When Priya Trivedi, a marketing manager in a fast moving consumer goods company, changed her job, she confided to her friend that the new salary package was fabulous. She giggled about the 50 per cent plus hike that she had garnered from her new employers. But her happiness was rather short-lived. The first month's salary itself gave her the shock of her life. The take home portion had gone up by barely 10 per cent.
She immediately went back to the 'salary break-up' part in her appointment letter. And unable to understand it, took it to her chartered accountant who explained that most of the packet had been designed to give her perks for performance and other bulk payments.
For instance, an amount Rs 300,000 was assigned under leave travel allowance. She went and wagged the letter in front of the company's human resource, which calmly said that she should have taken a look at the salary break-up properly before signing. She is still fuming from this experience.
But this is not a uncommon experience. In fact, this happens even in case of salary hikes after appraisals. Though you may have been given a good hike (say 20 per cent), the actual take-home salary would increase by less than 10 per cent.
While 'cost to company' is what the organisation is worried about, your take-home pay is what matters to you. Besides immediate liquidity, it also impacts your loan eligibility to a great extent. That is, when you go for a home loan, your loan eligibility is a function of your take-home salary and not the gross number. So we do need to know a bit more about this all important 'salary structure'.
As we all know your salary consists of basic pay, dearness allowances and other allowances. Some allowances are taxable under the head salary, while the others are either fully or partially exempt.
Further, there are retirement benefit contributions like provident fund in which both employee and employer contribute and the superannuation fund. Earlier, this contribution was taxable as fringe benefit tax, but now a contribution up to Rs 100,000 into a superannuation fund is not taxable under FBT.
In the Union Budget 2007-08, the finance minister has raised the basic exemption limit from Rs 100,000 to Rs 110,000. But the salaried taxpayers with high income are at a disadvantage as the education cess has been hiked by one percentage point to 3 per cent. Further, for income above Rs 10 lakh (Rs 1 million) there is a further surcharge of 10 per cent on income tax.
Let us take four salary slabs and how one can increase the tax benefits. But before that, let us take a simple example of take-home salary calculation. For this, from the gross package one has to deduct professional tax, income tax, mediclaim premium, investment in tax saving instruments and provident fund contribution from the total salary (See Tax Burden).
Scenario: I II III IV
Total salary (Rs) 500,000 10,00,00015,00,000 20,00,000
tax and investment (Rs) 361,797 703,125 996,178 12,76,168
% of actual salary 72.36 70.31 66.41 63.80
Here we assume that for investment under section 80C, the employee will take into account his provident fund contribution. He will invest in tax saving instruments over and above this contribution, if necessary. Therefore, in the case of salaries over Rs 15 lakh (Rs 1.5 million) (scenarios III and IV), the employee does not have to make any other investment. The employee has contributed more than 100,000 in provident fund, so for calculation of take-home pay, we deduct this contribution, which is in excess of Rs 100,000.
Rs 5-10 lakh bracket
You can make the following changes:
•Ask for telephone reimbursement instead of telephone allowance. The former is fully tax exempt, the latter fully taxable.
•Send your children to employer-owned educational institution as you can get a tax benefit of Rs 1000 per month instead of Rs 100 that you would get otherwise.
•Go for paid vouchers or coupons instead of a lunch allowance, as it is fully taxable. The former is-tax free up to an amount of Rs 50 per day.
•Opting to provide bills of travel from home to office and vice versa, which are completely tax exempt instead of going for transport allowance which limits your tax exemption to Rs 800 per month.
Rs 15 lakh
Besides the above, you can also add:
•A free car facility over conveyance allowance
•Servant allowance, if being used for official purposes
Rs 20 lakh
•Besides the above, you can add:
•Free bungalow/apartment (taxed only at 10 per cent of fair rent paid for such acco
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