Salary is one of the primary motivating factors for any employee. Since it is the remuneration they receive for their work, employees expect their company to pay the amount mutually agreed upon when they start working for the company.
The employee salary comprises various components that might be overwhelming at first. However, these components constitute a significant factor in deciding the final amount your company deposits in your bank account each salary cycle.
Hence, it is vital to understand the different components such as basic salary, provident fund, professional tax, etc. In this article, we will look at the various parts of salary in India and understand their relevance in the salary structure.
Also Read: New Wage Code 2022: How will it Impact your Payroll Processing?
Salary Structure in India
The human resources department is usually tasked with formulating the salary slip format of the employees in the company. They may approach this task using one of the two methods discussed below.
Bottom-up
The Bottom-up approach of salary structuring helps when you have a specific salary budget and need to allocate each employee’s salary within the specified budget.
In this case, the gross amount is set first, and the components of salary are divided as per that amount.
Top-down
The Top-down approach to salary structuring starts with defining the salary components and adding those to stay within the predefined budget.
In this case, the major components of salary such as the basic salary are defined first as per various factors, and the remaining components are adjusted as a percentage of the basic salary to stay within the budget.
Types of Salary
Salary can be expressed in different forms. Hence, understanding the terms and the difference between them seems confusing. Let us clear the confusion once and for all:
Cost To Company (CTC)
Cost To Company (CTC) refers to the amount the company spends on the employee in one financial year. Since it is the expense borne by the company, it includes all the components of the salary, including the basic salary and the PF contribution that they pay for the employee every salary cycle and their gratuity.
Gross Salary
Gross Salary is the amount visible to the employee in their payslip. It includes the salary they receive before regulatory and non-regulatory deductions.
One must understand that there is a clear distinction between gross salary and CTC. For example, CTC also contains the employer PF contribution, while it is not a part of the gross salary.
Net Salary or Take Home Salary
Net salary is the amount that the employee receives after all the deductions are completed. Hence, it is also called ‘in-hand’ salary. It is the final amount disbursed to the employees via wire transfer or direct deposit.
Salary Components in India
Many components constitute the salary structure in India. Some of these components are fixed, some are variable, and some are deductible from the employee salary.
Following are the major salary components in India:
1. Basic Salary
The basic salary is the fixed income provided to the employee. It is based on several factors such as the government-mandated minimum salary, the employee’s qualifications, experience, and skills.
As a fixed component of the employee salary, other components are calculated as various percentages of the basic salary.
2. House Rent Allowance
House Rent Allowance (HRA) is provided to employees to compensate them for staying in rented property.
Such employees can also claim full or partial tax exemption under Section 10 (13A) of the Income Tax Act, under Rule 2A of the Income Tax Rules. On the other hand, house rent allowance is taxable if the employee is not living in a rented property.
3. Dearness Allowance
Dearness allowance is a percentage of basic salary that is provided to help them combat the effects of inflation.
It is provided to employees of the public sector, government employees, and pensioners. It is also fully taxable by law.
4. Conveyance Allowance
Conveyance Allowance refers to the salary paid by the company for the daily travel expenses of the employee.
It is also referred to as ‘transport allowance’ by some companies. It was categorized as ‘Standard Deductions’ in Budget 2018, and in the next year, it was increased from ₹40,000 to ₹50,000.
5. Medical Allowance
The employer can pay their employees medical allowances as a salary component to compensate for their medical expenses. This amount is tax-free up to ₹15,000.
Some companies also categorize this amount as medical reimbursement and provide it only when the employee has incurred a medical expenditure.
6. Mobile Allowance
Some companies pay the mobile charges of their employees in the form of ‘mobile allowances’. In some organizations, it is a fixed component set as per the company’s corporate connections. The mobile phone allowance is exempted from taxes in some scenarios only.
7. Children Education Allowance
Some companies also provide an allowance for children’s education. It is categorized under ‘children’s education allowance’. If the employee spends more than ₹100 per month, this allowance becomes taxable under the law.
