Navigating CTC Structure: Can We Adjust Employee Contributions and Avoid Legal Issues?

Dear members, Attached is the CTC structure that forms part of the offer letters that we have rolled out. Our questions are:

1. Can we have an employee contribution of Rs. 1800 shown separately as a line item in the gross salary, or do we need to club it with a special allowance? Can we include the employee contribution of Rs. 1800 in the special allowance?

2. Can we have the employer contribution of Rs. 1950 removed from the gross salary and then from deductions as well? Will this have a nullifying effect?

3. Can we simply copy and paste the attached CTC structure into the payslips? Are there any legal roadblocks to doing so?

Your valuable responses are sought. Thank you so much!

Regards, PKAssociates

Your queries are answered below seriatim.

1. The employee contribution of Rs. 1800 cannot be shown in the gross salary as it is a deduction made from the gross salary.

2. The employer contribution of Rs. 1950 can be shown in CTC but is not generally shown on pay slips.

3. Proper Use of CTC Structure in Pay Slips It is not proper to copy-paste the attached CTC structure into the pay slips as it is misleading information. The pay slip has to reflect the actual monthly earnings of the employee and cannot be a notional entitlement shown as CTC. In the case of employees covered under the Payment of Wages Act 1936 or the Minimum Wages Act 1948, there are prescribed forms of wage slips by the respective State Government that have to be issued. The sample attached does not fall under those statutes.

Thank you! In continuation of your response, there is another question: Can we add the employee contribution to the special allowance instead of keeping it separate in the offer letter? Are we legally allowed to do this? I do understand that the net effect of this adjustment will be the same, but employees can always make it an issue.

Understanding CTC (Cost to Company)

CTC means Cost to Company. It signifies the cost at which any employee will be hired. Initially, this concept was not very well-known in the industry, but with time and changing scenarios, it has become prevalent. There are three parts to the CTC:

Monthly Gross

This includes the salary portion, which is reflected in the payslip. The components of the Gross salary are:
(A) Basic (35% to 45% of CTC, depending on the company, but not less than the minimum wages).
(B) HRA (40% for non-metro cities and 50% for metro cities).
(C) Conveyance Allowance - fixed at 1600/- for tax exemption. The applicable sections for this exemption are Section 10(14)(ii) of the Income Tax Act and Rule 2BB of the Income Tax Rules. In the Union (interim) Budget 2019-20, the Finance Minister proposed a Rs. 50,000 Standard Deduction from salary income for all employees and pensioners. The Standard Deduction of Rs. 40,000 was introduced in Budget 2018, replacing the transport allowance of Rs. 19,200 and medical reimbursement of Rs. 15,000 per annum.
(D) Sp. All = Balance to match up CTC [(Monthly Gross + Employer Contribution) - CTC Amount].
(E) Adhoc Allowance - Basic - 15000/- for EPF as per the new rules of wages.
(F) Washing Allowance - 1500 to 2000, depending on the company, with the requirement that a uniform should be provided to the employee.
Total Monthly Gross = (A + B + C + D + E).

Employer Contribution

(A) EPF Contribution - 12% (some companies take it as 13%), limited to 15000/-. If the salary exceeds 15000/-, Basic + Adhoc shall be considered for this calculation.
(B) ESIC - 3.25% of Monthly gross, except for washing allowance (if monthly gross is less than or equal to Rs. 21000/-).
Total employer Contribution = (A + B).

Total CTC

Total CTC = Monthly Salary + Employer Contribution.

Other Considerations

Some other parts that may not be included in CTC:
Gratuity - While some companies include it as a part of CTC, it is not legally binding. Gratuity is a reward given to an employee for their service in any industry for working beyond five years. If it is mentioned as a part of CTC, then the amount must be paid upon separation.
Bonus - The bonus amount is dependent on the profit and loss of the company; therefore, deciding the amount before finalizing the balance sheet may be challenging.

@ O B Gautam

Clarifications on HRA and ITAX Exemption

1. You mentioned that HRA should be 40% of Basic for non-metro and 50% of Basic for metro areas as per ITAX exemption. However, you did not specify the percentage base, which I assume is on the basic salary. Many organizations pay HRA at 10% to 25% of Basic for lower-level employees. Additionally, states like Maharashtra and West Bengal have statutory requirements for 5% HRA on Basic & DA as per state acts.

