Budget 2018 – Time for Employers to step in for Employees

Salaried employees have been historically paying the highest amount of individual income tax in India - the well known fact was explicitly admitted by the Honorable Finance Minister during his Budget speech where he also emphasized on the need to provide relief to the salaried tax payers.

Extracting data from the Budget speech reveals some astonishing numbers (for AY 2016-17):

This means that the average tax paid by a salaried employee is three times that paid by a non-salaried individual. However, unlike a professional / business individual tax payer, a salaried employee does not get the benefit to pay tax on the Net Profits/ Income earned after reducing all the expenses which are incurred for earning the salary income.

Relief sought to be provided by the Finance minister

In order to improve the horizontal equity of the tax system and to provide relief to the salaried taxpayers, the FM has introduced a standard deduction of Rs 40,000. This amount will be a flat deduction from the Gross Salary income of all salaried taxpayers. This is indeed a welcome step as this will provide huge relief to:

* Pensioners, whose Gross pension income is taxed as salary, without being eligible for any other deductions which a normal employee gets in respect of salary income. Now they will be able to take advantage of the standard deduction of Rs 40,000 from their pension income.

* all other employees will get a flat deduction of Rs 40,000 from their Gross income from Salary.

FM has also proposed to extend the 12% government contribution of Provident Fund to all new employees to all sectors.

While, this comes as a welcome move for salaried class, the FM has also proposed other benefits for Senior citizens and other individual tax payers:

* the government has further increased the limit of deduction on account of health premium under section 80D from Rs 30,000 to Rs 50,000.   

* Further, deduction under section 80DDB in respect of medical treatment for certain specified diseases has been raised from current Rs 60,000 for senior citizens and Rs 80,000 for very senior citizens to Rs 100,000 for both.

* To increase the disposable income in the hands of senior citizens, deduction allowed under section 80TTB in respect of the interest income is increased from Rs 10,000 to Rs 50,000.

* To promote parity in National Pension Scheme the 40% exemption currently available to salaried employees has been extended to self-employed section as well.

Disparity in intention and actions of the FM

Overall the government’s stated objective to provide relief to salaried class and senior citizens is applauded. However, there is a disparity between the governments’ intention stated above and the actual budget proposals for the salaried employees.

While on the one hand, the FM has sought to provided relief to salaried employees by introducing standard deduction of Rs 40,000, he seeks to withdraw the widely penetrated benefit of Transport allowance (Rs 19,200 p.a) and Medical Reimbursements (Rs 15,000 p.a), thereby reducing the net benefit of standard deduction to a mere Rs 5,800.

While the Government has been hinting at doing away with cesses, it seems a distant dream. In Budget, the FM declared a 1% increase in “Health and Education Cess” making it 4% from the earlier 3%.

Net Impact on Salaried taxpayers

This means that majority of the taxpayers who are in the higher tax bracket will actually land up paying a higher tax as depicted below:

Time for employers to step in for the employees

Though there are many tax benefits available to a salaried employee under the Income tax law, employers are reluctant to offer most of them due to various reasons such as administrative in-convenience, excessive documentation, lack of understanding of tax laws, etc. So majority of the employers prefer to play it safe and offer only the common pervasive benefits offered by other employers.

Transport allowance and Medical reimbursement were the most common tax benefits which employers have been including in the compensation structure of their employees. With these benefits taken away and considering the increased tax burden on employees, its time that employers introduce tax friendly components in the compensation structure to attract and retain employees. The following table provides an illustrative list of various available tax benefits:

* Eligibility amounts are for illustrative purposes only

As depicted in the table above, employers can assist employees in increasing their take home salary by a substantial amount.

Moreover, with the help of digitization, administering all the above benefits becomes much more simpler and economical. Government is also constantly encouraging digital means of transacting, thereby reducing the paperwork and documentation involved.

Digitisation thrust by the Government

The government has clearly indicated its intention to introduce digital means of scrutiny assessment thereby reducing the need of physical paperwork and compliance.

FM, in his speech categorically mentioned the introduction of e-assessment across the country which would transform the old age assessment procedure of the income tax department and the manner in which they interact with the tax payers and other stakeholders.

FM thus proposed to notify a New scheme for assessment in electronic mode which will eliminate person to person contact leading to greater efficiency and transparency. 

Way forward

With digitization taking over the conventional & cumbersome task of administering various tax benefits, it is possible for Employers to offer various tax benefits as a part of employee’s salary without the need to worry about administrative difficulties or compliance requirements.

Employers can also consider outsourcing the compensation benefits administration, as many companies are providing digital means of administering compensation related tax benefits to employees and ensuring that the regulations around them are strictly complied with and the requisite documentation is well maintained in digital form.

Zeta, a home grown startup is a Pioneer in providing digital Compensation Benefits through its “Optima” suite of products.  Zeta ensures 100% compliance to the Income-tax laws and provides the much needed flexibility and customization options to an employer while structuring their employees’ salary structures.