What’s the ideal salary structure?
So what’s the best way to draft salary structures? To answer this, we’ve put together a table of the common components that make up a salary. We’ve also added recommended amounts to each component that should assist you in drafting an ideal salary structure.
Component | Recommendation
--- | ---
Basic | 40-50% of CTC
DA | 5% of CTC
HRA | 50% of Basic + DA if metro and 40% if non-metro
Conveyance | Rs. 1,600 a month
Medical | Rs. 1,250 a month
LTA | No real benchmark, can even be used as a plug, but if not can set as 10% of Basic
ESIC (Employer Contribution) | 3.25% of Gross Salary
ESIC (Employee Contribution) | 0.75% of Gross Salary
Special | Usually used as a balancing component
Provident Fund (Employer) | 12% of Basic + DA
Provident Fund (Employee) | 12% of Basic + DA
Professional Tax | As per statewise slabs
Labour Welfare Fund | As per statewise slabs
*Note 1: The PF Employer Contribution also bears additional administrative charges.
*Note 2: Feel free to use components like Child Hostel and Child Education; since they are small, we have ignored them in our structure.
For higher-income employees:
- You can use Mobile, Driver Salary, Books and Periodicals, and Car Maintenance.
- You can set these amounts based on what you think the expenses of that employee would be, keeping in mind the exemption limits for Driver’s Salary and Car Maintenance.
Structuring salaries is an inevitable task for every HR and Payroll professional. Despite the importance of the activity, professionals are often uninformed of the technical and best practices of drafting a complete and efficient salary structure.
Basic Salary + Dearness Allowance
The Basic component is the primary component and the core of the salary structure. It is usually the largest component of the CTC, making up 40-45% of the total CTC. The basic plays an important role in defining the salary as other components like Provident Fund, Gratuity, and ESIC are dependent on it.
Dearness Allowance (DA) was introduced as part of the salary as a means to reduce the burden of inflation on salaried employees. This amount is usually set to about 5% of the total CTC and, like the Basic component, it also affects PF, ESIC, etc.
You should keep the following in mind while setting the amounts for Basic and DA:
- If it’s too high, it will increase the tax liability of the employee since this component is fully taxable. It also affects the liability of the employer since higher contributions would be required for PF, ESIC, etc.
- If it’s too low, then you may not be able to meet the minimum wage norms set by the respective state government. Since minimum wages are updated regularly, you would run the risk of falling below the recommended wage limit.
House Rent Allowance (HRA)
The House Rent Allowance, as the name suggests, is a component that employees can leverage if they are living in rented accommodations. The amount that you can claim as a tax deduction under HRA cannot be more than 50% of your basic in a metro or 40% of your basic in a non-metro. Hence, depending on where your workplace is located, this salary component will usually be set at 40% or 50% of the basic salary.
- When should employees declare the amount to get a tax benefit?
At the beginning of the new financial year, along with your other tax-saving plans (like LIC, PPF, Loan, etc.), before 25th April 2018, employees need to declare their details with their employer for FY 2018-2019.
- When should employees submit actual proof to HR?
Usually, by the end of the financial year, employees need to submit their tax-saving documents with their concerned HR. Resigned employees: At the time of exit, employees should ensure to provide their actual tax-saving proofs to the concerned HR before the FnF settlement gets finalized, or else excess tax will be recovered from the settlement amount.
Leave Travel Allowance (LTA)
Leave travel allowance (LTA) remunerates employees for their travel within the country. This component is widely used by employers due to the tax benefits associated with it. An employee can claim tax benefits for the fare expenses paid for his/her family when they take a holiday. However, there are restrictions to what you can claim as tax benefits:
- Only fare expenses are covered: Only the travel fare expenses can be claimed. Stay and food on your trip aren’t covered.
- Travel must be within India: If you travel to a foreign country, the expenses aren’t tax-deductible. Only travel within the country is covered.
- What counts as family: Immediate family that is mainly dependent on the employee is covered under LTA.
- When should employees declare the amount to get a tax benefit?
At the beginning of the new financial year, along with your other tax-saving plans (like LIC, PPF, Loan, etc.), before 25th April 2018, employees need to declare their details under the ‘Tax Declaration’ tab and enter the Tax Saving Plans for FY 2018-2019.
- When should employees submit actual proof to HR?
