What Is Salary Structure And How To Make One (With Samples)
By Indeed Editorial Team
Updated 19 September 2022 | Published 4 October 2021
Updated 19 September 2022
Published 4 October 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
When paying salaries to employees, companies generally use a salary structure to ensure fairness and compliance in compensation. It ensure pay parity between employees working in the same role and position. By understanding how employers use such a structure to organise payments, you can find the minimum and maximum earning potential for a specific job role and make better career decisions. In this article, we describe what a salary structure is, explain how to calculate it, look at its different components and demonstrate how to make one.
What Is A Salary Structure?
It is a payment structure that comprises different components of the total compensation package that a company offers to an employee. The company uses a salary structure to determine how much salary it is required to pay the employee. A salary structure may have pay grades with minimum, middle and maximum salary ranges. An employee's educational qualifications, skills, work experience and job responsibilities are some of the factors that may determine their pay grade. By understanding the salary structure for a role, employees can find out how much they can potentially earn and negotiate their salaries better.
Related: Salary Negotiation Tips and Examples
What Are The Components Of A Salary Structure?
The components of a salary structure help companies to make the right payment to their employees. They may vary for different employers, but some basic ones are as follows:
Cost to Company (CTC): It is the total amount that the company directly or indirectly spends on an employee as their salary package. It consists of the gross salary and the deductions for provident fund and gratuity.
Basic salary: This is a fixed, taxable amount that is 40-45% of the CTC and forms the base income of the employee before any allowances or deductions. The designation and industry primarily determine the basic salary.
Gross salary: It is the salary amount before taxes and any deductions. It consists of the basic salary, bonus and other allowances.
Net salary: This is also known as the take-home salary and is what an employee receives every month. The amount includes basic salary, allowances and does not include the deductions for the employee provident fund and various taxes.
Allowance: It is a partially or fully taxable amount that an employee receives in addition to the net salary. Depending on the company's policy, employees may receive a dearness allowance (DA), house rent allowance (HRA), leave travel allowance (LTA), children education allowance, medical allowance, phone reimbursement, special allowance or allowances for car maintenance, driver salary and books and periodicals.
Bonus: This is the fixed or variable amount that an employee may receive in recognition of their excellent work performance over and above their salary. Different companies may offer varying bonus amounts at different intervals.
Employee Provident Fund (EPF): This applies to companies with more than 20 employees and to employees whose basic salary, DA and special allowance are less than ₹15,000 a month. Employers and employees each are required to contribute 12% of the basic salary, DA and special allowance directly into the employee's EPF account every month.
Employees' State Insurance Corporation (ESIC): It is mandatory for employers with 10 or more employees who receive than ₹21,000 in gross salary every month. Employers are required to contribute 3.25%, and employees require contributing 0.75% of the gross salary for the ESIC.
Labour welfare fund: Employers and salaried employees are required to make contributions towards labour welfare. The contribution amount can vary from state to state.
Professional tax: The employer deducts a professional tax at the prescribed rate from the employee's salary and pays it to the state government. The annual professional tax amount cannot exceed ₹2,500.
Gratuity: Employers with ten or more employees pay a lump sum, known as gratuity, to employees retiring after working for five or more years with the company. The gratuity amount is 4.81% of the employee's basic salary.
What Are The Types Of Salary Structures?
The two basic types of salary structures are:
Top-down salary structure: In this type, you add together the assigned amounts of the different salary components and calculate the gross salary. For example, you can add the basic salary and the various allowances to get the gross salary.
Bottom-up salary structure: In this type, you first calculate the gross salary and then divide each salary component from that. So, if your gross salary is ₹P and the basic salary is 50% of the gross salary, and the allowances are 25% of the gross salary, your basic salary is P x 50%, and your allowances are P x 25%.
What Are The Methods For Defining Salary Components?
The methods for defining salary components may vary as per the policies of different companies. The most commonly-used methods are:
Lump sum method: The company assigns a specific amount based on the employee's job position and pays it to the employee in its entirety.
