New to HR in India: Seeking Guidance on Salary Structure and Benefits Calculation

Hello Friends!

I am new to this forum and must say, it seems like a very resourceful network for our HR fraternity! I have recently moved into an HR role from recruitment and am part of an MNC retail organization setting up operations in India. Would really appreciate if you could share your knowledge and experience on the following areas:

- How is base salary calculated? Is there a statutory requirement for arriving at a percentage which is part of the CTC?
- I read on this forum that as per Bombay Chamber of Commerce guidelines, there is a minimum basic that needs to be paid for semi-skilled/skilled employees. So, does it differ for every state? Is there a uniform basic that can be applicable across India?
- How is HRA computed? Again, is there a standard minimum that can be applicable to the whole of India?
- How is professional tax computed for employees? In which month is there an excess payout towards PT?
- I did go through the details on Fringe benefits shared by our friends here. But I still have questions like what are the benefits and impacts of fringe benefits and their limits for both employees and employers?
- The reasoning for including and excluding certain fringe benefits by employers? Does this depend on company size/profits/revenue or any other aspects?
- Is there a book that can be referred to structure and freeze on the compensation framework?
- What are the standard terms that should go into an offer letter and why?

Look forward to your help! Thanks a lot in advance!

Regards,
Poonam

Hi Poonam,

Clarification on some of your points.

1. Basic is generally taken as a percentage of CTC (40%, 50%) as per the policy of your company depending upon the grades or levels. Once basic percentage is fixed, it cannot be reduced in the future. So, one needs to be sure about how much percentage of basic to keep.
2. As per the Minimum Wages Act for specified industries, basic differs according to skills and varies from state to state.
3. Minimum HRA should be 5% of your basic; you can give more, but not less than 5%.
4. Profession Tax is calculated based on the income slabs. It also differs from state to state. The maximum PT deducted in Maharashtra is Rs. 2500.00 per year, which is fully exempt from income tax.
5. In the offer letter, you can mention the designation, level, and CTC. Also, if you require any specific documents, you can mention that. The date of joining should be mentioned in the letter, and in case the person does not join, necessary clauses should be included regarding the validity of the offer letter.

I hope some of your queries have been resolved.

Regards,

Harshad

Hi Poonam,

Thank you, Harshad! This should help. I have one more query. Are mobile phone expenses covered under fringe benefits, and is there a tax liability on employees?

Thanks! Regards, Poonam

Hi Poonam,

There is no liability on employees towards mobile phone expenses. It comes under FBT. The company will have to pay tax on such expenses.

Cheers! 🌟
Harshad

Hi Poonam



Harshad has replied to most of the queries, am touching only upon the FBT part.

As per Section 115WA(1), additional income-tax to be paid by an employer in respect of fringe benefit provided or deemed to have been provided to employees.

Fringe Benefit is defined as………. Any privilege, service, facility or amenity, directly or indirectly, provided by an employer to an employee by reason of his employment, or any reimbursement made by an employer directly or indirectly for any purpose, or any free or concessional travel ticket for private journeys, or any contribution by an employer towards an approved superannuation fund.

Logic - There were a lot of components (reimbursements and benefits) which were part of CTC / outside CTC and escaped the tax net (e.g fuel reimbursement, telephone reimbursement, employee welfare expenses, club memberships..). FBT in a way plugs this loop hole by taxing all these components. The tax rates vary and also the rates vary as per the industry. This means that the employer has to bear these additional expenses if provided to the employee. So the logical thing... many companies restructed their salary components and made it FBT free.

But now after 2 years companies are moving back to pre FBT era and again adding these components to the salary structure.. reason, the tax rate is usually 6.67% and the employee enjoys 33 %.. in effect even after paying 6% tax there is still a 27% benefit to the employee.

Some companies are now going to the extent of paying up this 6.67% and providing the full 33% benefit (assuming employee is in the highest tax bracket).