I recently got an opportunity to move out of my current organization. I informed my manager about wanting to leave. She negotiated with me and offered me a salary increment of 40%.

The problem here is that the salary increment is not reflected in my payslip, but they are paying it to me by cheque as a special allowance. When I asked my manager about it, her reply was, "This is not a period for salary hike, so we are crediting it in the form of a special allowance. The salary hike would be mentioned on your payslip starting with the next hike period. You need not worry."

The hike period is 8 months away. Do I have any reason to be concerned? Is this some kind of a trick they are playing?

  • Does this cheque get properly handled in terms of taxes? – nvoigt Aug 24 '16 at 5:27
  • Nope its not handled in terms of taxes – Logic Aug 24 '16 at 5:30
  • 1
    Was this the first payment of the increment? If so it may be due to missing the deadline for the payroll. – Ed Heal Aug 24 '16 at 14:17

I will post an answer from the Indian context, which should be of interest to the asker, who is from India. Of course, a huge chunk of the answer could be relevant to other countries as well.

Indian employees typically receive two kinds of payments from their employer:

  • Salary/wages: This typically also covers annual bonus, performance linked incentives, performance awards, and such.
  • Out of pocket expenses: This typically covers reimbursements for various expenses that the employee incurs "in the line of duty" (if you will). It includes taxi fare for client location visits, home internet expenses when employee works from home, passport or visa processing fees, lunch or dinner allowances when working overtime, etc.1

In your case, I strongly suspect that your employer is trying to shoehorn your salary into the "out of pocket expenses" category. This typically happens due to some silly corporate policy or, rather disappointingly, due to SAP software limitations, which prevents your manager from handing you an "off-cycle" hike.2

The problem arises because out of pocket expenses are typically reimbursements for expenses you have incurred, which means two things:

  1. These payments do not, and should not, count as your salary.
  2. More importantly, from the Government of India's perspective3, this expense has already been taxed elsewhere.

This shoehorning is not necessarily illegal4, but you need to be careful of a few things.

  • If you can encash this "extra salary cheque" only in cash, then congratulations, you just got paid in black money.
  • If this "extra salary" can only be credited to a bank account, then it is still white money.5 All you have to do is declare this extra income in your Income Tax Return and pay the so-called Self Assessment Tax on it, and you should be clear. However, the Income Tax Department may still have some polite questions for your employer.4

You have a few options to deal with this situation:

  • Ask your manager to give you an off-cycle hike: You mentioned your manager already said this cannot be done, but there's a chance she isn't aware of it. Your manager may have worked previously at a company with no off-cycle hike policy, but your company may have one, buried two civilisations deep into the "Corporate Policy for Managers" handbook.

  • Ask for your next 8 salary slips to include a "performance reward" or "one time bonus": I wouldn't consider this as lying or unethical, because technically the 40% salary hike is a reward for your performance.

  • Ask for the 9th salary slip to include the "performance reward": As a last resort, you could ask for the "extra salary" of next 8 months to be reflected on the 9th salary slip. As long as your settle the scores by end of the Financial Year, the Income Tax Department is usually cool with it.4
  • Don't bother: If none of the above works, you just file your Income Tax Return correctly, and move on. Let the employer deal with the tax issues at their end. They most likely hire professionals to deal with that thing. It would be prudent to keep a written record of all that you did to convince your employer to pay you cleanly.

As nvoigt points out, your "extra salary" reflecting in your salary slip could be important for things such as your home loan eligibility, insurance premiums, or credit card eligibility and limits. However, I personally don't feel strongly enough about this issue to quit your job, especially not right away when you seem to be doing well.

1 This varies from employer to employer. I have had the privilege of working for an employer who offered all these privileges, and some 20 more. :)

2 The above employer who once offered me off-cycle hikes in two consecutive years (in addition to the regular annual hikes), leading to my salary more than doubling in those two years!

3 Their perspective is always more important than most other things. This is most certainly not restricted to India alone.

4 Disclaimer: I am not a lawyer. I wouldn't offer free legal advice online even if I were one.

5 You cannot legally open a bank account in India without linking it to a Permanent Account Number (PAN), which by the way, is the number that the Income Tax Department identifies you and your money with.

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If you get pay "under the table" then it's illegal. It also means that money is not on your payslip and therefor anything that relies on your payslip to make calculations (for example unemployment, health care, pensions or credit) is still calculated with your old salary.

There is no reason why you shouldn't get an official pay raise.

However, make sure that your current additional pay is actually under the table. What may have happened is that there is a corporate overlord policy that raises are only done on a certain date but your boss has a budget he can do with as he pleases, so he gives you 8 one-time-bonuses to keep you happy until it gets official. These one-time-bonuses should be on your payslip, although they would not count for the calculations of your steady income.

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So you got a 40% increase. To make the numbers simple, assume this was $2,500 to $3,500. It may be as nvoigt said that your boss gives a $1,000 bonus every month until the increase is official, so your payroll info should say $2,500 salary + $1,000 bonus - tax of $3,500. In that case, no need to worry, everything is fine.

What would be very strange would be: You get $2,500 minus tax according to your payroll info, plus a $1,000 check. That might be illegal from the company's side. From your side, you are required to pay tax on $3,500; the employer paid tax on $2,500 on your behalf, so eventually in your tax return you'd have to state that your income was $3,500 and the tax office will send you a bill for the difference. From your point of view that would be fine. The tax office would also ask "what the hell is going on here" and the company would be in trouble.

Alternatively, if that happens you just keep the money, don't tell anyone, and if the tax office finds out you and your company are both in trouble. This is just mentioning a possibility, definitely not giving advice.

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