Clarifications on Special Allowance Calculation

2. You stated that Special Allowance = (Monthly gross + Employer's contribution) - CTC. I believe it should be reversed, i.e., CTC - (Monthly gross + Employer's contribution), as CTC is always greater than the other components.

Adhoc Allowance and EPF New Rules

3. You mentioned Adhoc Allowance = Basic - 15,000/- according to EPF new rules of wages. Please specify the particular section or circular of the new wage rules (Wage code/rules).

EPF Contribution Limitations

4. You indicated that EPF contribution should be restricted to 15,000/-. However, many organizations, especially MNCs and large Indian companies, pay EPF contributions above 15,000/- for both employer and employee contributions.

Gratuity and Bonus in CTC

5. You stated that Gratuity and Bonus should not be part of the CTC. However, in some organizations and under new labor codes, the Gratuity fund is insured, necessitating annual premium deposits that should be included in the CTC. Also, for fixed-term employment under 5 years, gratuity eligibility is applicable. If covered under the Payment of Bonus Act, the minimum bonus of 8.33% should be part of the CTC.

CTC Components

You mentioned that Total CTC = Monthly SALARY + Employer's contribution (PF & ESIC). This is incorrect. There are yearly components like LTA, Retaining Allowance (usually paid after one year or more), Furnishing Allowance, etc., which are part of the CTC.

CTC = Monthly gross * 12 + Yearly contribution of PF, Pension (if any as a third benefit for higher-level employees) + Yearly ESIC (if applicable) + Yearly components such as LTA, Furnishing, etc. + Company's Car (if any), Canteen subsidy, etc., as perks + Contribution to different insurances like Insurance in lieu of EDLI, Employee compensation insurance, Mediclaim, etc., as applicable in different organizations.

In the original post, it was mentioned that the Employee portion of EPF contribution is part of CTC, which is not the case. CTC is the cost borne by the employer only.

Regards, S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons] http://www.usdhrs.in

@ S K Bandyopadhyay Sir (WB, Howrah)

HRA and ITAX Exemption

1. You have mentioned HRA should be 40% of Basic for non-metro and 50% of Basic for Metro as per ITAX exemption (you have not mentioned % on what - I hope it is on basic). There are many organizations that are paying HRA 10 to 25% of Basic to lower-level employees. Moreover, there are states like Maharashtra, WB, etc., where as per State act, 5% HRA on Basic & DA is statutory.

Dear Sir, please read; I had clearly mentioned HRA should be 40% of Basic for non-metro and 50% of Basic for Metro as per ITAX exemption. I shared it will be the basic percentage. Second, if someone is paying less than it, then we cannot do anything. In fact, we know that we have to pay minimum wages to our workers, but after that, some companies are paying less than MW.

Special Allowance Calculation

2. You have mentioned Special allowance = (Monthly gross + Employer's contribution) - CTC. I think it will be reverse, that is CTC - (Monthly gross + Employer's contribution). CTC is always more than the other side.

Thanks, sir, you are right, but I hope it will also be understandable. My simple reply for understanding.

Adhoc Allowance and EPF Rules

3. You have mentioned Adhoc Allowance = Basic - 15,000/- to EPF new rules of wages. Requesting you to mention a particular Section/Circular of New rules of wages (Wage code/rules).

Sir, the new wages code is still pending for applicability, but as per the decision of the Supreme Court in the case of ‘Surya Roshni Ltd. & Others’ (Civil Appeal Numbers: 3965-3966 of 2013, 3969-3970 of 2013, 3967-3968 of 2013), which is a landmark judgment in the history of labor law. In what will have financial ramifications for many establishments, the Supreme Court has ruled that employers cannot segregate ‘special allowance’ from basic wages and must include it for the calculation of provident fund deductions from employees and their matching contribution. That's why I wrote it, and I think most companies are following the same practice.

EPF Contribution Limits

4. You have mentioned EPF contribution should be restricted up to 15,000/-. But there are many organizations, especially MNCs, Big Indian houses, etc., that are paying contributions to EPF above 15,000/- for the employer and accordingly matching contributions by employees.

