Structuring FBPs for tax planning and efficient compensation

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By greytHR
7 minute read ● April 26, 2017
FBPs for tax planning

In a world where just about everything is becoming customizable, it’s no surprise that employers want to offer flexible benefits that can be tailored to meet their employees’ unique personal needs.

In the benefits world, Flexible Benefit Plans (FBPs) are cool while traditional (or fixed) plans are boring. While sexy is what many of us want; there’s nothing wrong with boring, which is often all we need. A well-designed FBP can help provide competitive advantages for plan sponsors in an organization and be highly valued by its employees.

What is an FBP?

FBPs, also called cafeteria plans, are arrangements in which employees tailor their benefits package to their specific needs. Employees can select the benefits they value most and may forgo benefits of lesser importance to them.

Under a flexible arrangement, an employer allocates a specified amount of money to each employee to 'purchase' benefits. Employees can select HRA also as part of their FBP!

This method differs from a traditional benefits programme, in which an employer offers a standard package with few, if any, choices to employees.

Information on the components that can be part of your FBP

We thought of providing you with a few recommendations for structuring efficient compensation and benefits for your employees for tax planning purposes. Remember that employees can choose any of these components as part of their FBP package:

  • House Rent Allowance (HRA)

    HRA is given by an employer to an employee to meet expenses in connection with rent of accommodation, which the employee might have to take for his residential purposes.
    The HRA, thus received, is exempt u/s 10(13A) and Rule 2A to the extent of minimum of the following:

    • Actual HRA received
    • Excess of rent paid for accommodation occupied by him/ her over 10% of salary (Basic + DA)
    • 50% of salary (Basic + DA) where the residential house is located in Mumbai, Chennai, Delhi or Kolkata
    • 40% of salary (Basic + DA) where residential house is located in other cities
  • Leave Travel Allowance (LTA)/ Leave Travel Concession (LTC)

    This is an allowance provided to employees to go on vacation with their families. The LTA or LTC is exempt u/s10(5). This exemption is available only on submission of proof of expenditure on travel.

    Though, there is no capping defined for LTA by the income tax authorities, it is capped for effective administration. The popular limit for LTA is monthly basic. For LTA entitlement, it is essential that employee is on Annual leave during the period of his/ her travel. Preceding or intervening holidays may be included.

    The LTA/LTC allowance is exempt for:

    • Travel to any place in India with approved leave
    • Travel to any place in India after retirement from service

Important notes

-   This exemption is permitted twice in a block of four years. Note that the current block is 2018-2022. If an employee is unable to claim one or both exemptions, he can carry over one exemption to the next year only (which would be the first year of the next block of four years).
-   Family consists of all dependent family members (that is, self, spouse, children, parents and siblings, who’re mainly dependent on the employee).
-   The employee is expected to travel with his/ her family at least on the onward journey. The family cannot claim independent travel if the employee is not accompanying them
-   The LTA exemption is applicable only on the travel fare and not on any boarding or lodging expenses.
  • Exemption of LTA

    1. Where journey is by air: Economy class fare
    2. Where journey is not by air but both places are connected by rail: A/C first-class rail fare
    3. Where journey not by air or rail and both places are not connected by rail:
    4. If recognized mode of transport is available, then first class or deluxe class of such mode of transport
    5. If recognized mode of transport is not available, the amount equal to A/C first-class fare for the distance of the journey by the shortest route (assuming rail travel). Proof of journey e.g. petrol station receipts, toll tickets, private car rental receipts, need to be submitted
  • Meal Voucher/Coupon

    Under rule (3)(7)(iii), meal vouchers up to INR 50 per meal is exempt from income tax. The total allowance/ coupon value may be determined based on actual working hours of the company. Note that this amount should be used only towards food and non-alcoholic beverages to be used during working hours.

  • National Pension Scheme (NPS)

    Under Section 80CCD(2), voluntary deduction from employees’ salary upto 10% of Basic+DA may be contributed by the employer to NPS. This provides 100% tax benefits to the employee.

  • Uniform Allowance

    Uniform allowance is exempt u/s 10(14)(i). This allowance granted to meet the expenditure incurred on the purchase and maintenance of uniform to be worn during the performance of duties of an office or employment of profit.

    Important notes

    • As per a Gujarat High Court ruling, mere dress code for a company is inadequate to avail tax benefit under Uniform Allowance.

    • The uniform is required to be of a standard color and a standard pattern, which makes the employee group of the particular employer easily recognisable, and should be prescribed by the employer and be worn by all employees.

    • A mere prescription of formal shirts and trousers, or dresses, even if of a particular brand, may not suffice to treat the uniform allowance as exempt.

    • The amount exempt shall be least:

    • Amount received

    • Amount actually spend

  • Academic Allowance/ Technical Books Allowance/ Technical certifications

    This allowance is exempt u/s 10(14)(i). This allowance is granted for encouraging academic, research and training pursuits.