Usually, by the end of the financial year, employees need to submit their tax-saving documents with their concerned HR. Resigned employees: At the time of exit, employees should ensure to provide their actual tax-saving proofs to the concerned HR before the FnF settlement gets finalized, or else excess tax will be recovered from the settlement amount.
Conveyance Allowance
Note: With the introduction of standard deduction, exemption on Conveyance allowance has been removed effective April 2018 onwards. Employees don’t need to collect or submit any Conveyance proof.
Medical Allowance
Note: With the introduction of standard deduction, exemption on Medical allowance has been removed effective April 2018 onwards. Employees don’t need to collect or submit any Medical proof.
Child Education Allowance
This component is paid out towards tuition fees of employees’ children and is tax deductible up to Rs. 100 every month for a maximum of two children. Hence, this amount is usually set to not more than Rs. 2,400 a year for an employee.
- When should employees declare the amount to get a tax benefit?
Provide the count of children to your concerned HR, for availing tax benefit on Education Allowance.
- When should employees submit actual proof to HR?
Usually, by 15th January 2019, employees need to submit their tax-saving documents with their concerned HR. Resigned employees: At the time of exit, employees should ensure to provide their actual tax-saving proofs to the concerned HR before the FnF settlement gets finalized, or else excess tax will be recovered from the settlement amount.
Special Allowance
Special allowance is the balancing component of the salary structure. It is usually used by organizations as the leftover of the CTC when the rest of the components have been paid out. This component is fully taxable and is also taken into account for the calculation of Provident Fund.
Deductions
Deductions are elements of the salary that are part of the CTC but are deducted from the in-hand salary that employees receive. Let’s take a deeper look at some of the most common salary deductions and what they mean.
Provident Fund
Provident Fund (PF) is calculated at 12% of Basic + DA + Special Allowance. The employer and the employee both make an equal contribution of 12% each. This is applicable to companies who have 20 or more employees on their payroll. If an employee’s Basic + DA + Special Allowance are less than Rs. 15,000, then it is mandatory for Provident Fund to be deducted. Other employees can opt out by filling form 11 or can choose to have PF deducted on the ceiling of Rs. 15,000, which would be Rs. 1,800 monthly.
Employees State Insurance Corporation (ESIC)
Deductions towards ESIC are mandatory for employees whose gross salary is not more than Rs. 21,000. It is only applicable in companies where there are 10 or more employees within the Rs. 21,000 gross salary bracket. Employees have to make a contribution of 0.75% of the gross salary, and employers have to make a contribution of 3.25% of the gross salary.
Professional Tax
Professional tax is the tax levied by Governments of certain states on salaried employees. The states where professional tax is applicable are Karnataka, Bihar, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Odisha, Tripura, Madhya Pradesh, and Sikkim. The amount of profession Tax that is deducted varies from state to state where they are applicable.
Labour Welfare Fund
Labour Welfare Fund, as the name suggests, is a contribution made by salaried employees for the benefit of the labour class. This contribution is applicable in the states of Karnataka, West Bengal, Maharashtra, Andhra Pradesh, Kerala, Goa, Delhi, Punjab, and Haryana & Madhya Pradesh. The contribution amount varies from state to state and is relatively small. The employer and the employee both make contributions, and the employer pays approximately twice the employee contribution. The payments are made semi-annually in the months of June and December. Like Professional Tax, Labour Welfare Fund contributions also vary from state to state where they are applicable.
Component | Tax Deduction | Is PF Applicable? | Is ESIC Applicable | Part of Gratuity | Minimum Amount
--- | --- | --- | --- | --- | ---
Basic | Fully Taxable | Yes | Yes | Yes | As per Minimum Wages
DA | Fully Taxable | Yes | Yes | Yes | As per Minimum Wages
Medical | Fully Taxable | No | Yes | No | None (effective April 2018)
Conveyance | Fully Taxable | No | Yes | No | None (effective April 2018)
HRA | 1) Actual HRA 2) 50% of Basic + DA if Metro or 40% of Basic + DA if non-metro 3) Total Rent – 10% of Basic | No | Yes | No | Varies Depending on the state
LTA | As per actuals of the fare expenses on leave travel | No | Yes | No | None
Children Education Allowance | Rs. 100 monthly for each child up to 2 children | No | Yes | No | None
Children Hostel Allowance | Rs. 300 monthly per child for up to 2 children | No | Yes | No | None
Mobile & Telephone Reimbursement | Actual expenses incurred on one mobile phone and one landline | No | No | No | None
Car Maintenance | Rs. 1800/- p.m. in case Cubic Capacity of engine is 1.6 litres or else Rs. 2400 p.m. | No | No | No | None
Driver Salary | Actuals of driver’s salary up to Rs. 900 monthly | No | No | No | None
Books & Periodicals | Actual expenses | No | No | No | None
Special | Fully Taxable | No | Yes | No | None
Deductions, when applied to the CTC, give you the actual take-home salary that an employee gets.
