With the Indian economy projected to expand by a fair percentage in the coming years, as per industry forecasts, the job market is showing positive signs for those considering a switch. When transitioning to a new employer, there’s a good chance you can negotiate your way into a higher salary bracket.
Securing a new job with a 30% salary increase is undoubtedly a milestone. However, if this boost doesn’t translate into a substantial rise in your take-home pay, it could be disappointing. The key lies not only in focusing on the hike in your cost-to-company (CTC) but also meticulously analyzing each component to understand what your actual earnings will be.
CTC represents the total expense borne by the company when it hires you, encompassing various components of your salary along with any long-term benefits provided.
It’s possible that the new company allocates a significant portion into the variable component, which may not materialize in full, and adjusts your basic salary and other allowances accordingly. Alternatively, the salary structure might lead to an increase in your tax liability. Here’s what you should understand to ensure that the transition results in the most advantageous salary hike for you.
What constitutes your take-home salary?
Your take-home salary includes anything that comes to you at the month end in the form of cash or cheque
Basic salary:
The basic salary is a fixed amount and serves as a crucial component, as both the house rent allowance (HRA) and provident fund (PF) are tied to it. Typically, it’s predetermined according to the company’s policy for different managerial levels and is often non-negotiable.
Increasing the basic pay raises the employer’s cost since their contribution to the PF also increases. Consequently, some organizations might be hesitant to raise your basic salary and opt to increase only the allowances instead. However, having an excessively high basic salary isn’t also recommended as it is fully taxable.
Allowances:
These include reimbursements for a range of service and utility bills, such as cellphone, newspapers, magazines, and other relevant expenses incurred on duty. They also include reimbursements for any work-related expenses you’ve incurred. Certain allowances are exempt from tax under the Income-tax Act, up to specified limits. For allowances to be tax-free, you must produce bills for the expenses and justify that they were necessary for your work enhancement, business commitment, or incurred while on duty.
Different types of allowances exist, such as House Rent Allowance (HRA), Conveyance Allowance, and Leave Travel Allowance (LTA). Some organizations offer flexibility, allowing employees to select from a range of allowances. For example, individuals in their 20s might prefer a higher entertainment allowance, while those in their mid-30s with children might opt for a higher education allowance.
What’s not part of your take-home pay?
The CTC can be artificially inflated by including expenses like office telephone bills, stationary allowances, utility fees, and travel allowances from campus to the office location. However, these expenses are not part of your take-home salary, meaning you aren’t entitled to them, yet the cost falls on you.
For example, if your office is in Nariman Point or some other place and your employer includes office space rental in your allowances, it may inflate your CTC by a significant amount, but this increase won’t be reflected in your take-home salary.
Perks and facilities:
These include non-cash benefits like insurance policies, club memberships, company-provided vehicles with drivers, spa and salon vouchers, furniture allowances, and various other amenities.
Variable components:
Variable components of your salary are tied to both your organization and your performance. Once limited to sales and marketing roles, these components are now common across various sectors. As you progress up the hierarchy, the variable pay tends to increase significantly.
If your variable pay constitutes around 20-30% of your total compensation, there’s no need for undue concern. Typically, at the start of the year or when joining a new position, your employer will set performance targets for you. If you’re confident in meeting these targets and fulfilling your responsibilities, you can reasonably expect to receive the variable portion of your pay.
However, it’s important to note that the exact amount of variable pay is not guaranteed, so it’s advisable not to rely heavily on it as a substantial part of your salary.
Long-term benefits:
These include various provisions such as Provident Fund (PF), gratuity, and superannuation. PF contributions are entirely tax-exempt. Gratuity is fully tax-exempt for government employees, while for others, the exemption limit is determined by a specific formula.
A portion equivalent to 12% of your basic salary is allocated to PF, with the employer matching this contribution. However, many employers also include their share of PF contributions in your CTC.
What should you do?
When considering a job change, it’s essential to ensure that your CTC increases, but equally important is the increase in your take-home pay. Additionally, modern employees are becoming more discerning; they understand that monetary compensation is not the sole factor driving job decisions. Job satisfaction and opportunities for professional growth are also crucial considerations.
While money matters, job satisfaction shouldn’t be overlooked. Furthermore, it’s important to recognize that there are limits to negotiation, as each company operates within its own policies. Nonetheless, being informed about what to expect is always advantageous.
