Example of Total Reward ManagementSalary

The salary consists of following parts.

Basic Salary: As the name suggests, this forms the very basis of salary. This is the core of salary, and many other components may be calculated based on this amount. It usually depends on ones grade within the companys salary structure. It is afixedpart of ones compensation structure.

Allowance: It is the amount received by an individual paid by his/her employer in addition to salary to meet some service requirements such asDearness Allowance(DA), House Rent Allowance (HRA), Leave Travel Assistance(LTA) , Lunch Allowance, Conveyance Allowance , Childrens Education Allowance, City compensatory Allowance etc. Allowance can be fully taxable, partly or nontaxable.Perquisite:Is any benefit or amenity granted or provided free of cost or at concessional rate such as Rent free unfurnished house, Rent free furnished house, Motor car facility, Reimbursement of Gas, Electricity & Water, Club facility, Domestic Servant Facility, Interest Subsidy on Loan, Reimbursement of medical bills, Reimbursement of Hospital bills, Reimbursement of telephone bills, Benefits derived by employee stock option, and so on.

How are perquisites taxed?

Since these are non-cash components, they cannot be taxed directly. So the income tax laws attach a certain value to each of these components and charges a tax on them. The calculation of this value varies from category to category. Nevertheless, the thumb rule across all categories is that only those benefits that you use for personal purpose will be considered as perquisites.

Deductions:Two type of deduction are made from salary Compulsory deduction such as Provident Fund, Income tax, Professional Tax (where applicable) . Optional deduction such as recovery for advance or loan if taken, voluntary contribution to P.F etcProvident Fund Contribution

Provident fund contribution has two sides the employers contribution and employees contribution.This is usually12 per centof the basic salary. However, this contribution is not paid out . It is directly deposited in Provident Fund (PF) account and paid to employee when he retires or resigns.There is also employees contribution to PF. This amount is deducted from his monthly salary and deposited in his PF account.For details on provident fund you can readProvident Fund (PF) and Voluntary Provident Fund (VPF)Different types of salary

Gross Salary: is the amount of salary paid after adding all benefits and allowances and before deducting any tax.Net Salary: is what is left of your salary after deductions have been made.Take Home Salary: Is usually the Net Salary unless there are some personal deductions like loan or bond re-payments.Cost to Company: Companies use the term Cost to Company to calculate the total cost to to employ . i.e. all the costs associated with an employment contract. Major part of CTC comprises of compulsory deductibles. These include deductions for provident fund, medical insurance etc. They form a part of your compensation structure but you not get them as a part of in-hand salary. As such, although it increases your CTC, it does not increment your net salary.

Example

Lets see an example explaining the salary. An arbitrary salary break up is given below (Note: salary structure varies from one company to another):

Component of Salary(per annum or p.a)Amount

Basic Salary480,000

Dearness Allowance48,000

House Rent Allowance96,000

Conveyance Allowance12,000

Entertainment Allowance12,000

Overtime Allowance12,000

Medical Reimbursements15,000

Gross Salary6,75,000

Benefits vary from company to company. Example of benefits for the above employee is:

Medical insurance2000

Provident Fund (12% of Basic)57,600 (12% of 4,80,000)

Laptop50,000

Total Benefits109600

Cost to Company=Gross Salary + Benefits6,75,000 + 109600=7,84,600

Benefits would also vary from company to company. In some Laptop may not be provided. In some cost of cubicle would be added. For example: If rent of office space is Rs 200 per sq ft and then a cubicle of 6 feet by 8 feet (i.e48 square feet) would cost Rs. 9,600 per month, or Rs. 1,15,200 per year. Which can be added to your CTC. Please note CTC varies from company to company. How tax affect the various components of salaryComponent of Salary(per annum or p.a)AmountTaxTaxable Amount

Basic Salary480,000Full amount is taxable480,000

Dearness Allowance48,000Depends on company policy. Mostly fully taxable.48,000

House Rent Allowance96,000Applicable if living in a rented house. Minimum of three amounts (Note:Calculation shown below)52,800

Conveyance Allowance12,000Conveyance allowance of Rs 9,600 per annum is exempted from tax. If salary component is more than 9,600, the remaining part is taxable.In this case:12,000-9600=24002,400

