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Unit 10: Tax Consideration in Specific Managerial Decisions

10.4.2 Tax Efficient Compensation Package Notes

Provisions relating to tax laws associated with salaries, the exemptions limits on different types
of allowances and reimbursement and rule relating to perk valuation should be known for an
effective planning of tax package.
1. Medical Reimbursement: Tax exemption up to ` 15,000 per year is available for your
medical expenses reimbursed by the employer against production of vouchers or bills for
such payments. Even hospitalisation bills on self and family members are exempt if such
expenses are incurred in a hospital which is under government empanelment or approved
for notified diseases by the Chief Commissioner of Income Tax. Medical Insurance

reimbursement can be taken as a without limit tax-fee perquisite.
2. Leave Travel Assistance: The leave travel concession incurred by employee and his family
members for travelling in India is available as exemption to the extent of actual amount
spent excluding hotel lodging.
3. Transport Allowance: Transport allowance which helps an employee to meet the outlay
related to work place commuting is exempt up to the extent of ` 800 per month.

4. Motor Car: This perk has the capacity to significantly reduce the senior executives’ taxable
salary. The taxable value of a motor car provided by your employer for both personal
and official use is premeditated at ` 600 per month for cars having 16 hp rating and ` 800

per month for car with a higher rating. An additional cost of ` 300 for month is added for
availing driver facilities.

Example: Mohan working as a senior executive with R Ltd is provided with a car on hire
purchase with monthly instalment of ` 8,000. The driver and fuel charges are ` 3,000 and ` 5,000
respectively. An average of ` 1000 is paid on taxes, insurance and maintenance of car. Therefore
his company is spending ` 17, 000 for car but his taxable perk will only be ` 1100 per month.

5. Rent-free Accommodation: The taxable value of Rent free accommodation acting as a
major tool for tax reduction for senior personnel is computed as 10 percent of basic salary,
bonuses, commission, taxable allowances except DA, employer’s contribution to PF and
perks etc. In addition the fair rental value of house in excess of 60 percent if house is in
metropolitan cities and 50 percent in other places is also included.

Example: Ram employee of a company lives in Delhi in a house provided by his employer
for which he incurs expenses worth ` 30,000 per month. Ram’s salary excluding perks is ` 50,000.
The fair rental value of house is ` 30,000. In this case the value of rent free accommodation will
be 10 percent of salary or ` 5,000 per month.
6. House Rent Allowance: The House Rent Allowance (HRA) provided to employees by their
employers is exempt to the extent of the least of the three:

(a) Excess of rent paid over 10 per cent of salary
(b) If the house is provided in metropolitan cities than 50 per cent of salary or 40 per cent
of salary for other place
(c) Actual amount received

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