Confused About Basic Salary Calculation: Is It 50% of Gross or Company-Specific?

How is the basic salary calculated?

Is it 50% of the gross, or is it a specific amount, or does it depend on the company? Kindly let me know as I am confused. What is the minimum amount of basic salary?

Understanding Basic Salary Calculation

There is no legal sanctity to 50% or 60%, but whatever is paid as salary is considered basic salary only. It is by the unscrupulous employers and those HRs who wished to build a career that a formula was made suggesting that 50%/60% of the pay should be basic salary. Nowhere is it stated that basic salary is 50% or 60% of the total pay, but all the Acts say that salary means the total emoluments as per the contract of employment and nothing else. We made it so just on the presumption that statutory payments like PF, Bonus, gratuity, etc., are payable on basic pay, and putting a very nominal amount as basic pay would help to reduce our burden. However, various case laws say that all allowances which are paid universally to all employees should be part of basic wages. Then why should we struggle to break it into pieces?

Minimum Wages and Basic Salary

In respect of employees to whom minimum wages apply, certainly, the minimum wages notification has given an amount as basic wages. That should be followed. But establishments that do not pay dearness allowance should also calculate DA and add it to the basic wages so that the salary won't become legally incorrect. The notified minimum wages are the bare minimum wages, but you may not be able to find a worker at that rate. Then whatever is overpaid, that element can be put outside not forming part of basic wages. In respect of highly paid employees, you can build up a proportionate increase in the basic salary and allowances. This would be fair and legally unquestionable.

Salary Increments and Basic Salary

We should again understand that there should be a similar increase in basic salary whenever you give salary increments. We give salary increases due to two reasons, i.e., to compensate for the cost of living and to reward performance. The former will be reflected in dearness allowances and the latter in basic salary. In the absence of DA as a component of salary, you should give it in Basic salary itself. Companies that keep the basic salary unchanged will be in trouble if anyone puts a dispute.

If the gross salary is 1,50,000 per month, what will be the breakup of CTC per month for the same? Kindly let me know the breakup components and the amount for the CTC.

I have already said that there is no official breakup for salary. You can keep all the 1,50,000 as his basic salary or start with a base amount as per the Minimum Wages notification applicable to your establishment, as applicable to the category of the employee, as a base and build it up with other allowances depending upon the compensation policy of the organization. It is a process that involves various factors. You should make it clear what all are the perquisites, cashless benefits, performance-linked incentives, and other variable allowances which depend on certain conditions, like the generation of business, profitability of the organization, etc., included in this 1.5 lakhs and take it out first. It is not just a matter of formulae but compensation management will take the entire functions, the monetary valuations of various functions.

But you can take one thing as a base, and that is notified minimum wages. Whatever salary you fix should be over and above the notified wages. In respect of highly paid employees/managers also, the minimum wages will be available, and that can be a base for the fixation. Along with this, you should also consider the demand of the employee. Experienced employees will be more concerned about their salary and its bifurcation. That is to say, the employee concerned should accept the bifurcation that you give. Dispute will certainly arise if you show a lower basic salary because the statutory payments like gratuity at the time of discharge would normally be based on basic salary only even though it should be on total emoluments as per law. But if you are ready to calculate gratuity on the basis of the total salary, then there would be no issue for the employee. Obviously, since it is a part of CTC for many employers, you will get a higher CTC also.

Basic salary calculation

Basic salary calculation can vary based on company policies and labor laws in different regions. There isn't a fixed rule stating that basic salary must be a specific percentage of the gross salary. However, I can provide you with a general understanding of how basic salary is often calculated.

Percentage of Gross Salary

Some companies may use a certain percentage of the gross salary (total earnings before deductions) to determine the basic salary. This percentage can vary but is not necessarily fixed at 50%.

Industry Norms and Company Policies

Companies in different industries and regions may have different practices for calculating basic salary. They may take into account factors like job role, experience, and industry standards.

Legal Regulations

Labor laws and regulations in some regions might specify a minimum percentage of the gross salary that must be allocated as basic salary. For instance, some countries have laws that stipulate a certain proportion of the total salary as basic salary to ensure employees receive a reasonable fixed income.

Fixed Amount

In some cases, companies may set a specific fixed amount as the basic salary, regardless of the gross salary. This could be influenced by the job role, responsibilities, and other considerations.

Benefits and Allowances

Basic salary is often used as the foundation for calculating other benefits and allowances, such as overtime pay, bonuses, and retirement contributions. These calculations can also vary based on company policies and regulations.

As for the minimum amount of basic salary, it varies widely depending on factors such as the country, region, industry, and labor laws. Some countries have legally mandated minimum wages that employers must adhere to, which may include a specified portion allocated to basic salary.

To get accurate information about basic salary calculations and minimum amounts, it's best to refer to your country's labor laws, consult with your company's HR department, or seek legal advice if needed. Keep in mind that practices can differ, and there isn't a universal formula that applies to all situations.