“Did you get a 30% increase in your salary?” my father asked.
“It’s on CTC. The increase in take-home pay cannot be too outrageous,” Sanjay replied.
“Well, it depends on the structure of the CTC. How many components does it have?
“About ten. If I compare them to my current CTC, five of them are new. Now that you mention it, the variable pay also looks larger. It’s confusing; how should I calculate my salary on hand?
“Mail me your acceptance letter with an attachment of your current salary. I will calculate it and explain it,” his father said.
“Well, your hand increase is 20%. The House Rent Allowance (HRA) in the new offer is lower and the Leave Travel Allowance (LTA) is increased. As you pointed out, the variable salary is almost 40% of the fixed salary , while the current job ratio is 15%. Some flexible benefits have been added, but these benefits can only be claimed on the actual bill. Also, have you asked the company whether they will deduct their own EPF contribution from your fixed salary. payments as this will further reduce existing wages,” he explained.
“Wait, that’s a lot of jargon,” Sanjay said, laughing.
“I suggest you ask the company to provide you with a simpler CTC, which will give you a clearer idea of your take-home pay. In fact, now that you have started filing your tax returns under the new tax regime, ask them accordingly Build CTC,” his father said.
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New system provides better visibility
Sanjay’s father was right to advise him to ask the human resources (HR) professionals to establish the CTC (total annual salary) as per the new system. This will give Sanjay a better idea of his take home pay as the tax saving component will be reduced.
For example, HRA, LTA, meal and child education allowance are not available. Hence, the fixed salary has fewer components and hence it is easier to calculate TDS. Also, the TDS calculation will be simple since Sanjay will not claim any tax deduction, which salaried individuals usually did under the old system to maximize tax savings.
Also read: Don’t have a home loan or HRA? The old tax plan may not work for you
It should be noted that the decision between the two tax regimes should be based on which one saves you more tax, not because it makes your CTC structure simpler.
According to the Central Board of Direct Taxes (CBDT), around 72% of the returns filed for the financial year 2023-24 as on July 31 fell under the new regime. As most taxpayers have moved to the new tax regime, it is now easier to calculate expected existing salary for different total salary ranges, which is particularly useful when negotiating salaries when recruiting.
How to calculate take-home pay
In order to calculate existing salary with CTC, one should know the composition of CTC and its taxation. It consists of three components – fixed salary, variable salary and deductible.
Fixed salary includes base salary, tax-free transportation reimbursement, phone bills, fuel and allowances, as well as special allowances, which are a fully taxable direct monetary benefit. In the old system, HRA and LTA were also part of the fixed salary.
Under the new tax regime, tax-free allowances available to employees include uniforms, medical insurance, gadgets, car rental, fuel and driver salary reimbursement.
“Under the new tax system, if structured correctly, car rental allowances can be tax-deductible along with driver allowances and are generally tax-free if supported by receipts; and fuel reimbursements for business-related travel are not taxable.
Supporting bills and receipts must be provided to claim most reimbursements, she added. “Without proper documentation, these components may be taxable as part of the salary.”
The second component is variable pay, which includes annual bonuses, stock options and performance-related incentives. These are also fully taxable.
The third is the mandatory deduction of employer’s Employees Provident Fund (EPF) contributions and gratuity, which are 12% and 4.81% of the basic salary respectively.
“Apart from provident fund and gratuity, employees are also required to pay professional tax, which varies from state to state,” Sarkar said.
Ulka Shukla, pre-IPO HR consultant and leadership coach at Tyche Consultants, said the National Pension Scheme (NPS) is an optional deduction under the new tax regime and 14% of the basic salary contributed by the employer is tax-free. “At higher income levels, tax saving avenues are reduced and we encourage employees to take the NPS option,” she said.
Fixed salary is the main component that determines your existing salary every month, while variable salary is a one-time payment every two years or every year. Deductibles are indirect benefits in the form of pensions or gratuities that are paid after an employee leaves the company after five years of continuous employment.
When calculating existing wages, add the base salary and special allowances. For example, this addition is given to X quantity, TDS is decided based on the tax schedule. Calculation of TDS is very simple as most of the tax saving deductions like Section 80C, 80D, home loan, HRA, etc. are not claimed in the new regime.
Next, TDS as well as contribution to Employees State Insurance Corporation (ESI) is capped at $21,000 per annum, Labor Welfare Fund (LWF) and employee’s 12% EPF contribution are deducted from X.
Now, the tax-free allowance or reimbursement is added to the net salary, which is the take-home pay.
Know what you have
Given the limited components of the new system, Mint calculated take-home pay at different gross wage levels (see grfx). This method assumes that basic salary, tax-free allowance and special salary account for 30%, 15% and 40% of the total annual salary respectively, and variable salary accounts for 12% of the fixed salary. These assumptions apply for income up to $50 Lakhs as per industry trends. This may vary in some cases, depending on companies using different CTC construction methods across industries and seniority levels.
Shukla points out that variable pay for entry-level positions, for example, is typically lower, but may be higher for some positions. “Performance-linked incentives are higher in roles that directly impact business building. For example, in BD (Business Development), role incentives are higher, pushing employees to get more deals. Therefore, variable pay varies greatly depending on the function. big.
Sarkar agreed. “The specific allocation of variable pay also varies by industry. For example, industries such as sales typically have a higher variable pay component due to the direct correlation between individual performance and revenue generation. In comparison, variable pay for executive positions The percentage may be lower.
But in most cases, for more senior positions, variable pay can be equal to or higher than base salary. “For senior positions, variable pay can range from 30% to 50% of fixed salary, reflecting greater responsibility and impact on company performance,” Sarkar said.
With this in mind,Mint Estimated take-home pay of earnings comes from $6 million to $1 Crore respectively, the variable salary share is higher at 45% and the share of tax saving allowance is lower at 10%. In the higher income bands, the amount of the tax-free allowance will be smaller relative to the CTC because much of it is based on work-related expenses, which cannot increase beyond a certain amount.
In addition, our earnings estimates take into account a 15% range, covering changes in higher tax-saving allowances and lower base salaries. These income ranges can give us a clear idea of what real after-tax wages will look like at different income levels under the new tax system.
Sanjay’s case is a hypothetical case.
Also read: Do you need a salary advance this holiday season? There are a few startups working on this.
