In this post, we will take a deep-dive into understanding the salary structure in India.

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.

  1. Two basic types of salary structuring
  2. Three types of salaries
  3. Different components of salary structure (in India)
  4. Different ways of defining salary components
  5. 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. We will discuss more about this in a bit.

Three types of salary

When it comes to confusing salary terms, there are three which gets 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 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 which 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.

Conveyance allowance

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

Special Allowance is fully taxable and is also taken for the calculation of Provident Fund (PF).

Earnings:

Heads of salary Taxability PF applicability ESI applicability gratuity applicability
Basic Fully taxable Yes  Yes  Yes
DA Fully taxable Yes  Yes  Yes (if applicable)
HRA No  Yes  No
Conveyance No  Yes  No
Reimbursement As per the type of reimbursement No  No  No
Other Allowances (Maybe multiple including variable pay) Fully taxable No  No  No

Deductions

Heads of salary Calculation applicability
PF 12% of Basic+DA Company with atleast 20 employees
ESI 1.45% of gross salary (if applicable) 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 a 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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