Page 237 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes 10.2.1 Tax Implications of Employee Compensation Package to Employer

While deciding the salary packages, its various elements as well as tax provisions which have
implications to the employer must be taken into account. It must be kept in mind that values and
principles of any profession or business should not be sacrificed for the reason of attaining the

goals of reduction in liability of tax of an employee.
In respect of perquisites and compensation, the scope of tax planning is limited as the law gives
the treatment of each and every elements of the salary package. Hence, the provisions made
by the Income Tax for the following deductions from the compensation of employees are as
follows:

1. Commission and bonus
2. Payment of perquisites and allowances/salary
3. Expenditure on remuneration planning
4. Contribution of employer on staff welfare fund
5. Expenditures on entertainment

Therefore, employer has to make ensure that tax must be deducted apart from complying with
the necessity of the above listed provisions. And for this he/she must consider certain aspects:
According to Secs. 15 and 17 of Income Tax Act, 1961, Remuneration is chargeable to tax either
on due basis or on receipt which ever falls before. Here the term remuneration comprises of
commission, basic pay, leave encashment, fee, perquisites etc.

1. Deductions: You can found various types of deductions which are available to the income
earning of individuals in the form of compensation such as tax on employment on paid
basis, standard deduction and entertainment allowance. Entertainment allowance as shown
in fi gure 10.1 is maximum deductible to the least of following three for only government
employees.

Figure 10.1: Treatment of Entertainment Allowance

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Source: http://www.incometaxmanagement.com/Pages/Graphical-ITax/Entertainment-Allowance-Salary.html
2. Allowances: An employer offered the allowances to his/her employees for the personal

benefit as well as for the purpose of assessment of income tax will form the part of the
compensation. Some of the allowances which you found in Section 10(4) of the Income Tax
Act are as follows:

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