HR Services1

HR Services1

Sunday, 28 April 2013

Frequently asked questions on Payment of Bonus Act, 1965, in India



Payment of Bonus Act, 1965


As per this act, employer, employing 20 or more employees at any day of financial year is bound to pay bonus provided wages of employee should be below or equal to Rs 21,000/- per month. Every employee should get minimum of 8.33% of wages, capped at Rs 7,000/-, even if there is loss and maximum of 20% of wages, capped at Rs 7,000/-, in an accounting year. Download Payment of Bonus Act 1965.

Q  : Who is eligible for Bonus?


Every employee whether on probation, part time, contractual, permanent, supervisor or manager whose wage is less than or equal to Rs 21,000/- and has completed 30 days in an accounting year is eligible for bonus. Apprentice under Apprentice act are not eligible.


Q: On which salary components Bonus is calculated?


Bonus is calculated on Basic and DA.

Q :  Do a start up organization need to pay bonus?


In the first five accounting year following the accounting year in which the employer sells the goods produced or manufactured by him or renders services, as the case may be, from such establishment, bonus shall be payable only in respect of the accounting year in which the employer derives profit from such establishment and such bonus shall be calculated in accordance with the provisions of this act in relation to that year but the concept of set off and set on will not apply.

Q : When should a new unit be considered as separate unit for the purpose of taking Bonus exemption for new establishment.


As per Supreme Court judgement, any unit where Profit and Loss account and Balance sheet are maintained separately should be considered as separate establishment.

Q : What is the concept of set on and set off.


(1) Where for any accounting year, the allocable surplus exceeds the amount of maximum bonus payable to the employees in the establishment, then, the excess shall, subject to a limit of 20% of the total salary or wage of the employees employed in the establishment in that accounting year, be carried forward for being set on in the succeeding accounting year and so on up to and inclusive of the fourth accounting year to be utilized for the purpose of payment of bonus.

(2) Where for any accounting year, there is no available surplus or the allocable surplus in respect of that year falls short of the amount of minimum bonus payable to the employees in the establishment, and there is no amount of sufficient amount carried forward and set on which could be utilized for the purpose of payment of the minimum bonus, then, such minimum amount or the deficiency, as the case may be, shall be carried forward for being set off in the succeeding accounting year and so on up to and inclusive of the fourth accounting year.

Where in any accounting year any amount has been carried forward and set on or set off under this section, then, in calculating bonus for the succeeding accounting year, the amount of set on or set off carried forward from the earliest accounting year shall first be taken into account.


Example:

In the Example, the total amount of bonus equal to 8.33 per cent of the annual salary or wage payable to all the employees is assumed to be Rs. 1,04,167. Accordingly, the maximum bonus to which all the employees are entitled to the paid (twenty per cent of the annual salary or wage of all the employees) would be Rs. 2,50,000.


Year
Amount equal to sixty per cent, or sixty seven per cent, as the case may be, or available surplus allocable as bonus
Amount payable as bonus
Set on or set off of the year carried forward
Total set on or set off Carried forward
(1)
(2)
(3)
(4)
(5)

Rs.
Rs.
Rs.
Rs.  of       (year )
1.
1,04,167
1.04,167**
Nil
NIl
2.
6.35,000
2,50,000*
Set on 2,50,000*
Set  on           
2,50,000*       (2)
3.
2,20,000
2,50,000*
(inclusive of 30,000 from year –2)
Nil
Set  on           (2)
2,20,000
4.
3,75,000
2,50,000*
Set on 1,25,000*
Set  on          
2,20,000         (2)
1,25,000         (4)
5.
1,40,000
2,50,000*
(inclusive of 1,10,000 from year-2)
Nil
Set  on            (2)
1,10,000
1,25,000         (4)
6.
3,10,000
2,50,000*
Set on 60,000
Set on
Nil+                 (2)
1,25,00           (4)
  60,000          (6)
7.
1,00,000
2,50,000*
(inclusive of 1,25,000 from year–4 and 25,000 from year-6)
Nil
Set on
35,000            (6)
8.
Nil (due to loss)
1,04,167**
(inclusive of 35,000 from year -6)
Set off 69,167
Set off
69,167            (8)
9.
10,000
1,04,167**
Set off 94,167
Set off
69,167            (8)
94,167            (9)
10.
2,15,000
1,04,167**
(after setting of 69,167 from year-8 and 41,666 from year-9)
Nil
Set off
52,501            (9)
Notes-
* Maximum.
+ The balance of Rs. 1,10,000 set on from year-2 lapses.
** Minimum


Q : What is the time limit to pay bonus?


Bonus should be paid within 8 months from end of financial year.

Q : Can Bonus be paid on monthly basis?


Many company follow the practise of paying bonus on monthly basis, some pay minimum 8.33% of Rs 7.000 i.e Rs 583/- or some 20% of Rs 7,000/- i.e Rs 1,400/- per month.

