This article has been contributed by Mr. Sayeed Anjum, Co-founder and CTO, greytHR.
Believe it or not, tax planning remains an area where HR strategists could craft a loyal employee-employer relationship. Tax planning could also enable individuals to accumulate additional savings, which in turn could be used to meet various financial goals.
While tax planning is assumed to be a core HR function, new-age CHROs have automated payroll systems that make tax planning look like a thing of the past. Moreover, tax planning is mostly relegated to crafting attractive offer letters for new hires or a plan that employees have to share at the start of a new fiscal year. But, despite the automation, HR heads in India have their hands full. First, when it comes to providing an understanding of new budget announcements, and second, during the investment documentation cycle during the January-March period of a financial year.
Salaried employees, mostly freshers, usually scrutinize their offer letters to understand the salary breakdown, such as house-rent allowances, leave-travel encashment, tax slabs, and other benefits. But knowing a few tax principles helps employees and employers make rational decisions. Understanding the finances and asking appropriate questions is vital to avoiding unpleasant surprises. With that in mind, let us take a quick look at how employees and employers could leverage the many tax strategies.
Budget 2023: Old vs New
National Pension Scheme (NPS)
Smart HR Strategist
Budget 2023: Old vs New
Employees can either opt for an old regime of taxation where investments under various headers can be claimed as a concession. Under the new regime, the overall tax rate is lower but one cannot claim concessions. The 2023 Budget announced recently has increased the tax-free ceiling to INR 7 lakhs. Among the salient features, the rebate under section 87A has been hiked from INR 5 lakh to INR 7 lakh making it tax-free. When it comes to leave encashment, the maximum exemption limit of Rs 25 lakhs is increased from Rs 3 lakhs in the 2023 budget, which has not increased since the introduction of the policy by labour law. The proposal to increase to Rs 25 lakh indicates enormous savings for taxpayers. The government has recognized the fact that the amount of the exemption has become quite unrealistic in terms of tax relief.
While the surcharge has been reduced from 37 percent to 25 percent while the standard deduction has been marginally increased. The tax on employees opting to encash accrued leave has also been revised. To many employees, opting for the old or new policy is a baffling question. However, one must understand the schemes for claiming concessions prior to opting for a regime. While the announcements motivate the salaried class with additional savings, the onus is upon the CHROs and individuals to understand the importance of these concessions and accordingly plan for tax. Sections such as 80C, 80D, and 80EE, provide avenues to plan for finances. Let us take a quick look at each of these.
80C: This section of India's Income Tax Act provides individuals with exemptions from various expenses and investments made during a calendar year. The maximum ceiling of investments allowed under this section is Rs 1.5 lakhs every year. The section allows investments made under headers such as EPF (employee provident fund), PPF (public provident fund), ELSS (equity-linked savings schemes), principal repayment on a housing loan, and other savings schemes such as NABARD bonds, long-term bank fixed deposits, SCSS senior citizens savings schemes, National Savings Certificates (NSC), SSY Sukanya Samriddhi Yojana, etc. Donations made to certain trusts, institutions, and funds are also recognized as an exemption to tax under this section.
80D: This section of the Income Tax Act offers deductions for money spent on health insurance and maintaining the health of your near and dear ones, including spouse, children, and dependent parents. With the rising cost of insurance in a post-Covid world, this is a significant exemption for planning taxes and personal finances.
80EE: The less discussed exemption among the salaried class was introduced for the first time in 2013-14. Under this scheme, individuals owning a single property can claim a concession on the interest part of a housing loan. Section 80EE is capped at a limit of Rs 50,000 every financial year.
National Pension Scheme (NPS)
NPS is a retirement savings scheme with lesser loading and admin charges. This instrument is not fully exempted from tax as of now. But the government has been making amendments to the provisions of the scheme.
Besides these important exemptions, individuals are also exempted from housing rent, leave travel allowances (LTA), the employee contribution to Provident Fund, and a standard deduction to meet conveyance allowance and medical allowance. Some exemptions for the salaried class are also made available under schemes such as a pension, gratuity, donations to political parties, meal coupons, company-leased cars, etc.
For employees, reducing tax outgo could help save money while for HR strategists, schemes to reduce the tax outgo are likely to pass on the savings to their employees. A higher tax outgo reduces disposable income which may impact financial commitments. To those already struggling to make ends meet, paying lesser taxes could provide financial relief. Such savings could be handy during retirement or planning for unforeseen events.
Smart HR Strategist
To HR strategists, the tax calculation is often perceived as an automated process, although it has a significant impact on the employee-employer relationship. A well-designed compensation package can help attract and retain top talent, and taxes play a significant role in determining the take-home pay for employees. Tax policy can make or break an attractive compensation package which in turn increases the likelihood of an employee joining the organization.
Smart HR heads also realize that financial investment is not what a person shops for during a specific time of the year. For instance, an employee could buy medical insurance for his spouse; invest in a house; take a loan; invest in his child's education; have ailing parents, etc. New financial commitments could be made at any time of the year, and the current documentation policy may expose your employee to a higher tax outgo which could be a financial challenge in the short term. Inadequate planning for personal events could also strain an employee's financial health and productivity, thereby impacting the organization.
Organizations educate employees on tax exemptions and policies through internal team meetings and by addressing personalized questions Smarter organizations build self-help dashboards with a summary of the exemptions in simple language. HR tech such as reminders, alerts, and calculators also help educate employees on their personal finances while meeting compliance norms.
Smart organizations realize their relationship with the employee is not limited to an offer letter made on a specific date but a journey of handholding and education. Accurate tax computation is crucial in meeting the financial goals of the employees and their organization.
Understanding and implementing effective tax strategies is crucial for both salaried employees and HR strategists. By adhering to tax laws, people can optimize their tax savings and make the most of their income. One should be well-informed in order to ensure efficient financial management and maximize tax benefits.