The term ‘salary’ means different things to different people. While an employer looks at salary as Cost to Company or CTC, an employee looks at it as Net Pay. The journey from CTC to net pay is an arduous one; one that requires us to factor in all employee benefits (in some quirky cases this would include the number of coffee cups the employee consumes in a day!), contribution to statutory funds and, of course, taxes!
All this number crunching largely depends on the manner in which the salary structure is defined. A good salary structure would lead to a higher net pay without compromising on the essence of CTC whereas a bad one could lead to both the employer and employee coughing up more money.
The intent of the present article is to suggest an optimum salary structure which helps the employee understand how to increase take home pay. Let’s begin.
The traditional salary structure usually has the following components:
Employers, especially start-ups, are happy to experiment with their salary restructuring process to make it more beneficial to their employees. However, there exists a thin line between ‘a creative salary structure’ and ‘a salary structure that would not be acceptable for tax advantages’. It is better to weed out components that are on the borderline today, rather than suffering the wrath of government agencies that may ask the employer to contribute towards irregularly computed welfare benefits or taxes.
Nonetheless, there are certain benefits that are provided by the law itself, and employers may consider including them in the salary structure to make it more tax-efficient. Here are some of the components that can be added to the salary structure:
Employers could also encourage the employees to invest in tax saving schemes which give them benefits under Chapter VI-A of the Income Tax Act. An employee could aim to invest upto Rs. 200,000 into various savings schemes and even at a 20% tax bracket, this would mean a benefit of Rs. 3,300 per month. It is quite natural that the achievement of this number itself may be quite hard given that it represents close to a quarter of the gross salary earned for those in the 20% tax bracket. Again, the amount of investment depends on the net take home pay and for those wanting to invest to save taxes (and thereby increase net take home), this would be the proverbial chicken-egg scenario.
A few caveats
Most of the benefits under tax laws are subject to the availability of adequate documents and are limited to amounts prescribed. A ‘benefit’ given beyond what is legally permissible could result in the employer paying tax on the same. Further, it is important to know that certain advantages extended to employees could also be brought within the tax net, if it is not purely official in nature. For example, a motor car owned by the company, but used by the employee, could be subject to perquisite tax in the hands of the employee.
The combination of a sound investment plan together with a favourable salary structure will go a long way in helping employees take home more and thereby add more smiles along the way.