They do it for achieving following purpose:

  • In hand salary of employee will increase as we are paying statutory bonus up front on monthly basis.
  • Company liability of bonus payment is taken care of.
Now the question is whether this is a right practise or not? If you go out to find out answer of this question you will get two opinions as follows:

  1. Yes, we can do this as there is no mention in the act that we can not pay it on monthly basis.
  2. No, we can not do this. How can company calculate percentage of bonus to be paid in the starting of financial year? Also when you pay any money on monthly basis it becomes part of your salary which means statutory bonus is yet to be paid. ESI will also be deducted on such payments.
If you ask me, I would not recommend to pay bonus on monthly basis as it can create problem in future and employer pay need to pay statutory bonus again.

Q : What are the circumstances when an employee is not eligible for bonus?


An employee shall be disqualified from receiving bonus under this Act, if he is dismissed from service for -- 
(a) fraud; or
(b) riotous or violent behaviour while on the premises of the establishment; or
(c) theft, misappropriation or sabotage of any property of the establishment.


Q : Which institutions are exempted from payment of bonus?


Hospitals, Social welfare institutions, Chambers of the Commerce , Indian Red Cross society or other institutions of a like nature, universities and educational institutions. 

Q: How working days of an employee calculated for computing bonus?


Computation of number of working days.—An employee shall be deemed to have worked in an establishment in any accounting year also on the days on which-- 

(a) he has been laid off under an agreement;
(b) he has been on leave with salary or wage;
(c) he has been absent due to temporary disablement caused by accident arising out of and in the course of his employment; and 
(d) the employee has been on maternity leave with salary or wage, during the accounting year.

Q : Can interim bonus paid to employee be adjusted against statutory bonus payout?


When:

(a)    an employer has paid any puja bonus or other customary bonus to an employee; or
(b) an employer has paid a part of the bonus payable under this Act to an employee before the date on which such bonus becomes payable.

then, the employer shall  be entitled to deduct the amount of bonus so paid from the amount of bonus payable by him to the employee under this Act in respect of that accounting year and the employee shall be entitled to receive only the balance.

Q: Can an organization pay different percentage of bonus to different set of employees?


No, bonus percentage should be same for every employee who is eligible under the act. No discrimination.

Request you to post you queries on HR SUCCESS TALK Forum regarding Payment of Bonus Act, 1965. 
You can also join us on Facebook. Our face book page is HR SUCCESS TALK face book page.

If you are really serious about learning HR and want to grow then visit our web page LEARN HR THROUGH PRACTICAL IMPLEMENTATION

Friday, 26 April 2013

Useful websites on HR-Human Resource Management


Web is one the source of information for all kinds of content. Same is true for HR related information. I have consolidated list of some of the websites which are providing information on HR related things and forums where you can discuss your queries. Hope it will be useful for you.

Please dont forget to visit HR SUCCESS Forum.



































http://www.shrm.org


If you are really serious about learning HR and want to grow then visit our web page LEARN HR THROUGH PRACTICAL IMPLEMENTATION

Saturday, 20 April 2013

Insights of EDLI-Employee's Deposit Linked Insurance Scheme


















What is EDLI?


EDLI means “Employees’ Deposit Linked Insurance” which is a part of Provident Fund scheme and provides a lump sum payment to the insured person’s nominated beneficiary in the event of death due to natural cause, accident or illness.

Every employer pays certain amount to PF for insurance of its employees which is as follows:

EDLI Account              :  A/c No. 21 :  0.5% of Basic capped at Rs 6500/-
EDLI Admin Account   : A/c No. 22  :  0.01% of Basic capped at Rs 6500/- 

For more information read post PF Fundamentals everyone should know.

Above contribution is other than 12% of Basic contributed by employer and there is no contribution which is made by employee in this scheme. Every employee who is member of PF gets covered under this scheme and his nominated beneficiary get lump sum amount in case of employee’s death. EDLI cover applies across globe and 24 hours which means employee’s family will get claim even if death is not during working hours.

Calculation behind deciding amount of claim to deceased family


OLD METHOD


Before 08th January 2011, following method was used to decide claim amount. Let’s call it “Old Method”

“An amount, equal to the average balance in the account of deceased during preceding 12 months or during the period of his employment whichever is less, except where the average balance exceeds Rs 50,000/-, the amount payable shall be Rs 50,000/- plus 40% of the amount in excess of Rs 50,000/-subject to maximum of Rs 1,00,000/-“

Example : An employee, ABC, joined an organization on 01st August 2010 and died on 20th February 2012. His basic salary at the time of joining was Rs 6000/- and has been increased to Rs 7000/- wef 01st April 2011. His average PF balance in last 12 preceding months is Rs 1,20,000/-

As the average of PF balance in last 12 preceding months is more than Rs 50,000/-.