From India, Ghaziabad
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256So what’s the best way to draft salary structures? To answer this, we’ve put together a table of the common components that make up a salary. We’ve also added recommended amounts to each component that should assist you in drafting an ideal salary structure.
Component | Recommendation
--- | ---
Basic | 40-50% of CTC
DA | 5% of CTC
HRA | 50% of Basic + DA if metro and 40% if non-metro
Conveyance | Rs. 1,600 a month
Medical | Rs. 1,250 a month
LTA | No real benchmark, can even be used as a plug, but if not can set as 10% of Basic
ESIC (Employer Contribution) | 3.25% of Gross Salary
ESIC (Employee Contribution) | 0.75% of Gross Salary
Special | Usually used as a balancing component
Provident Fund (Employer) | 12% of Basic + DA
Provident Fund (Employee) | 12% of Basic + DA
Professional Tax | As per statewise slabs
Labour Welfare Fund | As per statewise slabs
*Note 1: The PF Employer Contribution also bears additional administrative charges.
*Note 2: Feel free to use components like Child Hostel and Child Education; since they are small, we have ignored them in our structure.
For higher-income employees:
- You can use Mobile, Driver Salary, Books and Periodicals, and Car Maintenance.
- You can set these amounts based on what you think the expenses of that employee would be, keeping in mind the exemption limits for Driver’s Salary and Car Maintenance.
Structuring salaries is an inevitable task for every HR and Payroll professional. Despite the importance of the activity, professionals are often uninformed of the technical and best practices of drafting a complete and efficient salary structure.
Basic Salary + Dearness Allowance
The Basic component is the primary component and the core of the salary structure. It is usually the largest component of the CTC, making up 40-45% of the total CTC. The basic plays an important role in defining the salary as other components like Provident Fund, Gratuity, and ESIC are dependent on it.
Dearness Allowance (DA) was introduced as part of the salary as a means to reduce the burden of inflation on salaried employees. This amount is usually set to about 5% of the total CTC and, like the Basic component, it also affects PF, ESIC, etc.
You should keep the following in mind while setting the amounts for Basic and DA:
- If it’s too high, it will increase the tax liability of the employee since this component is fully taxable. It also affects the liability of the employer since higher contributions would be required for PF, ESIC, etc.
- If it’s too low, then you may not be able to meet the minimum wage norms set by the respective state government. Since minimum wages are updated regularly, you would run the risk of falling below the recommended wage limit.
House Rent Allowance (HRA)
The House Rent Allowance, as the name suggests, is a component that employees can leverage if they are living in rented accommodations. The amount that you can claim as a tax deduction under HRA cannot be more than 50% of your basic in a metro or 40% of your basic in a non-metro. Hence, depending on where your workplace is located, this salary component will usually be set at 40% or 50% of the basic salary.
- When should employees declare the amount to get a tax benefit?
At the beginning of the new financial year, along with your other tax-saving plans (like LIC, PPF, Loan, etc.), before 25th April 2018, employees need to declare their details with their employer for FY 2018-2019.
- When should employees submit actual proof to HR?
Usually, by the end of the financial year, employees need to submit their tax-saving documents with their concerned HR. Resigned employees: At the time of exit, employees should ensure to provide their actual tax-saving proofs to the concerned HR before the FnF settlement gets finalized, or else excess tax will be recovered from the settlement amount.
Leave Travel Allowance (LTA)
Leave travel allowance (LTA) remunerates employees for their travel within the country. This component is widely used by employers due to the tax benefits associated with it. An employee can claim tax benefits for the fare expenses paid for his/her family when they take a holiday. However, there are restrictions to what you can claim as tax benefits:
- Only fare expenses are covered: Only the travel fare expenses can be claimed. Stay and food on your trip aren’t covered.
- Travel must be within India: If you travel to a foreign country, the expenses aren’t tax-deductible. Only travel within the country is covered.
