. The moment when an alumnus in a random crowd happens to say he’s a CECian, the other one in the crowd picks it up promptly and they instantly become family. This feature has helped the students (and alumni of the college) immensely, especially in networking and career prospects. CECians have a thing.

The sole intention of this article is not to ‘market’ my alma mater, but to use it as a case study as to how organisations can learn from it to build a highly-engaged crowd in their teams. There are no numbers since I have not conducted a formal study.

While I think of the reasons why there’s a high grade of the sense of belongingness to the college, it takes me to the fact that there have been a variety of events that happen at the college every year. Thanks to being a government college, most of the events are envisaged, planned and executed by the students alone. This gives them a sense of responsibility, pride and achievement.

Now what an HR should learn from this scenario: there are technical groups, arts club, sports club, National Service Scheme, Nature Club, multiple sports events, stages of art expressions, union senate, etc. In fact, there’s a surplus of forums and activities for a comparatively smaller college like ours.

The above fact has resulted in a very desirable scenario—that each of the students will be part of at least one of the activities/groups. There are exceptions, but on a negligible quantity. At the end of the four-year course, there would be at least an event/activity that every student has volunteered in/participated in.

Employee Engagement Credits: https://unsplash.com
Credits: https://unsplash.com

Students and the college recognise each such successful programs. This adds to the sense of achievement of the students. This ‘boost of pride’ is the sole reasoning for the immaculate belongingness of its students and alumni. That stays for good.

I was coming to it—the lesson an HR can take from this is how s/he should plan the engagement activities in the organisation. It’s imperative that the engagement initiates that the HR department drives at their organisation touch the sentiments of the employees. A wise selection of engagement events will strive to touch the likeness or interests of all employees.

It goes without saying that a single initiative alone cannot attract the interest of all employees. Hence, it is important to know what your employees are interested in. Some of the employees may have a personal interest in painting, some in music and some other in badminton. To the best extent possible, a  good HR engagement practice and design will always have events planned to touch these interests of the employees, at least once in a year. It’s simpler in SMEs, but in larger companies with HRBP concepts implemented, the same ideology can be extrapolated on smaller teams.

Let me close by saying this—the intention is not to create a heat map of the hobbies of your employees and then take the mode of it as the next engagement activity. But the intention is to identify those employees whose sentiments are barely touched and to address them.

How about a deeper analytics on the engagement score vs hobbies of the employees for better insights on what next you should take up as an engagement activity in the company? Will write about it in a few days, but would like to know your thoughts first on what’s written above. Let me know in comments.

Happy HRing 🙂

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