The fact that NRIs from the US are moving back to India is no shocking development. NRIs have, in the last few years, been relocating to India in large numbers, in search of better personal and professional lives. And if you are an NRI considering that move, there is one important thing that you must understand very well: the salary you will get in India.
“When it comes to compensation, we find that NRIs have inflated expectations. They mainly go by hearsay; their friend or friend’s friend who returned to India has told them a tall story about Indian salaries. They want to go by that yard stick.”
USD will not convert to INR
The first thing to remember is that you will not make the rupee equivalent of your US salary in India. The cost of living in India is significantly lower than that in the US. This also means a lower labour cost in India. These factors will determine your India salary. “The salary in India (for Cisco employees moving from US to India) is related to local labour market wage rates with a potential premium for critical skill sets.”
“In the nineties, people who were posted to India got expat salaries. But those days are over. In the last 10 years, India has become an attractive market for global companies who are not just looking to set up offshore centers here, but also to capitalize on the growing, educated and highly aspirational middle class consumer segment. Added to that is the availability of skilled labour within India itself. Companies no longer need to pay expat salaries.”
Benchmark: What then should be the broad benchmark?
There cannot be a standard formula, the Big Mac Index is a good guideline to calculate salaries. The Big Mac index published by The Economist, is based on the theory of purchasing-power parity (PPP), according to which exchange rates should adjust to equalise the price of a basket of goods and services around the world. The basket in this case being a McDonald’s Big Mac.
Now according to the last available index dated July 2011, a Big Mac costing USD 4.07 in the US costs USD 1.89 in dollar terms in India (Rs 85 converted at an exchange rate of Rs 45). It means that the Big Mac costs 54% less in India; the cost of living is 54% lower in India. Read another way, this means that the rupee is undervalued by 54% to the dollar and that on the basis of PPP, one dollar would actually be worth Rs 21 instead of Rs 45.
So if you are drawing a salary of USD 100,000 in the US, you can expect to draw Rs 21 lakh in India, give or take. At an exchange rate of Rs 45, that would translate to an Indian salary of USD 46,666 or 46% of the US salary.
“Senior management can expect anywhere between 40% and 70% of their last drawn US salary when they move to India,” “At the 70% end would be people who have moved to India to set up a development/ engineering center or to head the global company’s India start-up.”
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Having set that broad benchmark, the salary would also vary between industries and functions. You would need to choose your profile and company carefully to maximise your salary.
“Manufacturing would pay less than technology. Within technology, we find that delivery of software is something which Indian companies have become masters in. They don’t need to employ people from overseas. In fact, such people from the US are paid less than the person who stayed back in India because those returning from the US have handled fewer people teams as compared to peers in India,”
Similarly, domestic Indian companies do not usually recruit NRIs for strategic positions if the NRIs are not familiar with the dynamics of the Indian market and work place.
As an NRI moving back to India, it would be best to join a company in the US which has plans to start-up/ expand in India. “A lot of US companies across sectors like engineering, legal, analytics, financial services, pharmaceuticals are setting up operations in India.
These companies are happy to send an Indian to India who also has experience of their other markets. The employee benefits because he can grow with the company’s operations in India. In the beginning, the company will set up a 30-40 staff office and expand going forward. As a member of the start-up, the employee grows as the company grows, making it a win-win for both”
“At the end of the day, come back to India for the same reasons you went abroad: for personal and professional growth and happiness. Come with a long term view in mind and you won’t regret it,”
Broadly, you could expect 40-70% of your US salary as your salary in India. The next step is to understand what exactly salary means.
Salaries in India are quoted in terms of CTC or cost to company. CTC is nothing but the cost that the company incurs to employ you and keep you employed. It includes your pay and anything else that the company may incur to keep you in employment. It’s important because a lot of components of your CTC may not translate into actual take-home cash every month. “As a broad thumb rule, what you get in hand will be 70% of your CTC. So if your annual CTC is Rs 50 lakh, you can expect to get an annual take home of 35 lakh or Rs 2.9 lakh per month.”
So what happens to the difference? That’s one question we will try to answer today. The next is, there are many components that are offered in addition to the CTC, ESOPs being a good case in point. So what are the things you need to look at there? Let’s take a look.
