Struggling with Salary Structure Changes: How to Make It Tax-Friendly and Legal?

Proposed Salary Structure and Queries

I have recently joined a small company as a Payroll Manager. There is no HR Department, and management is encountering issues with the salary structure and other HR-related matters. Until now, they have been relying on consultants for assistance with HR or tax aspects of the salary components.

Here, we do not have a CTC criterion for employees, and a rough calculation has been done for Basic, HRA, Conveyance, and other allowances. I have proposed a revised salary structure as follows:

- **CTC:** 50,000
- **Basic:** 20,000 (40% of CTC)
- **HRA:** 8,000 (40% of Basic)
- **Conveyance:** 800 (fixed)
- **Medical:** 1,250 (fixed)
- **LTA/Bonus:** 1,666 (8.33% of Basic)
- **Special Allowance:** 15,783 (Balance after all deductions)
- **PF:** 1,665 (12%)
- **Gratuity:** 836 (4.18%)
- **In Hand:** 47,499

Is this correct?

Current Challenges and Questions

1. The Special Allowance is fully taxable. I need to further bifurcate it to make it tax-friendly.
2. The PF is capped at Rs. 6,500. For instance, if the old basic salary is 13,825 and PF is being calculated at Rs. 1,659 (12% of Basic), can I revise it as per the law? Can I reduce it to Rs. 780?
3. Can the Bonus be part of CTC? What about old employees who have been with the company for 15-20 years?
4. Can we offer Gratuity as part of CTC for newly joined employees?
5. If I revise the salary structure, can I increase or decrease the PF of any individual? Would this action disregard the PF Act?

Thank you in advance, and please ignore any grammatical mistakes.

Regards,
Anju

As per my knowledge, in the case of PF, you do not need to reduce the Basic salary to give the benefit of PF. In the books, you can continue with the same basic, and the calculation and deduction of PF can be made on Rs. 6500/-.

Secondly, you can include the bonus in the CTC. In the case of an increase or decrease in PF, most companies are not decreasing it because any problem may arise, and an inquiry may take place for the reduction in PF. For example, let's think currently all your employees' basic salaries are greater than 60% of your gross salary. Now, if you revise the structure with 50% basic, then the basic amount will be lesser than earlier, but your basic meets the requirement of 50% of the gross salary. So, in this case, you may reduce it, but please take the advice of a consultant before implementing.

Regards

I appreciated your proactive approach wherein you mentioned your understanding and asked to be rectified of mistakes if any.

The answers to your queries:

Dear, your In hand is the amount that you take home. So Basic + HRA + Conveyance + LTA + allowance + medical = GROSS. GROSS - Employee PF - Professional Tax - TDS (if applicable) = Net or In hand. So from your example, your

GROSS = 47499 ....... (20000 + 8000 + 800 + 1250 + 1666 + 15783)

Employee contribution to PF (depends on how your Company wishes to take it forward) at least 12% of 6500 = 780 or 12% of actual basic = 2400. (I failed to understand why 12% came out to be different in your case. Please note that 12% is of basic or 6500). Please note I am assuming 12% of actual and hence will take 2400 in further calculation.

Professional Tax = 200 pm (March - January) and 300 for February.

Monthly In hand/Net

Net = 47499 - 2400 - 200 (- tax) = 44899 - tax.

CTC is usually calculated annually and it has -> Annual Gross + Employer PF + (many companies put Gratuity + Bonus)

So in your case, Annual GROSS = GROSS * 12 = 47499 * 12.

Annual GROSS = 5,69,988

Employer Monthly PF = 12% of monthly basic = 12% of 20000 = 2400.

Employer's annual contribution to PF = 12 * 2400 = 28,800

Gratuity can be claimed by an employee only if he/she resigns/terminates/retires after a minimum continuous service of 5 years. However, every year, the Company has to put some amount in the Gratuity fund, and hence many companies put this under CTC. Gratuity amount to be deposited is calculated as:

15/26 * last drawn (basic + DA).

Hence in your case, Gratuity = 15 / 26 * 20000 = 11,539.

Bonus is a lump sum of a month's basic salary = 20000.

CTC = 5,69,988 + 28,800 + 11539 + 20000 = 630,327.

You can use mobile bill reimbursement. Since it is a reimbursement, you'd reimburse it to the extent of the amount quoted in the bills or a max limit you wish to fix per month (for example, say 1500 pm).

CASE A: Bill of 1500 exactly

Fully gets paid by the company, and he saves tax on such reimbursement.

Case B: Bill more than 1500

The Company pays only 1500, the additional amount is to be paid out-of-pocket by the employee. So if it's reimbursement, the employee will get 1500 against the bill. If the Company pays on his behalf, the additional amount can be deducted from the salary.