Rs 50,000 + 40% of Rs 50000/- (As max limit is 1,00,000) = Rs 50,000 + Rs 20,000/- = Rs 70,000

Amount paid to nominee will be Rs 70,000


NEW METHOD


On 08th January 2011, Central Government has amended the method of calculation of benefit under EDLI scheme where a new method was introduced to calculate benefit. Final benefit to nominee will be whichever is maximum i.e. benefit as per old or new calculation method.  Idea was to give maximum benefit to deceased nominee. 

Also limit of maximum benefit payout has been increase to Rs 1,30,000/-. Click here to download the notification.

Calculation process as per NEW METHOD is as below:

“The average monthly wages drawn (subject to maximum of Rs 6500/-) during the 12 months preceding death of employee should be multiplied by 20 times”

Example : :Lets take the same example above and find out benefit to employee under new calculation method.  An employee, ABC, joined an organization on 01st August 2010 and died on 20th February 2012. His basic salary at the time of joining was Rs 6000/- and has been increased to Rs 7000/- wef 01st April 2011. His average PF balance in last 12 preceding months is Rs 1,20,000/-

Average salary of last 12 months : (6000 x 2 + 6500 x 10) /12 = 6416

Explanation : In Feb and Mar 11 his basic was 6000 and wef April 11 is basic was 8000 (we will cap it at 6500)

Multiply average with 20 times : 6416 x 20 = 1,28,320/-

As per new method benefit is  :  Rs 1,28,320/-
As per old method benefit is :  Rs 70,000/-


Higher in both methods is Rs 1,28,320/- hence this will be paid as lump sum benefit to nominee of deceased. 

EDLI benefit through insurance company


There is no restriction to employer to contribute in EDLI through RPFC provided employer has taken other insurance policy to give benefit to nominee of employee in case of employee’s death. Benefit through insurance policy should be better than benefits provided by RPFC in EDLI. Sum insured of insurance policy can not be less than maximum capping provided by EDLI i.e. 1,30,000/- as on date. In case EDLI make changes in maximum benefit capping and increase it then employer also need to increase sum insured in insurance policy (if existing sum insured become less due to the changes in EDLI ruling). 

There are many insurance companies which provide such type of insurance policy to corporate for its employees eg LIC, Max insurance etc.

There are some benefits associated with taking insurance policy in place of EDLI. Some of them are listed below.


  • Premium paid to insurance company is lower as compared to contribution paid to RPFC for EDLI. Hence it is direct cost saving for the company.
  • Nominee of employee gets fixed sum insured irrespective of number of working days and contribution in PF or EDLI.
  • Processing of claim is faster as compared to EDLI. Formalities are also less.
  • Claim processing is hassle free.
  • Premium paid by employer is treated as normal business expense for the purpose of income tax.
  • Also, employer has flexibility to choose other benefits for employees in same insurance policy like double sum insured in case of accidental death etc, with little increase in premium.


Process of taking EDLI from Insurance company

Following is flow of activities which you need to do while opting for EDLI exemption:
  • Find an insurance company which gives policy on basis of which you can file application in RPFC for EDLI exemption.
  • Many insurance companies, especially private player, will allocate you a relationship manager, who will guide and help you to file your application to RPFC. 
  • Employer need to intimate employees about shift from EDLI to private insurance company along with benefits of doing so.
  • Apply to RPFC along with required documentation for exemption from EDLI. You need to attach copy of insurance policy you have taken.
  • You can stop giving EDLI contribution i.e 0.5% of Basic caped at 6500/-, to RPFC from the month you file the application to RPFC but you still need to contribute EDLI admin charges i.e. 0.01% of Basic, capped at 6500/-.
  • You need to fill and submit Form 7IF on monthly basis and submit to RPFC.  Click here to download the format.

Please add any other information related to EDLI. Also you can visit HR SUCCESS Forum to post your queries and get answers.


If you are really serious about learning HR and want to grow then visit our web page LEARN HR THROUGH PRACTICAL IMPLEMENTATION




Sunday, 14 April 2013

FAQ related to Leave Travel Assistance



I have received many queries through comment, on my email, facebook page of HR SUCCESS Forum and HR SUCCESS Forum after my last post on Leave Travel Allowance i.e. How to design Leave Travel Assistance- LTA policy of your company? Hence, I thought to compose all the queries in a new post and post it, so that, all of you can go through it and get benefited. Hope you will like it.

FAQ 1: As we know that LTA tax exemption can be claimed two times in block of four years. Does it mean that I cannot claim LTA every year?


You can claim LTA every year i.e. 4 times in block of 4 years. Current block year is 2010-2013. But only two LTA claims will be non taxable. Rest both will be taxable.

FAQ 2: Is there any limit of LTA tax exemption?


No, there is no limit set by Income Tax. Employer can give any amount as LTA and employee can claim the same. But there are some rules which should be kept in mind like bills submission, shortest path of journey etc.

Company should have a policy on eligibility of LTA for an employee. Generally it is one Basic salary or 10% of CTC depends from company to company.

FAQ 3: I have not claimed LTA in first year. Can I claim LTA of both years in next year?


