Understanding Salary Break-Ups: What Are the Legal Requirements and Best Practices Across Industries?

Dear Fraternity,

Happy Vinayaka Chathurthi to all. I would like to get the gyan on salary break-ups. Please bless with the gyan on salary break-ups.

In my current organisation, we give break-ups as follows: Basic - 40% of the CTC, HRA - 50% of the Basic, Conveyance - Rs. 800/month, LTA, Medical - Rs. 15,000 each/month.

I observed that not all organizations follow the same pattern. Please let me know what is the basis for the break-up. What break-up is legitimate or legally compulsory, and what are the best practices adopted across different industries?

Please share what's practiced in your organization and any knowledge you have on that. Please...

Thank you all.

Hi Spear,

There is no standard formula for designing a salary breakup until your company decides to have an approved compensation policy.

1. Basic Salary - As per the salary structure.

Non-Operational or Fixed Allowance
1. Variable Dearness Allowance depending on the cost of living index if there is an agreement with the company on this subject to introduce such an allowance.

2. House Rent Allowance: Applicable as per the city grade classification (A grade, B grade, C grade, and D grade) which ranges from 30% to 10% of the basic salary as per central government classifications.

3. Conveyance allowance/ Petrol allowance/ Transportation allowance: Depends on the hierarchy structure for 1st class or 2nd class Local pass for commuting from local trains. Reimbursement of petrol for two-wheelers to two-wheelers rates are fixed.

4. Any other allowance which is adopted by the company as part of the salary structure will determine the salary breakup. It is purely at the discretion of the management and depends on income tax laws.

Generally, items from the income tax exemption are adjusted in the salary package to extend the tax benefits under specific allowances mentioned as education allowance, medical allowance, Leave Travel Allowance, etc.

Following statutory payments are also considered as an integral part of the salary.

Operational Allowance:
1. Shift Allowance
2. Overtime Allowance
3. Hazardous Allowance
4. Attendance Bonus
5. Meal Allowance (or Subsidized Meal)

Additional Benefits under Labour Laws
Payment of Bonus Act - once a year
Payment under Gratuity Act - after a minimum of five years of service
Earned Leave Encashments under the Factories Act - once a year

Statutory Deductions Act
Provident Fund Act
ESIC Act
Labour Welfare Fund Act
TDS (Income Tax Act)

These are commonly observed as salary components.

Regards,

Sawant