How To Take Home A Higher Salary

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