Salary structuring: what is taxable and what is not
House rent, medical, conveyance and the perquisites employers get wrong β a practical guide for employers and employees.
Gross salary is not taxable salary
A salary package is made up of components, and they are not all treated the same way. Getting the classification right changes the tax outcome for the employee and the withholding obligation for the employer.
The main exemptions
House rent allowance β exempt up to 50% of basic salary or BDT 3,00,000 per year, whichever is lower.
Medical allowance β exempt up to 10% of basic salary or BDT 1,20,000 per year, whichever is lower. Higher limits apply for employees with a disability.
Conveyance allowance β exempt up to BDT 30,000 per year where no vehicle is provided.
These are ceilings, not entitlements. Paying more does not extend the exemption; the excess is simply taxable.
What is fully taxable
- Basic salary
- Bonus and festival allowance
- Overtime
- Commission and incentive payments
- Leave encashment
- Any allowance not specifically exempted
Perquisites: the common mistake
Where the employer provides a benefit in kind β a car, accommodation, a domestic servant, a soft loan β the value is added to the employee's taxable income under prescribed rules. This is where employers most often under-deduct, because no cash changed hands and it never appeared on a payslip.
If your company provides a car for personal use, that has a taxable value. If it provides free accommodation, that has a taxable value. Neither is optional.
The employer's exposure
Under the Act, an employer who fails to deduct the correct tax becomes liable for it personally, along with interest. Discovering during an audit that three years of bonuses were processed without the correct slab applied is an expensive conversation.
Practical steps
- Classify each component of the package correctly at the point of design, not at year end.
- Recompute deductions whenever a component changes β especially bonuses.
- Issue salary certificates that reconcile to what you actually deducted.
- File the section 108 return.
If you have more than 30 employees, outsourcing payroll usually costs less than one year's exposure.
