The composition of your salary can radically change your take-home pay
Getting your hard-earned money every month is such a satisfying experience, isn't it? It should be, but it may not be the case with everybody. Even for those receiving "fat cat" salaries, the plump cheque in hand may not fire up a lot of excitement, if the salary is not structured well-enough to minimise tax outgo. So read on to get a clearer idea of how your salary can be designed to maximise your take-home pay and minimise your tax payments.
A salary package can be divided into two components -- fixed and variable. The fixed portion consists of the basic salary, allowances and reimbursements and perquisites. The variable part includes performance bonuses, cash incentives and employee stock options (ESOPs).
In order to plan a tax-efficient package, one should understand the provisions of tax laws governing salaries, exemptions available for various types of reimbursements and allowances, and rules on how to value various types of perquisites.
House rent allowance
An important tool for tax reduction, most companies pay house rent allowance (HRA) to employees. HRA is exempt to the extent of the least of the following: excess of rent paid over 10 per cent of salary (basic + dearness allowance); 50 per cent of salary (if you reside in any of the four metros) or 40 per cent of salary (for places other than the four metros); and actual allowance paid by the company. Effectively, HRA up to 10 per cent of your salary is taxable. Exemption can be availed of when the rent paid exceeds 10 per cent of salary.
Evidently, in order to gain from better tax exemptions, it seems only sensible to design your salary to include a high basic component.
Rent-free accommodation
The taxable perquisite value of a rent-free house is calculated as 10 per cent of salary plus the fair rental value of the house in excess of 60 per cent of salary (for Calcutta, Chennai, Delhi and Mumbai), or in excess of 50 per cent of salary for other places.
Medical reimbursement
All medical expenses reimbursed by an employer are tax-exempt up to Rs 15,000 per year. Besides reimbursement of general medical expenses, hospitalisation expenses of the employee and his family members borne by the employer are also exempt, if incurred at a hospital empanelled by the government.
Leave travel allowance
Reimbursement of leave travel expenses incurred by the employee and his family on travel to any place in India is exempt to the extent of the actual amount spent. However, expenditure on hotel accommodation is not included while calculating this exemption. Further, this exemption is available only up to the cost of air travel in economy class to the destination. This tax break is available twice in a block of four years.
Conveyance allowance
This is meant to compensate the employee for the costs incurred in commuting to the workplace. Conveyance allowance is exempt to the extent of Rs 800 per month, irrespective of the amount actually spent in commuting to work. This exemption is not available if the employer has provided free conveyance.
Motor car
This perquisite helps to substantially reduce the taxable salary of senior executives. The taxable value of this perquisite is calculated as Rs 600 per month for cars up to 16 hp rating and Rs 800 per month for cars with a higher rating. It increases by Rs 300 per month if a driver is also provided by the employer.
The taxable value of the perquisite is not related to the amount actually spent by the employer on acquiring, or providing, and maintaining the car.
Domestic help
If the employee's domestic help (sweeper, watchman or gardener) has been engaged by the employer, regardless of the amount spent by the latter, the taxable value of such a perquisite will be Rs 120 per month per helper.
Contribution to PF and gratuity
The contribution made by the employer to a recognised PF scheme is exempt to the extent of 12 per cent of the employee's salary. Similarly, gratuity received by the employee on retirement -- calculated at the rate of 15 days' salary for every year of employment -- is also exempt up to Rs 3.5 lakh. Contributions made by an employer to a recognised super-annuation fund are also exempt.
Stock options
Budget 2000 rectified the anomaly of taxing stock options twice in the hands of the employee (at the time of availing the option and while selling the underlying shares) by making gains on stock options taxable only at the time of selling the shares. Moreover, compared with the long-term capital gains tax of 20 per cent, in the case of ESOPs for listed shares, the effective tax rate will not exceed 10 per cent of the sale value (inclusive of a surcharge of 10 per cent on total tax for taxable income between Rs 60,000 and Rs 1.5 lakh and 15 per cent on total tax for taxable income above Rs 1.5 lakh).
It must be remembered that one salary structure does not fit all. At best, the salary structure we present in the table on the left , can form a base from which you can build a more efficient salary composition. Eventually, every salary package should be designed to achieve both the short-term and long-term financial objectives of the employee, within the salary framework created by the employer.
