How to revamp salary package to increase net pay

You may have had the best package at campus placements, but when you join, your salary would appear less compared to that of your immediate seniors.Why's that? Because, simply put, your salary structure and your take-home pay are based on what the firm offers with YOU having very little control.

The India government does not recognise the concept of cost-to-company (CTC in HR parlance) in computing wages. Except for statutory heads, such as Employee Provident Fund (EPF), Employees’ State Insurance, gratuity and bonus, where the rules prescribe minimum contributions, there are no set rules on structuring the CTC. The salary break-up is the company’s prerogative. There are broad norms such as the basic pay being 30-40% of the salary and house rent allowance (HRA) being a percentage of the basic. But these are not wrtitten in stone either.

So, what constitutes CTC vary from company to company. All CTC structures include three main components — basic, retiral benefits, allowances and reimbursements -- while other components vary. Companies may or may not include variable payouts, such as performance bonus and gratuity in the ‘total target remuneration’. Also benefits given in kind, for instance, house, furniture and car, are in some cases part of the total pay. Some companies include premium paid for group benefits such as health and accident insurance in your CTC. So, the bottomline is check your salary structure to see what you are getting and if needed, customise your CTC.

Restructure basic pay
The basic, probably the biggest chunk of your salary, includes basic pay, HRA and often dearness and special allowance. Apart from HRA, every component is fully taxable. An easy way to reduce tax liability is to cut basic pay and adjust it as perks or long-term benefits. If you have a special allowance component, adjust it as a tax-free component. But you need to weigh the pros and cons. Your HRA (usually 40-50% of the basic) and EPF (12% of the basic) would be directly impacted. Also, if you want to apply for a car or home loan in the short term, you may not want the basic pay to be too low.

A higher basic would mean a higher HRA, DA and provident fund contributions. The DA is taxable and the PF contributions are tax-free but will reduce your take-home salary. On the other hand, reducing basic pay will mean a lower contribution towards retiral benefits, which may not be good in the long run. Also, if you live in a rented house, recalculate your tax benefits on HRA before lowering the basic. The idea is to have an HRA as close to the actual rent you pay (see HRA calculations). Choose one of the two ways to restructure the salary with maximum tax benefits.


Increase in-hand salary
Benefits such as leave travel allowance (LTA), medical and conveyance allowances serve two purposes. One, they increase net take-home salary. Two, they make the salary structure more tax-efficient. However, the limitation is there are caps on most of these perks. You can claim up to a maximum of Rs 15,000 every year for medical reimbursements, Rs 26,400 for food coupons, Rs 5,000 as annual gifts and Rs 19,200 as travel allowance. Also, keep in mind that you will have to produce original bills and receipts to claim some of these expenses.

Take advantage of perquisites if you are planning to buy a car or join a professional course while working. Rather than taking a loan, if your employer funds the expense and includes it as a part of your CTC, your tax outgo can reduce significantly. This is because you are taxed only on the perquisite value. For instance, if you plan to buy a Rs 6 lakh car on loan, you will have to pay a monthly EMI of Rs 13,000 for five years, which will be a post-tax expense. The tax outgo over five years on Rs 7.8 lakh will be slightly more than Rs 2 lakh. However, if the company shows it as a perk, you are taxed only for the perk value of the car, which is between Rs1,800 a month (for cars of up to 1600 cc) and Rs2,400 a month (for cars bigger than 1600 cc). The only disadvantage is that, legally, you don’t own the car. But when you quit, you may request the company to allow you to buy the vehicle at depreciated cost.

Optimise long-term savings
If you want to keep your basic intact but do not mind a slightly lesser take-­home pay, reduce your allowance and increase your retiral benefits to reduce your tax liability. The employer’s contribution to PF is linked to your basic (12%) and is unalterable.

However, you can increase your contribution using the voluntary provident fund (VPF) route. VPF is better than PPF because while both earn similar returns, PPF has a lock-in period of 15 years. Your EPF contributions can be withdrawn without any tax implication after five years of service. If tax liability is not nil after exhausting the Section 80C investment limit of Rs 1.5 lakh, contribute towards NPS to claim an additional Rs 50,000 deduction under the new Section 80CCD (1b). “An employee’s contribution is also considered as a self-contribution and therefore eligible for deduction under Section 80CCD (1b). One can first maximise his claims under Section 80C and then claim any residual under the new section,” says Archit Gupta, CEO, ClearTax.in. NPS, however, does not enjoy as high a liquidity as PF. Withdrawal is only allowed at retirement or under special circumstances.

Not all long-term benefits are tax-efficient and you may want to get rid of a few as well. For instance, gratuity, another common long-term benefit is tax-free up to 15 days of basic pay or Rs 10 lakh, whichever is lesser. However, it is payable only after five years of service. So, it is redundant if you do not plan to stick around for long. Although not a very big component, you should try and adjust the money under some other head.


Investing the savings
If you have an education loan running, paying it back should be your priority. You get a tax benefit under Section 80E for paying the interest back. Financial planners suggest prepaying a loan after the moratorium period rather than investing as there will be no prepayment charges. “If this your first job and your basic is higher than Rs15,000, you may even consider opting out of the EPF and instead pay back the loan,” says Vaibhav Sankla, Director, H&R Block India. “It is better to pay back a loan where you are paying 12-13% interest than invest in an instrument that fetches you 8.7% returns,” he adds. Prepaying in the earlier years is a tax-efficient strategy as well, when the interest component is higher. This is because there is no cap on how much you can claim under Section 80E. However, you have a time limit of eight years to claim this benefit.

Another benefit that people living with family miss on is HRA. Even if you are living with parents, you can claim a deduction for house rent, provided your parents own the house. They will be taxed on this, but can claim a flat 30% of the annual rent as deduction for maintenance expenses such as repairs or insurance irrespective of the actual incurred expenditure.