Employee Tax Benefits – How employees can save on tax

As an employer, you need to deduct tax before paying salaries to your employees. Income taxes help the government get the necessary funds for various projects. But did you know that there are several legal ways of saving money for your employees instead of them paying taxes? Of course, there is no doubt that paying taxes is going to help everyone in the long run, but if you can help your employees save some money, wouldn’t it be great? Lets look at the employee tax benefits available in India.

What are Employee Tax Benefits?

As stated earlier, on paying salaries, it is your responsibility to subtract TDS from your employees’ salaries and then credit it to their account. This is exactly where employee tax benefits come into the picture.

Employee tax benefits will help employees reduce their tax liability. In fact, in certain cases, these employee tax benefits can help save considerably. Lesser taxes mean more money in their account, thus allowing employees to do more.

The income tax department allows for 51 different types of allowances and perquisites. And most of these offer tax benefits for taxpayers. Of course, not all of them might be applicable to all individuals or job types. However, there are a lot of options which will help you maximize your savings.

It is usually the HR department’s responsibility to pick and choose from these benefits. You should usually pick the ones that suit the business, the need of the company and the needs of the employees.

History of Employee Tax Benefits in India

Some of the most common employee benefits that companies have been providing in India include paid time off benefits, employer employee insurance tax benefits, leave benefits, etc. And then there are some benefits mandated by the government such as Gratuity and Employee Provident Fund etc. The industrial reform took place in 1991 and that has led to certain changes.

Prior to the industrial reform, the majority of the organisations providing employment were in the engineering, manufacture or public sector. However, with time a lot more opportunities and ventures have come into the picture that now offers employment. Some of these companies and they work that they do, is quite different from the sectors mentioned above.

This requires the Human Resources department to look beyond the traditional measures and benefits. Just sticking to the older benefits might not be enough for the current day workplaces. Given the steady progress, India is making in the services sector, updating the employee tax benefits with time is the need of the hour.

Major Allowances and Perquisites

The Income Tax Act of 1961 governs and looks after the execution of various segments of the income taxes. The tax benefits that you provide as a part of employment offers is also governed by the act. Most of the employee tax benefits that you provide are either directly from Sections 10 and 17 or a part of it.

What are employee allowances?

An employee allowance is a financial benefit that an organisation can offer to their employees, on the top of their standard salary. Under most circumstances, employees might incur these expenses as a part of their job or due to it. As per the Income Tax Act, there are about 26 recognized allowances. However, only a few of them are completely non-taxable, others are either partially taxable or taxable.

What are employee perks?

A perquisite is another form of providing employees with additional perks. Perquisites are usually associated with job roles. Depending on your firm, it can either be under reimbursement scheme, non-monetary, monetary or even facilities that you can use. Companies off late have started making the most of perquisites to entice employees and even retain the existing ones.

Also read: Employee gifting – Creating a thoughtful corporate gifting strategy

Most Popular Employee Tax Benefits you can offer

Here is a quick overview of some of the most popular benefits that companies offer for their employees. Again, all the companies might not offer all the benefits. Depending on their business needs and requirements, they can offer one or more of these.

Survey conducted by Neilsen-Zeta

1. Vouchers

A gift voucher comes under the perquisite category. An organization can offer up to INR 5000 per year as gift vouchers. Any amount up to INR 5000 is tax-free, beyond which one obviously will have to pay taxes.

2. Phone or Internet Bills

Depending on the requirements of an organization, an employee might have to use the internet for their work or even make work-related calls. Employers usually offer monetary benefits, or you can reimburse your bills. The law has not set any cap on these expenses. Thus, it is at the discretion of the company to offer such benefits and set limits.

3. Medical Insurance

Employer employee insurance tax benefits is another popular offering. Some companies offer these benefits as a part of the package for employees, others allow their employees to buy insurance separately. Usually these medical insurance cover dependent parents, spouse and children. Or you might have to pay an additional premium to get the coverage.

4. Meal Vouchers

Another popular option that companies usually incorporate in their perks and benefits is meal vouchers for their employees. The meal vouchers help employees save money in the form of taxes, while they are at work. You might have come across Sodexo meal pass, which is one of the most popular options when it comes to offering meal vouchers. It depends on your company, the amount of taxes that you can save under this.

5. Leave Travel Allowance (LTA)

LTA is another allowance which can help your employees claim deductions. This covers expenses that employees incur while taking their time off work. The benefit is usually applicable for an employee along with their loved ones such as parents, spouse and children. Under LTA you can claim your expenses either by road, rail or air.

