Customisation is here to stay

It is important to structure a package in such a way that the basic is not too large to be taxed too much, but is large enough for the provident fund contribution to make sense.

N Venkatraman | Print Edition: September 4, 2008

N Venkatraman
N Venkatraman
Rigid salary structures are fast giving way to flexible pay structuring with a view to striking a balance between ‘tax efficiency’ and protecting the ‘take-home’ package. Traditionally, salaries in India were structured in line with tax rules and most of the allowances/heads were borrowed from the Income Tax Act. Employers did not bother to find out if such rigid structures were in sync with employees’ monthly expenses, and employees too didn’t have many options.

However, the struggle that companies now face in finding and retaining talent has made them customise salaries to suit an individual’s financial needs. With the coming of the Fringe Benefit Tax (FBT), perquisites that were taxed at a higher rate or which did not enjoy tax breaks earlier can now be structured in a manner that the FBT is borne by the company and a tax-friendly salary is paid to the employee.

Under the FBT scenario, certain perks are categorised as fringe benefits that the employer offers. The actual cost of providing such services results in a tax in the hands of the company at rates of either 6.8% or 17%. This is substantially lower than the maximum marginal rates for personal taxes which are in excess of 33%.

The basic salary is crucial. A pay package should be structured in a way that the basic is not too large to push the tax up but is still large enough for the PF contribution to make sense. The bad news is that companies are, by and large, not willing to bring in flexible pay structures. A typical salary structure is 40% basic, 25% house rent allowance and 35% other benefits.

Companies claim that this is due to increased overheads in managing a variable pay structure, uniformity in compensation structuring and global diktats (especially in case of MNCs). However, employee retention and peer pressure is slowly changing this mindset. Flexible pay structures have become a reality in case of senior profiles. In time, this might perhaps be extended to junior executives as well.

N Venkatraman is CFO, TeamLease Services

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