How to structure your salary and minimize tax liability
Job satisfaction matters. What matters more is the remuneration. All salaried employees will vouch for that. That’s the reason why they look forward eagerly to the first quarter of the financial year _ when salaries are revised. Thereupon, there is a mad scramble to understand the latest pay package and calculate the percentage of hike received. Not all employees can instantly decipher what the hike implies. The few who do immediately understand that taxes are a bitter part of their lives and jobs. The rest realize it when the salary is credited into their bank accounts.
Understanding the nitty-gritty of salaries is not everyone’s cup of tea. And the salary components can differ from one company to another. Ask Vinay Jhunjhunwala (34), head-treasury with MCPI, part of The Chatterjee Group, Kolkata. Jhunjhunwala received a 25% hike in salary when he joined the firm but his tax liability also trebled. “It was because of the lower LTA (leave travel allowance) and HRA (house rent allowance) component, compared to what I was getting at my previous organisation. Considering the post-tax income, my hike turned out to be just 15-16%," he says.
To avoid such dejections, it’s important for employees to understand salary components, mandatory deductions and their taxation before accepting an offer letter. So, ask the human resource department to explain your salary structure and negotiate for tax-friendly components that will get you the maximum tax benefit.
The cost to company
Employers calculate your salary in terms of cost to company, or CTC. It is the total amount that a company spends on its employee in a financial year. This includes basic salary, HRA, special allowances and flexi benefits, gratuity, and health insurance,
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