Sensex

Wednesday, February 20, 2008

DG - How to take home a higher salary | Tax Planning

How to take home a higher salary

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 at the end, Shyam's takehome 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 case of Ram is Rs 12,500 per month, whereas in 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 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 salary in case of Ram works out to Rs 2,500 (10% of basic salary of Rs 25,000). The difference between the two works out to Rs 7,500.

In 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. He only gets Rs 7,500 of his total HRA of Rs 12,500 as a tax deduction.

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 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 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 in for a structure that is heavy on reimbursements. That way the tax outflow will be lesser and, hence the take home pay much higher!

 

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 employee (monthly salary tax paid PF contribution)

40330.75

45937.018

 

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DG - FW: Sharekhan Post-Market Report dated February 20, 2008

 

 

From: The Sharekhan Research Team [mailto:marketwatch@research.sharekhan.com]
Sent: 20 February 2008 19:02
To: The Sharekhan Research Team
Subject: Sharekhan Post-Market Report dated February 20, 2008

 

 

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February 20, 2008

 

Index Performance

Index

Sensex

Nifty

Open

17,991.29

5,267.15

High

17,991.29

5,267.15

Low

17,505.56

5,116.30

Today's Cls

17,617.60

5,154.45

Prev Cls

18,075.66

5,280.80

Change

-458.06

-126.35

% Change

-2.53

-2.39

 

Market Indicators

Top Movers (Group A)

Company

Price 
(Rs)

%
chg

Gainers

Hexaware

71.95

7.39

Bosch (MICO)

4,263.60

4.51

EIH

177.60

4.41

HTMT Global

315.40

4.18

Bombay Dyeing

724.45

4.10

Losers

Lanco Infra

429.65

-8.47

Jaiprakash Associates

243.20

-7.97

Reliance Capital

2004.80

-7.68

Canara Bank

287.80

-6.27

Indian Bank

219.05

-6.21

Market Statistics

-

BSE

NSE

Advances

806

259

Declines

1932

909

Unchanged

58

17

Volume(Nos)

28.50cr

45.16cr

 Market Commentary 

Market hammered amid oil woes

Sensex crashed over 550 points in intra-day trades and closed at 17,618 by shedding 2.53% on across-the-board selling pressure.

Market witnessed heavy selling as the sentiment remained bearish on the back of sudden spurt in crude oil prices, which closed over $100 in US markets.  

 

After resuming 85 points lower at 17,991, extensive correction in heavyweight, realty, banking and capital goods stocks assured that the Sensex remains in negative territory. Fall in the Asian markets followed by weak opening in European markets also dragged the Sensex to day's low of 17,506, down 570 points from the yesterday's close. Major Asian indices like the Hang Seng, the Kospi index and the Straits Times index shed 2-3% each, thereby adding pressure on the domestic indices. The Sensex finally ended the session at 17,618, down 458 points, while the Nifty shed 126 points and closed at 5,154.

Except IT index, all the sectoral indices were hammered on the back of relentless selling pressure on Bombay Stock Exchange (BSE). The BSE Realty index dropped 3.43% at 9,726, the BSE Bankex index lost 3.25% at 10,607, the BSE CG index shed 2.79% at 15,936 and the BSE PSU index fell 2.70% at 8,306.

The broader market was weak. Of the 2,796 stocks traded on the BSE, 1,932 stocks declined, 806 stocks advanced and 58 stocks ended unchanged. Most of the stocks in the Sensex basket ended in the red. Among the major losers Tata Steel tanked 4.92% at Rs773, Maruti Suzuki tumbled by 4.76% at Rs769, BHEL declined by 4.54% at Rs2,124, Tata Motors slumped 4.36% at Rs706, ICICI Bank fell 4.19% at Rs1,167, HDFC plunged 3.77% at Rs2,752, M&M dropped 3.50% at Rs635, Reliance Communications slipped by 3.40% at Rs585 and NTPC was down 3.30% at Rs198. However, TCS gained 1.05% at Rs884, while Infosys, Bajaj Auto, Satyam Computers and Ambuja Cement closed with modest gains.

RNRL witnessed volumes of over 1.91 crore shares on the BSE followed by Bang Overseas (1.66 crore shares), Hexaware (1.53 crore shares), Shriram EPC (1.04 crore shares) and Essar Oil (97.07 lakh shares).

Valuewise, Bang Overseas registered a turnover of Rs326 crore on the BSE followed by Shriram EPC (Rs323 crore), OnMobile (Rs265 crore), RNRL (Rs258 crore) and Reliance Capital (Rs252 crore).

European Indices at 16:15 IST on 20-02-2008

Index

Level

Change (pts)

Change (%)

FTSE 100

5898.30

-68.60

-1.15

CAC 40 Index

4846.54

-39.29

-0.80

Dax Index

6931.85

-70.44

-1.01

Asian Indices at close on 20-02-2008

Index

Level

Change (pts)

Change (%)

Nikkei

13310.37

-447.54

-3.25

Hang Seng

23590.58

-532.59

-2.21

Kospi Index

1687.91

-32.61

-1.90

Straits Times

3026.83

-71.23

-2.30

Jakarta Composite

2689.26

-22.62

-0.83

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DG - Run-up to Budget 2008-09: Budget Special dated February 20, 2008

 

Sharekhan Budget Special
[February 20, 2008] Please see the attachment for details

Sharekhan
www.sharekhan.com

Summary of Contents

 

SHAREKHAN BUDGET SPECIAL

Run-up to Budget 2008-09

In all probability the last budget to be presented by the United Progressive Alliance government is likely to be a populist budget, considering the general parliamentary elections in 2009 and the forthcoming elections in some of the politically important states like Rajasthan, Madhya Pradesh, Delhi and Chattisgarh. In line with this, the finance minister is likely to substantially increase the allocation for health, rural development and employment generation schemes. Moreover, we expect some relaxation in tax structure that would benefit the lower- and middle-income population (the Aam admi).

Regards,
The Sharekhan Research Team

myaccount@sharekhan.com 

 

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