  • Children Education Allowance

    This allowance is exempt u/s 10(14)(ii). Exemption is granted for an allowance of INR 100 per month, per child upto a max of two children. Adopted children may also be included. No payment proofs are required. Only an intimation to company of the number of children and their age.

  • Hostel Allowance

    This allowance is exempt u/s 10(14)(ii). Exemption is granted for an allowance of INR 300 per month, per child to meet hostel expenses of upto a max of two children.

  • Transport allowance/ Conveyance allowance

    This allowance is granted to meet expenditure for commuting between place of residence and place of work; the exemption amount is INR 1,600 per month.

    **Note:** Conveyance allowance is usually a direct exemption item.  
  • Mobile phone/ Internet data card

    If office duty requires mobile/ telephone/ Internet connection, an employee can claim 100% exemption against billed amount by producing actual bills. Some employers take declaration from employees, that is, segregation of personal and official calls whereas others are liberal. There may be a monthly cap of INR 2,000 per month, however, it can be different for different bands.

    Important note: Reimbursements can be claimed for postpaid connections only.

  • Helper allowance

    The Helper Allowance is an exemption under section 10(14)(i), which you can use while structuring your employees’ salary. This allowance is granted to meet the expenditure incurred on a helper where such helper is engaged for performance of duties of an office or employment of profit.
    However, this allowance is eligible for employees, who’re designated as director or above in an organization.

  • Car Lease

    Employees using or planning to use four-wheelers for personal and official purposes including regular travel to office from home are recommended to opt for car lease program to save tax. For the company, this may also serve as a retention tool for key employees. An amount towards car program may be set aside from the CTC.

    This starts with a company reaching an agreement with a car leasing company, such as Orix, to lease cars for a specific section of employees, typically managers and above. The lease rental period is of three, four or five-year term. At the end of the term, the car may be purchased by the employee by paying a residual amount or the agency will be directed to sell it in the market at a price on or above the residual amount due.

    The company may reimburse to employee the following against bills with tax exemption:

    • Car lease rental as per specific plan
    • Fuel expenses towards official duty including coming to office
    • Driver expense, if any up to INR 900 pm
    • Maintenance expenses
    • Annual car insurance

    There is no income tax applicable on the above reimbursements. However, there is a perquisite tax to be added to taxable income:

    1. For cars upto 1.6 cc capacity: INR 1600 pm
    2. For cars above 1.6 cc capacity: INR 2400 pm
    3. If driver option is taken, then add a perquisite value of INR 900 pm.

    Note: Four-wheelers for 100% personal use cannot be covered under the car lease program.

Important considerations while implementing FBPs

  • Time to implement

    Implementing an FBP takes time so don’t rush it. Plan on six to 12 months lead time between the start of your project and the new FBP effective date. Simpler FBPs in smaller organizations may be implemented with slightly shorter lead times.
    greytHR, allows you to implement FBPs faster and, if required, only for select employees as a pilot project. Choice of adding unlimited salary components, configuration of salary structures, and automation of payroll inputs into payroll processing makes your life easier.

  • Administration costs

    Keeping track of employees’ choices adds administrative complexity to an FBP program.
    Depending on the degree of choice, you may need to use some sort of HRMS tool to make FBP implementation easier.
    Whether you decide to purchase an HRMS tool through your consultant, third-party administrator, or outsource payroll, it’s going to come with a cost, which typically includes both setup and ongoing maintenance fees.
    What if we say that greytHR comes with affordable monthly or annual pricing plans? With zero infrastructure and upfront investment! And accessibility from anywhere, anytime with near-zero uptime, this certainly reduces the administration costs of implementing your pet FBP projects.

  • Communication

    Increased complexity in payroll due to FBPs requires increased employee communications. The last thing you want to do is spend a lot of money, time and resources to develop a new FBP program and not follow through with a robust supporting communications campaign. Studies have shown that employee satisfaction with their benefits is directly correlated with their understanding of the program.
    greytHR allows you to communicate better and at regular instances with all or selected employees via useful CoreHR features, such as mass mails, mass SMSes and bulletin boards!

  • Employee satisfaction

    If you’re going to implement an FBP program, make sure the changes you make provide meaningful choice that promises to improve program satisfaction for the majority of your employees.
    Many times, plan sponsors spend considerable time and resources only to have a high percentage of employees select FBP options that were the same or similar to the coverage they had before. Therefore, the plan only really satisfied a small percentage of employees, who actually made a change.
    greytHR allows you to gauge your employees’ reactions to newly implemented FBP program via their likes, comments and discussions on such announcements and communication posted on its Social Feeds section.

Closing notes
As witnessed with most of greytHR’s clients, their employees prefer the following salary components to be part of their FBP package:

  • Medical Reimbursement
  • Meal Vouchers
  • LTA
  • Children Education Allowance

FBP project sponsors at your organization who’re considering a move from traditional compensation plans to FBP projects should set realistic expectations and understand that sometimes ‘cool’ comes with a lot of work.

Adopt greytHR, India’s leading HR & Payroll software on the cloud, to implement and make your FBP project(s) a grand success with your employees.

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