Impact of Union Budget 2024 on Employee Benefits and Compensation

With Union Budget 2024 to be presented by Hon’ble Finance Minister Smt. Nirmala Sitharaman, salaried taxpayers and employers are waiting with bated breath, expecting new reforms that might bring changes in employee benefits and compensation.

Given that this budget is coming out right after the recent election 2024, all eyes are on it.

So, let us look into major areas where changes may be brought in and what they could mean for employees and employers.

Income Tax Slabs and Rates

One of the most awaited things in any Union Budget is likely to be a revision in the income tax slabs and rates. Over the past years, the government has come up with an alternative regime of reduced rates in return for low exemptions. Budget 2024 may further fine-tune this scheme.

• Expectations:
  • Basic exemption limit to get hiked from ₹2.5 lakh to ₹3 lakh or more.
  • Rationalization of tax slabs to help ease the pain of the middle class
  • Possible changes in the new tax regime to make it more attractive

• Impact on Employees:

  Any reduction in income tax rates or widening of tax slabs would increase take-home salary of employees directly, thereby enhancing disposable income. If disposable income sees a hike, consumer spending would get a boost, and savings would increase, which benefits the individual as much as it benefits the economy as a whole.

• Impact on Employers:

  Changes to taxes do not impact employers directly; however, they will have to revise their payroll systems due to the new change in tax calculations. Reduced tax pressure on employees could also relieve pressure on employers regarding salary increases.

Standard Deduction

The existing basic exemption allowance is ₹50,000, of a flat nature, which is available to be claimed by the salaried people and retired personnel as an allowance for expenses incurred while earning their salary or pension.

• Expectations:

  Increase in standard deduction to ₹75,000 or ₹1 lakh

• Impact on Employee:

  Of course, an increased standard deduction will lower the taxable income of every salaried individual. Hence, take-home pay of all working individuals will rise with this step, and it will require neither investment nor any paperwork.

• Impact on Employer:

  This will not affect employers directly but indirectly, as staff satisfaction will improve due to the increase in take-home salary, which will not increase from the company’s compensation cost structure.

HRA

HRA has become a very key component for a lot of employees within the salary structure, giving them tax benefits for living in rented accommodations.

• Expectations:
  • Increase in HRA exemption limits, especially for non-metro cities
  • Simplify interest on housing loan calculation criteria

• Impact on Employees:

  Enhanced HRA benefit shall help employees in the cities with higher rentals since this will raise their disposable income.

• Impact on Employers:

  The salary packages may need to be revised and most probably reshaped to enable staff to fully exploit the HRA enhanced benefit.

Leave Travel Allowance

The LTA offers tax exemption on leave travel expense incurred by an employee and his/her family. This exemption is normally allowed once in a block of two years.

• Expectations:
  • Extension of the LTA benefit for more frequent travel or staycation
  • Inclusion of additional expenses such as accommodation under LTA

• Impact on Employees:

  With the introduction of this policy, more employees may tend to use extended LTA benefits, which would lead to better work-life balance and development of domestic tourism.

• Impact on Employers:

  The employer will have to revise the policy relating to LTA and may have to increase the budgeted amount towards this benefit as its utilization will increase.

Employee Provident Fund (EPF)

A Provident Fund is basically a savings and retirement fund backed by the Central government, usually established and contributed to by salaried employees and their employers. Essentially, it provides a basic initiative that aims to give working employees financial security during their retirement years. The Provident Fund has always been envisaged as one of the safest and tax-effective retiral benefit for employees.

Now, after a decade, the Union Finance Ministry is likely to increase the provident fund limit from Rs 15,000. According to a report in CNBC Awaaz, it can increase the ceiling to Rs 25,000. The Ministry of Labour and Employment has prepared a proposal accordingly.

• Expectations:
  • Probable increase in wage ceiling for mandatory EPF contribution from the current ₹15,000 per month
  • Probable changes in the tax treatment of EPF contributions and interest

• Impact on Employees

  If the wage ceiling goes up, more people will cover higher retirement savings. Any changes in the tax treatment of EPF would mean taxability of net returns on this investment.

• Impact on Employers:

  An increased wage limit would directly affect the employer’s EPF contribution and indirectly increase the cost of employment.

National Pension System (NPS)

Currently, deduction in respect of the employer’s contribution (capped at 10%) to NPS is allowed both under the old tax regime and the new tax regime. The government may consider increasing this limit to 12% aligned with the exemption of employer’s PF contribution up to 12%.

• Expectations:
  • Increase in additional tax deduction limit under Section 80CCD(1B) from the existing ₹50,000
  • Probable parity in tax treatment of the NPS at par with EPF at the time of withdrawal

• Impact on Employees:

  Improved tax benefits for NPS could make it still more attractive as a means for long-term savings, particularly for individuals in higher tax brackets.

• Impact on Employers:

  Improved NPS benefits might encourage more employers to offer NPS as part of their compensation package, perhaps as a partial alternative to gratuity or superannuation benefits.

Work From Home Allowance

With remote work becoming the new normal, there is an increasing debate for introducing work-from-home expenses.

• Expectations:
  • Introduction of a standardized work-from-home allowance with tax benefits
  • Guidelines for employers on providing and accounting for remote work expenses

• Impact on Employees:

  The formalization of work-from-home allowance would involve employees being able to compensate for the extra costs incurred in terms of spending on the internet, electricity, and other expenses indirectly incurred for setting up the office at home.

• Impact on Employers:

  While this would bring a new cost factor, the clarity brought in by introducing this expense may turn out to be beneficial for getting tax savings for the company.

Skill Development and Training

Faster job markets have increased the need for skill development in the case of both the employee and the employer.

Union Finance Minister Nirmala Sitharaman has said in the Interim Budget 2024 that Skill India Mission launched by the Government alone had trained 14 million youth, upskilled and reskilled 5.4 million, apart from the setting up of 3,000 new ITIs during its time.

• Expectations:
  • Increased tax benefits for expenses incurred on and towards employee skill development and training.
  • The possibility of the introduction of a separate deduction for employees investing in their own skill development.

• Impact on Employees:

  An increased focus on skill development will lead to better employability and career growth prospects.

• Impact on Employers:

  More generous tax benefits may lead to a higher investment in training and development by companies, hence developing a better skill-wise workforce. This will turn out to be more productive.

Wrapping Up

The Union Budget 2024 will likely bring sea changes in employee benefits and compensation structures. Though actual announcements may be at variance from these expectations, needless to say, any reform carried out in either of them will have far-reaching implications on both the employees and the employer.

Working individuals should be aware of such eventual changes and monitor the situation so they can change their financial planning accordingly. Employers, however, shall also have to prepare themselves and be willing to examine and potentially adjust an employee’s compensation package in a way that remains lawful but effective for the hired workforce.

In essence, budget 2024 and employee perks will be the most opportune for both employees as well as organizations to take stock of their present strategy in financial matters and be ready to ride on the crest of any positive changes coming their way.