How companies can help their employees save 1 lakh in taxes

Right now, there are eight exemptions, perquisites, and deductions that one can consider in their CTC.
Right now, there are eight exemptions, perquisites, and deductions that one can consider in their CTC.

Summary

  • Many companies allow the flexibility of making changes in the CTC offered to employees at the beginning of the financial year. If any company wants to give employees this option, they can restructure their salary by choosing tax-efficient components.

Ever wondered why students fare differently in exams? The toppers score exceedingly high marks, others barely pass, and some even fail. All of them have the same syllabus and study from the same books. Yet, there is a significant difference in the outcome of their efforts. This difference could be the school, the teachers, and the way they were taught. Also, their social circle and awareness have an impact on the results.

We see the same happening in the tax paid by salaried individuals. The tax laws are the same for everybody, which means all taxpayers can avail of the various tax exemptions and deductions offered. Yet, two people with the same pay package may end up paying a very different tax. The difference stems from the salary structure and benefits in the compensation package of the individual.

Many companies allow the flexibility of making changes in the CTC offered to employees at the beginning of the financial year. If any company wants to give employees this option, they can restructure their salary by choosing tax-efficient components. Right now, there are eight exemptions, perquisites, and deductions that one can consider in their CTC. Also, this can be managed digitally all through one card. These include meal coupons, gifts vouchers or wallets, newspapers and periodicals, health, and financial wellness, uniform or attire allowance, fuel and travel reimbursements, driver’s salary, leave travel assistance (LTA), gadgets allowance, movable assets other than laptop and mobile, internet, and phone bills.

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Typically, all the flexi benefits are not being provided by most of the corporates. Especially, small and medium companies lack resources in terms of tax expert guidance and fear of tax notice in case salary structuring policy is not as per tax laws. Wherever companies provide flexi tax benefits, the opt-in ratio depends on availability to all employees plus creating awareness among employees about using these tax benefits. Employees have misconceptions on many investment and financial tax saving options. They also have bad financial habits of thinking short term and not taking expert help to learn the tax avoidance within tax laws. These benefits increase take home up to 37.5% including surcharge because employees use money before tax. But the non-availability and lack of awareness leads to year-on-year tax loss. Another reason is prioritizing small savings and not changing the habit. Hence the compounding impact of tax loss for 30-40 years of earning life is getting lost in translation.

The earnings to savings benefits/ratio

Not all companies are willing to take this route. They are reluctant to implement tax-friendly options because they are worried about infringing tax rules and want to stick with what they see as a tried and tested formula. As a result, their employees end up paying a higher tax because of the archaic pay structure. A company can potentially help its employees save about Rs1 lakh in tax through these tax-efficient options without incurring any cost or adding to the administrative workload as most of these are available digitally.

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How to make employees opt for flexi benefits

Employees generally trust their companies for taxes and do not take the advice of tax experts or chartered accountants like businessmen do generally. Companies can provide tax expert services such as financial wellness, i.e., tax-free perquisites as part of CTC (cost to compancy). Otherwise, these can be included in employee benefits programs and employees can use them for their family's financial wellness. Financial stress is the prime reason for health issues these days and this results in lower productivity and profitability. Hence, spending on employees uniformly is an eligible business expense. Ideally the company should do the following:

● Include all the tax efficient options given under the tax laws with flexibility to increase/decrease the components as per employee financial situations to restructure the components within CTC.

● Allow all the employees to opt for the benefits. Many companies give it to limited employees or at a certain level of income.

● Digitize to manage compliance and ease of use for employees.

● Create financial wellness among employees for understanding with the help of tax and personal finance expert services.

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Hence, both employees and companies can benefit by incorporating these tax-saving elements into the CTC structure and managing them through a single digital platform. Additionally, deploying a single card can help streamline administration, ensure better tax compliance, and reduce unnecessary costs. Further, adopting the strategic and digital approach will empower their workforce and foster a positive work environment.

Avinash Godkhindi is MD & CEO of Zaggle.

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