Entertainment Allowance12,000Depends on company policy. Mostly fully taxable.12,000

Overtime Allowance12,000Fully taxable12,000

Medical Reimbursements15,000If substantiated with bills, are exempt to a limit of Rs 15,000 annually0

Gross Salary6,75,000Gross Taxable Salary6,07,200

HRA CalculationThe minimum of the three amounts will be exempt from tax:a. Actual HRA allowance in the salary package, that is Rs 96,000ORb. HRA received less 10 per cent of salary and DA, that is 43,200 (96,000 10% of 528,000)ORc. If you live in metropolitan (Delhi, Chennai, Bombay and Calcutta), 50 per cent of salary and DA However, if you live in any other city, it is 40 per cent of salary + DA. So, in this case it would be Rs 2,11,200 (40% of 528,000)So HRA will be minimum of ( 96,000; 43,200; 2,11,200) which is 43,200 which will be exempted.So the portion that will be taxed in this example is = 96,000 43,200 = 52,800

TaxAs Gross Taxable Salary 6,07,200 falls in the highest tax bracket. This tax amount includes education cess too. Assumption: Employee does not make any tax saving investment.Tax based on Assement Year 2011-2012 : 57,103. For tax estimator TaxCalculator from AY 2010-11 isis very helpful.

Tax57,103

Employee PF contribution(12% of Basic)57,600

Professional Tax2400

Total Deductions1,17,103

Net Salary = Gross Taxable Salary Tax=6,07,200- 1,17,103=4,90,097

Net Monthly Salary=490097/12=40,841.41

Can Take Home salary be increased?

Yes it is possible and that too legally. An employee can plan taxes and increase the take home. If employee invests Rs 1, lakh in tax saving instruments, Section 80C such as PPF, Equity Linked Saving Scheme(ELSS) etc he can save taxes. So now employee in above example will be taxed on 6,07,200- 1,00,00 = 5,07,200.

Amount to be taxed5,07,200

Tax33,413

Employee PF contribution(12% of Basic)57,600

Professional Tax2400

Total Deductions93,413

Net Salary = Gross Taxable Salary Tax=6,07,200- 93,413=5,13,787

Net Monthly Salary=513787/12=42,815.58

Tax saving instruments under section 80C, 80G, House loan etc are beautifully depicted in thisinfographic.Optimum Salary Structure Maximum In Hand Salary Or Minimum Tax Liability explains how restructuring the salary would increase the take home

PaySlip

A paycheck is a document/record issued by an employer to an employee which shows how much money an employee have earned and how much tax or insurance etc. has been deducted. .It will typically detail the gross income and all taxes and any other deductions such as retirement plan or pension contributions, insurances, garnishments, or charitable contributions taken out of the gross amount to arrive at the final net amount of the pay. One can read format of payslipor see a samplehere.

Form 16

If you are salaried employee in an organization, then you get the salary after deducting tax by the employer. This process is called asTax Deduction at Source (TDS). Company must issue a Form 16 which contains the details about the salary earned by that employee and how much tax deducted. The Tax deducted is paid to government by the company.Form 16 is the proof of employees income and tax paid to the govt. It is issued under section 203 of Income Tax Act for Tax. Tax payer has to use the Form 16 to file the Income Tax return every financial year. One can readUnderstand Your Form 16Disclaimer: While efforts have been made to ensure the accuracy of the information provided in the content, the web site or the author shall not be held responsible for any loss caused to any person whatsoever who accesses or uses or is supplied with the content (consisting of articles and information).Do you know the biggest employers in the world. Wal-Mart , a chain of department stores across the globe, employs 2.1 million employees worldwide.The Indian State Railways which has 1.42 million employees, is largest employer in India.Ref:Salary Income Tax Heads of Income: SalaryUnderstanding CTC and Your Salary Breakup,Tax implications of salary components,All you wanted to know about CTCEarning section of our website bemoneyaware.com covers: basics of earning such as How people earn money by working for someone else,How people earn money by starting their own business,Factors on which persons income depends ,Story on when we value money,Profit and Loss,Salaries of some famous Indian personalities,Salaries of some famous International personalities,Best jobs in the world,Worst jobs in the world