SAVE YOUR SALARY FROM TAX
Find out how you can rejig the compensation
package to
lower your tax significantly.
The appraisal season is here, raising Thopes of
generous increments
and higher incomes. Many people will be rewarded for the
hard work.
Several others will be lured to switch with
better offers. In either case,
before you sign on the dotted line, pay
attention to the compensation
structure being offered. A higher package does
not always mean
that your take-home salary will increase by the same margin.
Various components of the compensation package may not come
to you immediately.
Others may be fully taxable. If the compensation
package is not structured
properly, you might get a rude shock in your
next pay cheque.
This week's cover story tells you what you can
do to minimise the tax
outgo and enhance your take-home income. A large number
of
companies give employees the option to design their compensation
structures.
“Many companies are flexible when it comes to structuring
the pay package. An
employee earning `60,000-70,000 a month
can save over `20,000 in tax in a year
by realigning the
package appropriately,“ says Sudhir Kaushik, Co-founder
and
CFO, Taxspanner. If your current or prospective employer lets
you rejig the
compensation structure, here are some tricks to make
your pay more
tax-efficient.
Opt
for lower basic and variable pay
The basic pay, which is the primary component of
the compensation
package, is fully taxable. If the basic pay is too high, your
tax
liability will shoot up. However, you can't keep it too low because
the
other components of the package, such as the HRA and
Provident Fund benefit,
are linked to the basic pay. For those in the
highest tax bracket, it makes
sense to keep the basic pay low,
but a higher basic will not have a big impact
in the lowest 10%
income tax slab.
How much basic pay you should have will depend
on individual need.
“Those who have to fund immediate goals would need a higher
take-home pay. This can be done by lowering the basic pay
component. Those
focusing on building a corpus for retirement
can opt for higher basic pay, as
it leads to a higher contribution
to the Provident Fund,“ says Kuldip Kumar,
Executive Director,
Tax & Regulatory Services, PwC.
Similarly, the variable pay and special
allowance is also fully taxable.
Any bonus will get the same tax treatment.
Make sure that the employer
has not loaded your CTC with these heads. Make room
for more
allowances Instead of a high basic pay, opt for more taxfriendly
allowances and reimbursements, such as conveyance, medical,
telephone, and
newspaperperiodicals. Some companies even
offer soft furnishing allowances to
cover clothing and certain household
items. However, all these allowances
become taxfree only if the individual
submits bills as evidence of the expenses
incurred. If no bills are
submitted, these become fully taxable. The medical
bills can be
for self, spouse, children, parents and dependent siblings.
Though allowances can bring down the tax outgo
significantly,
choose the ones that you can avail of. The leave travel allowance
(LTA),
for instance, can be a big amount but you have to submit evidence
of the
journey. Kaushik points out that a higher LTA only benefits people
who travel
extensively. “Since LTA covers only the cost of travel
and no other expenses,
such as food and hotel bills, utilising the entire
benefit may not be possible
for everyone,“ he says.
Similarly, if you do not pay rent, the HRA
becomes fully taxable. Even
if you pay rent, the exemption is linked to your
basic pay. It is the least
of the following three options: the actual HRA
received, 50% of
basic pay (40% in non-metros), and actual rent paid minus 10%
basic.
If you pay a high rent and can claim exemption, include it in the
package.
If you live in your own house or the rent is very low, replace it with
some other allowance.“It would unnecessarily impact your take home
pay.
Instead, you should go for benefits you can avail of,“ advises Kaushik.
When you sit down to reconfigure your pay
package, keep in mind that
the allowances are allocated reasonable amounts.
There is no upper limit
to how much a company can pay under one head. However,
someone
with a monthly CTC of `80,000 cannot get `40,000 a month for
conveyance
and `10,000 for books and periodicals. If this component
is unreasonably high,
the taxman may raise an objection. “Even though
the law has not defined any
quantum under these heads, there has to be
some rationale behind the amount so
claimed,“ says Neeraj Chauhan,
CEO, Financial Mall.
