Creating a salary structure in India typically involves the following key components:
- Job analysis and evaluation to determine the relative worth of each position within the organization.
- Determination of the pay grade structure and ranges for each grade.
- Establishment of a base salary for each position within the grade based on the evaluation results and market benchmarks.
- Provision of additional compensation such as benefits, incentives, and allowances, based on the company policy and market practices.
What is a salary structure?
Salary Structure refers to the different pay grades, salary ranges and the hierarchy of these pay grades.
Salary structure is one of the most important factors that determine how much an employee earns.
Salary structure can be defined as a reference point for employees, who are allocated to a specific position or job.
It also determines how much each employee will get paid in a month or year based on their performance.
Salary structure is part of a company’s compensation planning strategy which includes salary range, grade, range and grade points.
What are the Key terms of salary structure?
There are different terms used for salary structures in India and it is important to understand the meaning and difference between each of these terms.
It is a base or most important term which you need to understand as it makes about 40 to 50% of your overall salary and most other benefits (Bonus) and retirement benefits (PF, Gratuity) are depended on this component.
Gross salary is the total earnings before taxes and any deductions. It includes all the earning components like Basic Salary, House rent allowance (HRA), Bonus, Holiday pay, Overtime and all other allowances.
Gross Salary = Basic Salary + HRA + Bonus + Overtime + Holiday Pay + Variable Salary + Other allowances
Cost to the company (CTC)
It is the total cost that a company incur directly or indirectly towards employee salary.
CTC Includes monthly components like Basic Pay, all types of allowances, Reimbursement and perquisite, Performance-based pay, Bonus, all benefits (Group Mediclaim Policy, Personal accidental policy, Leave encashment, Gratuity, Ex-gratia), Employer PF, Employer ESIC, Employer LWF. PF Admin charges.
CTC = Gross Salary + Employer PF + Employer ESIC + Benefits
Net salary or take-home salary
Net salary is basically also known as take-home salary which the employee receives every month after all deductions.
The net salary you get after all the deductions from the gross salary, deductions such as Provident Fund (PF), Employee State Insurance (ESI), Professional Tax (PT), Income tax deduction (TDS), Loss of pay and any other deduction applicable by the company.
Net Salary = Gross Salary – PF-ESIC-PT-TDS -Any other company deduction
Fixed pay is the pay component which is paid by employers to employees against the work done by them every month in the form of a fixed salary.
Fixed pay includes Basic Pay, Dearness Allowance (DA), House rent allowance (HRA) and All other allowances.
Variable Pay OR Pay for performance
Variable pay also known as pay for performance is a component that might or might not be paid every month.
It is a component which is linked to employees’ targets such as revenue targets, and individual Key Performance Indicators (KPIs) and is released once KPIs are achieved by employees.
This component depends on major 3 factors, employee’s Individual performance, Team OR Department performance and overall organization performance. Generally, this component is paid annually.
What are the key components of Salary structure?
The basic salary is generally 40% to 50% of your total salary. Many components like PF, Bonus, Gratuity and other benefits depend on your basic salary.
The basic salary is fully taxable. Basic salary varies from state to state and also depends on minimum wages and different categories of work like skilled, semi-skilled and un-skilled work.
Allowances are given over and above the basic salary paid to employees. Allowances and their limits differ from company to company and also depend on the location of work, seniority level and company policy.
Allowances are partially or fully taxable depending upon the type of allowances.
Some of the common allowances used in creating salary structure are given below:
Dearness Allowance (DA)
Dearness Allowance is paid to employees as part of their salary to manage the impact of inflation. It is generally set at 5% of the total salary.
Dearness Allowance is applicable to public sector employees, government employees, and pensioners only and it is fully taxable.
House Rent Allowance (HRA)
It is paid to employees by companies to meet their monthly rental expenses for accommodation.
HRA makes up to 40% to 50% of your basic salary and cannot be more than 50% of your basic salary, HRA amount you can claim as a tax deduction is 50% of your basic salary in metro cities and 40% of your basic salary in non-metro cities.
If an employee does not live in a rented accommodation, HRA is fully taxable.
The least of the following amount will be exempt u/s 10(13A):
- 40%/50%* of basic salary and dearness allowance (DA)
- Actual amount received
- Rent paid – 10 per cent of basic salary and dearness allowance (DA)
Leave Travel Allowance (LTA)
LTA is offered to employees to cover their travel expenses when the travel occurs during a leave of absence from work.
The amount paid as leave travel allowance is exempted from tax only on the actual travel costs under Section 10(5) of the Income Tax Act, 1961.
An employee can claim tax benefits on the Fare Expenses paid to his/her family during the holiday.
