Designing a New Salary Structure
I have the following query: If we want to design a new salary structure, what things need to be taken into consideration? In short, how do we design a new salary structure? What steps are involved in it, and how do we implement that in the middle of a financial year?
Regards,
Siddharth
From India, Sangli
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4I have the following query: If we want to design a new salary structure, what things need to be taken into consideration? In short, how do we design a new salary structure? What steps are involved in it, and how do we implement that in the middle of a financial year?
Regards,
Siddharth
From India, Sangli
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Major Salary Components
Money received under an employer-employee relationship is called salary. If one is a freelancer or hired by an organization on a contract basis, their income would not be treated as salary income. In such cases, your income would be treated as income from business and profession.
The salary consists of the following parts:
Basic Salary: As the name suggests, this forms the very basis of salary. This is the core of salary, and many other components may be calculated based on this amount. It usually depends on one's grade within the company's salary structure. It is a fixed part of one's compensation structure, and the complete amount becomes a part of your in-hand salary.
Allowances: Apart from the basic salary, there are some allowances your CTC will contain. Examples include HRA, conveyance allowance, and leave travel allowance. Some of these allowances are tax-free up to a certain limit, and some of them depend on your actual spending. It is the amount received by an individual paid by his/her employer in addition to the basic salary to meet some service requirements such as Dearness Allowance (DA), House Rent Allowance (HRA), Leave Travel Assistance (LTA), Lunch Allowance, Conveyance Allowance, Children's Education Allowance, City Compensatory Allowance, etc. Allowance can be fully taxable, partly taxable, or non-taxable.
Claims or Perquisites: A part of your salary may also be made up of your billed claims. These include components like mobile allowance, medical allowance, etc. There is a maximum limit set to these components, and they are paid when you submit your bills. These are usually tax-free. It is any benefit or amenity granted or provided free of cost or at a concessional rate, such as a rent-free unfurnished house, rent-free furnished house, motor car facility, reimbursement of gas, electricity & water, club facility, domestic servant facility, interest subsidy on loan, reimbursement of medical bills, reimbursement of hospital bills, reimbursement of telephone bills, benefits derived by employee stock options, and so on.
How are Perquisites Taxed? Since these are non-cash components, they cannot be taxed directly. So, the income tax laws attach a certain value to each of these components and charge a tax on them. The calculation of this value varies from category to category. Nevertheless, the thumb rule across all categories is that only those benefits that you use for personal purposes will be considered as perquisites.
Deductions: A major part of your CTC comprises compulsory deductibles. These include deductions for provident fund, medical insurance, etc. They form a part of your compensation structure, but you do not get them as part of your in-hand salary. As such, although it increases your CTC, it does not increment your net salary. Compulsory deductions include Provident Fund, Income Tax, and Professional Tax (where applicable). Optional deductions include recovery for advance or loan if taken, voluntary contribution to P.F, etc.
Provident Fund Contribution: Provident fund contribution has two sides – the employer's contribution and the employee's contribution. This is usually 12 percent of the basic salary. However, this contribution is not paid out. It is directly deposited in the Provident Fund (PF) account and paid to the employee when he retires or resigns. There is also the employee's contribution to PF. This amount is deducted from his monthly salary and deposited in his PF account. For details on provident fund, you can read Provident Fund (PF) and Voluntary Provident Fund (VPF).
Performance Linked Pay: Linking a part of the salary to productivity and performance has become a trend today. You get the complete amount only on 100% achievement of the target, but it forms a part of your CTC, fattening it up.
Different Types of Salary:
Gross Salary: This is the amount of salary paid after adding all benefits and allowances and before deducting any tax.
Net Salary: This is what is left of your salary after deductions have been made.
Take Home Salary: This is usually the Net Salary unless there are some personal deductions like loan or bond repayments.
Cost to Company: Companies use the term "Cost to Company" to calculate the total cost to employ, i.e., all the costs associated with an employment contract. A major part of CTC comprises compulsory deductibles. These include deductions for provident fund, medical insurance, etc. They form a part of your compensation structure, but you do not get them as a part of in-hand salary. As such, although it increases your CTC, it does not increment your net salary.
Taxes: Taxes are an unavoidable evil, and they eat up a large chunk of your salary. Taxes are obviously never mentioned in your offer letter. So, ensure that you calculate your tax liabilities with the new income in accordance with tax policies to figure out the amount you will receive in your pay cheque.
