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Get the most from your salary
September, 13th 2008

The moral of the story? You need to negotiate your salary structure, not just the salary. The amount you get as salary is generally not negotiable beyond a point, but increasingly, companies are offering to let employees structure their packages.
 
When Nitin Verma landed a job that paid him Rs 7.2 lakh a year four years ago, his joy knew no bounds. Earning Rs 60,000 a month put him among the top grossers at the IIT-Roorkee campus placements that year. An elated Verma decided to celebrate by making a down payment for a car with his first salary. But when his first pay cheque came in, he was shocked to see that only Rs 29,380 had been credited to his account. It was only then that Verma thought of checking all the deductions. Apart from the standard provident fund deduction and a hefty amount going as tax, he found that Rs 8,000 a month had been held back as the retention bonus. The bonus would have come to him only after he completed six months in the company. Naturally, his plans to celebrate with a new set of wheels were put on hold.

Four years on, Verma is wise in the ways of salary structure negotiations. So, during talks for his latest job, he made sure he got a large proportion of his income in tax-free allowances. That has reduced his tax liability to a great extent. And he's had enough of retention bonuses. Verma now prefers monthly payments so that his take-home component is fatter almost 85% of the cost to company (CTC). This makes his car loan payments easier on his pocket. Verma is thinking of upgrading to a bigger car next year when his current loan ends.

The moral of the story? You need to negotiate your salary structure, not just the salary. The amount you get as salary is generally not negotiable beyond a point, but increasingly, companies are offering to let employees structure their packages. A typical job negotiation no longer finishes once the company accepts the salary that a prospective employee had asked for. In many cases, it actually begins there. So, if you're lucky enough to join a company that gives you this flexibility, you can structure a package that will let you save on tax and take home a larger chunk of pay. Badly structured salaries can whittle down the take-home component through PF deductions, annual allowances and tax outgo, says Vishal Chhiber, head-HR, Kelly Services India, a global human resources solutions firm. The problem is that not all companies let all employees do this; this is reserved for those at the senior levels.
 
However, given that the job market is getting fiercely competitive and employees are hopping jobs looking for better pay and incentives, companies are becoming more flexible. More and more employees, particularly in the services sector, are now being given the freedom to choose their pay structures. Companies work out compensation packages on a CTC basis and allow employees to tweak their pay structures so long as the CTC remains constant.

Take the case of Shubha Narang, 25. When she joined a bank as a relationship manager, she was allowed to distribute her allowances under the heads that she wanted. The bank had fixed only the basic pay; the rest of the allowances were left for me to choose, she says. Narang was paying a large amount as rent so she opted for a house rent allowance (HRA) that was 50% of her basic pay and allocated the balance CTC to conveyance and medical allowance. This helped reduce her tax outgo because only the basic and a small portion of her HRA were taxable.

To be sure, there is no one-sizefits-all structure for a compensation package. The proportion of salary under different heads of income in the CTC depends on several parameters, including the employee's financial situation, the number of years before retirement, cash-flow needs, and whether he lives in a rented or his own accommodation. Depending on what your priorities are, the CTC-based compensation structure can be effectively used to make your salary package efficient. The first step to restructuring your pay package is fixing the quantum of basic salary. Experts say this crucial component should ideally be about 35-45% of the CTC. If it falls below 35%, the employee loses out on retirement benefits, which are linked to the basic. But if it exceeds 45% of the gross package, it pushes up his tax liability because the basic salary is fully taxable.

Then comes the house rent allowance (HRA), which can bring down your tax liability significantly if you pay a big rent. The exemption on HRA depends on how much rent you pay and on your basic salary. Experts say that HRA should be only 40-50% of your basic salary. If it is less than 40%, it will not save enough. And the HRA exemption is capped at 50% of basic in metros and 40% in other places, so it makes little sense to exceed that level. But remember, if you live in a self-owned house, the HRA is fully taxable.

Other components of the CTC that are fully taxable are the dearness allowance, special allowance, bonus and city compensatory allowance. Don't let these heads account for too much of your CTC because unlike the basic, they only add to the tax liability without doing anything to your retirement benefits.

While the fixed portion of the pay offers little room for change, the variable portion that has reimbursements and allowances offers tremendous scope. These perquisites are not very high at the junior level but form a larger component of the salary as one goes up the hierarchy. At the senior level, although they can pass on the tax to the employee.

The good news is that the tax on most benefits, including conveyance and entertainment, is only on 20% of the reimbursed amount. So the effective tax rate on these allowances is 6.12%, which is far lower than the tax a person pays in the highest income bracket. An employee can opt for a smaller special allowance that attracts a 33.3% tax and a larger conveyance reimbursement on which the company will pay 6.12% FBT. Under the CTC scheme of things, a company has no reservations against such jugglery so long as the FBT is included in the employee's overall pay package.

There are a few tax-free perks such as transport allowance (capped at Rs 800 a month), newspaper allowance, education allowance, uniform allowance, food coupons and restaurant passes. But the limit for the transport allowance is very low. Education allowance can only be used for paying the fees of up to two children, so not everyone can avail of it. And while the reimbursement of bills for newspapers and periodicals has to be within reasonable limits, food and restaurant passes have very specific use.

Freedom also means responsibility. It is important to keep in mind your financial goals when structuring your salary. While most benefits are taxable as salary income, opting for them ensures that specific needs are met, says Sugato Palit, head of HR at Perfetti Van Melle. There's always the temptation to go in for a high take-home to be able to buy everything you long for. But maybe that expensive digital camera is best left in the showroom window and that home theatre may not really fit into your cosy little home. Instead, a larger monthly contribution to the PF would serve you better. So be careful not to celebrate today at the cost of tomorrow.

Of course, in some cases a fatter take-home salary is a necessity. If someone has taken a large home loan, he may need to carry home a higher amount every month. Home loan EMIs are not consumption expenditure but asset creation, so he's not really sacrificing his longterm financial security by opting for a bigger in-hand salary. Young couples who are setting up homes or starting a family may also need larger take-home salaries because the expenditure involved at this stage of life is high. It doesn't make sense to take a personal loan at 15-18% or rollover credit card balance at 30-36% when you can just reduce the flow into your PF account that earns 8.5%. But once the financial requirements have been met, they must reopen the sluice gates of the PF stream so that their retirement planning does not go off track.

Another way to achieve the twin objectives of a higher take-home income and a lower tax incidence is to take the consultant route. But do so only after careful consideration of all aspects of the arrangement. Consultants do get a higher income and pay a lower tax because there are so many permissible expenses to show the taxman.

However, they also forego their retirement benefits. Unless they are disciplined savers, people earning a lump-sum income without retirement benefits can end up in a soup in their later years. Worse, they have to maintain records of their expenses and the slightest error can result in an income tax notice.

 
 
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