- What counts as family: Immediate family that is mainly dependent on the employee is covered under LTA.
- When should employees declare the amount to get a tax benefit?
At the beginning of the new financial year, along with your other tax-saving plans (like LIC, PPF, Loan, etc.), before 25th April 2018, employees need to declare their details under the ‘Tax Declaration’ tab and enter the Tax Saving Plans for FY 2018-2019.
- When should employees submit actual proof to HR?
Usually, by the end of the financial year, employees need to submit their tax-saving documents with their concerned HR. Resigned employees: At the time of exit, employees should ensure to provide their actual tax-saving proofs to the concerned HR before the FnF settlement gets finalized, or else excess tax will be recovered from the settlement amount.
Conveyance Allowance
Note: With the introduction of standard deduction, exemption on Conveyance allowance has been removed effective April 2018 onwards. Employees don’t need to collect or submit any Conveyance proof.
Medical Allowance
Note: With the introduction of standard deduction, exemption on Medical allowance has been removed effective April 2018 onwards. Employees don’t need to collect or submit any Medical proof.
Child Education Allowance
This component is paid out towards tuition fees of employees’ children and is tax deductible up to Rs. 100 every month for a maximum of two children. Hence, this amount is usually set to not more than Rs. 2,400 a year for an employee.
- When should employees declare the amount to get a tax benefit?
Provide the count of children to your concerned HR, for availing tax benefit on Education Allowance.
- When should employees submit actual proof to HR?
Usually, by 15th January 2019, employees need to submit their tax-saving documents with their concerned HR. Resigned employees: At the time of exit, employees should ensure to provide their actual tax-saving proofs to the concerned HR before the FnF settlement gets finalized, or else excess tax will be recovered from the settlement amount.
Special Allowance
Special allowance is the balancing component of the salary structure. It is usually used by organizations as the leftover of the CTC when the rest of the components have been paid out. This component is fully taxable and is also taken into account for the calculation of Provident Fund.
Deductions
Deductions are elements of the salary that are part of the CTC but are deducted from the in-hand salary that employees receive. Let’s take a deeper look at some of the most common salary deductions and what they mean.
Provident Fund
Provident Fund (PF) is calculated at 12% of Basic + DA + Special Allowance. The employer and the employee both make an equal contribution of 12% each. This is applicable to companies who have 20 or more employees on their payroll. If an employee’s Basic + DA + Special Allowance are less than Rs. 15,000, then it is mandatory for Provident Fund to be deducted. Other employees can opt out by filling form 11 or can choose to have PF deducted on the ceiling of Rs. 15,000, which would be Rs. 1,800 monthly.
Employees State Insurance Corporation (ESIC)
Deductions towards ESIC are mandatory for employees whose gross salary is not more than Rs. 21,000. It is only applicable in companies where there are 10 or more employees within the Rs. 21,000 gross salary bracket. Employees have to make a contribution of 0.75% of the gross salary, and employers have to make a contribution of 3.25% of the gross salary.
Professional Tax
Professional tax is the tax levied by Governments of certain states on salaried employees. The states where professional tax is applicable are Karnataka, Bihar, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Odisha, Tripura, Madhya Pradesh, and Sikkim. The amount of profession Tax that is deducted varies from state to state where they are applicable.
Labour Welfare Fund
Labour Welfare Fund, as the name suggests, is a contribution made by salaried employees for the benefit of the labour class. This contribution is applicable in the states of Karnataka, West Bengal, Maharashtra, Andhra Pradesh, Kerala, Goa, Delhi, Punjab, and Haryana & Madhya Pradesh. The contribution amount varies from state to state and is relatively small. The employer and the employee both make contributions, and the employer pays approximately twice the employee contribution. The payments are made semi-annually in the months of June and December. Like Professional Tax, Labour Welfare Fund contributions also vary from state to state where they are applicable.