1. Certain components of CTC may not be cash components
A company may beef-up your CTC with components that don’t really translate into month-end cash or that may have just a notional components. Some examples include:
-Value of perquisites is included in CTC. So if you are provided with a company accommodation, car, driver, child education expenses and so on, the value of these get included in the CTC.
-Banks may include interest subsidies in CTC. That is, if you are a bank employee, you are entitled to a discounted rate on loans. The difference between the market rate and the discounted rate maybe considered part of your CTC. Even corporate give out loans and advances at subsidized interest rates and the subsidy would be added to the CTC.
-Companies may include the cost of group medical or life insurance. Some companies may add food subsidies, that is, you may be getting a subsidy on your lunch in the office canteen. If you carry your lunch from home, you may not actually benefit from this component. Similarly, if the company provides transport, there maybe transport costs or subsidies.
-Companies include gratuity in the CTC. Gratuity is a sort of bonus that is paid out when you resign or retire from your company. The catch: You are entitled to gratuity only after completing 5 years in the company.
-Employer’s contribution to your provident fund is included in CTC. This amount is deposited by the employer in your provident fund and so this does not form part of your take-home. You will get this amount only at the time you resign or retire.
“Ask to see the cash-in-hand figure. That will give you a good idea of what you will get,”
2. Deductions further reduce monthly take home
Even after you have arrived at the cash value of your take home, there are certain deductions made from it. Tax is one such deduction. It is nothing but the taxes withheld from your income by the company. It is the equivalent of ‘withholding tax’ that several countries have. How much tax is deducted depends on the various components of your salary. This guide should help you understand.
In addition to income tax deduction, you will find a professional tax deduction being made every month.
“A lot of companies may allow you to choose the components in your salary. For instance, they may allocate a certain amount as a ‘flexi pay’ component. Within this amount, you maybe able to choose components such as HRA, medical reimbursement, etc depending on what maybe most tax efficient for you. If you are in a higher income bracket, it would be wise to consult a professional to help you optimize your salary to make it tax effective,”
The other deduction is your contribution to provident fund. This amount is deducted from your monthly salary and deposited in the provident fund. This is your contribution and comes out of your monthly salary, thus reducing your take-home. Again, a lot of companies make this deduction optional. However, making provident fund contributions maybe a wise saving tool. Currently company provident funds earn tax free returns of 8.5% per annum. Over a long period of time, that would build up to a decent corpus.
3. Annualised and variable components
There are certain components that are paid out to you annually or subject to your performance; these do not become part of your monthly take home. Examples include leave travel allowance, annual bonus etc.
“Variable salaries can range between 15-50%,” Lakshmikanth says, adding, “For programmers the variable pay would be around 15% of the CTC while for marketing professionals it could go up to 50%. Before the 2008 crisis, most companies paid out the variable components in full, but that has changed now. There are various factors that come into play while arriving at the variable pay outs. The company’s performance as well as your individual performance would both matter.”
4. Understand what your ESOP consists of
Employee Stock Option Plans or ESOPs are given out over and above the CTC. The company gives employees an option to purchase stocks at a certain future date at a discounted price. As the value of the company scrip increases, the employee stands to earn capital gains. “When a company offers ESOPs, the CTC part of the compensation maybe a little lower,”
While ESOPs might seem attractive when the company HR presents the numbers to you, it is important to look into the fine print. “There are a number of issues here. Firstly, people do not realize that there is a certain vesting period for ESOPs. That is, you will be eligible to exercise the ESOP only after working in the company for a certain period, say 2 years or so. The second issue is the strike price. This is the price at which the ESOP is granted. If the market price at the time of exercising the ESOP is lower than the strike price, there is really no gain. And that has happened many times in the past.”
So is there room for negotiation? “There is always a 10% room for negotiation in any component of your salary,” “So you might ask the employer to reduce the variable component by 10% or the value of ESOPs by 10% and increase the cash component by 10%. It’s worth giving a shot.”
5. Don’t forget to negotiate a relocation package
“It’s very common for senior executives to forget to negotiate a relocation package,” Relocating to another country, even if it is India, especially with a family in tow can be an expensive affair. You might get a few weeks of accommodation. Sometimes that time may not be enough. So negotiate a package before-hand. For instance, make sure the relocation package includes important things like getting a real estate agent through the company. That way, the likelihood of bumping into rogue agents is less,”