It’s a beautiful Saturday morning that I have chosen to pen down some of my thoughts on the employment situation in India. I thought that a fitting prelude to my comments on the title of this article would be to educate the readers about how India has moved on the path of creating employment. In my quest to find the right statistic, I came across an article by Dharmakirti Joshi and Dipti Deshpande published by Financial Express on 15th June 2015 that spoke of how woefully ineffective our statistics vis-a-vis the employment situation are; the quest seemed unnecessary now.
While I would leave the complexities of the ‘bigger picture’ to our government, I do know from my experience at the grassroots, that whether employment in India grows by 5% or 10% or even 15%, one golden question oft quipped by an applicant at any job interview is “Kitna milega?”. The question may be put forth politely or cheekily, but it is this answer that the applicant religiously seeks throughout the interview.
This article attempts to decipher the mumbo-jumbo behind the ‘kitna milega’question. We shall look at how your employer arrives at your ‘take home’ pay. We shall also look at how your salary can be structured to save your personal taxes. For obvious reasons, the options that I present would be the generalised version. As the popular saying goes ‘no two snowflakes are alike’, salary structures can be just as varied. Salary calculations can be structured to suit one’s industry, hierarchy or even one’s lifestyle. Let’s dive in!
Your ‘Net Salary’ is derived from your ‘Gross Salary’ after making some ‘Deductions’.
Gross salary is your full pay. Gross salary is sometimes understood as the ‘Cost to Company’ or CTC; there is however, a thin line of difference between the two. Cost to Company refers to the total cost incurred by your employer to hire you. This not only includes the salary that is agreed to be paid, but also contributions to employee welfare funds, health insurance costs, in a few cases gratuity pay and in another few (but extreme) cases, the welfare costs incurred by your employer on you. To keep our discussion simple, we shall focus more on ‘Gross salary’ rather than the overarching ‘Cost to Company’.
Deductions from your Gross salary are primarily towards taxes and contributions to employee welfare funds. Among taxes, the universal ones are the state regulated Professional Tax, and its evil omnipresent cousin, the Income Tax. Contributions to employee welfare funds would be towards Employee State Insurance schemes and towards the Employee Provident Fund. By the time the winter winds blow in December, you could also see a small deduction in the form of contribution to the Labour Welfare Fund. Employers sometimes recover salary advances & health insurance costs from the gross pay and this could appear as a deduction on some of your payslips.
With a little bit of help from that grand old science, Mathematics, we can safely conclude that the lower our Deductions are, the higher our Net Salary would be (PS: for the valiant ones, you always have the option of arm twisting your employer to increase your gross pay to take more home, for rest of us, Math is our saviour). How do we go about minimizing our Deductions? One of the best ways of achieving our goal would be to plan our taxes better & the secret lies in how your salary is structured.
The Income Tax Act (“Act”) is not as generous as we would all have wished; the salaried class reminds me of the poor Egyptian slaves who through backbreaking labour build some of the most wonderful pyramids, only to be ‘rewarded’ with little at the end. Nevertheless, the Act does provide for certain benefits that the taxpayer can make use of to plan taxes better.
An effective salary structure would be one that provides the employees with the maximum permissible benefits without diluting the effectiveness with which it can be administered throughout the year. While the standard components like Basic, House Rental Allowance, Conveyance Allowance (increased to Rs. 1,600 per month now) & benefits towards Medical Expenses make their way into most of the payslips, employees could also benefit from the following:
- Reimbursements towards telephone expenses- This is fully exempt. Given the age we live in, it would be fair to consider expenses incurred on data or internet packs as eligible for tax benefits.
- Food coupons- Exempt to the extent of Rs. 50 per meal per working day; for a company working from Monday to Friday, this translates to Rs. 2,000 per month.
- Reimbursements towards fuel where the vehicle is owned by the employee and used for both official as well as personal purposes. The employee can claim a benefit for both four wheeler (maximum Rs. 2,400) and two wheeler (maximum Rs. 900). Further, the Act also exempts reimbursements made towards chauffeur to the extent of Rs. 900 per month.
- Travel expenses on leave, popularly known as Leave Travel Concession- Expenses incurred on your family’s travel can also be claimed for tax benefits.
- Annual gift coupon or voucher of up to Rs. 5,000
It is also worth noting that where your employer is covered by the Provident Fund scheme, contributions made by the employer, subject to certain conditions, is exempt from tax in your hand. Further, reimbursements towards expenses incurred purely for the purpose of your employer’s business is never taxed in the employee’s hand.
Good tax planning cannot stop at a good salary structure. It is important that the employee makes use of the investment linked deductions available under the Act.
You may choose to save your money through any of the investment options available under Section 80C (this section is so popular that employees know more about it than Chartered Accountants themselves!). You should definitely make use of the benefit available towards health insurance premiums and donations made, if any to approved charitable trusts and funds. First time investors, could also consider investing through the Rajiv Gandhi Equity Savings Scheme.
There are many such alternatives available; a little bit of research and consultation with experts (your colleague sitting next to your desk may or may not be one) would help plan your investments better. Of course, the ability to make investments depends in the first place, on the amount that you take home! But it is always a good practice to save as much as you can.
This blog is written by Pavan Sharma, partner of Balakrishna Consulting. He can be reached at: [email protected]