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:
- GROSS SALARY:
Direct Components of the Gross Salary:
- Basic Salary (also referred to as the basic as most calculations such as HRA, etc. are based on your Basic 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.
There are various monetary allowances that are provided over and above the basic salary to the employees. HRA, Leave travel allowance, medical allowance, transport allowance, child education allowance, meal allowance and special allowances, etc. form a part of the employee salary structure. The Government employees also get the benefit of a dearness allowance over and above the same.
- House Rent Allowance or HRA
Employees who live in rented accommodation can claim House Rent Accommodation for the actual rent paid to the landlord. The rent cant is partially and fully exempted from taxes. This amount is fully taxable if there is no rent paid by the employee.
The HRA is the least of the following calculations:
- Actual HRA received by the company
- Actual rent paid less than 10% of the salary
- 50% of Basic Salary + Dearness Allowance (for people living in metro cities) and 40% of Basic Salary + Dearness Allowance (for people living in non-metro cities)
- Leave Travel Allowance or LTA
This allowance is provided for 2 domestic travels by air, train, bus or car in a block of 4 specified calendar years. This amount is payable only for an actual journey of self and dependent family, with an approved leave from the organization for travel purposes. Only the travelling expenses can be exempt from taxes and not costs for hotel accommodation, food, sightseeing, etc.
- Phone or wifi Allowance
Costs of the landline, including broadband and wifi as well as mobile expenses, are reimbursed against actual bills.
- Vehicle Allowance
This allowance is provided to staff to help them cover the costs of driving their own cars to work from home.
- Special or other allowances
This is a set sum of money paid by employees to assist employees in meeting particular goals. Special Allowances include everything from Child Education Allowances and Hostel Allowance to Transportation Allowance.
The Indirect Components of the Gross Salary:
- Overtime payment
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.
- Performance linked incentive
For the employee’s outstanding work within the pay interval, a bonus is given.
- Meals or meal coupons or accommodation provided by the employer
During ordinary working hours, the business can provide a meal, meal ticket, or lodging to employees as a personal benefit.
- Salary Arrear
Employees might also choose to grant arrears from their salary as a payment in advance.
- Health and wellness benefits
The organization can also take initiatives to preserve and improve their employees’ health and overall well-being.
- Utility bills such as electricity, gas, water, telephone, etc. are paid by the employer
Employees’ utility bills might also be reimbursed or paid directly by the company.
- Travel and food reimbursements
The corporation reimburses expenses incurred during business travel or food purchased during business meetings.
- NET SALARY
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.
- Professional Tax
Professional Tax can be defined as a direct tax levied by the State Government and paid by individuals who earn money through their profession, employment, calling, or trade. However, if only your total income as a business, an individual or a member of the Hindu Undivided Family crosses the given monetary threshold, you would be required to pay the necessary tax amount. The amount is determined by the current tax slab as specified by the individual states.
- Income Tax
ncome tax is a sort of tax collected by the Central Government on income earned by a person or a corporation over the course of a fiscal year. Non-residents only have to pay tax on the amount earned or accrued in India, whereas normal residents must pay tax on their total annual income. The amount of income tax owed is determined by the current tax slab, which is subject to change each financial year.
- Contribution to Provident Fund
The Provident Fund is a government-sponsored savings scheme that directs money from employee paychecks to a pension fund. Contributions to the provident fund are withdrawn from gross salary and accumulated, with the total amount payable as a lump sum at the end of employment or retirement.
- Professional Tax
- PROVIDENT FUND:
The Employees Provident Fund and Miscellaneous Provisions Act of 1952 established the Employees Provident Fund, often known as EPF. Organizations that work full-time with 20 employees or more are eligible to be under its coverage.
Employee wages are directed to a pension fund through this government-sponsored savings program. Contributions to the provident fund are deducted from gross pay and accumulated, with the whole amount payable in a lump sum at the end of employment or retirement, plus interest. To be qualified, an employee must have a monthly income of less than 15,000 INR at the time of joining the organization. Both the employee and the employer are required to contribute 12% of the employee’s base salary to the Employees Provident Fund under the plan. Employees are able to collect provident fund settlement if their employment ends or they retire after the age of 55.
