Salary Breakdown: Are There Legal Obligations for a 40% Basic and 60% Allowance Split?

I would like to know if any legal obligations arise when we bifurcate the salary as 40% Basic + 60% Allowance. We want to pay all contributions based on the Basic Salary, such as PF, PL Encashment, Gratuity, etc.

If yes, which ones are applicable?

Best regards,
Parimal

Dear Parimal,

There is no legal obligation for the bifurcation of salary, but there are some important points to consider:

1. Please ensure compliance with the minimum wages as per the state regulations.
2. If you base the CTC, the Basic should be 40% of the CTC.
3. If you base the Gross Salary, the Basic should be 60%.
4. Leave encashment depends on the number of EL/PL.
5. Gratuity is calculated at 4.83% of the Basic salary.

Regards,
Sarvesh

Whatever may be your bifurcation of salary, you need to ensure that it does not fall below the minimum wage. Additionally, P.F. contributions are payable on Basic + DA + retaining allowance, ESI is payable on Basic + other allowances (gross) except for travelling allowance, and gratuity is payable on Basic + DA.

Regards,
B. Saikumar

Please note, you can't bifurcate minimum wages. Minimum wages are always treated as basic salary/wages, so all liabilities like PF, ESI, bonus, and gratuity are payable on minimum wages.

Thanks and regards,
Sujeet

Nowhere in the law does it mention the bifurcation of salary. A few things you need to ensure are that PF is paid based on the minimum wage, and ESI is paid based on the gross salary. Your salary breakup could include Basic, HRA, DA, and any number of allowances. There are no restrictions on splitting, but make sure you are making all statutory payments as required by local laws. In addition to this, Gratuity and Bonus should meet the minimum wage requirements. Leave entitlement depends on the employee categories. For workers' categories, it's better to pay based on the gross salary.

Thank you.

Please find attached a copy of the minimum wages notification of Rajasthan state implemented on 01.01.2013. Please refer to point no. 6 on page no. 9 where it is clearly mentioned that the subtotal of Basic + DA cannot be less than minimum wages.

Thanks and regards,
Sujeet

Dear Parimal, it appears from the post that you want to separate the salary block into Basic, DA, etc., and want to contribute only to Basic. So, you are asking whether there will be any legal obligation.

This question is asked in many posts from many angles, so I thought to give a detailed reply:

Illustrative Salary Breakdown

(Figures are imaginary and are for illustration only)

Assume Minimum Wages are Basic = 4,000, Special Allowance = 2,000, and HRA (@ 5%) = 300.

Gross Wages (B+SA+HRA) = 6,300

Employer's Contribution of PF will be on Basic and SA = 12% of 6,000 = 720.00

Employer's Contribution on ESI on Gross = 4.75% of 6,300 = 299.00

Case 1: Employer's Trick of Flouting PF

Basic = 1,000, DA = 1,000, and HRA @40% on Basic and DA = 800, Allowance 1 @50% = 1,000, Allowance 2 @50% = 1,000, Allowance 3 @50% = 1,000, and Allowance 4 @25% = 500.

Gross = 6,300

PF only on Basic and DA = 240

ESI on Gross = 299.

The difference of PF in the above calculations is (720-240) = 480

If we consider the purposes of the PF Act, the trick of the employer as shown in Case 1 will not work. Anything below the MW for PF will not work. Employers should avoid fooling with the PF act and should have a policy of proper implementation of the PF scheme.

I hope I have answered the query.

Regards,
Adv. K. H. Kulkarni

Understanding the Basic Wage Rule

There is no 40-60 rule for basic by law. The basic wage should be at least the minimum wage as declared by the state from time to time. The higher the basic wage, the greater the benefits for an employee and the higher the CTC outflow on PF, Gratuity, Ex Gratia, etc., which increases the CTC.

Regards,
Diwyesh Dave
D'HUBB HR & Business Solutions

I have recently joined a private concern in Hyderabad where the nature of work involves the fabrication of EB tower parts and other steel structural components. Both the factory and office are located on the same premises. Our direct employees include fitters, turners, mechanics, machine operators, and helpers (both male and female) who have been receiving a consolidated salary for the past two years. The management now intends to implement a comprehensive HR policy and register for EPF and ESI coverage. I require assistance in structuring and segregating the salary according to the Minimum Wages Act. Can anyone help with the following questions:

1. How can I find the Minimum Wages list applicable to our nature of work?
2. How can I obtain the latest Minimum Wage details?
3. Could someone provide a sample salary calculation (salary breakdown) for Fitters and Turners?

Additionally, what registers need to be maintained?

Please help.

Regards,
R.S.Vasan
[Email Removed For Privacy Reasons]

I am in full agreement with Mr. Kulkarni. In some states, the government has notified that minimum wages cannot be split, or minimum wages will be treated as basic wages. Reducing basic wages (less than MW) just to save on EPF, EL, Gratuity, and Bonus liabilities is a form of worker exploitation.