How to understand your offer letter better

Rajesh Padmanaban, on how you can decode your offer letter to better understand your salary components

An offer letter details various aspects pertaining to your job including the salary you will be offered and other organisational facets which have a bearing on your experience in the organisation. Pay being a critical element, one needs to understand all aspects of their salary and benefit elements in detail to know how you are positioned, how much you will be paid as post tax salary.

Decoding your salary
Basic salary is a fixed part of your compensation structure. The complete amount becomes a part of your in-hand salary. Basic salary, in the Indian context, is very critical since several other elements like provident fund (PF) and gratuity are defined with this as the reference.

Apart from the basic salary, there are some allowances your salary will contain.

These could include house rent allowance (HRA), conveyance allowance, leave travel allowance, etc. These allowances are tax free/ tax beneficial up to a certain limit, some of them dependent on your actual spending.

Additionally, a part of your salary could also be paid to you against the claims you submit for expenses incurred by you. These include components like telephone/ mobile allowance, medical allowance, vehicle reimbursement, etc. These are usually fully or partially tax free.

Your salary also comprises of statutory deductibles including provident fund deductions (or notional deductions), Employees' State Insurance (ESI) coverage, gratuity, superannuation/ National Pension System (NPS), etc. Although they form a part of your compensation structure, you do not get them as part of your in-hand salary.

Variable pay, also known as performance pay, is used to reward employee contribution towards company productivity and profitability, and is often based on two factors; individual performance and company's performance. In certain cases, the company would also attribute team output as the third factor.

Taxes
Taxes are not a part of your salary/ offer letter. Hence, it is not only important for you to understand how taxes would be applicable to different elements of your salary, but also what impact these taxes would have on your annual pay and how you could minimise this impact by availing the provisions under tax laws.

There are various tools available that can help you estimate your taxes and plan for your tax deductions suitably.

Negotiating the amount
It is important to try and negotiate the amount you are allotted as part of the different salary components. Remember that your qualifications or internship experiences do not automatically grant you negotiation power. Companies train freshers to make them more proficient. Hence, negotiating is not very easy when you are just out of college with no experience or additional skills.

You can, however, cite a relevant part-time experience or leverage the relevance of your educational background on the job you're applying for, in order to bag a better pay package.

Additionally, if you possess a niche skill which the market regards as imperative, you could either target a higher pay or a niche skill allowance. Do not make multiple attempts to negotiate the amount allotted to various components in the offer letter. However, an experienced professional can leverage their experience and expertise to negotiate a better salary than what a company originally offers, but do remember to be rational while doing so.

Precautions
Considering that freshers who enter the job market are fairly oblivious about decoding an offer letter, they must keep certain things in mind before signing one.

They need to be wary of job scams by fake companies. Hence it is important to read job advertisements carefully. Since many rely on placement agencies to land a job, they must abstain from paying them unauthorised amounts. Always enquire about the purpose of the payment and ensure that you are issued a receipt for the same.

Components that are partially or fully taxable
Basic - fully taxed HRA - The lowest of the below-mentioned computations are considered for tax exemptions:

Actual house rent allowance
Actual house rent paid by you minus 10% of your basic salary 50% of your basic salary if you live in a metro or 40% of your basic salary if you live in a nonmetro, balance amount is taxed appropriately If the conveyance allowance is more than Rs 800 per month, the excess amount is taxed Medical allowance - if expenditure claims are less than Rs 15,000 for the financial year, the balance is taxed LTA, telephone, vehicle - each company has different limits of expenditure claims that are nontaxable. The balance amounts that are not claimed by the employees are taxed and paid out Incentive/ bonus/ variable pay - fully taxable Personal/ special allowance/ grade allowance - fully taxable.

(The writer is corporate vice president and chief human resources officer, Capgemini India)