With March-end approaching fast, employees would be hotly anticipating their annual increments. Even though expectations — in terms of increments — may not be great, most would be betting on 'something' rather than 'nothing'.
However, an increment is not just about a number. One has to carefully look at the components that have been increased. For instance, if your employer gives a 20 per cent raise on your CTC (cost-to-company), your net salary may not jump by the same amount.
Like E Balaji, executive director, Ma Foi, says, "A real increment is when it is given on a fixed pay and non-taxable perks are added to your salary structure." He added that companies that are sales-driven prefer giving a variable raise, as it doesn't increase their fixed cost for every employee.
Adds Ashok Ramchandran, director, human resources, Vodafone India Limited, "When a raise is provided on the house rent allowance (HRA), leave travel allowance (LTA) or medical; this directly increases the take-home salary of the employee, as those components come under exemptions."
In order to arrive at the post-tax annual income, one needs to subtract the tax liability amount from the total taxable income. This amount would indicate his annual net or take-home salary. Therefore, your net salary entirely depends on the exemptions your employer provides. More the exemptions, lesser the taxable income.
HRA, premium paid towards life and health insurance products, investment in infrastructure bonds, provident fund (PF) and gratuity are components that qualify as exemptions (as accepted by all firms). So, a raise provided on these would increase the net salary.
Components like medi-claim, conveyance, LTA and the newly-introduced NPS (New Pension Scheme) are also exemptions, but the decision to treat these so rests with your employer.
Also Read
These components have upper limits, beyond which increments cannot be made. Hence, companies introduce non-taxable perks, which increases the total CTC, making it a more tax-efficient structure.
Most perks are for employees in the middle- to upper-managerial levels. These include food coupons, driver's salary, uniform/wardrobe allowance, annual gifts, phone bills, car maintenance, car lease, term cover offered by the employer and periodicals, among others.
As an employee, one can claim deductions either on the HRA or the housing loan allowance only. "Increments given on components like special allowances, bonuses and basic usually reduce the employee's net salary," adds Balaji of Ma Foi.
When such taxable components are raised, the tax liability increases as well, inflating your taxable income and, in turn, reducing the post-tax income earned annually.
If the raise is on the total CTC, then the proportion of increment is distributed among the various components of the salary structure, according to the ratio in which the CTC was originally designed.
Employees can go back to the employer if they don't find their increments tax-efficient. In this, some employers do oblige and the employees get more take-home salary.