Understanding Basic Salary: Can It Be More or Less Than 50% of Your Total CTC?

What is the percentage of basic of the total CTC? Is there any rule to restrict basic to 50% of CTC? Can it be more or less than 50%?

Hi,

The basic salary is variable, ranging between 35% to 40%, and it also depends on the company's policies.

Regards,
Maniksing

Hi Anuradha,

All are very true. It depends on the company's salary structure, as it varies from company to company. Generally, it ranges from 35% to 50%, but it might be higher or lower as well.

Regards,

Amit Seth.

Your PF and ESIC will be affected if you increase the basic. If you are working with the minimum wage of 3861 for unskilled labor, the basic should be 1290 and DA should be 1635. You can decide, but it should not go below the rates I have given to you.

Dear Anuradha,

This depends on the company policy, but in the 7A (PF) inquiry, this issue arises. After facing this inquiry, I have realized that the basic salary should vary between 35% and 65%.

With regards,
Rahul
9822351982

It is correct that it varies from company to company, but the standard as per government rules is that of 60%, and 50% is quite fair. However, less than 50% could be questionable, especially for small companies that do not provide many benefits to the employees.

Then it also varies on what kind of organization it is - whether a firm, a trust, or a limited company, etc.?

Hi Rajdeeb,

The contents of the salary breakup are as below; you can prepare it according to your convenience. HRA would be 50% or 60% of the basic salary.

- Basic
- HRA
- CCA - ₹825/- is exempted from tax.
- Other Allowances
- Mobile Reimbursement
- Medical Reimbursement of ₹1250/month is exempted from tax.
- Gross Per Month = Sum of all the above.
- Gross Per Annum = 12*Gross/Month.
- PF Contribution = 12% of Basic/Annum.
- ESI Contribution = 4.75% of Gross/Annum.
- Medical = The mediclaim facility provided to an employee who is not covered under ESI, as the maximum ceiling for ESI is ₹10,000/Month. Getting more than this will be covered under Mediclaim, or it depends on company policy.
- Ex-Gratia/Bonus = A fixed amount as Bonus.
- Annual Fixed Gross Cost = Gross/Annum + Ex-gratia.
- Annual Total Cost = AFGC + PF + ESIC. Annual total cost is also called as CTC.

I hope this information has helped clear your queries to some extent.

Regards,
Amit Seth.

Basic salary can vary according to the company's rules. It is divided into different components that, when added, should result in 100%.

There is no hard and fast rule in fixing the Basic, but it should be reasonable. If the Basic+DA part is around 60% and the Allowance part is 40%, it is normally treated as reasonable by authorities.

P. Nalluchamy

I have an exciting idea for all of us. What we can do is let's share everyone's companies' salary structure and also find a solution on how different companies are using salary structure to help employees save on taxes.

I am starting with my input first...

First, we need to decide what the CTC of the person would be.

Breakup of CTC:

Basic - 40% of CTC

HRA - 50% of basic

Transport Allowance - ($800 if CTC less than $9000, $1000 if CTC less than $15000, $2000 if CTC above $15000)

Medical Allowance - (optional if ESI is paid, else 10% of basic)

Special Allowance - (CTC - PF - ESI - Bonus - Basic - HRA - Transport Allowance - Medical Allowance)

Gross Salary

PF - 12% on basic

ESI - 4.75% on basic (optional, if Medical Allowance is paid)

Bonus - 10% on basic with a limit up to $500

CTC

Net Salary (in hand) = Gross Salary - PF - ESI (1.75% on basic)

This is the structure used by my company, but we are not providing any benefits through which employees can save taxes.

I need suggestions from experts on how to design the salary structure so that employees can save on income tax.

Others, please contribute and share your company's salary structure. This would be a great learning opportunity on compensation and salary issues.

- Sanjukta

As per the PF Act, the contribution is payable only on basic wages. What constitutes basic wage is a million-dollar question. Various courts have given different interpretations like what are the earned components while on duty or on leave is basic. Hence, other than HRA, it is considered basic. Such basic wage, according to the act, is restricted to Rs. 6,500. Another view is that when there is a contract of employment prevailing, what the employer and employee agree as wages by bifurcation is basic. This is the well-settled position by the Supreme Court. However, the department is taking the corporates for a ride by the Gujarat High Court decision, and the industries should address the issue in the proper forum through litigation or representation.

The main affecting industries are shop act and contract workers.

GK

It's so nice that Sanjukta has taken the initiative. However, I feel in companies the basis-allowance ratio is about 50-50 of CTC.