To claim LTA, there are certain restrictions on what you can claim as tax exemption.
- Only Fare Expenses are covered (i.e., stay and food expenses are not covered)
- Travel must be within India
- This is applicable only to immediate family members who depend on the employee
- You can claim LTA twice in 4 years
Conveyance or Transportation Allowance
Conveyance allowance, also known as transportation allowance, is an incentive offered to employees to compensate for their travel expenses to and from their residence and workplace.
Note: In the Union Budget 2018, a standard deduction of INR. 40,000 (currently INR 50,000) was introduced in lieu of transport (INR 19,200) and medical (INR 15,000) allowances.
A medical allowance is a fixed allowance paid to the employees of an organization to meet their medical expenditures.
Note: In Union Budget 2018, a standard deduction of INR. 40,000 (Currently it is INR 50,000) has been introduced in lieu of transport (INR 19,200) and medical (INR 15,000) allowances.
Child Education Allowance
This allowance is paid towards the tuition fees of an employee’s children, which can be tax deductible up to Rs. 100 per month for a maximum of two children.
The max limit for child education allowance is usually set at Rs 2400 per annum.
Child Hostel Allowance
According to Section 10(14) of the 1961 Income Tax Act, special allowances are provided to salaried people in order to help them pay for their children’s education costs and housing costs.
Rs. 300 per month per child up to a maximum of 2 children. (This gives you a maximum exemption of ₹7,200.)
(*Only if expenses are incurred in India as per Section 10(14) of the income tax act)
After all the allocation of components whatever is left in the end is put under the special allowance. It is mostly smaller than the Basic salary and is fully taxable.
Perquisites are the perks or additional benefits provided by an employer based on your type of work or position in the organization.
Perquisites are the perks reimbursed against the expenses made by employees for official work as per the income tax limit.
Perquisites include Telephone & Internet Reimbursement, Car maintenance, Driver Salary, Uniform Allowance, Meal coupons, Books & periodicals etc.
Bonus is paid over and above salary against the individual or company performance. The bonus amount varies from company to company and is paid at different intervals.
Bonuses are paid to employees on various occasions like Performance or variable bonuses for achieving a certain level of performance, joining bonuses at the time of joining, Employee referral bonuses for referring employees to the organization, and longevity or long service bonus for completing certain years in the company.
Provident Fund (PF)
PF is applicable to companies with more than 20 employees and to employees whose Gross salary minus HRA is less than ₹15,000 a month.
Employers and employees each are required to contribute 12% of the Gross minus HRA directly into the employee’s EPF account every month.
A provident fund is an investment both by the employer and the employee each month, the lump sum amount of which acts as an employee’s retirement benefits scheme.
Provident fund contribution is mandatorily either of the following:
Case 1: Basic salary < 15000 (per month)
12% of Gross – HRA
Case2: Basic salary > 15000 (per month)
In this case, the company has the option to either contribute 12% of the 15,000 max limit (i.e. 1800) or 12% of the actual Basic salary.
Employee’s State Insurance Corporation (ESIC)
ESIC is applicable only if a company has 10 or more employees (20 in the case of Maharashtra and Chandigarh) whose gross salary is below INR 21,000 per month, then the employer is required to avail ESIC scheme for such employees.
The employer’s contribution towards ESI should be 3.25% of the gross salary while the employee contribution must be 0.75%.
Labour welfare fund (LWF)
Employers and salaried employees are required to make contributions towards labour welfare. The contribution amount can vary from state to state.
The contribution frequency (Monthly, quarterly, half-yearly, yearly) and the amount varies from state to state.
Professional Tax (PT)
This is applicable to organizations having even 1 employee. Professional tax is a tax levied on the income earned by salaried employees and professionals, including chartered accountants, doctors, lawyers, etc.
to the state government. Different states have varying methods of calculating professional tax. The maximum amount that is payable in a year is INR 2,500.
Employers deduct professional tax at prescribed rates, from the salary paid to employees, and pay it on their behalf to the State Government.
Gratuity is applicable to companies having 10 or more employees. Gratuity is a lump sum benefit paid by employers to employees who are retiring/leaving the organization.
This is only payable to employees who have completed five or more years with the company.
The gratuity amount is paid in gratitude for the services rendered by the individual during the period of employment.
Gratuity received during the employment is fully taxable whereas gratuity received at the time of retirement is exempted u/s 10(10) in the following cases:
For government employees: The amount of gratuity is fully exempted
For non-government employees: For private sector employees covered under the Payment of Gratuity Act, the Tax exemption limit is upto 20 Lakh INR
Gratuity Formula = (15* Last drawn Basic salary x number of completed years of service)/26