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Unit 10: Tax Consideration in Specific Managerial Decisions

10.4 Tax Planning Regarding Remuneration Planning Notes

Remuneration planning refers to minimisation of the employees’ tax liability. Restructuring
is done for present remuneration plan by keeping in view present and future tax liability of
employees. Remuneration is defined as the reward received from one’s employment and the

term covers all forms of salary and wages, including tips, allowances, benefits (such as company
cars, medical plans and pension provisions), bonuses, cash and non-cash awards and incentives.
It also includes the private use of company assets, although there are exemptions.
In terms of attracting and retaining the best people or rewarding them when they leave or retire, a

tax efficient remuneration structure can be crucial in a competitive market. Whether considering
termination payments (“Golden Handshakes”) or inducement payments (“Golden Hellos”) the
tax issues are often central to the Decision-making process and our team has the knowledge and
experience to guide you through all the issues.

10.4.1 Tax Planning for Salary Package

All income received as salary under employer-employee relationship is taxed under this head. If
the income exceeds the minimum exemption limit the employers must withhold tax compulsorily
as Tax Deducted at Source (TDS), and provide Form 16 to their employees, which show the
details of tax deductions and net paid income. The components of salary are divided into DA,
HRA, Conveyance Allowance, variable incentives etc. In order to get maximum tax benefi ts, the
following provisions of income tax which are benefi cial to employee should be included in the
salary CTC.

HRA

Calculation of HRA as shown in table 10.3. Under sections 10(13A) of Income Tax Act, 1961

allowance is defined as an amount received by an employee paid by his/ her employer as a rent
of his/her house. There is no exemption in tax if he is living in his own house or house for which
he is not paying rent.

Table 10.3: Computation of Taxable HRA
Particulars Amt (`) Amt (`)
Amount Received during the Year HRA XXX
Exemption under section 10 (13A) Xxx XXX
Less: Least of the following is exempt : Xxx
1. Actual Amount of House Rent Allowance
Xxx
2. 50% (for Chennai, Mumbai, Kolkata and Delhi) or 40% (for Other Place)
of Salary.
3. Rent paid for the accommodation over 10% of the salary*.
Taxable House Rent Allowance XXX

Source: http://www.taxpeople.in/Tax_Planning_For_Salary-%20CTC.html

Salary = Basic + DA (forming part of benefits) + Commission on sale on fi xed rate.
Tax Point for HRA

The maximum benefit of HRA can be derived by having all the above 3 components be of more
or less the same amount. Taxless Allowances are as follows:
1. Research Allowance: Any allowance granted for encouraging the academic researches and
other professional pursuits.

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