Salary Structure
Understanding Salary Structure: Key Components and Calculations
In this blog, we will discuss the concept of salary structure, its different types, and the key components that make up an employee’s pay in India. We will also cover how salary is calculated, including deductions like PF, TDS, and other allowances, to give you a clear understanding of what goes into a salary breakdown.
Let’s look at each section:
What is Salary Structure?
A salary structure is a company’s system for deciding how much employees are paid based on their role, qualifications, experience, and market rates for similar jobs. It also covers non-financial benefits like bonuses and perks.
Types of Salary Structure
Below are the common types of salary structures companies use based on their size, industry, and market trends:
- Traditional Salary Structure
In this structure, pay ranges have smaller differences, and employees move up the pay scale with each promotion. It’s a stable system that provides employees with a clear path for growth, encouraging them to stay with the company longer. - Market-Based Salary Structure
This structure is ideal for companies in competitive industries. It considers market rates and demand for specific roles, allowing companies to offer competitive pay and attract top talent. - Broadband Salary Structure
This structure offers more flexibility, with wide salary ranges within each grade. Employees can earn more based on performance and development without needing a promotion. - Step Salary Structure
Pay increases are based on a set schedule, like years of service, instead of performance or responsibility. It provides a clear path for pay raises and helps companies plan salary costs. - Flat Salary Structure
In this system, all employees receive the same base pay regardless of role or experience. Increases may come through bonuses or incentives, but the basic salary stays the same.
Different components of 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
- Deductions that 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). Generally, it is used by the organisation as surplus to the CTC when the other components have been paid.
Child Education Allowance
Child education allowance is paid towards employees’ first two child tuition fees and is tax-deductible up to Rs. 100 per month per child for a maximum of 2 kids.. Usually, this amount is fixed at Rs.2,400 once a year for an employee.
- To avail of the tax benefits on education allowance, you have to submit the tax-saving documents and provide the count of child or child information with concern to HR.
Children hostel allowance
It is also applicable for employee’s first two child hostel expenditures and is tax deductible up to Rs.300 per month and this amount is not more than Rs. 36,000 once a year.
Leave Travel Allowance (LTA)
An employee can claim tax benefits of all fair expenses paid for her/his family during the holiday. But there are some terms and conditions to claiming the tax benefits.
- Only a travelling allowance can be claimed, such as fair expenses.
- Travel must be within the country, not out of the country.
- Only dependent families are covered under the LTA.
- To get the tax benefits, employees should declare their details under ‘Tax declaration’ under the Tax Saving Plan, along with the saving plan, such as PPF, LIC, Loans and others.
- By the end of the financial year, employees need to submit their actual tax-saving proof with concern to HR and resigned employees need to submit their tax-saving proof with concern to HR before the Full & Final settlement.
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 |
Tax exemption based on 3 conditions –
40% of Basic + DA if non-metro |
No |
Yes |
No |
|
Conveyance |
Fully Taxable |
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 |
|
LTA |
As per the actual fair price |
No |
Yes |
No |
|
Educational allowance |
Rs. 100 PM for 2 child |
No |
Yes |
No |
|
Children hostel allowance |
Rs. 300 PM for 2 child |
No |
Yes |
No |
Deductions:
|
Heads of salary |
Calculation |
Applicability |
|
PF |
12% of Basic+DA |
Company with at least 20 employees |
|
ESI |
4% of gross salary (If applicable) Employees’ contribution – 0.75% Employer’s contribution – 3.25% |
Company with at least 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 a 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.
How Is A Salary Structure Calculated?
You can calculate the salary structure as follows:
- Find total earnings
Add your basic salary and any allowances (like HRA, conveyance, etc.) to get your total earnings. This is usually mentioned in your offer letter. - Calculate total deductions
Include taxes (like TDS), professional tax, and contributions like EPF, ESI, and gratuity. The sum of these is your total deduction. - Gross salary
Gross salary is your total earnings before any deductions. It includes your basic pay, allowances, bonuses, and overtime, if applicable. - Net salary
Net salary is what you take home after deducting taxes and other withholdings from your gross salary. Simply subtract the total deductions from the gross salary to get this amount.
Salary Structure Sample
Understanding the components of a salary structure can be easier with an example. Let’s consider an employee with a CTC of ₹15,00,000 per year. Here’s how the breakdown might look:
- CTC = Gross salary + EPF + Health insurance
= ₹12,11,200 + ₹1,11,451.2 + ₹1,77,348.8
= ₹15,00,000 per year - Basic Salary = 40% of CTC
= ₹5,99,200 per year - Dearness Allowance (DA) = 55% of Basic Salary
= ₹3,29,560 per year - House Rent Allowance (HRA) = 50% of Basic Salary (for metro cities)
= ₹2,99,600 per year - Health Insurance = ₹1,77,348.8 per year
- Total Allowances = HRA + Medical Allowance (₹15,000) + Transport Allowance (₹19,200) + Leave Travel Allowance (LTA) (₹1,28,400) + Special Allowance (₹1,49,800)
= ₹2,99,600 + ₹15,000 + ₹19,200 + ₹1,28,400 + ₹1,49,800
= ₹6,12,000 per year - Gross Salary = Basic Salary + Allowances
= ₹5,99,200 + ₹6,12,000
= ₹12,11,200 per year - TDS = 10% of Gross Salary = ₹1,21,120 per year
- EPF Contribution = 12% of (Basic Salary + DA)= ₹1,11,451.2 per year
- Total Deductions = Professional Tax (₹2,400 per year) + TDS (₹1,21,120) + EPF (₹1,11,451.2) = ₹2,34,971.2 per year
Net Salary = Gross Salary – Deductions = ₹12,11,200 – ₹2,34,971.2 = ₹9,76,228.8 per year.
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 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.
We have reached the end of this post. Please share your queries with us in the comment section below.
FAQs
1. Is PF a part of the fixed salary?
Ans: PF is not included in your fixed income, but is usually included in your basic salary. Your fixed salary includes Dearness Allowance, HRA, and other benefits.
2. What components are included in the gross salary?
Ans: Gross salary comprises basic income, dearness allowance (DA), housing rent allowance (HRA), and additional allowances.
3. Does the CTC include TDS?
Ans: CTC does not cover TDS. TDS, or Tax Deducted at Source, is deducted from an employee’s salary at the time of payment. TDS is normally 10% of the pay and has no set limit.
