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Monthly Salary Increase or Annual Bonus Decrease: What's Better?

Ramalingam

Ramalingam Kalirajan  |8103 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Oct 14, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Asked by Anonymous - Oct 12, 2024Hindi
Money

Hello Sir, Hope this mail finds you well ! Recently there has been a change in my salary structure. On an annual basis, my Basic salary has increased by 2.44L, HRA has reduced by 1.49L, Flexipay has increased by 1.6L. In the Flexipay, I can claim tax exemption for LTA upto 2.3L (earlier it was 40K) and my car allowance has been removed (earlier it was 2.9L). Under the new salary, I can claim tax exemption for Fuel (21K), Driver (10K), Meals (26K), Professional Dev. (20K). In my Old salary also I used to claim Fuel & Driver allowance. Also under both Old & New structure, I had opted for Employer NPS contribution (10% of basic). My annual target bonus has been reduced by 2L, PF has increased by 30K, Gratuity increased by 12K. However my Gross Salary under both Old & New structure is the same. I do not have any loans and stay in my own house so I do not claim HRA. I will be opting for New Tax regime. Based on the above description, since my bonus is reduced but my gross salary is same does it mean I will be actually getting more money in hand on monthly basis rather than waiting for annual payment. Will my New Salary Structure help me save more taxes OR my Old salary was more Tax efficient ? What investment & tax exemptions should I do to save more taxes under New salary structure & New Tax Regime ? Please advise.

Ans: Let’s begin by appreciating the good news! Your basic salary has increased, which means a higher contribution to your Provident Fund (PF) and Employer's National Pension Scheme (NPS). These will boost your retirement savings.

Let’s now carefully evaluate the changes in your salary structure.

Key Changes in Salary Components

Basic Salary Increase: Your basic salary has increased by Rs 2.44 lakh annually. This will result in higher PF and NPS contributions.

HRA Reduction: Since you own a house and don’t claim HRA, the reduction in HRA doesn’t impact you negatively.

Flexipay Increase: The increase of Rs 1.6 lakh in Flexipay is beneficial. You can claim exemptions for certain components under this.

LTA Increase: Your LTA claim limit has increased significantly, from Rs 40,000 to Rs 2.3 lakh. This is a huge benefit if you plan to travel and claim these exemptions.

Car Allowance Removal: The removal of the Rs 2.9 lakh car allowance may slightly affect your tax savings, as this was an exemption earlier.

Tax-Free Perks in Flexipay: You now have additional tax-exempt options like fuel (Rs 21k), driver (Rs 10k), meals (Rs 26k), and professional development (Rs 20k). These can lower your taxable income.

Target Bonus Reduction: Your target bonus has reduced by Rs 2 lakh. This means your annual payout may be lower, but since the monthly structure remains the same, you may see more in-hand salary.

Impact on Take-Home Salary

The removal of car allowance and the reduction in the bonus may seem like a loss, but the increase in Flexipay and basic salary offsets this.

Since your bonus is lower, and bonus tax is typically higher, your monthly salary may actually see an increase. The higher Flexipay exemption components can also contribute to a better in-hand amount each month.

Thus, in terms of monthly cash flow, you are likely to have more money in hand rather than waiting for the annual bonus.

Tax Efficiency of New Salary Structure

You’ve opted for the new tax regime. This regime doesn’t allow you to claim deductions under sections like 80C, 80D, etc. However, it has lower tax rates, which can benefit you with the higher basic salary and fewer deductions.

Let’s now explore how this salary structure aligns with the new tax regime.

Tax Exemption Opportunities Under New Salary

Employer NPS Contribution: You can still benefit from the employer’s NPS contribution. This can save you taxes up to Rs 50,000 under section 80CCD(1B).

Professional Development and Meals: You can claim these in the new salary structure, reducing your taxable income.

Fuel and Driver Allowance: Since these were already claimed in your old structure, there’s no significant change here. They still help lower your taxable income.

