Buy phone, car through flexi benefits plan route for extra saving

The default new tax regime, however, offers lower tax rates, albeit without most of the deductions.
The default new tax regime, however, offers lower tax rates, albeit without most of the deductions.

Summary

  • Flexible Benefits Plan (FBP), though, is available only under the old tax regime, which allows an individual to claim deductions and exemptions under various sections of the income tax Act.

It is April—that time of the year when salaried employees look forward to their annual appraisals and an effective increase in their monthly income. However, not many employees are aware of the flexible pay benefits offered by companies that can reduce the net taxable income and put more money in their hands. Flexible Benefits Plan (FBP), though, is available only under the old tax regime, which allows an individual to claim deductions and exemptions under various sections of the income tax Act. The default new tax regime, however, offers lower tax rates, albeit without most of the deductions. Salaried individuals can chose either of the regimes, depending on their income and tax burden.

House Rent Allowance (HRA) and Leave Travel Allowance (LTA) are the most common flexi pay benefits available to the salaried under the old tax regime. Some other allowances, albeit with smaller monetary benefits, include reimbursements for food and beverage, phone bills, newspapers and periodicals, uniforms and conveyance. The allowance for uniforms allows you to buy clothes that you wear at work. All the allowances typically offer a small benefit ranging from Rs12,000-25,000 annually, which may not allow meaningful tax saving for those in the higher tax brackets. In a scenario where the employer offers all or most of the above components, the collective benefit under FBP may add up to Rs1 lakh, resulting in a tax saving of about Rs20,000 and Rs30,000 for those in the 20% and 30% tax brackets, respectively.

However, there are other options that reduces the higher tax burden, while also allowing you to own an asset at a lower price—for instance, car lease facility and gadgets allowance. Under both these options, an employee gets to own a car, phone or laptop bought in the company’s name. The company pays the purchase price of the asset and recovers the amount from the employee’s salary. Savings for the employee are two-fold: the company claims GST (goods and service tax) and deductions on annual depreciation on the asset, thereby reducing the net purchase cost of the asset for the employee and the amount charged against the employee’s salary is tax-free for them. In this story, Mint explains in detail how these flexi pay benefits work.

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Gadget allowance

Gadgets like mobile phones or laptops can be bought in a company’s name and be used by employees. The purchase cost of the gadget, net of 18% GST, is added to the employee’s CTC (cost to company) as a tax-free component.

“Laptop and mobile use are tax-free perquisites for employees under section 17(2)(viii) of the IT Act. Whereas other gadgets bought in the name of the employer and used by employees are taxed at 10% of the gadget’s value," said Sudhir Kaushik, CEO and Founder, Taxspanner.com.

If the employee leaves the company soon after getting the gadget, they have the option of buying it off the company “If the gadget is in a good working condition, the company will take it back and give it to other employees. Alternatively, the employee who got the gadget in the first place has the option of buying it at the time of leaving the company at a fair market value determined by the company," said Avinash Godkhindi, MD and CEO, Zaggle.

The residual value of the gadget is determined by the company and is significantly lower compared to what you would pay for a used phone or laptop from the secondary market. This is because the companies claim deductions on depreciation and working costs of the gadgets every year, which lowers its resale value.

Ajay Rotti, founder and CEO, Tax Compaas, said not all companies may agree to extend this benefit to employees as it increases their administrative and compliance burden. “There is a strain on the companies to have efficient systems in place to collect and verify the bills. It is not easy to detect false claims and fake bills. The company could be liable for consequences of short deduction of taxes at source. And, many companies do not want this compliance burden," he said.

(Graphic: Mint)
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(Graphic: Mint)

Car lease

Leasing a car through your employer is a tax sop that can result in tax savings of 20-50% of the car’s value. Under this facility, the employer leases the car and gives it to the employee. The employee uses the vehicle throughout the lease tenure. The lease amount, which the employer directly pays the leasing company, forms a part of the salary package of employees under the FBP. Think of it as an EMI (equated monthly installment) that one would pay towards a car loan. The difference is that the installment (lease in this case) is tax-free for them.

Further, on the basis of car lease, the employee can also claim reimbursement on fuel and driver’s salary on actual bills. These two components also form a part of your annual CTC and are tax-free. All the three components combined can result in substantial tax savings for the employee. For instance, let us consider the hypothetical case of Sudarshan, whose CTC is 20 lakh. He leases a car through his company and is eligible for the monthly car lease component of Rs20,000 and reimbursement on fuel and driver’s salary of Rs15,000 each month. This means, he saves tax on Rs50,000 of his monthly salary. Of the Rs20 lakh CTC, Rs6 lakh along with standard deduction of Rs50,000 (available to all taxpayers) are tax exempt, which means he has to pay tax only on Rs13.5 lakh instead of Rs19.5 lakh. This results in tax saving of Rs1.8 lakh each year for Sudarshan.

Nitesh Buddhadev, founder, Nimit consultancy, pointed out that employees have to pay a fixed perquisite tax if they use the car for personal use as well. “The monthly perquisite tax ranges from Rs1,800 to Rs2,400 depending on the engine capacity of the car leased. If the employee is also claiming reimbursement on the driver's salary, an additional Rs900 is to be paid," he said.

At the end of the lease tenure, the employee can choose to surrender the car or buy it by paying the residual value of the car, which can range from 50-10% of the car’s value.

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