40% Of Gross Salary As Basic. Is It Legally Correct?

Dear all,

I work as an HR professional for an IT & BPO company with 45 employees in Mysore, Karnataka. Currently, we are allocating 40% of the gross salary as Basic pay. Is this a legally correct split for the state? Please inform me about the category my firm falls into and what the minimum wage is for the same.

Thank you,
Megha A

Dear Megha,

As per the classifications in Karnataka, IT & BPO fall under the Shops & Commercial Establishment Act. You should maintain basic pay & DA as per the Minimum Wages Act pertaining to the Karnataka Shops & Commercial Establishment Act.

Dear Prashant B Ingawale,

As far as I know, there are a few court decisions stating that the basic salary should be in a reasonable proportion of the gross salary, and that reasonable proportion is usually considered as 40%. Can you please share under which section of the Minimum Wages Act it is specified that the basic should not be less than 40% of Basic + DA? Just to update myself.

Regards,
Kamal

Dear Kamal,

Prashant and Jeeva are guiding Megha as the Basic + DA must not be below the Minimum Wages fixed by the appropriate Government. There is no rule or act that fixes the 40% as Basic or Basic + DA. If I am mistaken, please clarify.

Dear Bhaskar,

I am totally confused now. I am currently following basic as 40% of gross. If I go by the MW act, then basic is less than 5800 in a few cases, which is the statutory basic for my industry. My management does not want any changes that will decrease net pay and increase CTC. I am trying a few different calculations, but it does not fit the above parameter. Will the company be in any sort of legal bind if I stick to 40% basic? Please clarify this issue for me.

Thanks,
Megha A

Dear Megha,

Please ensure that the Basic + DA of any employee in your organization does not fall below the minimum wages set by the appropriate government. You do not need to worry about any percentage.

Additionally, could you clarify a doubt I have? If you increase an individual's basic salary by Rs. 1000, would you also raise other allowances by Rs. 1500 to maintain the percentage ratio? By doing so, you can keep the percentage consistent.

Thank you.

Dear Bhaskar,

If I increase the basic by, say, Rs 1000, I will not increase other allowances at all. I will be decreasing it so that the gross remains the same. The problem with us is that the gross and take-home amounts are fixed and cannot be changed. I can only play with the way it is split to ensure legal compliance.

Warm Regards,
Megha A

Dear Megha,

You have to increase the Basic & DA to comply with the Minimum Wages Act. Other allowances shall decrease. So, your gross will remain the same, and it will reflect only CTC and the net take-home.

Megha,

You started the thread in a wrong manner...

First, understand, legally there is no rule that says how salary will be structured. It is the notice of the company to decide what it will do and how it will break up the salary. There are certain norms you will find on this site and on other forums, sites, and books. However, you are free to decide your own structure.

However, there are some rules that you should follow to avoid problems, some of which members tried to explain to you above.

1. Ensure that Basic + DA is more than minimum wages. That is a requirement of the law. Check with the latest state notification for minimum wages.

2. Check if HRA is compulsory (as far as I know, Maharashtra and Gujarat are the only states that provide for compulsory HRA amounting to 5% of Basic + DA). Income tax allows tax-free HRA up to 40% of salary if the employee actually pays house rent. So it would make sense to provide an amount of HRA that gives maximum tax benefit. Speak to your accounts head; he will help you work that out.

3. An amount of Rs. 800 per month is allowed to each employee as tax-free travel allowance. So you can provide for that in the structure.

4. Companies generally try to reduce basic and DA since a lot of statutory benefits are often computed on that basic. However, I believe that is a fallacy that has resulted in companies creating a number of allowances unnecessarily. I believe that you should create allowances that actually make sense (e.g., additional allowance for night shift).

As desired by your management, you can adjust your structure without disturbing the total take-home or CTC.

Dear Megha,

Now Saswata has given you a good idea regarding the salary structure designing. The government has fixed minimum wages to be Basic + DA. For seniors and higher-level people, it can be on the upper side. 40% can be fixed as House Rent Allowance (for tax exemption). Additionally, there is a conveyance allowance of Rs. 800/-.

Education allowance may also have some exemption (please check). The balance amount can be fixed as an additional allowance or special allowance.

Hope you now have some idea regarding the framing of the salary structure.

Excellent reply by Mr. Banerjee, as well as Mr. Bhaskar. Very clear, transparent, and absolutely no confusion. We, as readers, really had a good update in our knowledge. Thank you, sirs, both of you.

Megha,

These types of problems arise only in the software/BPO offices. However, you should check with the Karnataka Minimum Wages periodically, and accordingly, the basic wages in your rolls should not be below the minimum wages (basic+DA). The balance amount can be divided into HRA and other heads. Normally, 50% of the total as basic and 40% of Basic as HRA is advisable. For the persons drawing at par with the minimum wages, the entire amount should be as basic.

[QUOTE=p ramachandran;2095987]

Megha,

This type of problem arises only in the software/BPO offices. However, you should check with Karnataka Minimum Wages periodically, and accordingly, the basic wages in your rolls should not be below the minimum wages (basic + DA). The balance amount can be divided into HRA and other heads. Normally, 50% of the total as basic and 40% of Basic as HRA is advisable. For the persons drawing at par with minimum wages, the entire amount should be as basic.

Also, see the judgment on this subject which may be useful to you (already available on this site itself).

Dear Megha,

I second the opinion of Mr. Saswata. Now let us take a case study to explain in a simple way.

For example, you have engaged a salesman in your establishment in Chennai, which falls under the TN Shops & Establishment Act. You are paying him a gross salary of Rs. 10,000/- per month. Normally, as a customary practice, if you keep 40% of GP as Basic Pay for the subject case, it works out to be Rs. 4,000/-.