Yes, if you are eligible for Rs 15000 per annum LTA and not able to claim it in first year then you can claim Rs 30,000/- in second year and can get tax exemption on total amount provided you have actually made that much expense.

FAQ 4 : I am handling LTA claim processing in my company. How do I ensure that an employee has not claimed LTA more than two times when he joins in last calendar year of current LTA block and claiming LTA. Eg. One of employee joined in 2013 and current LTA block year is 2010-2013. Now he claims LTA as per eligibility. How do I know that he has not claimed it in 2010, 11 and 12 in his previous employments?


You can simply demand self declaration from employee that he has not claimed LTA more than twice in current LTA block including his previous employment and keep it in your record for future reference.

FAQ 5 : I have claimed LTA once in current block year 2010-2013 and now cannot claim my second LTA for tax exemption due to some reason. Can I claim it in next LTA block year i.e. 2014-2017 and still get tax exemption?


Yes, you can still claim the second LTA of current block year i.e. 2010-2013 in next LTA block year and get tax exemption but you need to ensure that you claim in the first calendar year of next block year i.e. 2014.

Also you are eligible for two times LTA tax exemption in block year 2014-2017.

FAQ 6: Do an employer need to collect proof of travel from an employee as proof of travel?


In a judgement, in case of Larsen and Toubro, Supreme court has mentioned that employer can not be held responsible for collecting bills related to travel made by employee while claiming LTA which means now employee is directly responsible for same and income tax has authority to demand such proofs from employee during audit.
Hence employees need to keep copies of such expenses.


FAQ 7 : I did not claimed my LTA in current block year for all 4 years. My LTA eligibility is Rs 15000 per annum i.e. Rs 60,000/- not claimed yet. Can I claim the whole amount in first calendar year of subsequent LTA block year i.e. 2014-2017 and take tax exemption on it?


Yes, you can do so. From income tax exemption perspective there is no restriction on claiming Rs 60,000/- in 2014 provided you adhere to LTA claim rules. Actually, you need to also see your company policy and what does it states in such cases. Both Income Tax Act and company policy should be followed.

FAQ 8 : I have not claimed LTA for 3 years in current LTA block years. Can I claim amount of all four years in last calendar year i.e. 2013 and get tax exemption after producing necessary bills?


Yes. Same logic as in above FAQ.

FAQ 9 : Can I claim LTA for foreign trips and take tax exemption?


No, Tax exemption is only for travel in India. Employee can still claim LTA as per company policy but tax exemption can not be granted.

FAQ 10: What if, I have LTA eligibility of Rs 50000 but my travel expense is only Rs 20000/-?


You can claim Rs 50,000/-. For Rs 20,000/-, you will get tax exemption and rest Rs 30,000/- will be paid by company after deducting tax.

FAQ 11: Can I and my wife claim LTA?


You can not claim LTA for same journey together but can claim for different and take tax exemption.

FAQ 12: Can I claim both my LTA exemption in a year for two different travels?


No, You can not claim twice in a year. Only one claim a year is allowed.



You can write your queries in HR SUCCESS Forum. Click here to ask queries related to LTA on HR Forum.

If you are really serious about learning HR and want to grow then visit our web page LEARN HR THROUGH PRACTICAL IMPLEMENTATION


Sunday, 7 April 2013

How to design Leave Travel Assistance- LTA policy of your company?




One of the important component while designing a compensation policy is LTA i.e. Leave Travel Assistance. This is a tax free component (subject to some terms and conditions). Check out Must to know about designing CTC-Cost to Company of an employee.


What is LTA (Leave Travel Assistance)?


Leave travel assistance (LTA) is generally paid as a part of the remuneration of employees. With some proper planning, an employee can save some tax through this mode.

The LTA amount is received from the employer towards a journey within India. LTA is eligible for deduction under the Income Tax Act subject to compliance with specified conditions. Section 10 of the Income Tax Act specifies that in the case of an individual, the amount of any travel concession or assistance received by him is exempt.

What is the current block of calendar years?


The current block is calendar years (January to December) 2006 to 2009. Current block is calendar years 2010-2013 and next block is calendar years of 2014-2017. Where such travel concession or assistance is not availed of by the individual during any such block of four calendar years, it may be carried forward. Such amount of travel concession or assistance can be availed of by the individual during the first calendar year of the immediately succeeding block of four calendar years, and is eligible for exemption.
  1. 1986-1989
  2. 1990-1993
  3. 1994-1997
  4. 1998-2001
  5. 2002-2005
  6. 2006-2009
  7. 2010-2013
  8. 2014-2017


For which expenses I can claim tax benefit?


If you are thinking that you will be able to claim reimbursement for your complete travel expense then you are wrong. LTA can be reimbursed only for actual fare. Tax benefit is also for actual fare only. Hotel, food, sight seeing, local conveyance etc are not allowed. Also note that you will get tax exemption on lowest of LTA paid by employer and bill submitted for travel during leave. For example if my LTA eligibility is Rs 10000/- and employee spends Rs 5000 in travel and submits bills of same then only Rs 5000/- will be non taxable. Rest Rs 5000/- will be taxable income.




