Salary Structures in India : All you need to know

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Structuring Salaries is an inevitable task for every HR and Payroll professional. Despite the importance of the activity, professionals are often uninformed of the technical and best practices of a drafting a complete and efficient salary structure.

Being India’s leading payroll platform, our clients often quiz us on the how to frame the perfect salary. Hence, we thought it would be a good idea to create an informative guide on how to ideally structure a salary. Through this article, we’ll look at the various components of a salary, what they mean and how you can use them effectively.

 

Component Tax Deduction Is PF Applicable? Is ESIC Applicable Part of Gratuity Minimum Amount
Basic Fully Taxable Yes: Yes Yes As per Minimum Wages
DA Fully Taxable Yes Yes Yes As per Minimum Wages
Medical Rs. 1,250 a month or Rs. 15,000 a year No Yes No None
Conveyance Rs. 1,600 a month or Rs. 19,200 a year No Yes No None
HRA Tax Exemption subject to the minimum of the following 3 conditions
1) Actual HRA
2) 50% of Basic + DA if Metro or 40% of Basic + DA if non metro
3) Total Rent – 10% of Basic
No Yes No Varies Depending on the state
LTA As per actuals of the fare expenses on leave travel No Yes No None
Children Education Allowance Rs. 100 monthly for each child up to 2 children No Yes No None
Children Hostel Allowance Rs. 300 monthly per child for up to 2 children No Yes No None
Mobile & Telephone Reimbursement Actual expenses incurred on one mobile phone and one landline No No No None
Car Maintenance Rs. 1800/- p.m. in case Cubic Capacity of engine is 1.6 litres or else Rs. 2400 p.m. No No No None
Driver Salary Actuals of driver’s salary up to Rs. 900 monthly No No No None
Books & Periodicals Actual expenses No No No None
Special Fully Taxable No Yes No None

 

Deductions, when applied to the CTC give you the actual take-home salary that an employee gets. Here are some of the most common deductions:

Deductions How is it calculated? Whom does it apply to?
Provident Fund Employer and Employee each contribute Contribution 12% of Basic + DA + Special Companies that have more than 20 or more employees. It is mandatory for employees whose Basic+DA + Special is less than Rs. 15,000 a month
ESIC Employer Contribution is 4.75% of Gross Salary; Employee Contribution is 1.75% of Gross Salary If a company has 20 or more employees who have a gross salary of less than Rs. 15,000 a month, then it is applicable to all those employees
Professional Tax Varies from state to state All employees of applicable states
Labour Welfare Fund Varies from state to state All employees of applicable states, that might depend on designation

 

Objectives of the perfect salary structure

While creating the ideal salary structures, there are three things you should keep in mind

  1. It should be tax efficient: This means that it should give employees the opportunity to save as much tax as possible.  Salary amounts should be divided into components giving the employee the opportunity to avail as much tax deduction as possible.
  2. Reduce the employer’s liability: The salary structure should reduce the liability of the employer.  The employer’s contribution to PF, Gratuity etc. should be kept as low as possible.
  3. It should be compliant: Compliance norms like minimum wages and PF laws should be kept in mind while drafting the salary structure.

Performance appraisals can be time consuming which also attaches a certain cost to it.  Hence, larger companies with a greater number of employees may not find shorter appraisal cycles very appealing.  When deciding your appraisal cycle, keep in mind the time and costs associated with it.

A deeper look into each component

Let’s take a deeper look into the various components that make a salary.  What do they mean and how are they calculated?

1) Basic Salary + Dearness allowance

The Basic component is the primary component and the core of the salary structure.  It is usually the largest component of the CTC making up for 40-45% of the total CTC.   The basic plays an important role in defining the salary as other components like Provident Fund, Gratuity and ESIC are dependent on it.

Dearness Allowance (DA) was introduced as part of the salary as a means to reduce the burden of inflation on salaried employees.  This amount is usually set to about 5% of the total CTC and like the Basic component it also has an effect on PF, ESIC etc.

You should keep the following in mind while setting the amounts for Basic and DA:

  1. If it’s too high, it will increase the tax liability of the employee since this component is fully taxable. It also affects the liability of the employer since higher contributions would be required for PF, ESIC etc.
  2. If it’s too low, then you may not be able to meet the minimum wage norms set by the respective state government. Since minimum wages are updated regularly, you would run the risk of falling below the recommended wage limit.

2) House Rent Allowance (HRA)

The House Rent Allowance, as the name suggests is a component that employees can leverage if they are living in rented accommodations.  The amount that you can claim as tax deduction under HRA cannot be more than 50% of your basic in a metro or 40% of your basic in a non-metro.  Hence, depending on where your workplace is located, this salary component will usually be set at 40% or 50% of the basic salary.

