Dear Seniors,
Understanding Salary Head Components
I would like to know what the different categories or components are in designing the salary head for the purpose of calculations such as EPF, gratuity calculation, tax deduction, etc.
EPF Calculation: Basic + DA
The (Basic + DA) is also taken into account while calculating EPF presently in my organization. Can it only be calculated from the Basic base? I want to know why private companies mostly do not have DA in their salary structure. What is the actual logic behind that?
Non-Taxable Salary Heads
Lastly, is there any salary head name that is not taxable? This could be beneficial to employees in saving take-home pay!
Thank you.
From India, Bangalore
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1Understanding Salary Head Components
I would like to know what the different categories or components are in designing the salary head for the purpose of calculations such as EPF, gratuity calculation, tax deduction, etc.
EPF Calculation: Basic + DA
The (Basic + DA) is also taken into account while calculating EPF presently in my organization. Can it only be calculated from the Basic base? I want to know why private companies mostly do not have DA in their salary structure. What is the actual logic behind that?
Non-Taxable Salary Heads
Lastly, is there any salary head name that is not taxable? This could be beneficial to employees in saving take-home pay!
Thank you.
From India, Bangalore
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With my knowledge, I mentioned a few heads for salary break-up that are not taxable:
- Basic + DA (put 60% of salary for PF and all other employer benefits) - Note that recently, some amendments have been made on this issue.
- HRA (40% of basic + DA is exempt from taxation).
- Conveyance (₹800 per month, ₹9,600 per annum, is not taxable).
- Allowance (depending on employee attendance, it will be deducted).
- Washing (it is exempted for ESI).
- Medical allowance (₹1,250 per month exempt from tax).
- Other allowances.
Regards,
V. Nagaraju
From India, Mumbai
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- Basic + DA (put 60% of salary for PF and all other employer benefits) - Note that recently, some amendments have been made on this issue.
- HRA (40% of basic + DA is exempt from taxation).
- Conveyance (₹800 per month, ₹9,600 per annum, is not taxable).
- Allowance (depending on employee attendance, it will be deducted).
- Washing (it is exempted for ESI).
- Medical allowance (₹1,250 per month exempt from tax).
- Other allowances.
Regards,
V. Nagaraju
From India, Mumbai
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Major Salary Components
Money received under an employer-employee relationship is called salary. If one is a freelancer or hired by an organization on a contract basis, their income would not be treated as salary income. In such cases, your income would be treated as income from business and profession.
The salary consists of the following parts:
Basic Salary
As the name suggests, this forms the very basis of salary. This is the core of salary, and many other components may be calculated based on this amount. It usually depends on one's grade within the company's salary structure. It is a fixed part of one's compensation structure, and the complete amount becomes a part of your in-hand salary.
Allowances
Apart from basic salary, there are some allowances your CTC will contain. Examples include HRA, conveyance allowance, and leave travel allowance. Some of these allowances are tax-free up to a certain limit, and some depend on your actual spending. It is the amount received by an individual paid by his/her employer in addition to basic salary to meet some service requirements such as Dearness Allowance (DA), House Rent Allowance (HRA), Leave Travel Assistance (LTA), Lunch Allowance, Conveyance Allowance, Children's Education Allowance, City Compensatory Allowance, etc. Allowances can be fully taxable, partly taxable, or non-taxable.
Claims or Perquisites
A part of your salary may also be made up of your billed claims. These include components like mobile allowance and medical allowance. There is a maximum limit set to these components, and they are paid when you submit your bills. These are usually tax-free. It is any benefit or amenity granted or provided free of cost or at a concessional rate, such as a rent-free unfurnished house, rent-free furnished house, motor car facility, reimbursement of gas, electricity & water, club facility, domestic servant facility, interest subsidy on loan, reimbursement of medical bills, reimbursement of hospital bills, reimbursement of telephone bills, benefits derived by employee stock options, and so on.
How are Perquisites Taxed?
Since these are non-cash components, they cannot be taxed directly. So, the income tax laws attach a certain value to each of these components and charge a tax on them. The calculation of this value varies from category to category. Nevertheless, the thumb rule across all categories is that only those benefits that you use for personal purposes will be considered as perquisites.
Deductions
A major part of your CTC comprises compulsory deductibles. These include deductions for provident fund, medical insurance, etc. They form a part of your compensation structure, but you do not get them as part of your in-hand salary. As such, although it increases your CTC, it does not increment your net salary. Compulsory deductions include Provident Fund, Income Tax, and Professional Tax (where applicable). Optional deductions include recovery for advance or loan if taken, voluntary contribution to P.F., etc.
