42 The Economic Times Wealth, December 13, 2010

Jobs & Income

EARNING

Maximise your take-home

Get the most out of your salary by making it tax-efficient and customising it to suit your
day-to-day cash requirements and long-term savings needs
BINOY PRABHAKAR around compensation packages. For example, to attune compensation to their expense make them tax-efficient. While there is no rule
state-run explorer ONGC, which follows a patterns and tax planning. “For most of thumb for an ideal salary, the structure

E
xecutive compensation packages
are so up-to-the-second that
thumbing through the salary slips
of some companies can make you
feel like a relic. A stack of
elements such as meal coupons, customised
allowance pool and below-the-line benefits
have entered the compensation structures in
recent times, underscoring the profound shifts
in how pay packages are being designed.
Central to this shift is attracting talent. Com-
panies, even public-sector undertakings, are
increasingly tearing down the complexity
simple compensation structure broken up into
fixed pay variable pay and field duty
allowances, recently introduced a system
wherein an employee can tailor the salary to
minimise the income tax outgo.
This so-called cafeteria approach is being
embraced by a growing number of companies.
A spokesman for Maruti Suzuki, India’s biggest
carmaker, says, “All the tax-saving
opportunities for employee are utilised by our
company in letter and spirit.” After shrinking
the items of pay to as less as four, many
employers are giving employees the freedom
companies, a flexible salary is a USP,” says
Gangapriya Chakraverti, principal with global
HR consulting firm Mercer.
But there is a thin line between flexible pay
structures and tax avoidance. While companies
do offer some room to employees, they look to
avoid disputes with the taxman, who could
challenge flexible salaries. “Despite the flexibili-
ty offered by companies, tax rules on earning
components limit the scope for manoeuvring,”
says Chakraverti.
If you are among the lucky ones who have the
freedom to rejig pay structures, you too can
should broadly be defined by an individual's
current expenses and future needs. The tables
on this page provide a quick look at how you can
ensure a high take-home by restructuring a
salary package.
Chartered accountants and HR professionals
agree that there is no rule of thumb for
designing an ideal salary structure. Sure, the
take-home should match your current
requirements but the cash allowances and
deferred benefits must take into account your
spending pattern and future needs.
Companies are now increasingly structuring

One CTC, Three Salaries: How a monthly CTC of

`1.5 lakh translates into different take-homes C. HIGH TAKE-HOME
Take-home is almost 90
% of CTC but no benefits

Income head
E
A. LOW TAKE-HOM
`/month
gratuity are high B. MEDIUM TAKE-HOME A Consultancy fee
of CTC but PF and 1,50,000 Consul-
Take-home is 63.8% Take-home is 79.9% of CTC to meet higher expenses tants, who
B Deductible expenses get a
`/month Suitable for (monthly) lumpsum
Income head people who Income head `/month This structure Conveyance and fuel
60,000 suits someone 15,000 amount as
Basic live in rented Car EMI fee, can
A 30,000 A Basic 40,000
accommoda- who needs a 7,800
deduct
HRA tion and pay a HRA 20,000 higher cash flow Car insurance and mainte
15,000 nance 2,000 expenses
Special allowance high rent. Special allowance 48,000 to meet higher Telephone bill
3,000 from their
costs.
B REIMBURSEMENTS (monthly) Entertainment taxable
TS (monthly) 12,000
B REIMBURSEMEN It is also ideal Conveyance 18,000 The low HRA Newspapers & journals income.
10,000 3,000
Conveyance for those who suits those Driver's salary
4,000 Telephone bill 3,000
don't mind who live in 4,000 No
Telephone bill large deduc- Entertainment 10,000 Electricity deferred
8,000 their own 1,000
Entertainment tions on Newspapers and journals 4,000 house but have Peon's salary benefit
2,000 8,000
journals account of means the
Newspapers and C ANNUAL REIMBURSEMENTS high expenses, Depreciation (car, laptop, equip
RSEMENTS deferred bene- such as a big ment) 5,000 onus is on
C ANNUAL REIMBU fits such as PF Medical 1,200 Stationary and postage them to
1,250 home loan. 1,200
Medical or gatuity. LTA 1,000 Car parking charges save for
1,500 800
The effective Total expenses their sun-
LTA D OTHER BENEFITS
S The effective tax rate is low 62,800 set years.
D OTHER BENEFIT tax rate is close PF contribution 4,800 C TDS @ 10.3%
8,000 at 9% but has 15,450
Yearly bonus to the national Gratuity 3,050 factored in the Net take home
7,200 1,34,550
PF contribution average of E CTC (A+B+C+D) (per month) 1,50,000 tax benefits As % of CTC
3,050 12.5%, though on a home 89.7
Gratuity this could go up
F Deductions Effective tax rate
1,50,000 loan
(per month) 7.6%
E CTC (A+B+C+D) if the person is PF (own contribution) 4,800
Deductions not living on PF (employer's contribution) 4,800
F 7,200
on) rent. Note: All three examples
PF (own contributi Tax 13,500 assume annual tax sav-
tribution) 7,200
PF (employer's con Total Deductions 23,100 ing investments of `1.2
18,910
Tax G Salary income (A-F) 84,900 lakh under Sec 80 C and
33,310 Sec 80CCF and medical
Total Deductions H Cash reimbursements 35,000
insurance of `15,000. In
71,690
F)
G Salary income (A- Net take home income (G+H) 1,19,900 case of B, an additional
24,000
ursem ents deduction of `1.5 lakh
H Cash reimb As % of CTC 79.9%
ome (G+H) 95,690 has been claimed
Net take ho me inc Effective tax rate 9%
63.8% against interest paid on
As % of CTC housing loan.
12.6%
Effective tax rate

RAJ

Tax-saving potential: Not too much because cash Tax-saving potential: With 23% of CTC as cash Tax-saving potential: A raft of expenses incurred for
allowances are just 16% of CTC. reimbursements and home loan to pay, tax is much lower. professional duties are exempt from tax.
Paperwork: Not difficult because most of the Paperwork: Proof of high conveyance expenses and Paperwork: Very high. The taxpayer has to keep records of the
allowances are within reasonable limits. entertainment perks will have to be provided. expenses for up to eight years after filing the returns.