The salary structure varies from company to company based on their policies. Some of the common pay heads used are:
1) Basic – 35% – 50% of Gross
2) HRA – 40% of Basic for Non-metro & 50% of Basic for Metro (Delhi, Mumbai, Chennai, or Kolkata)
3) Con – Max Rs. 800/ P M which is Max of Rs. 9600 P A
4) Medical Reim – Max Rs. 1250 / PM which can be max of Rs 15000 PA
5) Spl Allow – Balance of Gross will be provided as Spl Allow
Statutory:
1) PF
Emp Contribution – 12% on Basic (can be subjective to 780, which is 12% of the min basic salary i.e., 6500)
Emp'r Contribution - (EPS – 8.33% (subject to a ceiling of Rs. 541)
PF – Rest of the amount out of 12% (can be subjective to 780, which is 12% of the min basic salary i.e., 6500)
PF administration charges – 1.1%
EDLI – 0.5% (subject to a ceiling salary of Rs. 6500)
EDLI administration charges 0.01%
2) ESI – Applicable to employees whose Gross Salary is less than or equal to Rs.10000
Emp Contribution – 1.75% on Gross
Emp'r Contribution – 4.75% on Gross
PT – It varies state to state
Gratuity = Basic/26*15*(no. of years- It is payable to the employee who completes 5 years of service in the organization. It can be shown as a part of CTC.)
OT Calculation = basic+da/26/8*no.of hrs * 2
If employees come under a high salary, then you can again split up the amount in Spl Allow as:
1) Food coupons
2) Car Hire
3) Petrol and Maintenance for Car
4) LTA
FBT is applicable apart from LTA.
From India, Mumbai
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Money received under an employer-employee relationship is called salary. If one is a freelancer or hired by an organization on a contract basis, their income would not be treated as salary income. In such cases, your income would be treated as income from business and profession.
The salary consists of the following parts:
Basic Salary: As the name suggests, this forms the very basis of salary. This is the core of salary, and many other components may be calculated based on this amount. It usually depends on one's grade within the company's salary structure. It is a fixed part of one's compensation structure, and the complete amount becomes a part of your in-hand salary.
Allowances: Apart from the basic salary, there are some allowances your CTC will contain. Examples include HRA, conveyance allowance, and leave travel allowance. Some of these allowances are tax-free up to a certain limit, and some of them depend on your actual spending. It is the amount received by an individual paid by his/her employer in addition to the basic salary to meet some service requirements such as Dearness Allowance (DA), House Rent Allowance (HRA), Leave Travel Assistance (LTA), Lunch Allowance, Conveyance Allowance, Children's Education Allowance, City Compensatory Allowance, etc. Allowance can be fully taxable, partly taxable, or non-taxable.
Claims or Perquisites: A part of your salary may also be made up of your billed claims. These include components like mobile allowance, medical allowance, etc. There is a maximum limit set to these components, and they are paid when you submit your bills. These are usually tax-free. It is any benefit or amenity granted or provided free of cost or at a concessional rate, such as a rent-free unfurnished house, rent-free furnished house, motor car facility, reimbursement of gas, electricity & water, club facility, domestic servant facility, interest subsidy on loan, reimbursement of medical bills, reimbursement of hospital bills, reimbursement of telephone bills, benefits derived by employee stock options, and so on.
How are Perquisites Taxed? Since these are non-cash components, they cannot be taxed directly. So, the income tax laws attach a certain value to each of these components and charge a tax on them. The calculation of this value varies from category to category. Nevertheless, the thumb rule across all categories is that only those benefits that you use for personal purposes will be considered as perquisites.
Deductions: A major part of your CTC comprises compulsory deductibles. These include deductions for provident fund, medical insurance, etc. They form a part of your compensation structure, but you do not get them as part of your in-hand salary. As such, although it increases your CTC, it does not increment your net salary. Compulsory deductions include Provident Fund, Income Tax, and Professional Tax (where applicable). Optional deductions include recovery for advance or loan if taken, voluntary contribution to P.F, etc.
Provident Fund Contribution: Provident fund contribution has two sides – the employer's contribution and the employee's contribution. This is usually 12 percent of the basic salary. However, this contribution is not paid out. It is directly deposited in the Provident Fund (PF) account and paid to the employee when he retires or resigns. There is also the employee's contribution to PF. This amount is deducted from his monthly salary and deposited in his PF account. For details on provident fund, you can read Provident Fund (PF) and Voluntary Provident Fund (VPF).