Provident Fund Contribution
Provident fund contribution has two sides: the employer's contribution and the employee's contribution. This is usually 12 percent of the basic salary. However, this contribution is not paid out. It is directly deposited in the Provident Fund (PF) account and paid to the employee when they retire or resign. There is also the employee's contribution to PF. This amount is deducted from their monthly salary and deposited in their PF account. For details on provident fund, you can read Provident Fund (PF) and Voluntary Provident Fund (VPF).
Performance Linked Pay
Linking a part of the salary to productivity and performance has become a trend today. You get the complete amount only on 100% achievement of the target, but it forms a part of your CTC, fattening it up.
Different Types of Salary
- **Gross Salary:** The amount of salary paid after adding all benefits and allowances and before deducting any tax.
- **Net Salary:** What is left of your salary after deductions have been made.
- **Take Home Salary:** Usually the Net Salary unless there are some personal deductions like loan or bond repayments.
- **Cost to Company (CTC):** Companies use the term "Cost to Company" to calculate the total cost to employ, i.e., all the costs associated with an employment contract. A major part of CTC comprises compulsory deductibles. These include deductions for provident fund, medical insurance, etc. They form a part of your compensation structure, but you do not get them as a part of in-hand salary. As such, although it increases your CTC, it does not increment your net salary.
Taxes
Taxes are an unavoidable evil, and they eat up a large chunk of your salary. Taxes are obviously never mentioned in your offer letter. So, ensure that you calculate your tax liabilities with the new income in accordance with tax policies to figure out the amount you will receive in your paycheck.
The salary structure varies from company to company based on their policies. Some of the common pay heads used are:
1) Basic – 35% – 50% of Gross
2) HRA – 40% of Basic for Non-metro & 50% of Basic for Metro (Delhi, Mumbai, Chennai, or Kolkata)
3) Con – Max Rs. 800/PM, which is Max of Rs. 9600 PA
4) Medical Reim – Max Rs. 1250/PM, which can be a max of Rs. 15000 PA
5) Spl Allow – Balance of Gross will be provided as Spl Allow
Statutory
1) PF
- Emp Contribution – 12% on Basic (can be subjective to 780, which is 12% of the min basic salary, i.e., 6500)
- Emp'r Contribution - (EPS – 8.33% (subject to a ceiling of Rs. 541)
- PF – Rest of the amount out of 12% (can be subjective to 780, which is 12% of the min basic salary, i.e., 6500)
- PF administration charges – 1.1%
- EDLI – 0.5% (subject to a ceiling salary of Rs. 6500)
- EDLI administration charges 0.01%
2) ESI – Applicable to employees whose Gross Salary is less than or equal to Rs.10000
- Emp Contribution – 1.75% on Gross
- Emp'r Contribution – 4.75% on Gross
PT – It varies state to state
Gratuity = Basic/26*15*(no. of years - It is payable to the employee who completes 5 years of service in the organization. It can be shown as a part of CTC.)
OT Calculation = basic+da/26/8*no.of hrs * 2
If employees come under high salary, then you can again split up the amount in Spl Allow as:
1) Food coupons
2) Car Hire
3) Petrol and Maint for Car
4) LTA
FBT is applicable apart from LTA.
The Variable Pay % also differs from company to company policy. In my previous organization, it is 12.5% of the CTC for all the departments except Sales. For sales, it will be 15%.
From India, Mumbai
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Money received under an employer-employee relationship is called salary. If one is a freelancer or hired by an organization on a contract basis, their income would not be treated as salary income. In such cases, your income would be treated as income from business and profession.
The salary consists of the following parts:
Basic Salary
As the name suggests, this forms the very basis of salary. This is the core of salary, and many other components may be calculated based on this amount. It usually depends on one's grade within the company's salary structure. It is a fixed part of one's compensation structure, and the complete amount becomes a part of your in-hand salary.
Allowances
Apart from basic salary, there are some allowances your CTC will contain. Examples include HRA, conveyance allowance, and leave travel allowance. Some of these allowances are tax-free up to a certain limit, and some depend on your actual spending. It is the amount received by an individual paid by his/her employer in addition to basic salary to meet some service requirements such as Dearness Allowance (DA), House Rent Allowance (HRA), Leave Travel Assistance (LTA), Lunch Allowance, Conveyance Allowance, Children's Education Allowance, City Compensatory Allowance, etc. Allowances can be fully taxable, partly taxable, or non-taxable.
