Personal Finance

Salary cut? Here’s how to optimize taxes, investments and manage expenses

Updated : April 18, 2020 09:38 AM IST

Making a list of your usual expenses and then segmenting essential vs non-essential items is a useful way to control expenditure.

Prioritising need we wants and identifying core expenses will help in tiding over the crises.

As India enters lockdown 2.0, employees across disparate sectors are staring at a likely eventuality of significant salary cuts. As business cycles contract and the ripple effects of a global shutdown are felt across supply chains and levels of employment, it is a moment of reckoning for the Indian economy.

How we meander through this unprecedented crisis will determine the fate of our country’s bourgeoning middle class, at least for the foreseeable future.

Significant salary cuts, or worse, lay-offs and pink slips will dictate lifestyle changes. It is appropriate to note that basic living expenses in most households aren’t very high. It’s the discretionary expenses such as eating out, travel and leisure, and other luxury goods that burn a hole in your pocket. All of these will have to be curtailed.

(Also read: Companies cutting salaries during lockdown will need employees' consent)

Making a list of your usual expenses and then segmenting essential vs non-essential items is a useful way to control expenditure. Prioritising need we wants and identifying core expenses will help in tiding over the crises.

After meeting basic expenses, if there is still some money left, only then, one may look at investing.

If you are unable to invest temporarily due to a lack of surplus, then you can stop making further investments for a few months. Investments can be brought back on track once things normalize. If you manage to carve out an investible surplus, then figure out which of your goals are more critical and try to save for them first. Avail moratorium on housing/ car/white good loans, wherever possible, and take advantage of various interest moratorium schemes announced by the government.

(Also read: Wipro says may ask some staff to go on leave, does not rule out layoffs)

If a pay cut has made it difficult for you to remain afloat, you can monetize your skills and hobbies to generate some additional income. Upgrading yourself during this period will help you get a better remuneration when the situation normalizes.

However, as mentioned earlier, COVID 19 pandemic has had unprecedented consequences globally, and hence will require sweeping changes. A crucial determinant to survival will be your ability to optimize taxes apart from investments and household expenses, till the situation stabilizes.

A salary cut can be permanent or just deferment and permanency could be of adjustable nature if the profitability normalizes.

But some of the pointers which one should keep in mind to optimize taxes are:

A pay cut should not be by way of renunciation but should be by way of revised terms which would avoid issue of waiver of salary, as waivers are taxable
Cut if possible should not be in basic and HRA, as that would affect the quantification of bonus / retirement benefits and exemption of HRA portion.
Salary cut wherever possible should be for reimbursements such as leave, travel assistance and ex-gratia amounts / use of accumulated leave balance.
CTC if includes reimbursement of car related expenses, the same can be negotiated as part of cut as it could lead to potential savings.
Certain expenses are inevitable like children’s education fees and hence, for claiming investment linked deduction, this bucket should be utilized.
Government has extended the time frame for investment for claiming deduction for FY 2019-20 but if the limit is already exhausted by making investments upto 31.03.2020, then, it is advisable to make investments only after 30.06.2020 to avoid a probable interpretation that all investments made up to 30.06.2020 cannot be counted for FY 2020-21.
Manage your salary cut proportionately for the entire year rather than just three months. If a non-proportional cut is taken in the first three months, TDS burden would reduce the take home salary. The fund flow can be managed by retaining certain amounts to be disbursed on a staggered basis

In conclusion, in the eventuality of a pay cut, it should be ensured that the terms are temporary and are confined to FY 2020-21 and that earlier terms are automatically revived once the exogenous factors are stabilized. It is critical for all of us to stay calm, focused and prioritize ours and our loved ones’ well-being.

Dhaval Selwadia is Partner at NA Shah Associates LLP

Salary cut? Here’s how to optimize taxes, investments and manage expenses

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