Starting from Scratch: How Do I Create a Salary Structure and What Forms Are Needed?

Dear Members, I am starting the HR processes in a company. Currently, there is no salary structure, and employees receive a consolidated amount. I am seeking guidance on where to begin in structuring the salary process and which formalities/forms to utilize. Your assistance in this matter would be greatly appreciated.

Thanks,

Regards, Punita

If you want to create a salary structure, you are free to do so on whatever basis fits the circumstances. It is better to keep it simple. HRA and Conveyance Allowances are tax beneficial, and therefore, you need to add them to your structure. For the rest, let it all stay in Basic unless you have a reason to create allowances, or in circumstances where allowances will be restricted to a specific group/type of employees.

Also, keep one thing in mind: you shouldn't do anything that may lead to labor unrest or disputes. The salaries being received by the employees have been in place for a long time, and any changes or amendments could affect their take-home pay, potentially leading to industrial disputes. Therefore, the first step is to create a roadmap and discuss it with other team members. This should be done smartly, and it's a good opportunity for you to enhance your skills.

While restructuring salaries of existing employees, utmost care needs to be taken to ensure that the take-home pay before and after restructuring is nearly the same or higher. In such a case, there shall be no resentment among staff. After drafting the restructuring, the staff must be taken into confidence by explaining to them the benefits they shall receive post-restructuring of the salary proposed by you.

CTC (Cost To The Company) Salary Structure

The CTC salary structure may consist of:

1. Basic Pay - 50% of Total CTC (As per New Wage Code)
2. HRA - 40% of Basic Pay in case of non-Metros and 50% of Basic Pay in case of Metros (Up to this amount, HRA (leaving the first 10% of basic salary) is income tax-free if the employee stays in rented premises.)
3. Conveyance Allowance - Rs. 1600/- per month or more depending upon the grade of the employee. Conveyance allowance up to Rs. 1600/- per month is exempt under the Income Tax Act.
4. Special Allowance - This will be the balancing figure.
5. Employer's Contribution towards Provident Fund Contribution - 12% of Basic Pay.
6. Employer's Contribution towards Employee's State Insurance Contribution - 3.75% of (1+2+4).
7. Gratuity Amount - 1/24 of Annual Basic Salary.

CTC shall be the sum total of points 1 to 7.

Modifications may be incorporated in the above depending upon industry/trade standards.

Regards, Jawaharlal Moondra
[Phone Number Removed For Privacy-Reasons]
[Email Removed For Privacy Reasons]

In the above pay structure as mentioned by Mr. Moondra, I have the following observations:

1. In the case of HRA, there are 3 tests: HRA paid minus 10% of Basic, 40% or 50% of Basic for non-metro and metro respectively, and HRA received by the employee. Of the three, whichever is less is allowed as an ITAX rebate.

2. As far as my knowledge goes, if an ITAX rebate is taken under Conveyance and Domestic Medical, then the Standard deduction will not be allowed. Please check this.

3. The employer's contribution to PF is 13% of the monthly gross minus HRA, subject to a maximum of ₹15,000 per month if the employer decides so. This is as per the Apex court verdict.

4. In the case of Gratuity, how you have arrived at 1/24 of the annual basic salary is a surprise to me. It is for a year 15/26 * Last drawn Basic, and to determine per month, it can be divided by 12 again. As far as I understand, you have done it by 15/30 = 1/2, and then as you have considered the annual basic, it is 1/24. This is not right.

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

The following steps may have to be followed for designing a salary structure:

1. Ascertain the Organizational Structure.
2. Ensure that clear Designations are available for all staff, and each of them has a detailed Job Description.
3. Then bring all the Designations into different GRADES, which are called GRADATION.
4. Then develop SCALES OF PAY for each Grade.
5. Then fit the present Consolidated Salary into the respective Scale of pay, which is called FITMENT.
6. Issue office Orders for the new structure.

Regards

The undersigned has provided broad guidelines rather than precise calculations applicable to each employee in an organization. The indicative details are based on a back-of-the-envelope calculation, and while designing a perfect structure, various other factors must also be considered.

HRA Component

As mentioned, the HRA component is tax-exempt only if the employee resides in rented premises. For those not staying in rented premises or paying less rent than the excess amount, it is taxable.

Conveyance Allowance

The conveyance allowance of Rs. 1600/- is exempt for all employees and is not covered under the standard deduction of Rs. 50,000/-. These amounts are the same for all, irrespective of the salary bracket under which an employee falls.

Employer's Share and Admin Charges

The employee is not concerned with the 1% admin charges required to be paid by the employer. The employer's share is just 12% of basic pay and has only been calculated for the CTC part. To retain skilled and trained employees, an organization may be required to pay the PF contribution on the entire basic component of salary.

Gratuity Calculation

In the case of gratuity, it is 15 days' salary per completed year of service. Therefore, what I have mentioned as 1/24 of annual basic salary is correct. 1/12 of annual salary equates to monthly salary, and 1/2 of that equates to 15 days' salary.

Monthly Salary Calculation

The salary shown per month is for 28/29/30/31 days but always includes intervening weekly holidays. Therefore, the salary being paid is effectively for 30-4 = 26 days.

As the gratuity is payable at the time of retirement or when leaving the service, provided the employee has completed 5 years of continuous service, it is 15/26 of the basic component of the last pay drawn.

Regards, Jawaharlal Moondra