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

Dear all,
I work as HR for an IT & BPO company with 45 employees in Mysore, Karnataka.
Currently we are giving 40% of gross salary as Basic.
Is is legally correct split for the state ?
Please let me know what category my firm falls into & what is the minimum wage for the same.
Thank You,
Megha A

Dear Megha
As per the Classifications in Karnataka IT & BPO falls under shops & commercial establishment act. You should maintain Basic & DA as per minimum wages act pertaining to Karnataka Shops & Commercial Establishment Act.

Dear Prashant B Ingawale,
As far as i know there are few court decisions stating basic salary should in reasonable proportion of the gross salary and that reasonable proportion is usually considered as 40%.
Can you plz share under which section of MW Act it is specified that 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 such rules/act which is fixing the 40% as Basic or Basic+DA.
If I am not right, 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 & 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 make sure that the Basic + DA of any employee of your organization should not go below the Minimum Wages of the appropriate government. Further you need not worry about any percentage.
Further can you clarify me in a doubt I have?
If you are increasing the basic Rs.1000/- for a person, will you increase other allowances also for another Rs.1500/- to match the percentage issue. If you do so, then you can maintain the percentage ratio.

Dear Bhaskar,
If I increase Basic by say Rs 1000, I will not increase other allowance at all.
I will be decreasing the it so that the gross remains the same.
The problem with us is that gross & take home amounts are fixed & 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 the minimum wages act. Other allowances shall decrease. So your gross will remain same & it will reflect only CTC & 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 of 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 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 if 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 (eg 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 good idea regarding the Salary structure designing.
Govt fixed Minimum wages must be Basic + DA. For seniors and higher level people it can be in upper side.
40% can be fixed as HRA (for Tax exemption)
Rs.800/- as conveyance allowance
Education allowance may also have some exemption (Please check).
Balance amount you can fix as Additional allowance/Special Allowance.
Hope now you got some idea regarding framing of Salary Structure.