With increasing competition in the labour market, attracting and retaining talent is paramount for businesses. In addition to offering a competitive salary, companies have started focusing on employee benefit plans to enhance employee satisfaction and meet their diverse needs. Implementing the Flexible/Flexi Benefits Plan (FBP) is an innovative compensation strategy.
A Flexible Benefits Plan allows employees to change the elements of their salary and arrange their flexible payment amount based on their expected expenditures. Apart from offering financial assistance to cover additional expenses, FBP also helps reduce an employee’s tax liability.
Flexible Benefit Plan
Under a Flexible Benefits Plan, employees can add different types and numbers of FBP components to their CTC. This innovative compensation strategy helps employees modify their salary structure per their needs and expense while significantly reducing their tax liability.
Components of FBP
Here are some tips for businesses to effectively arrange employees’ salaries and perks for tax planning reasons. Employees can choose any of the following as a part of their FBP package:
- House Rent Allowance (HRA)
HRA is financial assistance offered by an employer to employees for meeting expenses concerning rent of accommodation occupied for residential purposes. The HRA, thus received, is tax-exempted under section 10(13A) and Rule 2A to the extent of the least amount of the following:
- Actual HRA received
- Excess of rent paid for accommodation occupied by the employee over 10% of salary (Basic + DA)
- 50% of salary (Basic + DA), in case the residential house is located in a metro city, such as Mumbai, Chennai, Delhi, or Kolkata
- 40% of salary (Basic + DA) in case the residential house is located in other cities
For instance, Mr. A works in Mumbai. He has taken up accommodation on rent for which he pays a monthly rent of INR 20,000. He receives a Basic Salary of INR 50,000 and a DA of INR 10,000 monthly. The company provides Mr. A HRA of INR 50,000 during the year.
|
Sr. No. |
Particulars |
Amount |
|
1 |
Actual HRA received |
INR 50,000 |
|
2 |
50% of [(50,000+10,000) *12] |
INR 3,60,000 |
|
3 |
Actual rent INR 2,40,000 minus 10% of [(50,000+10,000) *12] |
INR 1,68,600 |
|
4 |
HRA deduction = Least of 1, 2, and 3 |
INR 50,000 |
Hence, INR 50,000 is eligible for exemption u/s 10(13A).
- Leave Travel Concession or Allowance (LTC or LTA)
This allowance is offered to employees to cover their travelling expenses on vacation with their families. Employees can claim tax exemption on LTA or LTC u/s10(5). However, this exemption applies to the production of bills and vouchers. Additionally, LTA/LTC can only be availed if the employee is on annual or privilege leave. It cannot be availed in case of casual or sick leave.
- National Pension Scheme (NPS)
Section 80CCD(2) allows employees to opt for a voluntary deduction of up to 10% of Basic + DA towards NPS. This provides 100% tax benefits to the employee.
- Uniform Allowance
Several organisations mandate employees wear uniforms while performing their duties. In return, organisations grant uniform allowance to meet the expenditure on purchasing and maintaining uniforms. This uniform allowance, thus provided, is exempt u/s 10(14)(i).
Please note:
- Gujarat High Court has ruled that a mere dress code for a company is not sufficient to claim tax exemption under Uniform Allowance.
- The uniform allowance is applicable only if the uniform is of standard colour and pattern, making the employee group of the employer easily recognisable, and should be prescribed by the employer and worn by all employees.
- The amount exempt shall be the least of the amount received and the amount spent.
- Food and Beverages Expenses
As per the provisions of the IT (Income Tax) Act, employees are permitted to spend up to INR 50 per meal tax-free on meals and non-alcoholic drinks. Companies may provide employees with meal cards, supermarket vouchers, or food coupons to help with this. Employees can get compensated for these tax-free expenses.
The amount is computed according to the number of hours worked. For instance, an employee works 22 days per month and receives two meals daily for INR 50 each. In this case, the monthly food budget will be INR 2,200. The firm will deduct INR 2,200 from employees’ salaries and add that amount to their meal wallets. This amount of INR 2,200 is tax-free.
- Fuel and Driver’s Salary
In certain cases, employers provide their employees with monetary benefits to cover the expenses
incurred for commuting from home to the office and reimburse them for official travel expenses. The Flexi Benefit Plan (FBP) allows employers to include fuel-related expenses within the salary structure.
The following are the conditions for availing tax exemption on fuel:
- For vehicles with a cubic capacity exceeding 1,600, an allowance of INR 2,400 is provided.
- For vehicles with engine cubic capacity below 1,600, an allowance of INR 1,600 is allotted.
- If the vehicle used is a bike/another two-wheeler vehicle, an allowance of INR 900 is provided.
- Fuel Bills:
Employees need to submit the relevant bills to claim the cost of petrol or diesel. Typically, fuel reimbursements are limited to INR 2,400. However, some businesses fully waive fuel costs if the vehicles are solely used for business purposes.
- Employer’s Vehicle (Car):
In certain circumstances, firms provide workers with a company vehicle they may use for work. If the company’s vehicle is used for business and personal purposes, the expenditure is divided between the employer and the employee. For instance, if the employee has a fuel bill of INR 5,000 and INR 2,500 is the allowance provided, the rest of the amount, which is INR 2,500, is taxable.
- Telephone and Internet Bills
Post-pandemic, telephone and WiFi bills have become common, with most of the workforce working from home. Companies can reimburse mobile bills and internet services as part of the Flexible Benefits Plan within the employee’s salary. The employer will define the limit on telephone bills as per the CTC of the employees.
A company’s benefits program is crucial to employee engagement and retention. According to a MetLife study in 2022, 73% of employees feel benefits programs are important for employee satisfaction. Companies must understand that managing internal benefits programs efficiently is pivotal for employee engagement. Using a biometric attendance and payroll management system can simplify the entire benefits enrollment process for your staff and human resource management.
Wrapping Up
Every employee is unique, and so are their requirements. Offering employees a Flexible Benefits Plan only strengthens interpersonal relationships between employees and employers.
HR professionals must perform multiple duties to implement an FBP successfully in the organisation. From compliance to managing benefits, employee benefits administration includes several steps that require precision and paperwork. You can leverage sumHR, an automated time and attendance payroll system, for offering and managing Flexible Benefits Plans. Reckoned as one of the best attendance and payroll software in India, sumHR lets you develop insights and make informed decisions on a comprehensive range of benefits and perks.
FAQs
- How is gross salary different from net salary?
Gross salary includes income tax, retirement benefits, and net salary. Net salary, on the other hand, refers to the amount of take-home pay. Gross salary is computed by deducting retiral benefits, including PF, from CTC. Net salary is the in-hand amount after all deductions.
In simple terms, Net Salary = Gross Salary – {PPF (Public Provident Fund) + Income Tax + Professional Taxes}
- What are NPS Tiers 1 and 2?
The National Pension Scheme (NPS) offers two types of accounts – Tier 1 and Tier 2. Tier 1 is the principal NPS account for building a retirement corpus, while Tier 2 is a voluntary savings account offering greater flexibility regarding deposits and withdrawals.
U/s 80CCD (1) of the IT Act, Tier 1 investors can avail of a tax exemption for an additional investment of up to INR 50,000. However, there are no tax benefits for Tier 2 accounts.
- Can ESOP be considered a component of FBP?
ESOP refers to employee stock ownership plans. ESOP is a type of employee benefit plan that allows workers to have an ownership interest in the company in the form of shares of stock. It is a powerful tool to encourage employees to serve the company with full dedication and commitment. It helps convert their hard work into financial rewards. ESOP is taxable since it is a capital asset, and selling such shares would attract capital gain tax.