But, as per TN S&E Act, the minimum wage for a salesman working in Chennai is Rs. 2,578 (Basic wage) + Rs. 2,450 (VDA) = Rs. 5,028 per month.

In such a case, if you do not want to alter the Gross Pay, then you may fix the wage as follows:

a) Basic Pay (incl VDA) - Rs. 5,100 (Rounded off to the higher rate of government-notified minimum wages)

b) HRA (50% of Basic) - Rs. 2,550

c) Conveyance - Rs. 800

d) Other Allowances - Rs. 1,550 (You may have the components as fixed by your company)

To summarize, in cases where 40% of Basic falls below the notified minimum wages, keep the government-notified minimum wages as Basic Pay, 50% of Basic pay as HRA, a conveyance allowance of Rs. 800, and the balancing amount as per your company policy may be added to match the Gross Pay.

By doing this, you are complying with the statutory norms as well as taking care of the tax liability of the employee.

For higher pay bands, you are free to keep the components as long as they do not violate the statutory norms and the tax liability of the employee.

I hope this clears your doubts.

With regards,

P. Vathiraj
Associate Operations Manager
Aparajitha Corporate Service Limited

Dear Mr. Vathiraj,

This indeed helps me clarify the issue. Can I request you to give me the break-up for an employee belonging to shops & commercial establishment category in Karnataka? The gross will be 6000 per month. The employee works for a BPO process as an executive.

Thanks,
Megha A

Dear Megha,

As per your statement, he is working in the BPO industry, which is covered under the Shops & Establishment Act, and he is an executive, which means he is in the clerical cadre as per the traditional way of ranking.

The minimum wages for that category in Bangalore city are Rs. 5629.20 per month (Rs. 4680.00 as Basic and Rs. 949.20 as VDA), which may be rounded off to Rs. 5700 per month (Rs. 4700 as Basic and Rs. 1000 as VDA).

Since you have mentioned that his gross salary is Rs. 6000 per month, you have to fix Rs. 5700 as Basic and DA as specified in the above paragraph, and the balance amount of Rs. 300 may be fixed as Other Allowances (the nomenclature of the component may be fixed as per your company policy).

Also, for your convenience, I am enclosing the Minimum Wages Notification of Shops & Establishment for the period from 01.04.13 to 31.03.14 for your ready reference.

Regards,

P. Vathiraj
Associate Operations Manager
Aparajitha Corporate Service Limited

Dear Megha,

There is no prescribed rule to maintain a minimum basic. However, some state governments have notified for the deduction of PF on total wages prescribed under minimum wages for different schedules of employment. Payment of wages primarily focuses on timely payment, deductions, and minimum wages, which is the minimum rate of wages per day/per month. These two acts serve different purposes.

The PF and MIS Provisions Act mainly focuses on covered employees (Basic + DA < Rs 6500 pm) and excluded employees (Basic + DA > Rs 6500 pm) if the establishment is covered, along with the rate of contribution. You should also check with the RPFC for provisions regarding the infancy period, as there have been various judgments on that.

To comply, you need to set the basic wages below Rs 6500/- (starting scheme) or you have the option not to cover by declaring them as excluded employees.

Regards,
Mritunjay Nath Sahu
GM (HR)

Let me ask a question for you, why is a salary divided into Basic, DA, and other allowances, etc.? And what if it is kept consolidated? The main and obvious reason for such division is to avoid the contribution of PF. Unfortunately, the EPF Act talks of Basic and DA only. Hence, what is not shown as Basic and DA in the salary is not taken for PF contributions. Though there is a limit of Rs. 6,500 per month for PF contributions, one can contribute over and above the limit and the company can also do the same. But to avoid this, the artificial division is made in salary. The ESI act does not make such a classification, so the entire amount has to be considered if the salary is up to Rs. 15,000 per month.

The minimum wage is a form of paying wages which has a Basic Wage as one part and something in tune with the dearness called a special allowance (the name may differ) as the other part. As long as any management is paying not less than the minimum wages declared from time to time, the format or classification of wages becomes immaterial. So, whether 40% of Gross earnings are shown as Basic and the remaining as other allowances makes no difference as far as the MW act is concerned. But it certainly makes a major difference for the PF Act. Hence, the idea of making such artificial or superficial classification of salary was developed just to reduce PF liability, about which none is speaking.

In recent inspections in many organizations, PF authorities and I had gone through that. One E.O. suggested us to maintain the PF salary should not be lesser than 70% of the total amount.

Regards, T. Muralidaran

Hi,

This was really helpful information. Thank you so much.

Kindly clarify the following:

We are operating a Software Development firm in Chennai and would like to know the minimum 'Basic' to be paid to the employees as per the Minimum Wages Act of Tamil Nadu for the 2013-14 year.

Dear Muralidharan,

As a matter of fact, the conveyance allowance of Rs. 800/- and 40% of basic wages in the form of HRA are exempted from income tax. The PF authorities can claim in case the basic wages fixed are less than the minimum wages fixed by the appropriate government for deducting the PF. If you are deducting the PF for more than the prescribed minimum wages, then the PF authorities cannot question you regarding the deduction.

Dear Mr. Vathiraj,

Your input has been invaluable! I have amended our salary break-up accordingly.

Thank you for all the help!

Warm Regards,
Megha A

Dear Member,

The ratio of 40% of CTC as Basic is decent enough. As for minimum wages, there is no binding law that states your Basic + DA should be equal to Minimum Wages. However, if you follow the thread on the PF vs. G4S Securities, it is highly likely that the PF authorities will soon be demanding PF contributions on Basic or Minimum wages, whichever is higher.

To keep your future costs in check and have a better salary breakup, it is suggested that the Basic should be equal to minimum wages.

Regards,
Preetam Deshpande