Letters: Beware of tax shelters

Last Updated: Tue, Feb 08, 2011 20:00 hrs

This refers to the article "Claim exemption on salary components" by Neha Pandey. (February 4). Tax-sheltered allowances and perks reduce the role of basic salary and dearness allowance, which normally attract retirement benefits like provident fund, pension, gratuity, term and accident insurance and medical care coverage as an employee and as a pensioner, if medical care cover is available to retired employees and spouse of a deceased or retired employee.

The medical allowance of Rs 15,000 (that may be increased from 2012) for minor medical expenses has been converted into a pay item by many organisations. Reportedly, some claims may not stand good audit. And it has adversely affected the amount of medical care insurance. A recent adverse development is a significant increase in performance-related rewards that is normally paid in lump-sum and does not attract retirement benefits.

The Employees Provident Fund and Miscellaneous Provisions Act excludes commission (probably including sales commission) and incentives that are included on a case-by-case basis. The approach places sales people and a number of plant employees at a disadvantage against employees in comparable positions in the organisation.

The tax-sheltered pay items reduce contributions to employee benefits, salary increases and adjustments with a worthwhile reduction in old-age benefits and contingency allowances (death and early retirement because of major/total and permanent disability) at a time when life expectancy is increasing and medical care costs are rising faster than the cost of living.

Also, there is an increase in the retirement age. The Employee Pension Scheme provides for retirement at 58; some states stipulate retirement at 58 (and 55 in one state) with the exception of some management-level employees.

With mediclaim (strictly hospitalisation coverage) favouring minor and middling injuries/illnesses rather than major illnesses, and preventive and educative medicine, and with linkage of premium to experience by age brackets, insurance coverage has become unaffordable for the lower middle class and some middle-class families.

These practices require meaningfully higher savings by employees to make a reasonable provision for old age and contingencies in a society that is experiencing increasing consumerism, rising costs of education and housing, and stagnation or job losses owing to technological and organisational changes.

Nalin Thakor, Ahmedabad 

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