Can I Legally Simplify Salary to Just Basic and D.A.? Seeking Advice on Structure Changes

I want to ask whether I can put the total salary into only two parts, i.e., Basic and D.A. Currently, I am having the following structure for one of our employees:

Current Salary Structure

- Total Salary: 41,635.00
- Basic + D.A. 70%: 29,145.00
- HRA 15%: 6,245.00
- Conveyance 15%: 6,245.00

Proposed Salary Structure

- Basic: 20,000.00
- D.A.: 21,635.00

Is there any legal information about the structure?

There is nothing in the law that governs the breakup of the salary structure. You are free to set up any structure you wish, subject to certain legal requirements.

Legal Requirements for Salary Structure

First, the basic salary plus DA must be more than the minimum wages. Second, in Maharashtra, you need to give a 5% HRA (compulsory). Some other states have such requirements. For example, in Jharkhand, those working in Jamshedpur are entitled to a medical allowance of Rs. 0.50 per day. Income tax allows a tax-free conveyance allowance of Rs. 800 per month. Therefore, giving a conveyance allowance of 800 in the salary structure is tax-beneficial to employees. Similar rules are available regarding HRA and some other allowances under the tax laws. However, while these are tax-beneficial, nothing in the law requires you to give the same.

Regards

Dear Nitin4u, please explain why you need this type of salary structure with only two components: Basic and D.A.?

If yours is a private company, it may be advisable not to include DA as a salary head; otherwise, you may have to define the norms for the revision of DA for employees. This point, therefore, needs to be discussed with your management in advance.

Salary Structure in Private Companies

Normally, the salary in private companies has a balancing head called 'Miscellaneous/Special Allowance'. The remaining sub-heads are Basic, HRA (which is up to 50% of Basic), EPF (company contribution), Medical Allowance (Rs 15K per annum, tax-free), ESI (company share, as applicable), Conveyance Allowance (Rs 9600 per annum, tax-free). If an employee's total salary is Rs XXX and the Basic + Allowances (mentioned above) are Rs YYY, then the Miscellaneous/Special Allowance will be: (Rs XXX - Rs YYY).

Types of Allowances

You may observe that Miscellaneous/Special Allowance can take into account all types of allowances such as Qualification Allowance, Cost of Living Allowance, Car/Fuel Allowance, Mobile Allowance, Lunch Allowance, Night Working Allowance, etc. Since all income (including perks) is taxable these days, clubbing various types of allowances under one sub-head makes salary administration easy.

Even if you pay other allowances, an employee's basic and DA only will be taken into account for gratuity purposes. If you give a certain percentage of basic as DA, that has to be revised quarterly with the percentage change in AICPI. Perks and allowances you pay add up to the salary and are taxable. There is no legal hurdle in defining the salary structure as per the company's convenience. The only thing is that it should not fall below the minimum wage notified for different categories of employees.

Thank you.