Understanding the Components of your Compensation Pay

Most of us fail to understand the difference between the cost to company (CTC) and the net salary. Cost to company is the aggregate of all forms of compensation and benefits offered by the company, while the net salary is the total amount received after deducting net tax liability on each component. People are often quick to become elated on receiving a higher CTC, failing to realize that the actual increase in the amount they receive in-hand may be marginal. This makes it necessary to understand the various components of CTC, which affect your in-hand salary directly.

Different Salary Components and their Tax Implications

The basic is the most important component of your salary. It is the actual compensation given for rendering services. Dearness allowance (DA) is another vital component of salary. These constitute a major chunk of the CTC, and are fully taxable. Other common components of CTC are:

• House rent allowance (HRA): This is offered to employees for aiding them in meeting the cost of a rented accommodation. The tax treatment of HRA is slightly complicated. The lowest of the following three amounts can be claimed as tax deduction:

• Actual HRA received
• 50% of salary (basic + DA) if residing in a Metro, or else 40%
• The amount by which rent exceeds 1/10th of salary (basic + DA)
• Conveyance: This form of allowance is paid to compensate employees for travel expenses incurred by them. Conveyance allowance is fully exempt from tax, provided the travels have been made for official purposes. Besides, in case of conveyance allowance for travel to-and-from work, up to Rs.800 per month is tax deductible.

• Medical reimbursement: Typically, medical expenses incurred by an employee for self-treatment of treatment of his/her dependant are reimbursed by the employer. These reimbursements are tax exempt, up to a limit of Rs.15,000 per annum.
• Lunch coupons: It has become a common trend for employers to provide lunch or lunch coupons to the employees. These benefits are fully tax exempt, provided they are not offered in cash.
• Annual bonus: This is perhaps the most popular incentive given by Indian employers, offered in the form of cash bonuses and commissions. Such bonuses are fully taxable.

Other Salary Components to Consider

Besides these, there are several other components of salary, including pension, gratuity and leave travel compensation (LTC). Note that some salary components are fully taxable, while others are partially or fully tax-exempt. Remember, understanding these components explicitly will enable you to negotiate for a more tax-saving and flexible salary structure.