What is the definition of family for LTA claim?


For the purposes of this exemption, 'family' means the spouse and children of the individual, and parents, brothers and sisters who are mainly dependent on the individual.

What are the things, I need to keep in mind while selecting mode of travel?


In case the journey is by air, an amount not exceeding the economy fare of the national carrier by the shortest route to the place of destination is taken. In case the place of origin of journey and destination are connected by rail, and the journey is by any other mode of transport other than by air, an amount not exceeding the air conditioned first class rail fare by the shortest route to the place of destination is taken. Where the place of origin of journey and destination are not connected by rail, the amount eligible for exemption is - where a recognized public transport system exists, an amount not exceeding the first class or deluxe class fare, on such transport, by the shortest route to the destination, and where no recognised public transport system exists, an amount equivalent to the air conditioned first class rail fare, for the distance of the journey, by the shortest route.

The exemption is available for a maximum of two children of an individual. The journey should be in India only. The exemption is available for the farthest place by shortest route when a circular journey is undertaken.



LEAVE TRAVEL ASSISTANCE POLICY


Below is the draft of LTA- Leave Travel Assistance Policy which you can use and customized for your organization.

OBJECTIVE: 


With a view to enable employees to take time off from their work and to enjoy a holiday with their family, the company has provided a policy for reimbursing the travel expenses incurred by the employee along with his/her family members.

SCOPE:


This policy is applicable to eligible employees of the company.

DATE OF COMMENCEMENT:


This policy will come into effect from <<Date of Effective>>.

ELIGIBILITY:


This policy is applicable to permanent employees who have opted for LTA as part of their salary and their families.

The word “family” shall include, (i) spouse and children* (ii) dependent parents and (iii) brothers and sisters who are wholly dependent on the employee.

* Exemption from tax is available to only two children of an individual after 1st October, 98. However, this restriction does not apply in respect of children born before 1st October, 98 and also in respect of multiple births after first child.

Employees can avail the option of combining LTA for two years in a block of four years (for eg-2002-05, 2006-2009,2010-2013,2014-2017 etc.) and take them together. In case the employee avails LTA every year, the LTA would be subjected to tax as per Income Tax rules and regulations.


POLICY                                                                

                                                                         
                                                                         
LTA is applicable when the employee is proceeding on leave to any place in India.

The LTA shall be the amount actually incurred on undertaking such travel subject to the following conditions, namely:


  • Where the journey is performed by air, an amount not exceeding the air economy fare of the national carrier by the shortest route to the place of destination.
  • Where places of origin of journey and destination are connected by rail and the journey is performed by any mode of transport other than by air, an amount not exceeding the air-conditioned first class rail fare by the shortest route to the place of destination.
  • Where the places of origin of journey and destination or part thereof are not connected by rail the amount exemption for shall be: 
  • Where a recognized public transport system exists, an amount not exceeding the 1st class or deluxe class fare, as the case may be, on such transport by the shortest route to the place of destination. 
  • Where no recognized public transport system exists, an amount equivalent to the air-conditioned first class fare, for the distance of the journey by the shortest route, as if the journey has been performed by rail. 



PROCEDURE FOR AVAILING LTA                                            


An employee availing LTA shall submit his/her request for leave to the sanctioning authority at least 15 days in advance. Sanction of leave should not be assumed for LTA.  LTA will be payable only when an employee actually proceeds on leave for a minimum period of 5 working days sanctioned in advance as per the leave rules in force. When the LTA leave commences at the end of the year and ends in the New Year, the LTA will be treated as it is availed for the year in which the leave commenced. The employee shall submit the claim form along with supporting tickets within one week on resuming duty from LTA. In case an employee fails to submit the declaration of travel as required, the LTA claim shall be liable to income tax which will be deducted from salary, and responsibility of satisfying Company/IT authorities rest with the employee concerned, regarding exemption of the same for I T purposes.

In case an employee is not able to avail leave after getting sanction for LTA due to work exigencies, his/her eligible family members will be allowed to take the advantage of  the policy. However, the LTA amount received by the employee will be liable to income tax and the same will be deducted from salary at source.

 LTA payment will be considered as per prevalent IT regulations subject to employee furnishing necessary information/proof.

QUANTUM OF BENEFIT                                                    

                                                                         
As per terms of appointment letter.                                                                    
                                                                         
The company reserves the right to amend/withdraw the policy at anytime without assigning any reason whatsoever. The utility and   interpretation of the policy will be at the sole discretion of the Management            


CLAIM FORMAT

You can approach HR department for LTA claim related formats.

Please download LTA claim related format from post of HR SUCCESS FORUM Post i.e. Download LTA Request and Claim Formats"

Still if you have some more queries visit FAQ of Leave Travel Assistance.

To ask questions regarding LTA- Leave Travel Allowance, post your queries on HR SUCCESS TALK FORUM and let HR professionals help you.