Claims or Perquisites
A part of your salary may also be made up of your billed claims. These include components like mobile allowance and medical allowance. There is a maximum limit set to these components, and they are paid when you submit your bills. These are usually tax-free. It is any benefit or amenity granted or provided free of cost or at a concessional rate, such as a rent-free unfurnished house, rent-free furnished house, motor car facility, reimbursement of gas, electricity & water, club facility, domestic servant facility, interest subsidy on loan, reimbursement of medical bills, reimbursement of hospital bills, reimbursement of telephone bills, benefits derived by employee stock options, and so on.
How are Perquisites Taxed?
Since these are non-cash components, they cannot be taxed directly. So, the income tax laws attach a certain value to each of these components and charge a tax on them. The calculation of this value varies from category to category. Nevertheless, the thumb rule across all categories is that only those benefits that you use for personal purposes will be considered as perquisites.
Deductions
A major part of your CTC comprises compulsory deductibles. These include deductions for provident fund, medical insurance, etc. They form a part of your compensation structure, but you do not get them as part of your in-hand salary. As such, although it increases your CTC, it does not increment your net salary. Compulsory deductions include Provident Fund, Income Tax, and Professional Tax (where applicable). Optional deductions include recovery for advance or loan if taken, voluntary contribution to P.F., etc.
Provident Fund Contribution
Provident fund contribution has two sides: the employer's contribution and the employee's contribution. This is usually 12 percent of the basic salary. However, this contribution is not paid out. It is directly deposited in the Provident Fund (PF) account and paid to the employee when they retire or resign. There is also the employee's contribution to PF. This amount is deducted from their monthly salary and deposited in their PF account. For details on provident fund, you can read Provident Fund (PF) and Voluntary Provident Fund (VPF).
Performance Linked Pay
Linking a part of the salary to productivity and performance has become a trend today. You get the complete amount only on 100% achievement of the target, but it forms a part of your CTC, fattening it up.
Different Types of Salary
- **Gross Salary:** The amount of salary paid after adding all benefits and allowances and before deducting any tax.
- **Net Salary:** What is left of your salary after deductions have been made.
- **Take Home Salary:** Usually the Net Salary unless there are some personal deductions like loan or bond repayments.
- **Cost to Company (CTC):** Companies use the term "Cost to Company" to calculate the total cost to employ, i.e., all the costs associated with an employment contract. A major part of CTC comprises compulsory deductibles. These include deductions for provident fund, medical insurance, etc. They form a part of your compensation structure, but you do not get them as a part of in-hand salary. As such, although it increases your CTC, it does not increment your net salary.
Taxes
Taxes are an unavoidable evil, and they eat up a large chunk of your salary. Taxes are obviously never mentioned in your offer letter. So, ensure that you calculate your tax liabilities with the new income in accordance with tax policies to figure out the amount you will receive in your paycheck.
The salary structure varies from company to company based on their policies. Some of the common pay heads used are:
1) Basic – 35% – 50% of Gross
2) HRA – 40% of Basic for Non-metro & 50% of Basic for Metro (Delhi, Mumbai, Chennai, or Kolkata)
3) Con – Max Rs. 800/PM, which is Max of Rs. 9600 PA
4) Medical Reim – Max Rs. 1250/PM, which can be a max of Rs. 15000 PA
5) Spl Allow – Balance of Gross will be provided as Spl Allow
Statutory
1) PF
- Emp Contribution – 12% on Basic (can be subjective to 780, which is 12% of the min basic salary, i.e., 6500)
- Emp'r Contribution - (EPS – 8.33% (subject to a ceiling of Rs. 541)
- PF – Rest of the amount out of 12% (can be subjective to 780, which is 12% of the min basic salary, i.e., 6500)
- PF administration charges – 1.1%
- EDLI – 0.5% (subject to a ceiling salary of Rs. 6500)
- EDLI administration charges 0.01%
2) ESI – Applicable to employees whose Gross Salary is less than or equal to Rs.10000
- Emp Contribution – 1.75% on Gross
- Emp'r Contribution – 4.75% on Gross
PT – It varies state to state
Gratuity = Basic/26*15*(no. of years - It is payable to the employee who completes 5 years of service in the organization. It can be shown as a part of CTC.)
