Confused About Salary Calculation? How Do Companies Decide Basic Pay and Allowances?

Hi Seniors, thank you for your valuable suggestions that you all gave me before. I want to know about the salary calculation. In my company, the Basic pay varies from salary to salary, and I am not sure how they calculate the percentage. I have searched on many sites, and it differs from one to another.

Understanding Salary Components

How do I calculate the Basic pay, HRA, Conveyance, and special allowances? Does it really vary from company to company and salary to salary? Please advise me on this.

Thanks & Regards,
Swathi
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Yes, it's different from company to company and salary to salary. As you know, the basic is fully taxable, and there are no rules and regulations for considering Basic. The simple thing to always remember is to take the basic below 40% (because it's a fully taxable component, so try to give a lesser amount).

HRA Calculation

HRA is either 40% or 50%, depending on metro and non-metro cities. HRA will always be calculated on Basic.

Conveyance Tax Exemption

Conveyance tax exemption is ₹800. If you give more than the exempted amount, then the employee will be taxable above ₹800.

Special Allowance Calculation

Special allowance equals gross minus all components (Basic, HRA, Conveyance).

I hope this information will help you.

Generally, the basic salary should be 50% of the gross salary, and HRA should be 40% (Non-Metro) or 50% (Metro) of the basic salary. As mentioned by Mr. Ravi, conveyance up to 800 is tax-exempt.

Example Calculation

For instance, if Gross = 30,000:
- Basic should be 15,000
- HRA should be 7,500
- Conveyance 800

Totaling to 23,300. If there are no other allowances as per company policy, then the Special Allowance would be (30,000 - 23,300) = 6,700.

Annexure Details

The annexure would be as follows:
- Basic should be 15,000
- HRA should be 7,500
- Conveyance 800
- Special Allowance 6,700
- Gross Salary = 30,000.

I hope this explanation clears up any doubts.

Regards,
Pijush Chunari
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Hi, Pijush, don't say that it should be 50%. I won't agree with that because most companies' basic pay is below 40%, or at most up to 40%. As you know, Pijush, the basic pay is fully taxable. Then what is the use of giving 50%?

I know that most companies offer a 50% basic salary, but it varies from company to company. I am referring to the general and simple structure. The salary structure depends entirely on the company's policies.

Understanding Basic Salary Calculation

There is no hard and fast rule that the basic salary should be 40% or 50% of the gross salary. As per the Minimum Wages Act (MWA), the basic pay should not be less than the minimum wage. We can work backwards after covering all the exempted tax structures and arrive at the basic salary by reverse calculation too, so there is no need to fix the basic salary at 40% or 50%.

Regards

Thank you for the quick and valuable answers. In my company, the basic pay differs from one salary to another. How do they calculate it? Why is it not equal for everyone? Here, the basic pay is 65%.

As I said earlier, there is no hard and fast rule; it can be any. In some companies, Basic is kept higher so that all statutory calculations are based on Basic + DA. This benefits the employees more, and that is the rationale behind having a higher Basic salary.

I think in your company, manpower is more, so they may have formed different groups like:

- If an employee's salary is between 10,000 to 20,000, then it falls under Band-1.
- If an employee's salary is between 20,000 to 40,000, then it belongs to Band-2.

For this reason, they may have prepared different CTCs for different bands. These could be the possibilities. Is it so?

Hi, Ms. Swathi. As our colleagues suggested, there are no hard and fast rules in the salary components, and I agree with that. The only thing that should be followed is that salaries are divided to save the employees' TDS. However, we should ensure that basic wages are not lower than the minimum wages set by the act. At the same time, most companies follow the practice of setting the basic wage at 50% of the gross salary.

Understanding Salary Structures

The salary structures depend upon the company and employees. Normally, organized sectors will have their own salary structure with grades and scales of basic pay fixed by the designations and nature of work. The dearness allowances are also fixed in 3 to 4 slabs of basic salary. Besides this, some organizations are also giving Variable Dearness Allowances based on the Consumer Price Index on a quarterly basis. HRA, Washing Allowances, CCA, etc., depend upon the agreement or settlement as per the Industrial Dispute Act.

In the absence of this, if the company is paying a lump sum salary that should not be less than the Minimum Rates of Wages, then it is advisable to break it into Basic, VDA, HRA, Traveling, Education, etc. Restrict the Basic and DA as per the Minimum wages and the remaining as per convenience to be shown in the wage register.

Normally, the breakup of a lump sum salary shall be 50% Basic, 25% DA, 15% HRA, and 10% as washing allowances. In such a case, Basic and DA will be considered for the computation of Provident Fund, Bonus, and Gratuity, etc.

This is what we were following in a well-established mining sector in Goa.

Regards,
Adoni Suguresh, Sr. Executive (Pers and Adm) Rtd.

It depends on the company whether it gives 40%, 50%, or 35% as it is the company's policy regarding the salary structure. The basics are also attached with the company's gradation chart, so it doesn't matter much about the basics and HRA.