Understanding Incentives: Are They Really Part of Gross Salary and Why?

Incentives are a part of Gross Salary. If "YES," then why?

Awaiting clarification...

Please clarify what you mean by gross salary. Do you mean CTC or monthly salary without deductions?

Hi,

Are incentives part of Gross Salary? If "YES," then why? Awaiting clarification.

Dear Soma,

Many organizations have incentives as a part of the CTC, but the payout may vary. Computing incentives monthly is a big struggle, so they can be paid out quarterly, semi-annually, or annually. It's advisable to include the incentives as part of the CTC, but ensure you specify the payout duration to avoid any issues.

Regards,
Resha

Hi,

Salary may or may not be part of the gross CTC.

1. May Be
1.1: When it is given on a performance basis (PLI) or in the form of a bonus.

2. May not be
2.1: When it is given on a product basis, for example, if you sell or deliver a certain quantity, you will be given a specific amount. Sales employees, for instance, receive compensation based on their sales.

Hi,

Incentive in any form is considered as earnings as per the provisions of the Income Tax Act; hence, it is taxable whether you consider it as a part of CTC or not.

Regards,
Rajpal

Yes, incentive is a part of gross salary, whether it is a production incentive or an attendance-related incentive.

Hi,

Incentives are part of the gross salary only if they are not paid once in three months. If they are not paid within this timeframe, then these incentives are not considered part of the gross salary. If incentives are paid monthly, then they are included in the gross salary. Additionally, ESIC is calculated based on the gross salary.

Regards,

Nilesh Mhaskar
HR Executive

Some organizations, especially in the financial sector, do not include incentives as part of the CTC. The incentives are offered over and above the CTC and are purely performance-based. If the incentives are specified as part of the CTC in the appointment letter, then the timing of payment (yearly/quarterly) should be clarified.

Priya

Hi,

Incentive is not a part of Gross Salary. First of all, one has to understand there are two terms used in the Salary part - Fixed CTC & Variable CTC. The Fixed part consists of Gross Salary and other benefits given by the Company like PF contribution, Gratuity, Superannuation. All these make Fixed CTC. Variable CTC is meant for the performance incentive/incentive that is purely based on performance and varies based on your performance.

Hope you got your doubt clear! 😊

Regards,

Rachna Sinha
Hyderabad

Hi,

I believe that incentives are paid for better performance. Though it is taxable at the end of the employee, it cannot be considered as part of the gross salary; however, it should be considered as part of the Cost to Company (CTC). Please also note that certain Acts, such as ESI, are applicable based on the gross salary. Adding incentives to the gross salary will only increase the burden on the employee as well as on the employer.

Anup

Hi,

Ours is an IT company. We have quarterly appraisals wherein we do salary increments every alternate quarter and give out incentives (on gross salary) on the remaining two alternate quarters. These incentives are paid based on the performance of the review period. The percentage of the incentive is fixed for various categories (assessed as per performance), but the amount of the incentive is not fixed.

So, how can these be included in the gross salary figure or the CTC figure of an employee while giving an offer/appointment letter or while calculating the gross salary of an existing employee? Please suggest.

Hi,

Please note that CTC is the cost which the company incurs on an employee (does not include hiring cost, sitting cost, training cost, or any other cost which is not paid to the employee as these are counted under different heads). Hence, any single amount which is to be paid to the employee contributes to CTC. Though incentives are not fixed, there certainly is a limit to it which you cannot cross.

While making an offer, we show what would be the maximum incentive paid or % of incentive. Please remember what the employer wants to know is the CTC, not the gross salary because in any case, he has to pay that amount to the employee.

Regards

Hi folks,

Unfortunately, I do not have the ESI book as I am abroad, but do look up the meaning of wages - it includes bonuses and incentives. The ESI rules apply here too.

Incentives fluctuate based on the policy of the company. An average expected incentive can always be arrived at; in fact, while formulating the incentive policy, this aspect is taken into consideration. For example, we expect an employee to take home an incentive of, say, 4000 INR. Based on these parameters, conditions are applied - in other words, reverse engineering to match an average of INR 4000. If the performance is better, then the incentive becomes higher. A good scheme will permit very high incentives as the performance improves. Having arrived at the average figure, the rest of the salary can be worked out.

So, looking at the picture from this angle, would you not agree that incentives are part of the salary?

Best regards,
Ajay

An annual performance-linked incentive where there is a cap on the payout is considered as a part of the gross salary. This is because the limit that can be paid out is quantified at the beginning of the year and can be computed as part of the gross salary/CTC.

There are also other incentives which would be on a monthly basis, product-specific, period-specific, or ones that include paid vacations, foreign travel, etc., which are not part of CTC/gross salary as these are variables and would be announced from time to time depending on the organization's short-term objectives.

Regards,
Inderpal Singh

Hi,

Ideally, an incentive is not part of the gross salary and is given to an employee based on performance, which is again taxable. However, some companies do mention it as one of the components of the salary structure. They usually specify the maximum amount that can be given as incentives, with the actual amount being performance-based.

Sonal

Dear Soma,

Incentives are basically based on the performance of your job because it affects the profits of the organization. Therefore, all sectors such as Telecom, Pharma, IT, FMCG, etc., develop different kinds of incentives for various targets achieved by the employees.

Finally, when calculating the Gross Income annually, it is also termed as income and taxable under the Income Tax Act.

With Cheers,
Om Prakash

Yes, Incentive is a part of CTC of an individual. In many organizations, it is known as PLI - Productivity Linked Incentive in India and also referred to as Goals/Gain Sharing in US-based companies.

Regards, Ashwani Singhvi
Delhi NCR

Hi,

We need to first note the nature of the incentive. If the incentives are fixed and part of the contract between the employer and employee, then they should be included in the Gross.

In case the incentive is variable, it is advisable not to include it in the CTC. If the incentives are paid on a monthly basis, they should be included for ESI deduction (if the gross is less than 10K). In the case where incentives are paid at intervals of more than 2 months, they will not come under the purview of ESI deductions.

Regards,
Suresh Ramalingam
Consultant - Compliance

Incentives are not a part of the gross. Based on the gross amount, incentives are decided for an employee.

Incentive is a part of salary treated as variable pay. If it is paid as a reward, then it will no longer be considered as part of the salary.

Incentive, if VARIABLE, is not a part of Gross Salary. Incentive, if FIXED, becomes part of the Gross Salary. Whether it is Variable or Fixed, in all cases, it is taxable.

Regards, Sanjeev Sharma

(Blog: http://sanjeevhimachali.blogspot.com/)

In some cases, it is a part, and in some cases, it's not. For example, a quality incharge of our client gets incentives excluding the gross.

Regards,
Pravin.P

I am Krishnan, working in a Pvt Ltd Company. We are paying a lump sum amount (based on their service) in the name of "Incentive" as a part of the salary and deducting ESI and PF from the incentive also. If the salary of an employee is more than 15,000, PF contribution from the employer is 15,000 and from the employee is the total salary inclusive of the incentive.

Gratuity Calculation and Incentive Inclusion

In such a case, when calculating Gratuity, can we consider this "Incentive" portion apart from Basic+DA? In the Salary Register, Basic, DA, and incentives are shown separately. But in books, all amounts show under the Head "Salary."

Please give an expert opinion on this matter.