If you are really serious about learning HR and want to grow then visit our web page LEARN HR THROUGH PRACTICAL IMPLEMENTATION






Monday, 1 April 2013

Must to know about designing CTC-Cost to Company of an employee



CTC -Cost to Company


CTC- This term is confusing for many people and my post will help them to understand this better. Definition of Cost to Company differ from company to company and every company has its own structure and salary components which company wants to make part of CTC.  For simple understanding, let me define CTC which includes cost which company incurs on an employee in form of statutory contributions, reimbursement, benefits and sometimes administrative costs other than the Gross salary of the employee.

We will understand all the possible components which company can put in CTC and what is the impact of these components on your in hand and tax liability.




CTC includes various components like:

Fixed Salary: It includes Basic, DA, HRA, Conveyance,  City compensatory Allowance, Special Allowances etc

Variable Salary: It includes a Performance based incentive, Sale based incentive and Profit based bonus.

Reimbursements: It includes reimbursement of conveyance, medical, telephone, Books, and Periodicals, Leaves Travel Allowance.

Contributions: It includes the benefits offered by the company like Provident Fund, ESI, Superannuation, Gratuity, Statutory Bonus, Medical Insurance, Accident Insurance, Leave encashment etc.

Stock Options: Stock Options



Fixed Salary:


As the name implies it is fixed salary of the employee and generally linked with attendance or number of payable days of the employee. This is a major portion of an employee in hand salary. 

Basic :


Generally, it is 40% to 50% of CTC (Cost to Company). Basic salary is fully taxable. Many statutory components such as Provident Fund, Bonus and Gratuity etc and other benefits as per company policy such as Leave Travel Allowance etc. are related to Basic salary hence increase and decrease in Basic may impact CTC of the employee.

DA- Dearness Allowance:


Very few private companies use it as salary component. It is mostly given to government employees. In Private companies, in case DA is missing from salary component then consider Basic as Basic + DA. Dearness Allowance is paid to lower the impact of inflation.

HRA- House Rent Allowance:


HRA is paid to the employee to meet expenses against paying rent of a home. Normally companies keep it 40% to 50% of Basic salary depending upon where you live. In case you stay in metro cities then HRA will be kept 50% of Basic salary and in case you stay in non-metro cities then HRA will be 40% of Basic salary. It is due to the fact that HRA is non-taxable salary components and its taxability depends on where you live.
HRA is exempted from taxable income. 

Least of following is exempted:
  • Actual HRA received
  • 50% of salary (basic + DA) if residing in a metropolitan city, or else 40%
  • The amount by which rent exceeds 1/10th of salary (basic + DA). In simple words (Rent Paid – 10% of Basic)



Example :  Lets take example of an employee with following figures.

Basic salary                   :               10,000/- per month lives in Delhi (Metro city)
HRA                               :               5000 (50% of Basic)
Rent Paid                        :               4000

To calculate his HRA tax exemption, let find out all three criteria:

Actual HRA received                      :               5000
50% of Basic                                   :               5000
Rent paid-10% of Basic                  :               3000 ( 4000 i.e. Rent Paid minus 1000 i.e. 10% of Basic)

(Minimum of above three is Rs 3000/- hence employee will get tax exemption on Rs 3500 per month.)

From above example, it is evident that HR should keep HRA as 50% (40% in case of non-metro) so that employee can get the maximum benefit of HRA for tax exemption.

Let’s understand what I am trying to say here. For example, if HR structures above employee HRA wrongly and keep it Rs 2000/- which means new structure will look like as below:

Basic salary                                         :               10,000/- per month lives in Delhi (Metro city)
HRA                                                   :               2000
Rent Paid                                             :               4000

To calculate his HRA tax exemption, let find out all three criteria:

Actual HRA received                      :               2000
50% of Basic                                   :               5000
Rent paid-10% of Basic                  :               3000 ( 4000-Rent Paid minus 1000-10% of Basic)

Minimum of above three is Rs 2000/- hence employee will get tax exemption on Rs 2000 per month. Hence it is clear that this is not a tax friendly salary structure.


Conveyance Allowance:


Conveyance allowance is paid to an employee against expense to commute between Office to Home. Conveyance allowance is non-taxable up to Rs 1600/- per month. If an employee gets Rs 1800/- per month, as conveyance allowance, then Rs 200 per month will be taxable. Hence normally you will find maximum Rs 1600 under Conveyance allowance head. The employee need not submit any bill for the same.

CCA- City Compensatory Allowance:


This is paid to the employee to compensate the cost of living of a particular city. This is basically a fully taxable component. In standard form, CCA varies from city to city and grade to grade. CCA depends upon company policy.

Example: Below is an example of CCA for Delhi and Jaipur for Grade 1 and 2.



Location
Grade
CCA
Delhi
Grade 1
3000
Delhi
Grade 2
2500
Jaipur
Grade 1
2000
Jaipur
Grade 2
1500


Whenever an employee gets transferred from one location to another CCA also gets changed accordingly. This is also as per company policy.