Make
use of perquisites
One smart way to avoid tax is to opt for a
company leased car instead
of buying one yourself. Instead of you paying the
EMI out of your
post-tax income, your employer pays the EMI and includes it in
your
CTC. This cuts the tax significantly because you are taxed only for
the
perk value of the car, which is between `1,800 a month (for cars
of up to 1600
cc) and `2,400 a month (for cars bigger than 1600 cc).
Yes, you don't own the
car but it is available to you for all practical
purposes. As our calculation
shows, if you buy the car you will
have a depreciated car valued at `2 lakh at
the end of five years, but
if your company provides it, you would be able to
save more than
`2 lakh in tax. “Another benefit of this arrangement is that if
you lose
your job, the company simply takes back the car. You are not burdened
by EMI payments you can't afford,“ says financial planner Pankaaj Maalde.
The same arrangement can work for other benefits
as well. Some
companies also offer to fund the higher studies of their employees.
If your employer is willing to fund a professional course, the taxable
value of such a perk will only be at 10% of the course fee.This means,
for a
benefit of, say `70,000, you will be taxed for only `7,000. Check
if your
employer can provide you a laptop or tablet for professional as
well as
personal use. You will have to pay tax on the perk value of the
gadget, which
is only 10% of the price of the gadget.
Other tax-efficient perks include food coupons,
which can be used at
various outlets and departmental stores to buy food items.
Most
of big grocery chains, fast food outlets and departmental stores accept
these coupons. One can take nearly `30,000 worth of meal coupons
and gift
coupons of up to `5,000 in a year. This has the potential to
reduce the tax by
almost `10,000 for someone in the 30% tax slab.
Opt for more long-term benefits
Tax can be reduced further if you
opt for certain long-term benefits. Every
month, 12% of your basic
pay flows into your PF account with a matching
contribution
by your employer. While your contribution fetches you tax benefits
under Section 80C, you can opt for investments that give you
additional tax
benefits over and above the `1.5 lakh deduction under
Section 80C. Under
Section 80CCD(2), up to 10% of your basic
salary is fully deductible if invested
in the national Pension System
(NPS). Additionally, the employer's
contribution, which is up to
10% of the basic, is deductible under Section
80CCE over and
above the `1.5 lakh deduction limit for Sections 80C, 80CCC and
80CCD. If your company does not offer you this benefit yet, it's
time to ask
for it in your forthcoming appraisal. In the highest
30% tax bracket, it will
enhance your increment by 3% of your
basic salary. All your employer needs to
do is rejig the salary
structure by reducing any of the fully taxable
emoluments (special
allowance, performance-linked bonus, etc) and diverting it
to this
new head in your CTC. Become a consultant Another way to ensure
a
higher take-home salary and lower tax is by becoming a
consultant. Consultants
can claim deduction for work-related
expenses. As a consultant, your income is
taxed under the head
`income from business or profession' and accordingly you
can claim
deduction of all expenses incurred, including telephone bills,
travel, entertainment, stationery and depreciation of assets. This can
go a
long way in reducing the taxable income for the individual.
However, there are several hassles you need to
go through as a
consultant. You will have to maintain proper books of accounts
and
get an audit report in case the gross receipts exceed `15 lakh in a
year. A
consultant is also liable to pay service tax if his income exceeds
`10 lakh.
“It is wrong to assume that the tax burden will lessen
if one becomes a
consultant. It will depends on how much expenditure
one has incurred against
receipts,“ cautions Kirit Sanghvi, senior partner,
K.S. Sanghvi & Co.
Besides, you stand to forego some benefits you
would have
otherwise enjoyed as a salaried individual. For instance, HRA,
LTA
and medical allowance are some key benefits that consultants
are not eligible
for.
Kumar advises taxpayers to think about the
long-term benefits of
continuing as an employee rather than becoming fixated
with the s
hort-term tax benefits of a consultant.“In the absence of a
robust
social security system in the country, professionals should
continue working as
salaried employees.They stand to reap certain
incidental benefits that help
build long-term savings in the form of
Provident Fund, as well as certain
terminal benefits like
gratuity and superannuation.“
This should help you design a more taxfriendly
compensation
package for yourself.
SANKET
DHANODKAR ETW16FEB15
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