Is your take-home pay in sync with CTC?

With the Indian economy expected to grow at 8-9%, according to industry estimates, the market is giving green signals to those wanting to switch jobs. When you hop over to a new employer, there is a fair chance that you are able to bargain your way into the higher salary bracket.

Says Vivek Ahuja, managing director, Confiar Global, an HR consultancy: “Given that the economy is booming, a lot of organizations are looking to hire. In fact, many organizations are looking at expats and other senior managerial level personnel to head their India operations. You can expect a 20-30% increase around this time.”

Landing a new job with a 30% hike in salary is sure an achievement. But if this hike doesn’t translate into a higher take-home income, it could be a dampener. The trick is to not just get caught with the hike in your cost to company (CTC), but look at each component carefully to work out what you will really get. CTC is the expense that the company incurs when it employs you and includes the components of your salary as well as long-term benefits, if any.

It’s possible that the new company puts a large chunk into the variable component, which never comes in full, and hacks off from your basic salary and other allowances. Or, the salary structure may be such that your tax liability goes up. Here’s what you need to know to ensure the jump brings you the optimal hike.

What constitutes your take-home salary?

Your take-home salary includes anything that comes to you at the month end in the form of cash or cheque.

Basic salary: A fixed amount, basic pay is the most important component as the house rent allowance (HRA) and provident fund (PF) are linked to it. It is usually fixed as per the company policy for various managerial levels and is usually non-negotiable.

A hike in the basic pay increases your cost to the employer as his contribution to the PF increases. Therefore, some organizations may be reluctant to hike your basic and increase only the allowances.

However, a very high basic salary is also not advisable since it is completely taxable.

Allowances: These include reimbursements for various service and utility bills such as cellphone, newspaper and magazines, among others. Reimbursement for any expenses you may have incurred on duty is also included.

Certain allowances are exempt from tax under the Income-tax Act up to a certain limit. “Allowances will be tax-free only if you produce bills for the expenses and can justify that the expense was necessary for your work enhancement and business commitment, or was incurred on duty. The rest will be taxed under the perquisite tax,” says Vikas Vasal, managing director and head (personal taxation), KPMG India, a consultancy firm.

There are various kinds of allowances.

HRA: How much of your HRA is tax-free is determined by a formula. Calculate 50% of your basic if you live in one of the four metros and 40% elsewhere, your actual HRA and the total rent you pay minus 10% of your basic. The least of these amounts is tax-exempt, provided you produce the rent receipts or some other proof as per the company policy. The taxability may change if you own a house.

Medical allowance: It is tax-exempt up to Rs15,000 per year. Thus if the medical allowance paid to you is anything less than Rs1,250 per month, then get it increased up to that level. However, only the amount for which you submit bills is tax-exempt.

Conveyance and leave travel allowance (LTA): A conveyance allowance of up to Rs800 per month and LTA is tax-exempt. Only reimbursement for economy class return airfares on the shortest route anywhere within India are tax-free. You can avail this benefit twice in a block of four years for your dependants and yourself.

Some organizations allow you to choose from a basket of allowances. While choosing your allowances, bear in mind your needs and requirements, family status and lifestyle. Says Muthal: “For instance, if you are in your 20s, you will probably opt for a higher entertainment allowance, while someone in his mid-30s will choose a higher education allowance if he has kids. But remember to pick allowances only to the extent to which you can furnish bills for them.”

What’s not part of your take-home salary

The CTC can be inflated by adding expenses such as office telephone bill, stationary allowance, utility fee, travel allowance from campus to office location but these never come with your take-home salary.

“These are expenses that you are not entitled to and yet the cost falls on you. For instance, if your office is in Nariman Point and the employer adds office space rental to your allowances, it will inflate your CTC by a few thousands, but that will not get reflected in your take-home salary,” says Muthal.

Perks and facilities: These include non-cash perks such as insurance policies, club memberships, company car and driver, spa and salon vouchers and furniture allowance, among other such facilities. “Usually, these are over and above your CTC, so you can’t really negotiate on these. Anything that is included in your CTC is negotiable so you can ask your employer to cash it out,” says Vasal.

Usually, these perks are given to those on senior positions in accordance to their specific roles. Says Ahuja, “At the senior level, whether you need it or not, the employer offers it to you because he expects you to move in certain circles, be well networked and entertain clients. Do take it up and use it to the optimum.”

Also, if you get a car from your company, your driver and petrol allowance may be tax-exempt and can bring down your tax liability substantially.

Variable components: These are linked to both your organization and and your performance. Earlier restricted to sales and marketing positions, now these are common across sectors. In fact as you climb up the hierarchy, the variable pay will increase significantly.

If your variable pay is anywhere between 20-30%, don’t worry much about it. Says Ahuja, “At the beginning of the year or when you take up a new job, the employer will set targets for you. If you are confident about achieving those and deliver on what is expected of you, then rest assured it will come to you.”

However, you can never be sure of how much you will get, so ensure its not a substantial part of your salary.

Long-term benefits: These include PF, gratuity and superannuation. The PF is completely tax-exempt. Gratuity is fully tax-exempt for government employees; the exemption limit for others is fixed according to a certain formula.

12% of your basic salary goes into PF and the employer contributes an equal sum to it. However, a lot of employers include their part of PF in your CTC, too.

Says Ahuja: “When you are changing jobs look at your CTC, it should definitely increase but more importantly your take-home pay should also increase. Apart from this, employees are also getting wiser, they know that people are looking not just for money but also for job satisfaction and professional growth. So let money not be the only consideration.”

While money is important, so is job satisfaction. Moreover, you can’t bargain beyond a point since every company has a particular policy. But it’s always better to know what to expect.