As far as saving tax is concerned, there have been more precise guidelines from the IT Department. You can avail INR 15,000 PA as Medical allowance. This is exempted subject to producing bills. You can benefit from Conv. Allowance - INR 9,600 PA.

HRA, if calculated at 40% of the basis, serves the purpose. As such, the investment and limits are set at INR 100,000 PA. So we can't do much with the salary structure.

Many companies indulge in voucher payment, which is not a professional way to save tax. Some time back, the practice of food coupons was very famous, but their limit is up to INR 15,000 PA. This can be tried.

LTA Reimbursement is exempted twice in a slab of 4 years. This is a good option. We pay LTA Reimb. of INR 20,000 PA to managers. This helps.

Views from others invited, please. - Hiten

"I have an exciting idea for all of us; what we can do is... let's share everyone's companies' salary structure and find a solution on how different companies are using the salary structure to save employees' taxes.

I am starting with my input first...

First, we decide the CTC of the person would be?? Break up of CTC:
Basic - 40% of CTC
HRA - 50% of basic
Transport Allowance - (INR 800 if CTC less than 9000, INR 1000 if CTC less than 15000, INR 2000 if CTC above 15000)
Medical Allowance - (optional if ESI is paid, else 10% on basic)
Special Allowance - (CTC - PF - ESI - Bonus - Basic - HRA - Transport Allowance - Medical Allowance)
Gross Salary
PF - 12% on basic
ESI - 4.75% on basic (optional, if Medical Allowance paid)
Bonus - 10% on basic, with a limit of up to INR 500
CTC
Net Salary (in hand) = Gross Salary - PF - ESI (1.75% on basic)

This is the structure used by my company, but we are not giving any benefit in which employees can save taxes. I need suggestions from experts on how to design the salary structure so that employees can save income tax. Others, please contribute... Share your company's salary structure; this would be good learning on compensation/salary issues. - Sanjukta"

Hi Hiten,

In the Gujarat decision of Gujarat CyproMet Ltd vs. Assistant Provident Fund Commissioner 2004 III CLR 485, the department referred to is the Provident Fund department. Industries encompass all industries for whom 7A proceedings are initiated on the subject mentioned above.

GK

Yes, you are right for Basic - 50% on CTC. But I would like to know more details on how to save tax so that we can show benefits to employees.

- Sanjukta

Hi All,

I agree with all of you that it depends on the company's policy. However, one should also take into consideration the local laws to plan their tax payouts and statutory compliances. For example, fixing 50% of the salary for Metro cities and 40% for other cities is based on the logic to avail House Rent Allowance exemptions for employees as per the Income Tax Act in India. Furthermore, there are labor laws prevailing in India that require consideration. For the past 18 months, the EPF department in Karnataka has taken the view that employers are reducing the basic salary to avoid PF contributions. They consider this an anti-labor welfare practice and are asking employers who pay less than 50% of the Gross Salary as basic salary to contribute to CPF on the Gross salary, including allowances. Appeals by employers to the Honorable High Court have been set aside, ruling in favor of the department. The HR community should take note of these aspects while working out the components of the salary.

Regards,
Vishwanath

Hi,

Could you please tell me should the salary structure be 100% including PF & ESI or should all the components except PF & ESI be 100% of the CTC?

Regards,
Yash

Dear Friends,

According to government rules, the basic salary should be 60% of the Cost to Company (CTC) or 6500. If the basic is 6500 with a lower percentage, there will not be any problem. However, when the basic is less than 6500, we should ensure that the basic salary is not less than 60%.

Thanks,
Kavitha S

Hi Kavita,

Is that the rule? Because we are maintaining a standard structure for all employees, which means Basic - 50%.

- Sanjukta

Dear Kavitha,

Can you provide the government rule that states the basic should be 60%? In my 35 years of compliance service, I have never heard of such a rule. It would really help me and others like me. In my view, if there is a contract of employment and the employee and employer agree on a certain percentage of CTC as basic, perhaps it could be 60% or so.

Please highlight the rule.

Thank you,
GK

Generally, basic salary does not exceed 50%. However, if the basic salary is greater than 50%, the percentage of HRA, etc., has to be less so that the whole amount fits into the CTC.

Abhishek Saini
CITE HR, Member

There is no restriction in calculating the basic and don't have a specific percentage for calculation, like HRA. It is left to the management's discretion. HR professionals should be a benefit to the employees and employers for the growth of the organization. And thus, the basics are calculated.

Good luck

Hi,

Any percentage can be set, but it should be ensured that it covers the minimum wage rate fixed by any government.

Suraj Biswal