BALU.... (CCI STUDENT....) 13 January 2010
V Vidyalaxmi, ET Bureau
One of the biggest financial decisions that an individual takes is choosing a news employer. Case abound where individuals get a take-home salary which is a fraction of what their employment letter states. ET helps prospective job hoppers with tips on how to avoid the common mistakes.
My prospective employer is offering me a higher salary which includes variable pay:
Ask the organisation to clearly chalk out your target and what is required to achieve the variable pay. For example, a company may offer a performance bonus of Rs 5 lakh, where one-third of the component is lined to the company's performance, one-third to the team's performance and the last one-third is based on individual performance
My employer is talking about a cost-to-company structure:
Your salary package may sound impressive but look for the size of the variable component, periodicity of bonus, and milestones set by the employer. These parameters vary on a case-to-case basis.
"There have been cases where an employee with an annual income of Rs 10 lakh takes home a monthly salary of Rs 30,000. His variable component was Rs 3 lakh and vehicle compensation was Rs 2 lakh. After accounting for other taxes, the net take-home income was Rs 30,000," says Kris Lakshmikanth, CEO and managing director of HeadHunters India.
Salaried job v/s contract:
Employees pay income tax while consultants pay service tax. If two individuals earn Rs 9 lakh a year each, the tax outgo for the salaried employee would be around Rs 1.5 lakh. The contractual employee, on the other hand, would witness a tax outgo of just Rs 50,000, assuming he has mad tax savings U/S 80C. The one-third amount is mainly because of allowances such as conveyance, education, entertainment, etc.
"This situation reverses once the individual breaches Rs 10 lakh limit as service tax comes into account. If your annual salary was Rs 12 lakh , the service tax, especially from the second year would be at 10% and the total tax outgo could go up to as high as Rs 2 lakh against Rs 1.5 lakh for a wage board," adds Mahesh Padmanabhan, principal advisor- direct taxes group, RelaxWithTax Consultants.
Choosing from the a-la-carte menu:
A salary has known heads such as basic, HRA, conveyance and variable. Some company lets you decide the fifth component from the menu they offer. You could choose education, uniform, Sodexho, whichever is relevant to your needs. But HR consultants say these a-la-carte salaries are losing relevance as the maximum tax savings can Rs 20,000 a month.
New job involves relocation:
Most companies offer relocation allowance which should compensate for your travel, movers & packers and other transportation costs. But you have to factor in the cost of living of the new city and a mark-up over that to make significant difference in net inflows.
For instance, you are relocating from Pune to Mumbai, you have to account for higher rentals, commuting costs and over all higher cost of living, which would be more than 30-40% of your existing inflows. This number would get even higher if you were moving away from your family to a new city. Through these calculations you can arrive at a ball park figure and compare it with the offer letter.
I have signed a bond with my employer:
Bonds are usually enforced when a particular industry witnesses a huge turnover. Signing bonds are very common among IT companies and BPOs as they undertake huge costs in training the employees. "Often employees pay off the bond penalty from the signing amount they receive from the new company. But they forget they have to pay a tax on the signing amount. Hence, it can become a double whammy," adds Mr Padmanabhan.
Look at your non-monetary perquisites carefully. Your new employer may offer a one time furnishing allowance which can be availed of only for furnishing your apartment.
If a substantial portion of your new salary is earmarked to life insurance, it doesn't add to your net inflow. In fact you are better off buying a non-frill term cover at much lower cost out of your pocket and avail a tax benefits u/s 80 C.
Your non-monetary perquisite such as Sodexho coupons in your old company may transform into a monetary benefit in the new company. Your income increases so does your monthly expense and tax outgo.
Check on your leave policy, which vary from company to company. In MNCs, for instance, leaves lapse every year while some allow leave to be encashed.
Ask for the break-up of the salary to know your exact take home salary and get the figure confirmed with chartered accountant or a tax expert.
If your company promises ESOPs, ask for the option plan and the valuation. If the stock is trading at Rs 100 you could get it for Rs 90 or even Rs 10, if company is sitting on old or restricted stocks.
In case of joining bonus, check if it's one time pay out or paid out in installments. Also be aware of the treatment of joining bonus if you were to leave the organisation within a year.