I know even we are also covered under Section 1(4) of the EPF Act. So it's not a big matter.

Gratuity and Bonus in CTC

5. You have mentioned Gratuity and Bonus should not be part of the CTC. There are organizations, and even in new labor codes, Gratuity fund is insured. Then it is essential to deposit premium every year, which should be part of the CTC. Moreover, there will be Fixed-term employment when working for less than 5 years - gratuity will be eligible for gratuity.

Sir, what I wrote is as per the current scenario, as I told you NEW WAGES CODE is still pending, and for I don't think to count the Gratuity insurance premium amount as part of CTC. If someone is covered under the Payment of Bonus Act, then a minimum bonus of 8.33% should be part of CTC. Agreed, but how can you decide the % of the bonus at the beginning of the year? It may vary depending on the profit and loss of the company. How can you say that we will give only 8.33%, it may be 10, 15, or 20, whatever comes after the balance sheet finalization.

Components of CTC

You have mentioned that Total CTC = Monthly SALARY + Employer's contribution (PF & ESIC). This is also not right. There are yearly components like LTA, Retaining Allowance (usually paid after 1 year or more), Furnishing Allowance, etc., which are also part of CTC.

Sir, for LTA tax exemption, the employee/taxpayer can claim exemption in respect of any 2 journeys in a block of 4 years. The Income Tax Department has created a block of 4 years each, and in each block, the exemption can be claimed twice. But normally, we have seen that employees claimed it every year, so I think we have to make it as a part of normal salary.

CTC = Monthly gross * 12 + Yearly contribution of PF, Pension if any as a 3rd benefit for higher-level employees + Yearly ESIC if applicable + Yearly component - LTA, Furnishing, etc. + CO's Car if any, Canteen subsidy, etc., as perks + Contribution to different insurance - Insurance in lieu of EDLI, Employee compensation insurance, Mediclaim, etc., as applicable in different organizations.

In the original post, it has been mentioned that the Employee portion of EPF contribution is part of CTC, which is not. CTC is the cost borne by the employer only.

Dear O B Gautam,

Thank you for your clarification. I apologize for not noticing that you mentioned HRA as a percentage of Basic. My purpose in seeking clarification is to ensure that the young readers of CiteHR posts are not confused. In my opinion, CTC is not an accurate calculation, as it changes with the situation, such as variable DA, Bonus, etc.

Comparison of HRA Percentage with Minimum Wages

Regarding the comparison of HRA percentage with the payment of minimum wages, I could not find any relation. As of today, minimum wages consist of Basic, DA, and HRA. All states publish minimum wages as Basic and DA. There are three states that have the State House Rent Allowance Act, which mandates a minimum of 5% of Basic and DA for HRA. If an organization chooses to pay at least the minimum Basic and DA along with a certain percentage of HRA and other allowances as per the organization's policy, there should be no issue with compliance with minimum wages. The income tax rebate guideline of 40% or 50% for HRA is unrelated to minimum wage compliance. Organizations are free to pay a higher percentage of HRA if they wish.

Special Allowance and Apex Court Verdict

After reviewing your clarification and the original post, it seems to me that you mentioned special allowance, ad hoc allowance, and the Apex Court verdict, which can be confusing. For any remuneration structure, it is not necessary for special allowance to be a component. Even if it is included, according to the Apex Court verdict, it should be considered part of PF gross, and contributions should be made on it, subject to a maximum of Rs. 15,000 per month or any upper limit set by the organization's policy.

Gratuity and CTC

Regarding Gratuity, there are still many organizations that have insured gratuity with an insurance company and pay premiums annually. There are differing opinions on whether gratuity should be included in CTC. I believe it should be included because all payments are conditional. For example, monthly salary may not be eligible if the employee has no leave balance and is on leave without pay. Bonus, at a minimum of 8.33%, should be part of CTC if the employee is eligible, though it may be higher in actuality, subject to a maximum of 20%. CTC is not an exact calculation but a management tool for decision-making.