Performance Linked Pay: Linking a part of the salary to productivity and performance has become a trend today. You get the complete amount only on 100% achievement of the target, but it forms a part of your CTC, fattening it up.
Different Types of Salary:
Gross Salary: This is the amount of salary paid after adding all benefits and allowances and before deducting any tax.
Net Salary: This is what is left of your salary after deductions have been made.
Take Home Salary: This is usually the Net Salary unless there are some personal deductions like loan or bond repayments.
Cost to Company: Companies use the term "Cost to Company" to calculate the total cost to employ, i.e., all the costs associated with an employment contract. A major part of CTC comprises compulsory deductibles. These include deductions for provident fund, medical insurance, etc. They form a part of your compensation structure, but you do not get them as a part of in-hand salary. As such, although it increases your CTC, it does not increment your net salary.
Taxes: Taxes are an unavoidable evil, and they eat up a large chunk of your salary. Taxes are obviously never mentioned in your offer letter. So, ensure that you calculate your tax liabilities with the new income in accordance with tax policies to figure out the amount you will receive in your pay cheque.
The salary structure varies from company to company based on their policies. Some of the common pay heads used are:
1) Basic – 35% – 50% of Gross
2) HRA – 40% of Basic for Non-metro & 50% of Basic for Metro (Delhi, Mumbai, Chennai, or Kolkata)
3) Con – Max Rs. 800/ P M which is Max of Rs. 9600 P A
4) Medical Reim – Max Rs. 1250 / PM which can be max of Rs 15000 PA
5) Spl Allow – Balance of Gross will be provided as Spl Allow
Statutory:
1) PF
Emp Contribution – 12% on Basic (can be subjective to 780, which is 12% of the min basic salary i.e., 6500)
Emp'r Contribution - (EPS – 8.33% (subject to a ceiling of Rs. 541)
PF – Rest of the amount out of 12% (can be subjective to 780, which is 12% of the min basic salary i.e., 6500)
PF administration charges – 1.1%
EDLI – 0.5% (subject to a ceiling salary of Rs. 6500)
EDLI administration charges 0.01%
2) ESI – Applicable to employees whose Gross Salary is less than or equal to Rs.10000
Emp Contribution – 1.75% on Gross
Emp'r Contribution – 4.75% on Gross
PT – It varies state to state
Gratuity = Basic/26*15*(no. of years- It is payable to the employee who completes 5 years of service in the organization. It can be shown as a part of CTC.)
OT Calculation = basic+da/26/8*no.of hrs * 2
If employees come under a high salary, then you can again split up the amount in Spl Allow as:
1) Food coupons
2) Car Hire
3) Petrol and Maintenance for Car
4) LTA
FBT is applicable apart from LTA.
From India, Mumbai
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The salary structure is evolved from an organized organization and not from a 'disorganized' organization—where a structured hierarchy is NOT present. Once the levels of hierarchy are set, the salary structure can be developed.
For example, there could be three levels in the management cadre like M-3, M-2, and M-1, which have Junior Managers, Middle Managers, and Senior Managers respectively. Based on the existing salary and other parameters like age, qualification, service within and outside the organization, etc., fix the Basic Pay. This should be uniform for all in the same cadre. The DA, HRA, Transport Allowance, Special Allowance, etc., may vary for each individual based on the work, special qualifications, etc., to make up the CTC.
Regards,
Rajusiachen
From India, Coimbatore
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For example, there could be three levels in the management cadre like M-3, M-2, and M-1, which have Junior Managers, Middle Managers, and Senior Managers respectively. Based on the existing salary and other parameters like age, qualification, service within and outside the organization, etc., fix the Basic Pay. This should be uniform for all in the same cadre. The DA, HRA, Transport Allowance, Special Allowance, etc., may vary for each individual based on the work, special qualifications, etc., to make up the CTC.
Regards,
Rajusiachen
From India, Coimbatore
Acknowledge(0)Amend(0)
Dear All, it would be more helpful if you could provide 2-3 patterns or examples of working with figures in Excel, along with explanations. Including some figures or numbers, showing the full CTC (Salary Structure) with percentage and tax explanations would be greatly appreciated.
Regards,
Bhakti
From India, Mumbai
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Regards,
Bhakti
From India, Mumbai
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