Special Allowance:


This allowance component is mainly used to adjust rest of the amount which is to be given to an employee. For example, the company wants to give Rs 20000 as gross to an employee and company has allocated Rs 18000 as Basic, HRA, Conveyance allowance and CCA then Rs 2000 will be put under Special allowance. It is fully taxable allowance.

Any other type of allowance:


The company as per company policy can also make some other allowances which can be paid to employees. For example Uniform Washing Allowance, Attendance Allowance etc. All these components are taxable.

Variable Salary:


As the name implies variable salary is not fixed and depends upon the performance of an employee. Nowadays, many companies are keeping this as part of their employee CTC. Earlier, only employees related to sales or profit making department use to have a variable component in their salary but now even employee related support functions like HR, admin, QA, Training etc also have variable components in their salary. Companies are not willing to pay more fixed but open to pay higher variable pay as a variable is related to sale and profitability of organization and company has no problem in paying money to employees if the company is making a profit. This is the reason that fixed salary is decreasing and variable pay percentage is increasing day by day. Even some of the companies make Fixed and Variable pay as 50-50 for sale profile.

Performance Based Incentive:


Performance based incentive, if made part of CTC, normally known as variable pay. Every company has a different policy to give performance-based incentive or variable pay. Some companies may consider your monthly performance rating to give this variable amount. Please refer link How to Build mature performance management system without any automation software?” to know more about performance rating system.

Example: Below is one of the sample sheets which shows variable pay % given to an employee basis his rating.

Rating
Variable pay %
5
150%
4
125%
3
100%
2
70%
1
0%

Some companies link it with major key deliverable of an employee.

Example: In the case of a Recruitment Executive profile, variable pay can be paid if recruitment executive achieves some key deliverable. One of the example as below:

  • If 100% positions are closed within 30 days TAT    :               150% of variable pay
  • If 90% positions are closed within 30 days TAT      :               100% of variable pay
  • If 80% positions are closed within 30 days TAT      :               70% of variable pay and so on


Sale Based Incentive:


Sale based incentive is normally over and above CTC but some company makes it part of CTC. In any case, sales based incentive is given to employees who are in sales profile.

Profit-linked Bonus:


In most of the cases, it is paid annually. Company link “profit-linked bonus” with the profitability of company or project or department. This also works as a retention tool and motivates the employee to ensure higher profitability at the same time.

The design of performance incentive scheme is very important and many factors should be kept in mind while framing one. Policymaker should give due importance to historical data, person’s capability, product and service saleability  market trend etc so that incentive plan framed should not look unrealistic otherwise employee will feel that he will never be able to achieve variable pay which is made part of his CTC and in this case performance based incentive will loose its positives.

Reimbursement:


Reimbursement is paid to an employee against some expenses and employee need to submit bills for the same. Every reimbursement should be seen differently in the context of tax.

Medical Reimbursement:


Medical reimbursement is paid to the employee to meet expenses on medical. It is nontaxable up to 15000 per annum. It is up to the company whether the company wants to pay it monthly, quarterly, half-yearly or annually. Amount paid above 15000 in a year will become taxable. The employee needs to submit medical bills in support of medical expenses. In absence of medical bills, it will become taxable income. An employee can submit bills of medical expenses made on spouse, child and dependent parents.

Many things related to medical reimbursement payout depend upon company policy. For example, whether an employee can start claiming medical reimbursement from the first month or after completion of the certain period of time, whether the employee will get medical reimbursement in case of nonsubmission of medical bill even if it is taxable, whether medical reimbursement is linked with employee attendance by anyway etc.

LTA - Leave Travel Allowance:


Leave Travel Allowance is also known as Leave Travel Concession (LTC) which is paid for travel cost incurred by the employee in travel. Every company has its own rule to decide on the amount of LTA to be given to an employee. A company may prefer to keep it equal to the monthly basic salary of the employee or make it fixed depending upon grade and native place of the employee. There is no, as such, guidelines from the government on LTA amount. It can be any amount which employer wants to keep as LTA.

It is a nontaxable income but there are some rules which should be kept in mind while taking benefit of LTA for tax.

  • The employee needs to take leave especially Privilege leave.
  • Only travel cost will be reimbursed which includes travel cost of spouse, child and depended on parents.
  • The only amount paid against travel cost will be nontaxable. For example, if my LTA eligibility is Rs 10000/- and employee spends Rs 5000 in travel and submits bills of same then only Rs 5000/- will be nontaxable. Rest Rs 5000/- will be taxable income.
  • LTA is exempted for two journeys in a block of four years. The current block is 2014-2017 and next block will be 2018-2021.
  • The journey should be made through the shortest path between two destinations.

Training Reimbursement:


It is provided to the employee for the expense incurred on professional training. It is nontaxable up to Rs 14000/- per annum and employee needs to provide bills of same.

