Please see the following example... I hope the same will help you.
"Can two individuals having the same cost-to-company (CTC) package earn different take-home salaries?" a friend of mine enquired over the weekend. "Interesting question," I thought. A little bit of number crunching and I came up with the answer.
Yes, the salaries of two individuals having the same CTC can vary. It all depends on the way the salaries are structured.
Let us take an example of two friends, Ram and Shyam, who work for different companies but have the same CTC package of Rs 6 lakh (Rs 600,000) per annum.
As can be seen from the table given below, Shyam's take-home salary per month is Rs 45,937 whereas that of Ram is Rs 40,330. A clear difference of Rs 5,606 per month or around Rs 67,200 per annum, for the same CTC package!
Now how is that possible? Well, the answer to that question is very simple: Shyam's package -- as can be seen from the table below -- is heavy on reimbursements. The money Shyam gets as reimbursement is not taxable as long as he is able to provide bills for the same.
On the other hand, in Ram's case, there are no reimbursements. Given this, a major portion of his salary is taxable.
Both Ram and Shyam pay a rent of Rs 10,000 per month. The house rent allowance (HRA) in the case of Ram is Rs 12,500 per month, whereas in the case of Shyam, it is Rs 6,250. As per the Income Tax Act, the entire HRA is not tax-free. The tax deduction allowed is limited to the minimum of: a) The actual HRA an individual gets; b) The actual rent paid minus 10% of salary (which includes the basic salary plus the dearness allowance); c) 50% of salary if the individual happens to live in Mumbai, Chennai, Kolkata, and Delhi and 40% of the salary in other cases.
If we follow the above rule, the minimum in the case of Ram works out to Rs 7,500. This figure comes from the second option. The actual rent paid is Rs 10,000. 10% of the salary in the case of Ram works out to Rs 2,500 (10% of the basic salary of Rs 25,000). The difference between the two works out to Rs 7,500.
In the case of Shyam, the minimum works out to Rs 6,250, which is the actual HRA he receives. These are the amounts they are allowed as a tax deduction for their HRA.
As can be seen, Shyam gets his entire HRA as a tax deduction, whereas that is not the case with Ram.
Ram
Shyam
Salary
Basic Monthly Salary (taxable)
25000
12500
Employer's Contribution to PF
3000
1500
HRA
12500
6250
Medical (monthly)
1250
1250
Special Allowance
8250
7500
Total (A)
50000
29000
Reimbursements
Conveyance allowance
0
10000
Communication allowance (mobile, telephone, internet, etc.)
0
3000
Entertainment expenses
0
5000
Books and Periodicals
0
3000
Total (B)
0
21000
Fringe benefit tax per month (6.789% of total monthly reimbursements)
0
1425.69
Fringe benefit tax per year (6.789% of total yearly reimbursements)
17108.28
Total Monthly Salary (A+B)
50000
50000
Cost to company for the year (total monthly salary x 12)
600000
600000
Taxable Income (Basic+ HRA+Special Allowance) per month
45750
26250
Gross Yearly taxable Salary
549000
315000
Less: deduction for HRA
7500
6250
Less: Deduction u/s 80C, 80CCC & 80D
110000
110000
Less professional tax
2500
2500
Taxable Income
429000
196250
Tax
77700
13250
Add: Education Cess (3% of tax)
2331
397.5
Tax payable
80031
13647.5
Add: FBT Paid by company and recovered from the employee
0
17108.28
Total tax to be paid by the employee
80031
30755.78
Total monthly tax paid
6669.25
2562.9817
Employee's contribution to PF (12% of basic salary)
3000
1500
Monthly take-home of the employee (monthly salary – tax paid – PF contribution)
40330.75
45937.018
Other than this, companies these days have to pay a fringe benefit tax on the reimbursements it gives to its employees. This tax in most cases works out to 6.798% of the total reimbursements paid.
In Shyam's case, the company does not want to bear this tax and passes it on to Shyam. The total for the year in the case of Shyam works out to Rs 17,108 for the year. Shyam pays this up happily. His logic is that paying a tax of 6.798% is any day better than paying income tax, which can be 10%, 20%, or 30%, of the taxable income, depending on the tax bracket.
Both Ram and Shyam make their Section 80 C investments of up to Rs 1 lakh (Rs 100,000). Other than this, they also have a medical insurance policy for which they pay a premium of Rs 10,000 per annum. For this, a deduction is allowed under Section 80 D of the Income Tax Act.
Due to all these reasons, the yearly tax outflow for Ram works out to Rs 80,031. The same in the case of Shyam (including the FBT he pays back to the company) works out to Rs 30,755.
A clear difference of around Rs 50,000. And that is why Shyam earns more than Ram.
The moral of the story is, if you are in a position to negotiate your salary structure, go for a structure that is heavy on reimbursements. That way, the tax outflow will be lesser, and hence the take-home pay much higher!
Regards,
PRANAV DAVE