salary math
Salary increase is always good news for employed people, but not every increased amount reaches their pocket directly. In the new tax system, as income increases, tax liability also increases, due to which a part of the salary hike goes in tax. Especially for employees earning Rs 12 lakh to Rs 50 lakh annually, the actual benefit of a 10% salary increase may vary. Let us understand how much extra money is left in hand after increasing the salary.
An increase in the salary of an employee does not mean that his entire additional income will reach his bank account. As income increases, tax also increases according to the tax slab. Apart from this, some deductions related to basic salary, like Employees Provident Fund (EPF) may also increase. This affects the take-home salary. Under the new tax system, salaried employees get a standard deduction of Rs 75,000, but despite this, as the income increases, the tax liability also increases.
Those with a salary of Rs 12 lakh are most affected.
If the annual salary of an employee is Rs 12 lakh and he gets a hike of 10%, his income will increase by Rs 1.2 lakh. However, tax liability on increased income will also increase. Even after getting the benefit of marginal relief, additional tax of about Rs 46,800 may have to be paid. In such a situation, the actual benefit in the hands of the employee remains only around Rs 73,200.
What will be the impact on income ranging from Rs 16 lakh to Rs 24 lakh?
An employee earning Rs 16 lakh annually will get an additional Rs 1.6 lakh after the 10% hike. But after deducting tax, he will be left with an actual profit of around Rs 1.31 lakh. Whereas an employee with a salary of Rs 20 lakh will get a post-tax benefit of approximately Rs 1.52 lakh on an increase of Rs 2 lakh. If the annual income of an employee is Rs 24 lakh, then after deducting tax from the increased salary of Rs 2.4 lakh, the profit will be only about Rs 1.69 lakh.
A large share of high income earners goes in taxes
As income increases, the impact of tax also becomes more visible. An employee earning Rs 30 lakh annually will get an actual benefit of around Rs 2.06 lakh on an increase of Rs 3 lakh. Whereas an employee with an annual income of Rs 40 lakh may have to pay additional tax of approximately Rs 1.25 lakh on an increased salary of Rs 4 lakh. After this he will be left with a profit of around Rs 2.75 lakh. An employee earning Rs 50 lakh annually will get a salary increase of Rs 5 lakh, but the additional tax liability can reach around Rs 2.82 lakh. In such a situation, the actual profit in his hands will be only around Rs 2.18 lakh.
Instead of being happy just seeing the gross increment on getting a salary hike, one should calculate the post-tax profit. Employees can review their pay structure and utilize options like corporate NPS available through the company. Also, it is important to do tax planning by understanding the benefits available in the new tax system, so that more of the increased salary can reach their pockets.
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