Condition-based method: The company determines the payment amount as per the employee's educational qualifications, skills, experience and location.
Variable method: The company reviews the employee's work contributions, performance and attendance and bases the salary amount on these factors.
Related: What Is Compensation?
How Is A Salary Structure Calculated?
You can calculate the salary structure in the following manner:
1. Find out the total earning
Your earnings can include the basic salary and the various allowances you get from your employer. The first step to do is to add all of these different components together. The amount you get is your total earnings and is also usually mentioned on the employment offer letter.
2. Calculate the total deduction
Deductions may include the tax deducted at source (TDS), professional tax and contributions made towards the employer provident fund, the employees' state insurance corporation and gratuity. Adding these deductions gives you the total amount that would be subtracted from your salary. This can help you calculate the total deductions you would be paying each month.
3. Add the gross salary
The gross salary consists of your total earnings. It is the amount you have earned in an entire year before paying taxes and making other deductions. If you have earned overtime pay, commissions or bonuses in that year, you can add those to the gross salary.
4. Determine the net salary
The net salary is the amount you get after making deductions for taxes and other withholdings. You can get the net salary by subtracting the total deduction amount from the gross salary. Generally, the net salary is lower than the gross salary, but the two may be equal in cases where the employee is exempt from taxes or eligible for other deductions.
Tips For Making A Salary Structure
If you are an employer, here are some tips to keep in mind when developing a salary structure:
Maximise employee savings
A tax-efficient salary structure consists of different salary components. These can allow employees to get tax deductions and reduce tax liabilities. Employees usually benefit when the basic salary and dearness allowance are not too high, a house rent allowance that is not more than 40-50% of the basic salary, a leave travel allowance that pays travel fare expenses in India and a children's education allowance that does not exceed ₹2,400 a year.
Reduce the employer's tax liability
To reduce the employer's tax liability, it is essential not to set the basic salary and dearness allowance too high. Ideally, they are required not to be more than 40-50% of CTC and 5% of CTC, respectively. If these components are too high, you may be required to pay more to contribute to the employee provident fund, employees' state insurance corporation and the gratuity.
Ensure that it is tax compliant
The salary structure is required to comply with government regulations regarding minimum wages and contributing towards the employee provident fund, employees' state insurance corporation and the gratuity. As an employer, you be required to pay 12% of the total amount towards the EPF, 4.75% of the gross salary towards ESIC and 4.81% towards gratuity.
Related: Salary Negotiation Tips and Examples
Salary Structure Sample
Looking at the components of a salary structure with an example can help you comprehend the concept with more clarity. For an employee with a CTC of ₹15,00,000 per year, a typical salary structure may be as follows:
CTC = gross salary + EPF + health insurance = ₹12,11,200 + ₹1,11,451.2 + ₹177348.8 = ₹15,00,000 per year
Basic = 40% of CTC amount = ₹5,99,200 per year
DA = 55% of basis salary = ₹3,29,560 per year
HRA = 50% of basic salary in metro city = ₹2,99,600 per year
Health insurance = ₹177348.8 per year
Total allowances = HRA + medical (₹15,000 per year) + transport allowance (₹19,200 per year) + LTA (₹1,28,400 per year)+ special allowance (₹1,49,800 per year) = ₹2,99,600 + ₹15,000 + ₹19,200 + ₹1,28,400 + ₹1,49,800 = ₹6,12,000 per year
Gross salary = basic salary + allowances = ₹5,99,200 + ₹6,12,000 = ₹12,11,200
TDS = 10% of gross salary = ₹1,21,120 per year
EPF = 12% of (basic salary + DA) = ₹1,11,451.2 per year
Total deductions = professional tax (₹200 per month for salaries above ₹20,000 = ₹2,400 per year ) + TDS (10%) + EPF employee contribution (12%) = ₹2,400 + ₹1,21,120 + ₹1,11,451.2 = ₹2,34,971.2
Net salary = basic salary + allowances – deductions = ₹5,99,200 + ₹6,12,000 - ₹2,34,971.2 = ₹9,76,228.8
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