Case C: Bill less than 1500

The Company pays the actual amount quoted in the bill, and the remaining amount lapses (i.e. can't be adjusted for the next month). Similarly, there is Food allowance. If you give meal vouchers like Sodexo, they are fully tax-exempt.

As per the law, you are to contribute from each side a minimum of Rs. 780 pm towards the PF account even if (Basic + DA) is more than 6500. So there are no legal obligations on your end if you wish to revise your contribution to 12% of 6500 rather than 12% of actual Basic+DA.

I don't know if Bonus forms a part of CTC, many companies do include it. About employees with 15-20 years of experience, how does the bonus matter to the number of years served? Bonus is an annual bonus that is to be paid to the employees before completing 8 or 9 months from the book closure.

Again as I said earlier, many companies do put Gratuity in their CTC component. However, if you are doing so, I would suggest you include an explanation that Gratuity can be claimed only after 5 years of service are rendered, except for employees who die in the said period or those who attain a disability.

Can you elaborate? I didn't understand this query.

Thank you for giving detailed replies to my queries.

Net In-Hand Salary Calculation

The net in-hand salary I calculated after deducting PF is ₹47,499 (₹50,000 - PF - Gratuity). Please note that no professional tax is applicable here, and regarding PF calculations, ₹1,665 includes both the Employee (12%) and Employer's (12% + 1.61%) shares. I forgot to mention this. I calculated it this way. Why isn't this correct?

Bonus as Part of CTC

Could the bonus be part of the CTC? What about the old employees who have been associated with the company for the last 15-20 years? As I mentioned in my earlier post, presently there is no CTC criterion in the company. We have to implement the same. So, my question was how to calculate for the old employees. Previously, management was giving them one month's salary (including all allowances) as a bonus on Diwali. Should it continue this way, or could there be some other option without harming employees' benefits?

Revising Salary Structure and PF Calculation

If I revise the salary structure, can I increase or decrease the PF of any person? Would this disregard the PF Act?

Present Salary | Proposed
---|---
Salary | 30,500 | 30,500
Basic | 13,825 | 12,200
HRA | 6,100 | 4,880
Conveyance | 800 | 800
Medical | 1,250 | 1,250
LTA | 1,152 | 1,016
Special Allowance | 7,373 | 10,354
Less PF | 1,659 | 780
Net Salary | 28,841 | 29,720

My question is if I revise the salary structure, the basic would change, affecting PF calculation. For example, previously deducting ₹1,659 now comes to ₹780 after revising. Or vice-versa. Are there any legal obligations?

Thanks again.

Regards,
Anju

How to calculate incentives as a part of CTC? Does it include in CTC? In the sales field, the company provides incentives to sales employees.

Secondly, does PF apply to stipend or trainee employees? Is there any rule specifying the maximum salary that can be paid to stipend or trainee employees?

Is there a measurable difference between a trainee and a stipend person? Because I feel both are the same! If yes, what are the documents to prove that?

Regards

Hello Dhruvin,

Performance-based incentives are a common practice these days. I do not have much knowledge in this, so I'll share what I know about it.

In my last service, I was to be given a performance-linked incentive of 60,000 for a year. They included it in my CTC, in the place where we add the employer's contribution to PF and all, with a line added below that the incentives are linked to performance.

We were told that we all would be given targets, and on completion of targets, they would map the achieved targets and then accordingly distribute the incentives in the ratios.

For example, if you are the highest achiever, then our targets would be mapped according to you, and whatever is the ratio, we'd get that percentage of our incentives.

However, seniors who have been handling Payroll and compensation should be in a better position to answer this query.

Stipend staff is usually covered under the apprentice act, while salaried employees are covered under standing orders and other employment acts.

Apprentices are not covered under ESIC/PF acts. Employees are covered under ESIC/PF acts.

Now it depends on how you have brought the trainee on board.

If you are to cover him under standing orders and normal employment acts, irrespective of you saying it stipend or salary, they'd be covered under PF acts.

If you bring them under the apprentice act, irrespective of their title or you calling the pay as stipend or wages, they'd not be covered under PF acts.

Furthermore, my notations -

Actually, an Apprentice is usually and technically a schooling person who is given a working experience with a real boss and works under real scenarios.

The apprenticeship nowadays is mostly referred to as an Internship, which may vary for a duration of 2 months to 6 months depending on the project and area of study.

During this time, the internship or apprenticeship is said to have an enhanced impact on the academic as well as professional study of the person.

There is this reply from a lawyer -

There is a difference between a trainee and an Apprentice. Apprentices are engaged under the Apprentice Act whereas trainees are appointed by the employers under their own rules and/or standing orders. Thus, trainees are covered by the EPF Act.

Source: Trainees Comes under EPF and ESIC Act

There is a discussion forum about apprenticeship and traineeship which you can refer to -

https://www.citehr.com/303170-what-d...-employee.html

Hope this helped you.

Seniors, please correct me if I happen to be wrong somewhere.

Thanks.