Gratuity is a sum of money given to an employee as a show of appreciation for their service to the company. The employee is eligible for gratuity if he or she satisfies the following conditions:
- The employee must be qualified for retirement benefits.
- The employee must be retired.
- The employee must have completed five years under the same organization.
- The employee passes away or becomes disabled as a result of a sickness or an accident.
These are the components of CTC or Cost to Company. However, you should also be aware of the following salary terminology.
Employee State Insurance, or ESI, is a self-funded plan that assists employees in avoiding financial hardship as a result of illness, disability, or death caused by work-related accidents. To be eligible the company must be active over the year with 10 or more employees and their monthly wage must not exceed Rs. 21,000.Complete medical care is issued to the employees under the scheme and money deducted from their salary due to being absent during the period of illness is reimbursed.Employee’s contribution towards the plan is 0.75% of their take-home pay and the contribution from the organization is 3.25% of the wages paid.
A payslip, also known as a wage slip or pay stub, is a document delivered by an employer to an employee at the conclusion of a pay period that provides information about their pay. It consists of one’s basic income, any deductions made, any bonuses received, and finally, the net salary. It is also an official document that verifies one’s employment with a specific company. It’s typically required when applying for a loan.
Payslips are required to be issued to employees under the Payment of Wages Act of 1991.
- Form 16
Form 16 is a document issued by an organization to employees as verification of TDS deduction from their pay stub and payment to the government. It also gives a summary of the payslip and the amount of tax deducted.
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:
- Top-Down Salary structuring
This method of storing pay information entails calculating each component of the income and adding them together to arrive at the gross salary.
For example- The Basic salary is X and Allowances add up to Y. Gross salary will be X+Y.
- Bottom-up salary structuring
The complete opposite of the above structure, this method of organizing salary involves calculating gross salary and dividing and calculating each component from the total amount.
For example- The gross salary is A. The Basic salary and Allowances are calculated at 70% and 30% respectively. The basic Salary will be A x 70% and Allowances will be A x 30%.
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.
- Lumpsum method:
It is by far the most straightforward way of determining pay components. An individual is assigned a specified sum by the organization, which is distributed to him in its entirety. The amount of money allotted to an employee varies depending on their position in the firm.
- Method based on Conditions:
t is currently one of the most popular approaches for establishing wage components. The phrase “based on conditions” simply means that the amount assigned and supplied to an individual is determined by his qualifications, location, and the value he is expected to provide to his team.
- Variable method:
It is one of the more recent strategies that is only employed in a few organizations. This method determines salary components based on an employee’s attendance, performance, and contributions to his team. If the company uses this system, it’s a good idea to study and comprehend the wage components mentioned in the employment letter before agreeing.
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:
- The structure should be able to save as much money as feasible on taxes. It should be broken down to allow individuals to save as much tax as possible.
- The structure should be able to minimize the organization’s liabilities as much as possible. It should be capable of relieving the corporation of its provident fund, gratuity, and other obligations.
- The structure should be compliant with employee regulations.
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:
- One can easily claim a tax rebate by investing in various programs such as Equity Linked Saving Scheme (ELSS), National Saving Certificate (NSC), and Senior Citizen Saving Scheme under Section 80C.
- Donating to a charity qualifies for a tax break under Section 80G.
- The principal amount of a home loan can also be deducted from taxes under Section 80C.
- Repayment of student loan interest is eligible for a tax credit.
- Tax refunds are available for a variety of personal expenses, including tuition fees for children, insurance premiums for self or family, medical care for uncommon diseases or handicapped patients, and more.
- One can request that his or her employee rearrange your wage components and incorporate more tax-saving provisions.
- If a person’s leave travel allowance is limited to AC tier 1 rail travel or economy air travel, he or she may be eligible for a tax deduction for the same.
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.
No. Reimbursements are not taxable.
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.
Free snacks, drinks provided by the employer during working hours, gratuity, and travel reimbursement are the few items that are not included in the gross salary.