6. Book Materials

Certain companies allow their employees to purchase books, journals, newspapers etc. and receive a tax exemption on it. The intent is to allow employees to enhance their skill set in particular fields.

7. Car Maintenance

Few companies allow their employees to reimburse their petrol or diesel expenses, which they spend for coming to the office and going back. This allowance usually is not applicable to every employee, as it is reserved for the sales team, middle and senior management. Some companies go one step ahead and allow reimbursement of maintenance costs, driver’s salary, etc.

8. House Rent Allowance

You most probably would have come across the HRA component of your salary. The HRA component helps employees with their rent that they pay for their house. HRA should be a component of your salary so that you can claim reimbursements. Though you can claim for tax exemption on your house rent, you cannot do it on the entire amount, as there are a few limits.

9. Allowance for Children Education

Employees can avail a children education fee or INR 100 per month or INR 1200 per year under this allowance. The amount is deducted from the taxable income of a taxpayer under this pretext. You can avail this allowance up to a maximum of two children. At the same time, you can claim the amount you pay towards tuition fees under Section 80C.

10. Allowances for Uniform

Should your company require you to wear a specific uniform to work on a daily basis, you can make claims related to the purchase of clothes or uniform. The cost is usually for the purchase and maintenance of uniforms if it is a requirement for employees to do their duty.

11. Allowance for Hostel Expenditure

Parents can make additional claims apart from education expenses for their children. As per the rule book, you can claim up to INR 300 per month or INR 3600 per year for one child. The expenses must be related to hostels. This professional tax benefit to employee enables parents to save some money on the education of their children.

12. Employee Provident Fund

The EPF Act governs all contributions and other related activities. As per the act, 12% of an employee’s basic salary and dearness allowance combined must be contributed to the EPF of an employee. It is then the responsibility of the employer to match the contributions from their end. Any amount that you contribute towards EPF is exempted from the income tax under Section 80C. In other words, the maximum contributions that you can make towards EPF is INR 1,50,000 per year.

Here is a complete list of benefits available to salaried individuals according to the Indian Government – List of employee benefits

How can your employees claim tax benefits?

Let’s face it. Reading and understanding of income tax rules aren’t all that straightforward and might not excite all of us. The Chartered Accountants are around for the very reason. However, this does not mean that a company cannot or should not put in additional effort from their end. For example, Human Resources can look into these different aspects and decide which ones are most likely to attract new employees and retain existing ones.

Another important thing to keep in mind is that most of the professional tax benefit to an employee requires them to submit proof. Most of the allowances will let them avail tax exemption for the benefits only if they submit their expense proof. Should they fail to do so, all these expenses will be completely taxable.

And depending on the type of allowance or perquisite in question, the rules might differ a bit. For example, there are some straight forward allowances, such as your internet or phone expenses. Most companies allow their employees to submit their bills and reimburse the same. Of course, there is an upper cap for the amount.

And then there are allowances such has HRA or House Rent Allowance. HRS requires a lot more calculations. There are three different calculations and only the lower of them is taken into consideration. For example, the actual HRA an employee receives, rent that an employee pays in excess of 10 percent of salary and the dearness allowance or 40% of salary and dearness allowance.

If your employees want to claim LTA, they will have to submit a train ticket, flight boarding pass, etc. If they wish to claim internet charges or phone bill, they will have to submit a copy of the same. Similarly, for HRA employees might have to submit rent transactions or rental agreement. To reimburse fuel bills and maintenance bills, employees will have to submit fuel bills and service invoice.

How employee tax benefits will help employers?

It is a common belief that if you offer a better package, employees will stay with your organisation. Or to hire good employees you need to offer outrageous packages. However, you can achieve similar impact by merely tinkering with the existing package to make them more effective. This way, you as well as your employees can save money on taxes. NPS or National Pension Scheme is a good example of the same.

NPS allows your employees to save money Under Section 80CCD. It is an attractive option, since it is above the default INR 1.5 lakh limit of Section 80C. By making way for NPS, employers can save money under Section 36(i) (IV) of the Income Tax Act of 1961. Slight restructure of salary will allow your employees to benefit from Section 80CCD (1B) and 80CCD (2).

To conclude…

Since there are rules, there are bound to be certain loopholes and broken lines. However, it is the responsibility of the employee, HR, finance and even payroll team to do their due diligence. Taking compliance with tax laws seriously is essential in smooth functioning and keeping non-compliance away.