How Should We Structure Salaries to Optimize PF, IT, and FBT for Employees?

Dear sirs,

With pleasure, I introduce myself as a new member of CITEHR. We have a salary range of $30,000 - $3,000 for our employees. We want to structure it by considering:
1) PF
2) IT
3) FBT

One of my friends suggested the following:
1) Reduce Basic+DA to a maximum of 25%-45% of the total salary so that CTC on PF will be less.
2) HRA should be a maximum of 40% of the total salary.
3) The remaining balance can be split into CCA and Special Allowance.

Could you kindly advise if the above calculation is in order? Also, please advise on the maximum allowable limit of CCA and Special Allowance per year per employee. Is there any FBT applicable against CCA and Special Allowance?

Kindly advise.

With Regards,
Ramesh kg

Your answers are useful to me. But I want some tables about those allowances. Somebody told me that HRA is maximum 4000 non-taxable, and CCA is a maximum of 800. Are they correct? Can you provide me with a list of values like DA and Basic as well? Thank you in advance.

Hi Ramesh,

When dividing the gross salary, you should keep in mind the minimum wage acts of each state. If you don't know, you can obtain this information through a Google search.

Based on my understanding, you can consider the basic salary as 50% of the gross salary for a safer approach (regardless of the state).

I mention this because in most Employee Welfare offices in India, they primarily look at the Basic+DA or Basic when calculating benefits such as PF, ESI, Gratuity, Leave Encashment, Bonus, etc.

Thus, it is advisable to keep at least 50% of the gross salary as basic. If the Labour Laws and Minimum Wage Act in your state specify a lower percentage, you can follow those guidelines.

The HRA should ideally be capped at 40% of the basic salary (permitted by income tax regulations). You have the flexibility to set it lower or higher, but for IT calculations, it's recommended to stick to 40% for easy computation.

The remaining amount can be allocated towards Transportation, Special Allowance, etc.

Example:

Gross Salary Rs. 10,000.00 Basic Salary Rs. 5,000.00 (50% of Basic Salary) HRA Rs. 2,000.00 (40% of Basic Salary) Transportation Rs. 800.00 (Standard as per Income Tax Act) Special Allowance Rs. 2,200.00

I hope this information proves helpful.

Thanks & regards, Ravi