Tip Tuesdays: Why It Makes Sense to Have a Higher Basic Pay as Part of Your Salary?

by Vinaya HS on June 23, 2009

in Finance

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Recently, at work, there was a restructuring of our salary components. Many concerns were raised when the outside consultants proposed that Basic pay be at least 50% of the Gross pay — it was finally fixed at 40%. I think we lost out. Here’s the math (all figures are per annum).

Suppose your Gross pay is Rs 500,000. At 50%, your Basic pay is Rs 500,000 x 50% = Rs 250,000. At 12%, your contribution to EPF is Rs 250,000 x 12% = Rs 30,000 (and which carries over fully as income tax savings). Your employer contributes an equal amount, taking your total contribution to EPF to Rs 60,000.

On the other hand,

At 40%, your Basic pay is Rs 500,000 x 40% = Rs 200,000. At 12%, your contribution to EPF is Rs 200,000 x 12% = Rs 24,000 (and which carries over fully as income tax savings). Your employer contributes an equal amount, taking your total contribution to EPF to Rs 48,000.

Observe closely. That’s a straight Rs 12,000 less in your automatic savings. You just saved your employer Rs 6,000. You also lost Rs 6,000 as part of your automatic income tax savings.

In general, the higher the Basic pay, the higher are these figures. Employer’s contribution to EPF is akin to free money. Why would you ever want to lose out on that?

And the gains? Rs 500 extra in your pocket each month.

Which option would you choose?

Tip Tuesdays is my initiative to share practical personal finance tips — every Tuesday. I’d be delighted if you could share a tip or two from your own experiences. Drop a comment to submit your tip. And, as always, do spread the word if you find this useful.




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{ 4 comments… read them below or add one }

Shilpa June 23, 2009 at 10:54 AM

This is an excellent post, V.
I remember the time when companies provided tax-free sops (What was the specific name for that? Was it fringe benefits? Can’t remember) and people liked lower basic pay and higher sops so they could save on tax.
But now, since most payout (made in whatever form) should be accounted for in your payslip and is hence taxable, opting for a higher basic pay is the best way to go.

Vinaya HS June 23, 2009 at 11:08 AM

You’re right Shilpa. We’re often short-sighted just so that we can save a few thousands in income tax.

Anoop June 23, 2009 at 4:33 PM

Great info dude!, Employers are known to do Tight rope walking. Its always the employee who has to bear the brunt of the situation and take risks with whatever he/she earns and its so bloody obvious that its always employees who lose out. No matter how wealthy a company is they never fail to amuse me on a salary perspective, it always happens we are always offered 10% below our quote rate, this is a universally accepted fact. What do you think about Low basic pay + Commission based salary?.. I think its no better and worst than a low basic pay, because we end up with no savings and we still pay tax.

Girish June 25, 2009 at 7:04 AM

Usefull information…
HOw does the gratuity work???
topic for one more blog….
Keep the blogs flowing..

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