Is 60% Too High for Basic Salary? Seeking Advice on Cost-Saving Strategies in HR

Hello friends,

I need your advice to understand what is the minimum percentage of basic salary we need to maintain. I am aware that the minimum requirement is 50% only.

I recently joined as an HR executive in a retail organization, where, based on the guidance of our consultant, we have set the basic salary at 60% of the gross, which I find quite high. Are there any ways to reduce this percentage of basic salary to save costs for the company?

Please advise.

Regards,
Madhura

Dear Madhura,

There is no such rule or act which guides us to have a particular percentage of the basic rate. At the same time, it is also made clear that after fixing the basic and other components, you cannot change them unless a notice under section 9A is given under the Industrial Disputes Act, 1947. Why would one accept lower wages?

Regards,

R.N. Khola

(Labour Law & Legal Consultants)
09810405361

Dear Madhura,

You can do restructuring of CTC after accepting the employee (if they are covered under Any Labour Act viz. PF, ESIC) to have a lower basic. I also performed the same exercise in my previous company. For example, if an employee's CTC is Rs. 25,000/- per month, then you can structure the CTC as follows:

Basic - Rs. 7,500 (30% of CTC)
HRA - Rs. 3,000 (40% of Basic)
Cov. - Rs. 800 (Fixed)
Other Allowance - Rs. 10,300
LTA - Rs. 625 (8.33% of Basic)
Medical - Rs. 1,250 (Fixed)
PF - Rs. 900 (12% of Basic)
Bonus - Rs. 625 (8.33% of Basic)

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Total CTC - Rs. 25,000/- pm
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I hope this clears all your queries.

Regards,
Vivek Vashisth
AM - HR

Dear Madhura,

Generally, 50% of the gross salary is considered as the basic salary because PF, Bonus, and Gratuity are calculated based on the basic salary. This is the liability of the employer.

The basic salary cannot be reduced, but on the next increment, you may increase other salary heads, such as Other Allowances/Special Allowances. This will definitely reduce the percentage of the basic salary.

Regards,
Mahesh Patel

Dear Madhura,

Based on which PF/ESI, as applicable, is deducted cannot be reduced. The only way left to reduce costs for the company is to 're-appoint' employees at revised terms. That is to say, you have to break the continuity of service to reduce the salary.

A higher percentage of the basic is actually beneficial for the employees. I know some may say that the higher the basic, the higher the taxes. But consider the higher PF contribution. Losing a couple of dimes as taxes will be worth it at the end of the day.

Prashant

Understanding Basic Wages and HRA

All my friends have shared their views on fixing Basic Wages/Salary. It is relevant to note that the Labour Department has not clearly suggested what the percentage of HRA is in the total salary or the Minimum Wages as fixed by the State Government.

You may be aware that the definition of wages under the Payment of Minimum Wages Act reads as follows:

Section 2(h) "wages" means all remuneration capable of being expressed in terms of money which would, if the terms of the contract of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment and includes house rent allowance but does not include:

(i) the value of -

(a) any house accommodation, supply of light, water, medical attendance, or

(b) any other amenity or any service excluded by general or special order of the appropriate government;

The above definitions clearly suggest that HRA (House Rent Allowance) is part of Minimum Wages. However, while circulating the Minimum Wages Rates, the State Government does not specify or make it clear what amount of HRA is included in the total Rate of the Minimum Wages.

If the Government specifies the Minimum Wages with different components of wages that constitute the Minimum Wages, the situation would be much clearer in deciding the Basic Salary in the total rate of pay.

Regards, SC Bhatia

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