Understanding Basic Salary: Is There a Legal Requirement for It to Be 60% of Total CTC?

Is there any law or act that prescribes the amount or percentage of the total salary or wage that should be considered as the Basic wage on which PF is calculated?

Or

Is there any law or act that specifies that the Basic salary should/must be 60% of the total CTC?

Thanks in advance for your support.

Dear Vinod, there is no defined percentage for the breakup of gross salary (please note, I am saying gross salary and not CTC). However, once you establish a policy, be firm on it forever. You have to follow this policy across the board, i.e., from the office boy to the top management officials. You cannot have variation based on designation, age, gender, etc.

Ok...

Regards, DVD

There is no such law. However, if you are paying a very low salary, say Rs 4000, and of this, you pay Rs 1000 as Basic, then authorities are likely to take the entire amount as Basic as it is less than the Minimum Wages. We can argue that the law does not prescribe, but the law needs to be examined in totality and not in fragments.

Let us examine these two scenarios:

1. Company is restricting PF Contribution to Rs 6500 as prescribed under the PF Act. Assume Minimum Wages in the State where your Company is located are Rs 5500. Let us assume again that the Company pays a Basic of Rs 3000 and DA of 1000 and pays other allowances of 4000, making the total Rs 8000 as wages. Even though there is no legal provision for fixing Basic at a percentage, here is a case where the Basic plus DA is lower than the prescribed minimum wages. Definitely, Authorities will question and insist on deducting contributions at least up to the Minimum Wages level. Legally, PF Authorities are not the inspectors for Minimum Wages, and we can question their authority. But legally, they can refer the matter to the concerned authorities, and they, in turn, can take action.

2. Company is not restricting the contribution to Rs 6500. Assume that the Total wage is Rs 20000. Of this, Rs 7000 is paid as Basic and Rs 2000 as DA. The balance is paid as HRA and Medical Allowance. The percentage of Basic plus DA is lower than 50%. Authorities do not question the percentages here as you are already contributing much higher than the legal requirement.

Thanks,

Regards, T Sivasankaran

As Mr. Dinesh said, there is no law prescribing any formula for fixing a certain percentage as basic pay, and even the Minimum Wages Act does not interfere with the structure of salary as long as the wages paid by you are not less than minimum wages. It is entirely within the realm of the employer to fix the quantum of various components of the salary/wages, and no one can insist that P.F. contributions shall be paid at least on minimum wages. However, the employer shall adopt sound principles of wage fixation, having regard to the industry-cum-region formula and the degree of responsibilities, the level of skills required to perform the job, etc.

Regards,
B. S. Aikumar
Mumbai

Yes, the legal implications dictate that the basic pay should be between 30% to 60% of the gross salary, with 30% being the minimum and 60% the maximum. However, it is left to the companies to decide whether to set the basic pay at 30%, 45%, 55%, or 60%. They may choose any percentage as the basic pay.

Regarding PF, please refer to EPFO at EPFO.

Yes, the legal implications provide that the basic pay has to be between 30% to 60% of the gross salary, with 30% being the minimum and 60% being the maximum. However, it is left to the companies to decide whether to fix the basic pay at 30%, 45%, 55%, or 60%. They may choose any percentage as basic pay.

Regarding PF, please refer to EPFO.

I request you to please guide me on where I can find the written circular you mentioned.

Dear, I request you to please inform me where I can find the written circular as you mentioned. I apologize, but I am unable to search for the circulars. However, I will attempt to provide a reference.

Basic Salary as a Component of CTC

The basic salary is one of the components of the CTC, calculated as 50% of the CTC. This percentage may vary from company to company, typically ranging between 30% and 60%, depending on the company's norms.

Thank you.

I am inquiring about the same issue to confirm whether it has been addressed or not. After reviewing several state government salary updates from my sources, I have learned that the basic minimum is set at 35% to a maximum of 45%. On average, you can consider it to be around 40%, and this percentage consistently aligns with the minimum wages.

Thank you very much for providing the information.

Regards

The company may fix any percentage as basic, but not less than 30% and not more than 60%. So, a 35% fixation is the chosen percentage for that particular company. However, it mostly depends on the profitability of the companies and their generosity in sharing it with the employees. Few companies pay 60% of the basic salary, while most companies pay around 35% to 40%. This is mainly due to most social security funds and taxation being calculated based on basic pay percentages. If the basic pay is set at 60% of the gross salary, then the deductions would be higher compared to what is being paid currently. For instance, PF deductions at 12% of a 60% basic salary are higher than 12% of a 35% basic salary, plus additional administration charges of approximately 1.61%. This increase in costs affects both the company and the employees.

Therefore, there is a greater emphasis on incentives, allowances, as well as good appraisal practices, not only as a sound payroll strategy but also as effective tools for employee engagement and satisfaction.

Thank you, Dear Vinod, DVD & T Shiva. First of all, we should understand the basic difference between Gross Salary/Wages and the Cost to the Company (CTC). It's true that there is no defined criteria for CTC, hence there should not be a debate on the calculation of CTC. Nowadays, some of our colleagues calculate Payment of Gratuity in CTC.

Minimum Wages and Fair Wages

Minimum wages are a bottom-line payment for an employee in any scheduled employment in the prescribed State and Zone (I, II, and III in Maharashtra). An employee either receives a monthly salary as per the minimum wages or less than MW. If the wages/salary is above MW, it is called Fair Wages. According to the latest directions of the High Courts and the apex court, an employer is at liberty to split employees' salary into various parts like Basic + Special Allowance/D.A. and allowances. The employer can split the employees' salary into these components if they are paying Fair Wages and not Minimum Wages (refer Group 4 security or Airfreight case).

Uniform Strategy and EPF Contribution

As specifically described by T Shivasankaran, you have to follow a uniform strategy for the entire organization, and this time, you have to consider a trio of ACT - FACT - TACT. After all, you have to pay EPF contribution on the earned Basic + D.A. or Special Allowance, not only on the basic.

All the Best.

Regards,
Nitin

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