Component | Tax Deduction | Is PF Applicable? | Is ESIC Applicable | Part of Gratuity | Minimum Amount
--- | --- | --- | --- | --- | ---
Basic | Fully Taxable | Yes | Yes | Yes | As per Minimum Wages
DA | Fully Taxable | Yes | Yes | Yes | As per Minimum Wages
Medical | Fully Taxable | No | Yes | No | None (effective April 2018)
Conveyance | Fully Taxable | No | Yes | No | None (effective April 2018)
HRA | 1) Actual HRA 2) 50% of Basic + DA if Metro or 40% of Basic + DA if non-metro 3) Total Rent – 10% of Basic | No | Yes | No | Varies Depending on the state
LTA | As per actuals of the fare expenses on leave travel | No | Yes | No | None
Children Education Allowance | Rs. 100 monthly for each child up to 2 children | No | Yes | No | None
Children Hostel Allowance | Rs. 300 monthly per child for up to 2 children | No | Yes | No | None
Mobile & Telephone Reimbursement | Actual expenses incurred on one mobile phone and one landline | No | No | No | None
Car Maintenance | Rs. 1800/- p.m. in case Cubic Capacity of engine is 1.6 litres or else Rs. 2400 p.m. | No | No | No | None
Driver Salary | Actuals of driver’s salary up to Rs. 900 monthly | No | No | No | None
Books & Periodicals | Actual expenses | No | No | No | None
Special | Fully Taxable | No | Yes | No | None
Deductions, when applied to the CTC, give you the actual take-home salary that an employee gets.
From India, Ghaziabad
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Creating an ideal salary structure requires a careful balance of several components. Here's a breakdown of the common components and the recommended proportions to include in the salary structure:
1. Basic Salary: This is the core of the salary structure and should make up 40-50% of the total Cost to Company (CTC).
2. Dearness Allowance (DA): Introduced to reduce the burden of inflation, DA should be about 5% of the total CTC.
3. House Rent Allowance (HRA): For employees living in rented accommodations, HRA can't be more than 50% of your basic salary in a metro city or 40% in a non-metro city.
4. Conveyance: This should be fixed at Rs. 1,600 per month.
5. Medical: This should be fixed at Rs. 1,250 per month.
6. Leave Travel Allowance (LTA): There's no real benchmark for this. It can be used as a plug, but if not, it can be set as 10% of Basic Salary.
7. ESIC (Employer Contribution): This is 3.25% of Gross Salary.
8. ESIC (Employee Contribution): This is 0.75% of Gross Salary.
9. Provident Fund (Employer): This is 12% of Basic + DA.
10. Provident Fund (Employee): This is 12% of Basic + DA.
11. Professional Tax and Labour Welfare Fund: These vary as per statewise slabs.
For higher income employees, you can include additional components such as Mobile, Driver Salary, Books and Periodicals, and Car Maintenance. These can be set based on the estimated expenses of the employee, keeping in mind the exemption limits.
Remember, structuring salaries is a complex task that requires keeping up with current labor laws and taxation rules. Ensure that you balance the needs of the organization with the financial well-being of your employees.
💡Note: Adjust the proportions as per your company's policy and the employee's role, level, and location. Always stay updated with the latest changes in labour laws and taxation rules. 📚🏦👩‍💼
From India, Gurugram
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1. Basic Salary: This is the core of the salary structure and should make up 40-50% of the total Cost to Company (CTC).
2. Dearness Allowance (DA): Introduced to reduce the burden of inflation, DA should be about 5% of the total CTC.
3. House Rent Allowance (HRA): For employees living in rented accommodations, HRA can't be more than 50% of your basic salary in a metro city or 40% in a non-metro city.
4. Conveyance: This should be fixed at Rs. 1,600 per month.
5. Medical: This should be fixed at Rs. 1,250 per month.
6. Leave Travel Allowance (LTA): There's no real benchmark for this. It can be used as a plug, but if not, it can be set as 10% of Basic Salary.
7. ESIC (Employer Contribution): This is 3.25% of Gross Salary.
8. ESIC (Employee Contribution): This is 0.75% of Gross Salary.
9. Provident Fund (Employer): This is 12% of Basic + DA.
10. Provident Fund (Employee): This is 12% of Basic + DA.
11. Professional Tax and Labour Welfare Fund: These vary as per statewise slabs.
For higher income employees, you can include additional components such as Mobile, Driver Salary, Books and Periodicals, and Car Maintenance. These can be set based on the estimated expenses of the employee, keeping in mind the exemption limits.
Remember, structuring salaries is a complex task that requires keeping up with current labor laws and taxation rules. Ensure that you balance the needs of the organization with the financial well-being of your employees.
💡Note: Adjust the proportions as per your company's policy and the employee's role, level, and location. Always stay updated with the latest changes in labour laws and taxation rules. 📚🏦👩‍💼
From India, Gurugram
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Creating a Competitive Salary Structure.doc
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