Nitty-gritty of your taxable Pay Package!

What is your CTC (Cost of Company)?

The definition of ‘CTC’ can be very comprehensive as apart from your basic salary, all fixed allowances and cash reimbursements are part of your package. Defined contributions towards long-term and retirement benefits such as provident fund, superannuation fund and gratuity, along with benefits given in kind, for instance house, furniture and car, are also included. Some companies even include variable payouts such as performance bonus and gratuity in the ‘total target remuneration’.

Group benefits such as health and accident insurance that are either contingent or for which no specific value can be attributed to a single employee may also be included on the basis of derived or ascertained value.

The situation is get more badly, when tax is axed silently on your pay package. The key, therefore, lies in finding out what makes taxable part of your CTC. Here we discuss some common elements of the CTC and how they are to be taxed into the total package.

Tax on Base Package

In your base package, there are three main elements – basic pay, dearness allowance (DA) and house rent allowance (HRA). A higher basic pay means higher house rent allowance, dearness allowance and contribution towards provident and superannuation funds leads to a higher tax exemption limit for HRA. It also increases contribution towards provident fund (usually 12 per cent of the basic pay) and superannuation fund, leads to a lower take-home salary but fills the gap of investment under section 80C. Bonus is also fully taxable in employees’ hands, whether part of salary or not.

How to get exemption in HRA

To get the claim the tax exemption of HRA, you have to produce rent receipt to your employer. Have you received HRA below or at Rs 3,000p.m., you do not need to provide any rent receipt to get exemption. Otherwise, you can give rent receipt up to maximum of actual HRA received by you plus 10% of your (Basic+DA), to get the claim full exemption of HRA received by you.

Allowances and Reimbursement

Allowances and reimbursements are guided by two things-the pay scale and the tax rules that apply to these components.

Allowances whatever name called, are either fully taxable or taxed only after a limit. For instance, the tax-free limit for conveyance allowance for commuting to work is Rs 800 a month; it is usually capped at Rs 9,600 a year. For medical reimbursement, the tax-exempt limit is Rs 15,000 a year, provided the bills are submitted. Similarly, the Leave Travel Allowance (LTA) is also exempt to the extent of the expense incurred. However, it is limited to two trips in a block year of four calendar years (the current block is calendar years 2010 to 2013) and travel within India. Other list of allowances and reimbursements is quite long.

Tax on Perquisites and Privileges 

Perquisites provided by the employer such as a house with zero or concessional rent, vehicle, insurance, medical and club facilities are also part of the total compensation. Each has a different valuation rule. The tax treatment also varies from situation to situation. In case of accommodation, the rules depend on whether it is a company-leased or a company-owned property. If the accommodation has been taken on rent by the employer, the taxable value is 15 per cent salary or the rent paid, whichever is lower.

If it is owned by the employer, the valuation is based on the population of the city (as per the 2001 census). According to the tax rules, the perquisite valuation should be 15 per cent of salary in cities with a population of more than 25 lakh, 10 per cent in cities with 10-25 lakh people and 7.5 per cent of salary in other areas. In case of furnished accommodation, 10 per cent of the actual cost of furniture owned and provided by the employer, or in case of hired furniture, actual charges paid by the employer is added to valuation of accommodation.

If you take any interest free or concessional loan, except for the purpose of specific medical treatment from company, the valuation of such a loan is done on the basis of the interest that the employee otherwise would have paid, which is taken as the rate charged by State Bank of India on a yearly basis for similar loans and computed on the maximum outstanding monthly balance. However, consolidated loans worth less than Rs20, 000 are exempted.

Now that you know the rules of tax and CTC on your package, so, before deciding anything, you must have to wait for the ‘offer letter’.

Unless you see the salary break-up and do the math, you cannot be sure about what you’ll get in hand. For example, suppose the company has offered you a good salary increase but has made variable pay a big part of the CTC and taxes. In such a case, the compensation may be less than expected and the deal may not turn out to be as good as it seems.