OT Calculation = basic+da/26/8*no.of hrs * 2
If employees come under high salary, then you can again split up the amount in Spl Allow as:
1) Food coupons
2) Car Hire
3) Petrol and Maint for Car
4) LTA
FBT is applicable apart from LTA.
The Variable Pay % also differs from company to company policy. In my previous organization, it is 12.5% of the CTC for all the departments except Sales. For sales, it will be 15%.
From India, Mumbai
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Understanding Dearness Allowance (DA) in Salary Structures
The gross salary includes a component called Dearness Allowance, which is further divided into Fixed (DA) and Variable DA (VDA). Most organized sectors, unionized companies, banks, and government sectors follow this pattern. The FDA is either a percentage of the basic pay or a lump sum, which is partly or fully merged when a wage revision pact is signed. On the other hand, the VDA is linked to the Wholesale Price Index (WPI) and Consumer Price Index (CPI). These are monitored through notifications issued by the Labor Department of the Government of India on a quarterly or half-yearly basis. These indices normally trend upwards with inflation but occasionally decrease when there is de-escalation in market prices of select commodities, food grains, oils, vegetables, and other items, leading to revisions in VDA. However, this pattern of DA is not commonly followed in modern or multinational corporations.
Regards,
Kumar S.
From India, Bangalore
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The gross salary includes a component called Dearness Allowance, which is further divided into Fixed (DA) and Variable DA (VDA). Most organized sectors, unionized companies, banks, and government sectors follow this pattern. The FDA is either a percentage of the basic pay or a lump sum, which is partly or fully merged when a wage revision pact is signed. On the other hand, the VDA is linked to the Wholesale Price Index (WPI) and Consumer Price Index (CPI). These are monitored through notifications issued by the Labor Department of the Government of India on a quarterly or half-yearly basis. These indices normally trend upwards with inflation but occasionally decrease when there is de-escalation in market prices of select commodities, food grains, oils, vegetables, and other items, leading to revisions in VDA. However, this pattern of DA is not commonly followed in modern or multinational corporations.
Regards,
Kumar S.
From India, Bangalore
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Dear Seniors,
Firstly, thank you very much for all the insights!
Regarding Basic + DA and Employer Benefits
Dear Nagaraju 00001, regarding the (Basic + DA) constituting 60% of the salary for PF and all other employer benefits, is it mandatory, or is there any circular?
Medical Allowance and Tax Exemption
Regarding the medical allowance on tax exemption, if I include a medical allowance, will the tax exemption be Rs 15,000?
ESIC Applicability in India
Dear Bhaktinarang_123, the suggestions were of immense value, and I would like to know the states in India where ESIC is applicable, as I have found some states that are not covered under the ESIC Act.
Alternative Naming for DA
Dear loginMiracle, I understand that the pattern of DA is not in vogue in modern/MNC settings. What I want to know is regarding the benefits of naming it or if there is any other alternative name that will help in making it non-taxable.
EPF Calculation from Basic Base
Dear All, lastly, the (Basic + DA) is also taken into account while calculating EPF presently in my organization. Can I make it calculated only from the Basic base even though DA exists? Is there any legal/statutory binding?
Regards, ningjems
From India, Bangalore
Acknowledge(0)Amend(0)
Firstly, thank you very much for all the insights!
Regarding Basic + DA and Employer Benefits
Dear Nagaraju 00001, regarding the (Basic + DA) constituting 60% of the salary for PF and all other employer benefits, is it mandatory, or is there any circular?
Medical Allowance and Tax Exemption
Regarding the medical allowance on tax exemption, if I include a medical allowance, will the tax exemption be Rs 15,000?
ESIC Applicability in India
Dear Bhaktinarang_123, the suggestions were of immense value, and I would like to know the states in India where ESIC is applicable, as I have found some states that are not covered under the ESIC Act.
Alternative Naming for DA
Dear loginMiracle, I understand that the pattern of DA is not in vogue in modern/MNC settings. What I want to know is regarding the benefits of naming it or if there is any other alternative name that will help in making it non-taxable.
EPF Calculation from Basic Base
Dear All, lastly, the (Basic + DA) is also taken into account while calculating EPF presently in my organization. Can I make it calculated only from the Basic base even though DA exists? Is there any legal/statutory binding?
Regards, ningjems
From India, Bangalore
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Exemption on Salary Components.doc
SALARY SHEET CALCULATION.xls