Gratuity and PF: These are part of your salary savings, which will contribute to your retirement fund but won’t immediately impact your tax savings.

Which Salary Structure is More Tax Efficient?

The old salary structure had car allowance and a higher bonus. However, the new structure gives you more flexibility with Flexipay and a significant boost to LTA claims. Since you’re not claiming HRA, the reduction here doesn’t affect you.

If you utilize the Flexipay allowances efficiently, your new salary structure will be more tax-efficient compared to the old one.

Investment Strategies Under New Salary and New Tax Regime

Now that you’ve opted for the new tax regime, which limits your traditional exemptions, it’s important to make smart investment choices that align with your long-term goals.

Employer NPS Contribution: Since you’ve opted for this, you’re already on the right track for retirement planning. Continue maximizing this benefit as it offers tax relief.

Focus on Debt Mutual Funds: Since you’ve chosen the new tax regime, you might want to consider debt mutual funds. These offer stability and can be taxed based on your income tax slab.

Maximize PF Contributions: Your increased PF contribution, due to the rise in basic salary, is an automatic way to save for retirement. PF is a great tool for tax-free returns in the long run.

Equity Mutual Funds for Long-Term Growth: While you don’t get section 80C benefits under the new regime, investing in equity mutual funds can still help you grow wealth. Since long-term capital gains are taxed at 12.5% beyond Rs 1.25 lakh, it’s still a tax-efficient option for wealth creation.

SIP Investments: Systematic Investment Plans (SIPs) in equity mutual funds can offer growth while being tax-efficient. However, under the new regime, remember to account for capital gains taxation.

Disadvantages of Index Funds and Benefits of Actively Managed Funds

In your investment strategy, it’s important to note the downsides of index funds.

Limited Growth: Index funds track the market and can’t outperform it. If the market performs poorly, so will your investment.

No Flexibility: Index funds don’t have the flexibility that actively managed funds have. Active funds can move between sectors and take advantage of market changes.

Sectoral Allocation: Actively managed funds can allocate more to sectors that are performing well. Index funds are bound by the index composition.

Actively managed funds, through a Certified Financial Planner, offer better diversification and potential for higher returns. The expertise of a CFP can help you adjust your portfolio as needed.

Disadvantages of Direct Funds and Benefits of Regular Funds

Let’s also consider direct mutual funds versus regular mutual funds.

Limited Advisory Support: Direct funds don’t provide professional guidance. You’re on your own, which might result in missing better opportunities.

Higher Risk: Without expert advice, you might invest in schemes that don’t align with your goals or risk appetite. Regular funds come with the support of an advisor who can guide you.

Benefits of Regular Funds: Investing through a Mutual Fund Distributor (MFD) with CFP credentials ensures you get personalized advice. This can help optimize your portfolio, ensuring it meets your long-term goals.

Final Insights

To summarize:

Your new salary structure, with Flexipay, increased basic salary, and NPS contributions, is more tax-efficient. You will likely have a better monthly take-home salary.

Use the tax exemptions in your Flexipay (fuel, driver, LTA, etc.) effectively to lower your tax burden.

Continue focusing on equity and debt mutual funds for a balanced investment strategy. SIPs are still a great tool under the new tax regime.

Consider working with a Certified Financial Planner to fine-tune your investments and take advantage of actively managed mutual funds. This can help grow your wealth more effectively than index or direct funds.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Mutual Funds, Financial Planning Expert - Answered on Mar 15, 2025

Asked by Anonymous - Mar 15, 2025Hindi
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I AM THINKING OF TAKING A LOAN OF 5,00,000 AGAINST MY CURRENT MUTUAL FUND MOTILAL OSWAL SMALL CAP FUND AND REINVEST IT IN SAME FUND FOR NEXT 3 YEARS. I DON'T WANT LIQUIDITY FOR NEXT 3-4 YEARS. SEEING THE MARKET IS LOW RIGHT NOW CAN I EXPECT A REURN? SHOULD I CONSIDER THIS OPTION?
Ans: Taking a loan against your mutual funds and reinvesting in the same fund may seem like an opportunity to maximise gains. However, this strategy carries significant risks.

