Payment made to employees in lieu of services rendered towards their work is broadly called a salary. The salary has many components and the way that this compensation is structured to benefit the employee is crucial to accommodate all the allowances and perquisites that are paid out by the company. The structure of your salary could impact your take-home pay and the amount of tax you pay.
Every employee should be aware of the components of the salary structure to understand what goes into forced savings schemes and how to lower the tax burden appreciably. The components of the paystructure in India are unique and tailored to suit the income tax laws in our country. Any changes in the pay structure could have an impact on your tax component.
Components of salary structure
The sum total of the money spent on an employee by the company is termed CTC or ‘cost to company’ or the Gross Salary. Your CTC includes basic salary, perquisites, allowances, deductions, mandatory contributions and the tax component or TDS. CTC would be different from your take-home salary
There are some direct and indirect components of the Gross Salary or the CTC such as:
CTC= Gross salary + Provident fund + Gratuity
Let us decode each component in detail:
Direct Components of the Gross Salary:
The basic salary is the designated income of an employee. It is the fixed amount that comes before any reductions and additions of bonuses. Your location may impact the basic salary amount as well as your designation in the organization. The rest of the components are completely based on your basic salary This part of the salary is fully taxable. For example, 12% of your Basic Salary is your Provident Fund contribution.
The HRA is the least of the following calculations:
This is a bonus offered in exchange for office work completed outside of normal working hours.
A fixed amount of money is provided in exchange for a year of service to the company.
For the employee’s outstanding work within the pay interval, a bonus is given.
During ordinary working hours, the business can provide a meal, meal ticket, or lodging to employees as a personal benefit.
Employees might also choose to grant arrears from their salary as a payment in advance.
The organization can also take initiatives to preserve and improve their employees’ health and overall well-being.
Employees’ utility bills might also be reimbursed or paid directly by the company.
The corporation reimburses expenses incurred during business travel or food purchased during business meetings.
After deduction of due taxes from the Gross Salary, Net Salary is received. The sum is also known as ‘Take-Home Pay,’ because it is the amount received after income tax, professional tax and provident fund contributions have been deducted from the gross paycheck.
It is always less than the gross salary.
The formula stands,
Net Salary = Gross Salary- Deductions from Tax and EPF
The deductions include Professional Tax, Income Tax and Contributions to the provident fund.
These are the components of CTC or Cost to Company. However, you should also be aware of the following salary terminology.
How should salary details be organized?
Salary arrangements can be divided into two categories. Both are dependent on how the company decides to break and shape it’s CTC (Cost to Company). The following are the different types of employee salary structure formats in India:
Various methods for defining salary components in India
Each company defines wage components in its own way. The three most popular approaches of defining components of pay structure in India are listed below.
How to figure out your take-home pay and other deductions?
As previously stated, your take-home pay, also known as your net income, is not the same as your Cost to Company, or CTC. The CTC is the annual amount spent by an organization on a single individual. The sum is decided by the company’s variable benefit amounts and the mutually agreed-upon basic salary. On the other hand, Take-home pay, also known as net salary, is the amount received after taxes and provident fund contributions have been deducted from the basic amount.
The first step in determining net salary from CTC is to determine the Gross Salary. Gross salary is the total amount an individual makes in a pay period, as the name suggests. It includes the employee’s basic salary, allowances, and a few more perks. To determine gross salary from CTC, subtract gratuity and EPF.
Gross Salary = Cost to Company – Gratuity – EPF
Once the gross income has been determined, all that remains is to deduct PPF and taxes to arrive at take-home pay. The two most prevalent taxes deducted from gross salary are income tax and professional tax.
Net Salary = Gross Salary – (Income Tax+ Professional Tax) – PPF
However, it must be noted that both income tax and professional tax are determined by the tax slabs available for that fiscal year. Before deducting taxes from a gross salary, it is required to check the applicable tax slabs. If an employee receives a pension from a previous company or the government, the amount must be factored into his gross pay. Travel and food reimbursements are not included in gross salary.
What are the goals of the ideal wage structure?
There is no such thing as an optimal salary structure format when it comes to this topic. However, in theory, it should meet three major requirements:
Alternate ways to lawfully save money on taxes
There are several legal ways to save money on taxes. The following are a handful of them:
In most cases, the House Rent Allowance is based on the agreed-upon basic pay. The sum is over 40% of the basic salary. The basic salary is estimated to be roughly 50% of the CTC. As a result, HRA can be estimated to be roughly 20% of HRA. It varies depending on the company’s management, but it is often the same amount.
It is usually possible to obtain a loan from your gratuity money after five years of working under the same employment.
The financial year, which begins on April 1st and ends on March 31st, is the 365-day period during which an individual or organization earns money. Assessment year is the financial year or the year following it when tax returns are filed.
Yes. Income tax and professional tax must be deducted from your gross compensation. The amount is determined by the tax bracket for that fiscal year. However, certain states, such as Haryana, do not implement professional tax; therefore employees in those states are not subject to it.
Some allowances are entirely taxable, while others are partially taxable or exempt.