3) Leave travel allowance (LTA)

Leave travel allowance (LTA) remunerates employees for their travel within the country.  This component is widely used by employers due to the tax benefits associated with it.  An employee can claim tax benefits for the fare expenses paid for his/her family when they take a holiday.  However, there are restrictions to what you can claim as tax benefits:

  1. Only fare expenses are covered: Only the travel fare expenses can be claimed. Stay and food on your trip aren’t covered.
  2. Travel must be within India: If you travel to a foreign country, the expenses aren’t tax deductible.  Only travel within the country is covered.
  3. What counts as family: Immediate family that are mainly dependant on the employee are covered under LTA.

4) Conveyance Allowance

The conveyance component of the salary structure is paid to employees for their travel expenses between their homes and workplaces.  The maximum amount that is tax deductible under this component is Rs. 1,600 a year or Rs. 19,200 a year.  Hence, this is also the recommended limit that most organisations would use for conveyance allowance.

It’s also important to note that this component is only tax deductible if an organisation does not have its own means of transport for employees. If the organisation has made arrangements to ferry employees to and from work, then conveyance allowance cannot be claimed for tax benefits.

5) Medical Allowance

Medical allowance is paid as a reimbursement for medical expenses borne by employees.  This amount is tax deductible up to Rs. 15,000 a year or Rs. 1,250 every month.  In order to claim tax benefits under this component, employees need to submit proof of their medical expenses.

In case the Rs. 1,250 isn’t claimed in one month, then this amount is carried forward to the next month. This means that a cumulative amount of Rs. 15,000 can be claimed at the end of the year.  This is also the recommended amount that organisations usually allot to this component of the salary structure.

6) Child Education Allowance

This component is paid out towards tuition fees of employees’ children and is tax deductible up to Rs. 100 every month for a maximum of two children.   Hence, this amount is usually set to not more than Rs. 2,400 a year for an employee.

7) Special Allowance

Special allowance is the balancing component of the salary structure.  It is usually used by organisation as the leftover of the CTC when the rest of the components have been paid out.  This component is fully taxable and is also taken into account for the calculation of Provident Fund.

Deductions

Deductions are elements of the salary that are part of the CTC but are deducted from the in-hand salary that employees receive. Let’s take a deeper look at some of the most common salary deductions and what they mean.

1) Provident Fund

Provident Fund (PF) is calculated at 12% of Basic + DA + Special Allowance.  The employer and the employee both make an equal contribution of 12% each.  This is applicable to companies who have 20 or more employees on their payroll.   If an employee’s Basic + DA + Special Allowance are less than Rs. 15,000 then it is mandatory for Provident Fund to be deducted.  Other employees can opt out by filling form 11 or can choose to have PF deducted on the ceiling of Rs. 15,000 which would be Rs. 1,800 monthly.

You can find all the information you need about Provident Fund in our in-depth article.

2) Employees State Insurance Corporation (ESIC)

Deductions towards ESIC are mandatory for employees whose gross salary is not more than Rs. 15,000.  It is only applicable in companies where there are 20 or more employees within the Rs. 15,000 gross salary bracket.  Employees have to make a contribution of 1.75% of the gross salary and employers have to make a contribution of 4.75% of the gross salary.

3) Professional Tax

Professional tax is the tax levied by Governments of certain states on salaried employees. The states where professional tax is applicable are Karnataka, Bihar, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Odisha, Tripura, Madhya Pradesh, and Sikkim.

The amount of profession Tax that is deducted varies from state to state where they are applicable.

4) Labour Welfare Fund

Labour Welfare Fund, as the name suggests, is a contribution made by salaried employees for the benefit of the labour class.  This contribution is applicable in the states of Karnataka, West Bengal, Maharashtra, Andhra Pradesh, Kerala, Goa, Delhi, Punjab, and Haryana & Madhya Pradesh.

The contribution amount varies from state to state and is relatively small. The employer and the employee both make contributions and the employer pays approximately twice the employee contribution. The payments are made semi-annually in the months of June and December.

Like Professional Tax, Labour Welfare Fund contributions also vary from state to state where they are applicable.

 

What’s the ideal salary structure?

So what’s the best way to draft salary structures?  To answer this, we’ve put together a table of the common components that make up a salary.  We’ve also added recommended amounts to each component that should assist you in drafting an ideal salary structure.

Component Recommendation
Basic 40-50% of CTC
DA 5% of CTC
HRA 50% of Basic + DA if metro and 40% if non-metro
Conveyance Rs. 1,600 a month
Medical Rs. 1,600 a month
LTA No real benchmark, can even be used as a plug, but if not can set as 10% of Basic
ESIC 6.5% of Gross Salary
Special Usually used as a balancing component
Provident Fund (Employer)* 12% of Basic + DA
Provident Fund (Employee) Rs. 1,600 a month
Professional Tax As per statewise slabs
Labour Welfare Fund As per statewise slabs

 

*Note 1: The PF Employer Contribution also bears additional administrative charges
*Note 2: Feel free to use components like Child Hostel and Child Education; since they are small, we have ignored in our structure

For higher income employees:

• You can use Mobile, Driver Salary, Books and Periodicals and Car Maintenance
• You can set these amounts based on what you think the expenses of that employee would be, keeping in mind the exemption limits for Driver’s Salary and Care Maintenance

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