Key Risks to Consider
1. Market Uncertainty
Small-cap funds are highly volatile.
A temporary market correction doesn’t guarantee strong returns in the next 3 years.
If the fund underperforms, you could face both a loan repayment burden and lower returns.
2. Interest Cost vs. Expected Returns
Loan interest rates on mutual fund pledges typically range from 9-12% per annum.
Your small-cap fund must generate higher returns than the loan rate to make this strategy profitable.
If the fund returns below 12% CAGR, your effective gains will be negligible or negative.
3. Forced Liquidation Risk
If the market corrects further, your lender may sell your pledged mutual fund units to recover the loan.
This could happen at a loss, forcing you to exit at a lower NAV.
4. Overexposure to a Single Fund
Investing additional money into the same small-cap fund increases concentration risk.
Instead, diversification across flexi-cap, mid-cap, and small-cap funds is better.
Alternative Approaches
Instead of taking a loan, consider:

SIP Investment Strategy

Continue SIPs in a staggered manner rather than a lump-sum reinvestment.
This reduces the risk of investing at an unfavourable price.
Diversified Portfolio Allocation

If markets recover, large-caps and flexi-caps may rebound earlier than small-caps.
Diversifying into these categories will balance returns and risk.
Rebalancing Your Current Portfolio

If you have underperforming funds, consider shifting money to stronger funds.
This avoids borrowing costs and interest rate risks.
Final Insights
Taking a loan against your mutual fund for reinvestment is not advisable due to the high risk of market downturns, interest costs, and forced liquidation. Instead, a disciplined SIP approach in diversified funds will offer better risk-adjusted returns.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

...Read more

Dr Dipankar

Dr Dipankar Dutta  |963 Answers  |Ask -

Tech Careers and Skill Development Expert - Answered on Mar 15, 2025

Asked by Anonymous - Mar 15, 2025Hindi
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Greetings to Gurus, I am student from Kolkata,West Bengal. I have completed my ISC in year 2020 from Commerce stream without maths. I am from Lower Middle Class Family, finance is big issue for me. After ISC I enrolled in B.COM(Hons) course from a college under Calcutta University. I was ambitious of being Chef from childhood. But during Covid times and finance problem, I haven't pursued. During my college life, My first three semesters completed online in Covid period, after the lockdown period, my fourth semester got offline and I just passed in one paper out of 4 and then my 5th semester exam got cleared after that I appeared for rest 3 papers of sem 4 and cleared 2 papers and in sixth semester cleared 3 paper out of 4. Again in 2024, I appeared for 6th sem 1 backlog paper and cleared it but don't able to clear 4th sem one backlog paper. So, I have started my UG in year 2020 but not able to clear it till 2024 because of 1 paper(Taxation) and I have last option to reappear in 2025 examination. I want to earn good in my life, suggest me some opportunities and a way to get out from this loop. Mentally getting depress also.
Ans: Hello! First of all, I really appreciate that you're sharing your situation openly. I understand that you're going through a tough time, but I want to assure you that there are always ways to move forward. You are not stuck, and there are opportunities for you to earn well and build a good career.
Step 1: Clear Your B.Com Degree (Important)
You have only one backlog paper (Taxation) left. Make it your #1 priority to clear this in 2025 because having a degree will open more opportunities.
You already passed all other subjects, so just focus on this one. If needed, get help from a tutor or YouTube courses on Taxation.
ccounting & Taxation (?25,000 - ?60,000 per month)
Since you already studied B.Com, this is a natural career path.
Learn Tally, GST Filing, Income Tax Filing.
Free courses: Government’s NPTEL, YouTube (Search “GST Filing Course India”)
I believe in you. Take the first step today! Your situation will improve within 1 year.

...Read more

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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