Mobile/ Telephone Reimbursement:


Mobile reimbursement is paid to an employee against expense incurred for use of mobile/telephone for official purpose. The employee needs to submit a bill for same. An employer can fix an amount for such reimbursement. Such amount should be logical and linked with employee's profile

Books and Periodicals:


This is paid to the employee to reimburse expense made on the purchase of Books and periodicals. It is nontaxable if bills are submitted.

Children Education Allowance:


It is exempted from tax up to Rs 100 per month per child for two children.

Children Hostel Allowance:


It is paid to meet expenses for Children hostel allowance. It is exempted from tax up to Rs 300 per month per child for two children.


Food coupons or Meal Pass


It is given to the employee to get a meal during working hours. Rs 50/- per meal is tax-free. Please read my blog post 5 facts regarding Food coupons/meal pass and its tax implications to know more.


Contributions:


Contribution means a contribution made by the employer for employee’s long-term saving schemes or social benefits scheme as per statutory compliance.

Employee Provident Fund:


It is a contribution made by the employer (12% of Basic salary) against EPF. It is statutory obligation on the part of the employer. The employee gets the benefit of PF deduction (12% of basic) at his part under Section 80C of income tax. There are many other facts related to Provident fund. 

To know visit following two posts:


The employer also keeps PF Admin (1.61% of Basic) as part of CTC which employer needs to pay to RPFC other than 12% of Basic salary.

ESIC (Employee State Insurance Corporation)


The employer needs to deposit 4.75% of the gross salary of an employee in case employee’s gross salary is less than 15000. Hence employer keeps it as part of Employee CTC.

1.75% of gross get deducted from employee’s Gross salary which decreases his in hand salary by that amount. There is no tax benefit associated with ESI contribution or deduction.


Gratuity:


Gratuity is paid to the employee once employee completes 5 years of continuous services or in the case of employee death irrespective of the completion of 5 years. It is the statutory liability of employer hence many employers keep it in employee CTC. It is one of the most debated topics whether the employer should keep gratuity amount as part of CTC or not? You can refer my post which can help you get many other questions related to gratuity i.e. 13 facts one should know about Gratuity!!

The employee gets 15 days salary for a number of years completed as a gratuity. Hence gratuity taken in CTC is @ 4.81% of Basic.


Gratuity paid to an employee is exempted from tax. Least of following is exempted.

  • Actual gratuity amount paid
  • 15 days salary for each year of completion or 4.81% of Basic multiplied with a number of months completed.
  • Rs 10 Lacs


Statutory Bonus:


It is a statutory bonus which is paid to employees whose basic is less than or equal to Rs 21,000/-. Minimum bonus payable is 8.33% of basic capped at Rs 7,000/- or minimum wage of the state whichever is maximum and maximum 20% of Basic capped at Rs 7,000/ or minimum wage of the state whichever is higher-. Employer keeps it as part of CTC.

You can also refer following blogs to know more about Bonus Act in India.

Group Medical Insurance and Accident Insurance:


The employer takes medical and accidental insurance for employee welfare hence employer keep premium paid against such insurances in employee CTC. Learn How to reduce medical insurance premium cost by controlling claim ratio.

Stock Options:


Nowadays, many companies provide stock options to employees. This option is mainly given to top management employees. This helps the company to keep their employee engaged towards company growth. It is beneficial for an employee in case company is growing. Their stock value can increase in that case.

Conclusion:


If you know about these components and how these components will impact you as a person or your employees as HR then you will be able to make your compensation package in such a way that suits to employee’s need.

For example, 

  • If an employee whose CTC is less and do not fall in tax range then HR can structure the CTC in such a way that gives more in hand to the employee.
  • If an employee whose CTC is higher and falls under tax range then HR need to prepare best possible tax friendly structure so that employee can get maximum in hand at end of financial year.
Current Tax slabs are as below:

India Income tax slabs 2014-2015 for General tax payers and Women

Income tax Slab (In Rs) in a FY
Tax
0 to 2,50,000/-
Zero
2,50,001/- to 5,00,000/-
10%
5,00,001 to 10,00,000/-
20%
Above 10,00,000/-
30%

India Income tax slabs 2014-2015 for Senior Citizen ( 60 to 79 years) tax payers and Women

Income tax Slab (In Rs) in a FY
Tax
0 to 3,00,000/-
Zero
3,00,001/- to 5,00,000/-
10%
5,00,001 to 10,00,000/-
20%
Above 10,00,000/-
30%

India Income tax slabs 2014-2015 for Very Senior Citizen (Aged 80 and above) tax payers and Women

Income tax Slab (In Rs) in a FY
Tax
0 to 5,00,000/-
Zero
5,00,001 to 10,00,000/-
20%
Above 10,00,000/-
30%

If you are really serious about learning HR and want to grow then visit our web page LEARN HR THROUGH PRACTICAL IMPLEMENTATION

In case you have any queries please share your query on HR SUCCESS FORUM

Also, you can join us on Facebook.