How to take home a higher salary
Can two individuals having the same cost to company (CTC) package, earn different take home salaries?" a friend of mine enquired over the weekend. "Interesting question," I thought. A little bit of number crunching and I came up with the answer.
Yes, the salaries of two individuals having the same CTC, can vary. It all depends on the way the salaries are structured.
Let us take an example of two friends Ram and Shyam, who work for different companies but have the same CTC package of Rs 6 lakh (Rs 600,000) per annum.
As can be seen from the table given at the end, Shyam's takehome salary per month is Rs 45,937 whereas that of Ram is Rs 40,330. A clear difference of Rs 5,606 per month or around Rs 67,200 per annum, for the same CTC package!
Now how is that possible? Well, the answer to that question is very simple: Shyam's package -- as can be seen from the table below -- is heavy on reimbursements. The money Shyam gets as reimbursement is not taxable as long as he is able to provide bills for the same.
On the other hand, in Ram's case there are no reimbursements. Given this a major portion of his salary is taxable.
Both Ram and Shyam pay a rent of Rs 10,000 per month. The house rent allowance (HRA) in case of Ram is Rs 12,500 per month, whereas in case of Shyam it is Rs 6,250. As per the Income Tax Act, the entire HRA is not tax free. The tax deduction allowed is limited to the minimum of: a) The actual HRA an individual gets; b) The actual rent paid minus 10% of salary (which includes the basic salary plus the dearness allowance); c) 50% of salary if the individual happens to live in Mumbai, Chennai, Kolkata and Delhi and 40% of the salary in other cases.
If we follow the above rule the minimum in case of Ram works out to Rs 7,500. This figure comes from the second option. The actual rent paid is Rs 10,000. 10% of salary in case of Ram works out to Rs 2,500 (10% of basic salary of Rs 25,000). The difference between the two works out to Rs 7,500.
In case of Shyam the minimum works out to Rs 6,250, which is the actual HRA he receives. These are the amounts they are allowed as a tax deduction for their HRA.
As can be seen, Shyam gets his entire HRA as a tax deduction, whereas that is not the case with Ram. He only gets Rs 7,500 of his total HRA of Rs 12,500 as a tax deduction.
Other than this, companies these days have to pay a fringe benefit tax on the reimbursements it gives to its employees. This tax in most cases works out to 6.798% of the total reimbursements paid.
In Shyam's case the company does not want to bear this tax and passes it on to Shyam. The total for the year in case of Shyam works out to Rs 17,108 for the year. Shyam pays this up happily. His logic is that paying a tax of 6.798% is any day better than paying income tax which can be 10%, 20% or 30%, of the taxable income, depending on the tax bracket.
Both Ram and Shyam make their Section 80 C investments of up to Rs 1 lakh (Rs 100,000). Other than this they also have a medical insurance policy for which they pay a premium of Rs 10,000 per annum. For this a deduction is allowed under Section 80 D of the Income Tax Act.
Due to all these reasons the yearly tax outflow for Ram works out to Rs 80,031. The same in case of Shyam (including the FBT he pays back to the company) works out to Rs 30,755.
A clear difference of around Rs 50,000. And that is why Shyam earns more than Ram.
The moral of the story is, if you are in a position to negotiate your salary structure, go in for a structure that is heavy on reimbursements. That way the tax outflow will be lesser and, hence the take home pay much higher!
| | Ram | Shyam |
| Salary | | |
| Basic Monthly Salary (taxable) | 25000 | 12500 |
| Employer's Contribution to PF | 3000 | 1500 |
| HRA | 12500 | 6250 |
| Medical (monthly) | 1250 | 1250 |
| Special Allowance | 8250 | 7500 |
| Total (A) | 50000 | 29000 |
| Reimbursements | | |
| Conveyance allowance | 0 | 10000 |
| Communication allowance (mobile, telephone, internet etc) | 0 | 3000 |
| Entertainment expenses | 0 | 5000 |
| Books and Periodicals | 0 | 3000 |
| Total(B) | 0 | 21000 |
| Fringe benefit tax per month( 6.789% of total monthly reimbursements) | 0 | 1425.69 |
| Fringe benefit tax per year( 6.789% of total yearly reimbursements) | | 17108.28 |
| Total Monthly Salary (A+B) | 50000 | 50000 |
| Cost to company for the year (total monthly salary x 12) | 600000 | 600000 |
| Taxable Income (Basic+ HRA+Special Allowance) per month | 45750 | 26250 |
| Gross Yearly taxable Salary | 549000 | 315000 |
| Less: deduction for HRA | 7500 | 6250 |
| Less: Deduction u/s 80C, 80CCC & 80D | 110000 | 110000 |
| Less professional tax | 2500 | 2500 |
| Taxable Income | 429000 | 196250 |
| Tax | 77700 | 13250 |
| Add: Education Cess (3% of tax) | 2331 | 397.5 |
| Tax payable | 80031 | 13647.5 |
| Add: FBT Paid by company and recovered from the employee | 0 | 17108.28 |
| Total tax to be paid by the employee | 80031 | 30755.78 |
| Total monthly tax paid | 6669.25 | 2562.9817 |
| Employee's contribution to PF (12% of basic salary) | 3000 | 1500 |
| Monthly take home of employee (monthly salary � tax paid � PF contribution) | 40330.75 | 45937.018 |
2 comments:
Thank you for sharing your knowledge on tax; it’s very helpful and informative. It is important for people to know more about tax, especially if they own a business. For any purpose, tax planning is needed, as this will help them avoid unnecessary expense and also help in managing any finance, whether it is business or personal.
Tax Planning
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