India is perhaps the only large country in the world with a salary structure that has a multitude of allowances, other than Basic Salary. It was not always this way though. The evolution of the concept of allowances has been a process-driven from both regulatory and tax structures, and also based specific nuances of some industries and business need.
“Traditionally, salary or wages would only have the component of Basic Salary and Dearness Allowance, as most salaried jobs were either in government, armed forces or public sector companies”
Today, most salary structures have components like Basic, Employer contribution to PF, Statutory Bonus, and a bouquet of allowances, which are often flexible with a certain ceiling based on particular labor laws or section(s) of Income Tax act prescribing a limit, either on contribution, or an exemption or rebate that can be derived from the allowances. The usual allowances that we typically see are called House Rent Allowance, Transport Allowance, Special Allowance / Personal Pay, PF, Gratuity, Statutory Bonus, Meal Vouchers, NPS, Car Lease EMIs, Leave Travel Assistance, etc.
Why Should We Do It?
The question then arises that under what circumstances should we review the salary structure. Broadly, the causes for triggering a review of our salary structure are driven by the following factors:-
- Regulatory Change- These changes are related to statutory contributions, especially those related to Employee PF Act, Employee State Insurance, Statutory Bonus – This is the most common of all triggers.
- Minimum Wage Revisions – States review their minimum wages on biannual basis, with updates being notified after April, July, October or January vide gazettes. These may not call for wide salary structure related changes but may lead to a review of carving out money from allowances into the basic salary.
- Changes Related to Finance Bill – This is an annual activity in February every year, and almost always leads to reviews of the structure. In recent Finance bills, the exemption given on Medical Allowance and Conveyance allowance were discontinued and in a way replaced with a standard deduction of INR 40000/-
- Proactive Review of Salary- The salary structures to see if they are aligned with all the statutory rules, and provide the benefits that are possible in the given taxation regimes:- It is possible that there would be many provisions under Income Tax Act which would not have been fully exhausted or comprehensively reviewed. It throws immediate opportunities to review the structure.
- Flexible Pay Implementations – Many organizations have made part of the compensation structure flexible for employees so that they can decide which benefits are useful for them and allocate their allowances to those benefits that will fulfill their needs as per individual life goals at different points of time in their employment lifecycle. Any provision of flexibility requires changes to the salary structures, and the introduction of new systems and processes to enable such flexibility.
- Mergers & Acquisitions – Any merger, acquisition and divestiture scenario throws an immediate opportunity to do comprehensive side by side analyses of the salary structures to come up with best fit structures that would serve the needs of the business and will be quick to implement. The decisions may be driven by multiple factors including the cost of doing changes in systems and processes.
If we look hard enough, we will find ample opportunities to make our salary structure more compliant and more tax friendly. Sometimes, the return of investments by way of additional benefits may not be as lucrative as the cost of changes.
When is The Best Time?
The best times to introduce salary structure changes that are not triggered by any regulatory changes are (a) the effective dates of annual merit increase in the company and (b) the start of the fiscal year. To coincide with one’s annual salary review cycle has many advantages such as:-
- There is no need for additional communication, as all employees covered by an increase would anybody be receiving a communication, which can be modified to include the changes in salary structure and ethos behind the same.
- It is difficult to make a change when there is no positive news associated with the salary itself. When salary is increasing, employees take any change positively.
- It reduces the load on various upstream and downstream processes. Employees do not need to declare their investment twice, as anyway they are expected to update their income tax declaration after a revision in salary.
How Should We Do It?
All the stakeholders must be on-boarded early on, especially HR Business Partners, HR Shared Services/Service Delivery Teams, HR Systems/ HRIT, Legal, HR Communications, Tax, Finance, etc. For all changes, all stakeholders are not needed, but safer to have more rather than less.
We may or may not need external consultants, and it depends on whether the expertise and knowledge are available inside the organization to be able to make the business case and convince the stakeholders of the cost-benefit analyses and change impacts.
We must also think through all aspects of management of change like talking points, leadership collaterals, emailers, roadshows, teasers, computer desktop space marketing, FAQs, training for HRBPs and HR Helpdesks, etc.
In DXC Technology India, which was formed with the merger of CSC and HPE Enterprise Services business in 2017, we have made many transformations in how our salary is structured. In particular, we brought about the following changes in the last 3 years.
- Made the salary structure fully flexible, while introducing a fixed structure of basic pay. Employees can choose the components they want to have, and how much money they want to fund in the selected allowances, subject to minimal guardrails to be compliant to taxation rules.
- Introduced new car lease policies where we allowed better participation, more flexibility in the value of the lease, tenure and associated benefits like fuel and driver wages.
- Allowed employees to claim an exemption for employee-owned cars too up to the limits prescribed in Income Tax rules.
- Class-leading compliance standards ensured that all changes to the PF Act, Statutory Bonus Acts, and Income Tax Acts were implemented
- Removed the medical and conveyance allowance almost immediately post the approval of the Finance Bill.
- During the merger between CSC and HPE-ES, we harmonized the salary structure of both the companies within timelines despite being on different payroll systems. The same feat was achieved during a smaller acquisition of Xchanging.
- Introduced the meal voucher program, which was later converted to a card and app-based program, for employees to claim exemptions for meals in the office.
- For the purposes of harmonization, we introduced Child Education and Hostel Allowances, which were earlier not introduced in legacy CSC due to the small size of benefits accruing from them.
- Introduced the benefits of Telephone Reimbursements, and later extended it to HPE- ES entities too.
- Launched National Pension System in both the entities in Xchanging, HPE-ES and CSC, despite this being a mammoth change due to HRMS and payroll systems involved.
All these initiatives have ensured that employees are able to maximize the benefits as provided in various regulations and acts, at the same time having complete freedom to decide his/ her bouquet of allowances.