8. Books & Periodicals Allowance
Some companies provide an additional allowance for the employee to buy books and periodicals. This allowance is covered under the ‘books and periodicals allowance’. It is exempt from taxes until the actual expenditure in purchasing those items is covered.
9. Leave Travel Allowance
Leave travel allowance is the payment provided by the company to compensate the employee for their travel expenses while on leave.
It covers the standard modes of domestic travel via aeroplanes, railways and other ways of public transport. The amount paid under ‘Leave Travel Allowance’ is exempted from taxes under Section 10 (5) of the Income Tax Act, 1961.
10. Bonus
Bonus is how the company highlights their appreciation for employees working hard for their company. Businesses usually share their profit with their employees with the help of bonuses to appreciate their efforts in helping the company exceed their targets. It is also a taxable component of their salary structure.
11. Gratuity
Gratuity is a statutory component of the employee salary paid in a lump sum to the employee upon their resignation from an organization. It is payable by the company only if the employee has served in the company for a minimum period of 5 years.
It is set as 4.81% of basic salary per the provisions of the Payment of Gratuity Act of 1972. It is paid as gratitude for the services rendered by the employee while in the organization.
12. Arrears
There are instances when human errors cause an employee to receive less salary than expected. Similarly, due to computation delays, employees might receive their first hiked salary in the next month from which their pay was hiked. Arrears refer to any such payments provided to the employee later than when they were expected to receive them.
Also Read: Salary Arrears – Definition, Processing, and Payments
13. Incentives
Incentives refer to the additional bonuses provided to the employees for their exceptional work. It acts as an ‘incentive’ for employees to remain more engaged with their work. It is solely based on the performance of the employee.
14. Income Tax
Income Tax refers to the tax levied by the government on the employees working in India. The percentage of income to be given as income tax is decided in the budget as different slabs, which are set depending on the taxpayer’s income bracket.
15. Provident Fund
The employee provident fund is a savings fund developed solely to help the employees in times of need. A specific percentage of the employee’s salary is deducted and deposited every month by the employer. The employer must also deposit the same amount from their end for the employee’s provident fund.
16. Professional Tax
Professional tax is the tax levied on the employee’s income by the state government, which is different from the income tax imposed by the central government. Hence, professional tax differs from one state to another. Employers can deduct the professional tax from their employee’s salaries before disbursing them.
17. Employee State Insurance Premium
The Employee State Insurance Premium is a component of the salary deducted for providing employees medical insurance.
The ESIC Act of 1948 stipulates that if a company has 10 or more employees with a gross salary of less than ₹21,000 per month, then 1% of their salary should be deducted for ESIC. The employer must also provide 4% of the employee’s salary as an ESIC contribution.
18. National Pension Scheme
The National Pension Scheme is a scheme by the Government of India to allow a person to save additional money that can be provided as a lump sum upon retirement. It will enable the employees to be self-reliant after their retirement.
The employee should provide a minimum of ₹6,000 if their salary is up to ₹ 50,000 per annum. The employer must also contribute 10% of the employee’s basic wage towards NPS.
19. Labour Welfare Fund
The labour welfare fund is an additional fund provided by the state government to support any labourer needing financial help. Since it is a statutory requirement by the state governments, it differs from state to state. The State Labour Welfare Board decides the contribution percentage.
Also Read: New Labour Law: New Changes in Working Hours, PF, Salary Structure, In-hand Salary & more
20. Other Deductions
The companies are free to add other deductions apart from the statutory ones. However, these deductions should be aimed toward employee welfare. A typical example of such deductions is health insurance premiums, which help the employee in case of a medical need.
Conclusion
As we have seen throughout this article, employee salary structure and its various components are complicated. However, once you understand the different terminologies and their definitions, it is easy to set and compute the individual employee salaries for your organization.
The recent changes made by the Finance Ministry in the employee salary structure will dictate your take-home salary, gratuity, and PF contribution. Hence, we suggest you keenly observe your salary slip as the changes will come into effect in the following months.
