In this post, we will take a deep dive into understanding the salary structure in India.
- The Department of Expenditure issued a memorandum regarding the Revised rates of Dearness Allowance (DA) to employees in Central Government and Central Autonomous Bodies. There is a 3% hike in DA and Dearness Relief (DR) for the central government employees and pensioners. DA for such employees is now raised to 31% from 28%. This hike will be applicable from July 1, 2021. It will impose an additional annual burden of Rs 9,488.7 crore on the exchequer.
- Due to Covid-19, the Centre had frozen the 3 additional installments of the DA and DR due from January 1, 2020, July 1, 2020 and January 1, 2021.
As we all are aware, creating an ideal salary structure is one of the most important tasks of HR or payroll manager. So we have broken down this post into multiple topics. You can pick and choose any topic you are looking for or you can read through the entire post to get a detailed understanding of designing salary structure in India.
- Two basic types of salary structuring
- Three types of salaries
- Different components of salary structure (in India)
- Different ways of defining salary components
- Important points to note while fixing an employee’s salary
Two basic types of salary structuring
The two basic types of structuring salary involve how we want to break up and define CTC. There are two ways to this:
- Top-down: In this type, you define the amount for different salary components and add up the total as gross. For example: Basic – 5000, DA – 5000 = Gross – 10000.
- Bottom-up: In this type, you define the total gross and then divide the amount between different components. For example, Gross = 10000; Basic is 40% of gross, DA is 60% of gross.
The definition of the individual can be as simple as a lump sum amount or basic percentage or complex based on grades, slabs or conditions depending on your company policy.
Three types of salary
When it comes to confusing salary terms, there are three which get misused and confused more than the others. Let us get clear on them before proceeding further:
- Net Salary: Simply speaking, this is the salary you get in your hands and thus also sometimes called an in-hand salary. This is the amount you get (or pay) after deductions such as PF, ESI, PT, TDS, loss of pay, and other deductions as per your company.
- Gross salary: This is the salary which is shown in the payslip. This salary is the total earnings of an employee excluding statutory and non-statutory deductions. Please note that the gross salary will include loss of pay based on the employee’s attendance.
- CTC: CTC or cost-to-company is the total monetary benefit provided by the employer for the complete financial year. This will include components such as PF contribution from the employer, gratuity provision, any insurance that is being provided or any other benefits.
Different components of the salary structure in India
Now we will take a look at the different components of the salary structure. Basically, it includes:
- Earnings such as basic, DA, HRA, Conveyance and other allowances
- Variable pay calculated of different criteria
- Reimbursements as per company (Read more on reimbursements)
- Deductions that can be statutory or non-statutory in nature
Things to remember while setting the amounts for:
Basic and DA
- If the amount is too high, it will increase the tax liability of the employee as it is fully taxable. Also, it affects the liability of the employer since higher contributions would be required for PF, ESI deductions.
- If the amount is too low, then you won’t be able to meet the norms of minimum wages set by the state government. As minimum wages are updated on a regular basis, you may run the risk of falling below the recommended wage limit.
With the introduction of Standard deduction in India, the exemption on conveyance allowance is removed w.e.f April 2018 onwards. It is not necessary for employers to collect or submit any conveyance proof.
Special Allowance is fully taxable and is also taken for the calculation of Provident Fund (PF). Generally, it is used by the organization as surplus to the CTC when the other components have been paid.
Child Education Allowance
Child education allowance is paid towards employees’ first two child tuition fees and is tax-deductible up to Rs. 100 per month per child for a maximum of 2 kids.. Usually, this amount is fixed at Rs.2,400 once a year for an employee.
- To avail of the tax benefits on education allowance, you have to submit the tax-saving documents and provide the count of child or child information with concern to HR.
Children hostel allowance
It is also applicable for employee’s first two child hostel expenditure and is tax deductible up to Rs.300 per month and this amount is not more than Rs. 36,000 once a year.
Leave Travel Allowance (LTA)
An employee can claim tax benefits of all fair expenses paid for her/his family during the holiday. But there are some terms and conditions to claiming the tax benefits.
- Only a traveling allowance can be claimed, such as fair expenses.
- Travel must be within the country, not out of the country.
- Only dependent families are covered under the LTA.
- To get the tax benefits, employees should declare their details under ‘Tax declaration’ under the Tax Saving Plan, along with the saving plan, such as PPF, LIC, Loans and others.
- By the end of the financial year, employees need to submit their actual tax-saving proof with concern to HR and resigned employees need to submit their tax-saving proof with concern to HR before the Full & Final settlement.
Heads of salary
|Taxability||PF applicability||ESI applicability||gratuity applicability|
|Fully taxable||Yes||Yes||Yes (if applicable)|
|HRA||Tax exemption based on 3 conditions –
40% of Basic + DA if non-metro
|Reimbursement||As per the type of reimbursement||No||No||
Other Allowances (Maybe multiple including variable pay)
|LTA||As per the actual fair price||No||Yes||
|Rs. 100 PM for 2 child||No||Yes||No|
|Children hostel allowance||Rs. 300 PM for 2 child||No||Yes||
|Heads of salary||Calculation||applicability|
|PF||12% of Basic+DA||Company with atleast 20 employees|
|ESI||4% of gross salary (If applicable)
Employees’ contribution – 0.75%
Employer’s contribution – 3.25%
|Company with atleast 20 employees|
|PT||State-wise depending on gross earnings||No lower limit of employees|
|TDS||Depending on the total income for the financial year||No lower limit of employees|
|Labour welfare fund||State-wise||No lower limit of employees|
|Other deductions||As per company policy||As per company policy|
Different ways of defining salary components
Salary components can be defined using a number of ways. So, let us discuss some of those methods:
- Lumpsum: This is the simplest way by which you can define salary, as it involves just arbitrarily allocating some amount to each of the heads.
- Based on conditions: This is the type of salary definition which we come across most often. Sometimes you need to give salary based on city, grade, income slab, etc. In such cases, we can use a formula to allot salary.
- Variable: This is the component that will keep changing every month based on things such as performance, attendance, etc. here, in such cases, we sometimes define a rate and keep changing the unit.
Important points to note while fixing an employee’s salary
- If you don’t already have, make a list of each available position within your company and create a job description for each position.
- For these positions, fix minimum, middle and maximum salary values which your company can allow. You can use research and industry benchmarks for this process.
- The ideal salary breakup is done as per the company policies. It differs from one company to another.
- When fixing the salary, keep in mind the employee’s education and skill level.
- Also, remember to ensure that CTC has been optimally managed in such a way that it is not burdensome to the employer as well.
Before we end, if you are a company with complex salary structures (or even a simple one) and are looking to optimally manage payroll, then do take a look at our payroll software which handles all your payroll process and compliance with ease.
And that’s it from us. This ends our blog on salary structure in India. Also, if you have any questions or opinions, drop them in the comment section below. We would like to hear from you.
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- Salary head creation in Saral PayPack Cloud
- Assigns salary heads to Salary structure in Saral PayPack Cloud
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