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Saturday, June 7, 2008
Negotiating salary? 4 important tips
When Sanjeev Verma took the offer to join a new company, he was quite happy with the cost-to-company salary that was offered to him.
However, after the first month, when the salary cheque came, he was shocked with the numbers. His actual take-home was slightly more than his previous salary. And,Verma is not alone.
There are many of us who get lured with the numbers that show in our CTC package, but when the actual take-home salary comes in our hand, it causes a lot of heartache. It is therefore very important that when you are negotiating the salary, you should have a clear idea about numbers. A good way to achieve this is by using tax saving strategies that would reduce your burden.
Ah! those slips that snip
The first thing to look for is the different heads in your salary package. Heads like performance incentive sound challenging, but they are always taxed. Special allowances, added with conveyance and phone reimbursement, also attract tax.
Often, there is a notion among salary-earners that a lesser basic pay and high allowances may bring down income tax burden. However, it is best if you avoid this approach. A reduced basic salary leads to a lower provident fund, which is a forced saving for your future.
Anyone who gets many allowances must combine all of them under a single head. Put car allowance, books reimbursement, house rent allowance, office travel allowance, phone, vehicle and staying in hotels under on head, which straight away lowers your tax bill. Call this consolidated allowance.
Allowances that help
Always go for conveyance allowance. A sum of Rs 800 a month is tax-free. Even if your office does not give conveyance allowance, you can ask for a reduced basic pay and additional conveyance allowance. This move can cut down tax outgo.
Daily allowance, wherever allowed, must be grabbed with both hands because it carries total tax exemption. Professional tax, up to Rs 2,500, is also unencumbered by tax. Also, office loans for car or personal reasons can be used to avoid taxation to a great extent.
Policies that pay
Employees State Insurance Scheme, if available, must be compulsorily availed. Unlike LIC [Get Quote] schemes, the amount is absolutely free from income tax. Fidelity Guarantee Scheme is another insurance plan that is completely tax-free.
Even if you are contributing to a Public Provident Fund, a salaried individual must also opt for Employers Provident Fund, because this also doesn't attract tax. Many salaried people are unaware that a loan for medical treatment is exempt from income tax under Rule 3 A, but make sure that your medical insurance policy is not utilised.
Avoiding FBT
The fringe benefit tax can be avoided if you own a car and the company pays for maintenance and petrol bills. The most profitable way to claim HRA is to ask the company to take a house on lease, which is owned by any of your relatives. If it's your parents, who don't have any income, it works completely to your advantage.
It is because, on one hand, you claim HRA and they, having zero income, don't have to pay any tax. In fact, even if they have some income, but less than the stipulated base limit of Rs 220,000 a year (assuming they are retired), they would gain from the situation. The maximum benefit occurs when the rent is over 20 per cent of your salary.
When gift vouchers are given, insist on taking them under the employee welfare scheme.
Mobile phone bills are considered a perquisite and taxed, causing your office to fret a lot. You can again offer tax counselling by suggesting a simple trick.
The mobile phone bills can be placed under "recurring operative expenditure" head. All taxes are eliminated at one stroke. At home, leased phone landlines installed at the company's behest and cost, allows you to get rid of paying tax on calls.
Travel expenses and hotel stays are taxed under FBT. In fact, even a conference to discuss reducing tax incidence on perquisites will also be taxed! However, by not showing the expenditure as conference/seminar and calling it "convention" would remove the tax burden.
The office may want to give meals, breakfast or tiffin, but FBT fear precludes an employer from extending this perquisite to staff. Why not have an office "food and beverage" account? Show the claim in the income tax return.
The FBT will not apply, at all. Finally, soft furnishings for a house (such as curtains and table cloth), which give the abode a decent appearance for entertaining guests who drop in for official duties, can be shown as expenses. They also qualify for tax exemption.
How to use your credit card smartly
Jayant Bhadauria, 34, head of education solutions at Adobe India, is expecting his second child this month. He has his heart set on a Shoppers' Stop pram that costs Rs 7,800. Says Bhadauria: "I liked the pram. To dish out Rs 7,800 would hurt, but since I have credit card points to redeem I don't mind the indulgence."
Credit cards don't just substitute for cash, they can also earn you reward points. "I use cards for their convenience and other benefits which I can milk," says Bhadauria. And you, too, can tap the monetary value of the points collected on your card.
How to accumulate points?
Every time you swipe your credit card to make a purchase, you collect reward points. Typically, you get one point per Rs 100-250 spent. This, however, depends on the card and the bank. For instance, banks offer more points on co-branded cards. State Bank of India [Get Quote] gives one point per Rs 40 spent on its Gold Card and eight points per Rs 100 on its co-branded Tata Card.
The value of each reward point also varies across credit cards and banks. Says Sachin Khandelwal, head (cards), ICICI Bank [Get Quote]: "The value of a point can be anywhere between 30 paise to a rupee and is also a function of the merchant partner in case of co-branded cards." For example, the value of one point on the SBI Gold Card is 70 paise, while it is Re 1 on the SBI-Tata Card.
The limitation with most accelerated reward points on co-branded cards, however, is that they can be redeemed only against products and services of the partnered establishment.
One also needs to remember that points get accumulated against spends (that too, not all of them), not for cash withdrawals.
How to redeem points?
What to redeem on. Earlier, banks offered a limited catalogue of products. Plus the prices were very high and one couldn't negotiate on them. But now there is a laundry list of what you can do with the points.
For starters, there is the conventional catalogue that includes apparel, gadgets, jewellery, luggage items, and the like. You can also encash your points against gift vouchers. For instance, with HDFC Bank's [Get Quote] Gold Card you can get gift vouchers from Domino's, Cafe Coffee Day, Pantaloons, Westside, Lee, Music World and Landmark.
Going a step further, some banks have tie-ups with certain merchants where you can redeem points instantly. You don't have to contact the bank and get vouchers; you can pay using the points.
When the card is swiped, the reward points get reflected on the machine. So, if you have accumulated points worth, say, Rs 500 and you buy goods worth Rs 1,000, the merchant will offer you the choice of using your points for payment.
Some banks now offer air tickets on reward points, a feature that was earlier limited to co-branded cards. For instance, HDFC Bank has tied up with Jet Airways [Get Quote], Indian and Kingfisher Airlines to allow its card users to convert their reward points into air miles. The value of one air mile is usually equal to one reward point.
"The air miles required to get complimentary tickets would depend on the airline and the travel sector," says Parag Rao, executive vice-president, head (product and portfolio management), credit cards, HDFC Bank.
Some banks, like Bank of Baroda [Get Quote], also let you redeem your reward points against cash. That is, cash corresponding to your reward points are credited to your account. Deutsche Bank does the same on its Gold Card, but also offers a gift catalogue.
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