ITAX Exemption Clauses and Remuneration Structure

You have consistently referred to ITAX exemption clauses (LTA, HRA, etc.), which are not directly related to structuring remuneration for organizations. When determining different components of a remuneration structure, it is advisable to consider tax benefits for taxable employees.

Remuneration structures vary randomly from organization to organization across India, especially in terms of the percentage of Basic and DA relative to monthly gross or total remuneration. That is why lawmakers have established a uniform definition of wages (Basic and DA) in all labor codes to prevent discrepancies nationwide.

Once again, thank you for your post and clarification. I have done my best to provide clarity based on my experience. In law, nothing is permanent, and interpretations can vary from person to person, influenced by different court verdicts.

Warm Regards,

S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons] USD HR Solutions – To Strive towards excellence with effort and integrity

You can like:
1. Basic, DA + others (specify)
2. Gross
3. Employer Share (Like PF + ESIC + Bonus, etc. Whatever available as per your adjudication)
4. CTC

Dear all, My question is: we have separately shown the employee contribution as a line item in the offer letter instead of clubbing it with the special allowance. This was done to ensure better clarity with respect to contributions.

Can we club the employee contribution with the special allowance in the salary slip? Or can an employee raise an issue on this?

We will club the employee contribution with the special allowance in the employment contract.

Requesting esteemed members to guide us.

Hi Prem Chandra, Please elaborate. I think you are saying that the employment contract will supersede the offer letter and this will fix the problem. Is it? Do you also think that we should have an explanatory line in the offer letter stating that the employee contribution is shown separately for clarity's sake and will be included in the special allowance in the employment contract?

Regards, PKAssociates

We need to clearly mention all entitlements in all documents such as the offer letter, appointment letter, salary register, salary slip, etc. Each word is correlated to the other. If we show a special allowance, it should be categorized separately as a special allowance and not converted into a PF share, i.e., entitlements are carried forward on a head-to-head and cap-to-cap basis.

Sir, we cannot modify the offer letters that have been rolled out. Can you provide a solution to this matter? I assume members are highly experienced in HR subjects in this community.

Possible solutions that I can think of:

1. Employee contribution can be renamed as other allowance or contribution allowance or some other allowance which would amount to Rs. 1800. This way, our employees won't get confused.

2. We can include it in the special allowance, and while signing the employment contract, we can get them to agree that the employee contribution as shown in the offer letter is included in the special allowance.

Thanks!

Regards, PKAssociates

@ PKAssociates

Please correct me if I am wrong. My observations and suggestions are as follows:

1. The Excel sheet enclosed appears to differ in terms of remuneration compared to other organizations in India. Usually, in today’s context, employees at medium/higher levels also receive LTA, car facilities, variable pay, etc., which are absent in your structure.

2. The organization is restricting PF contributions up to INR 15,000 per month, a statutory cap.

3. Usually, in any offer/appointment letter, the employee's portion of PF contribution is not mentioned. What about PTAX, if applicable in your state, to be deducted from the employees' earnings?

4. There is no relation between PF contribution and special allowance (other allowance). The concept is PF gross, as per the verdict of the Apex court, on which PF is to be deducted, subject to the statutory cap of INR 15,000 per month or with no upper limit, as per the organization's policy.

5. Since you have already issued the offer letter, in my opinion, you need not change anything.

6. Your payslip should only show the earning components on the earning side, with no employer or employee contribution to PF. The deduction side should include the employees' portion of PF, PTAX if applicable, ITAX, any deductions against loans/advances, with net salary calculated as earnings minus deductions.

7. Your payroll should follow the above format, which, in case of any visit from a statutory body, will be checked and approved.

8. My personal suggestion is to restructure your existing remuneration structure as mentioned in your Excel sheet, incorporating some yearly components, including at least one variable pay based on the organization's and individual's performance.

S K Bandyopadhyay (WB, Howrah) CEO-USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons] USD HR Solutions – To Strive towards excellence with effort and integrity

Good evening, all of you. I have one query related to CTC. How do we find out the Gross salary? Based on the Gross salary, the remaining amount is calculated. Additionally, we calculate PF and ESI based on basic and gross. So, how do we divide the gross salary from CTC?

The factors included in the CTC are known only to the people in your organization. For others, it can at best be only guesswork.