Saturday, February 21, 2015

FINANCE / TAX SPECIAL ...............SAVE YOUR SALARY FROM TAX

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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