What is a salary breakup?
The division of an employee’s remuneration into several components, such as basic pay, allowances, administrative taxes and other deductions, is known as compensation breakdown. It is an essential process as it assists in calculating different salary segments such as gross and net salary and in compiling appropriate details in the salary slip.
What are the essential components of salary structure calculation?
The salary breakup refers to the numerous terms that comprise an employee’s salary. Indicators of salary breakdown include:
1. CTC
The cost of acquiring and retaining an employee in an organisation is referred to as the CTC. It refers to an organisation’s total monetary contribution to an employer for the entire fiscal year, both direct and indirect. Management’s CTC covers monthly contributions such as base salary, allowances such as HRA, conveyance, etc., as well as yearly elements such as gratuity and annual variable compensation.
You can use the following formula to calculate CTC:
CTC = Basic salary + Benefits + PF
2. Basic Salary
The basic salary is an employee’s fixed income and accounts for 35-50% of the entire salary package. It is a fixed sum determined before any tax reductions or additions owing to bonuses, overtime, or allowances and is fully taxable.
Additionally, the position of the employee, their background, and the company budget all play a significant role in determining the basic pay. The majority of the supplementary components, such as allowances, are based on basic pay. The base salary is not determined using a predetermined formula. The organisation is free to determine the total amount of basic compensation accordingly.
3. Gross Salary
It is the sum of an employee’s basic salary and any special allowances before taxes and other deductions.
You can use the following formula to calculate gross salary:
Gross Salary = Basic Salary + HRA + Other Allowances
4. Net Salary
The actual figure that the employee receives is termed as take-home salary, which is yet another name for net compensation. The take-home pay is calculated after deductions such as taxes, PF, and other expenses. The net pay is often less than the gross salary unless there are no reductions imposed under the government tax slab.
You can use the following formula to calculate net salary:
Net salary = Gross Salary – Professional Tax – Employee Provident Fund – Income Tax
Calculating net salary with an example
Here’s how to figure out an employee’s net salary.
For instance, their CTC is INR 8 lakhs, and they get an INR 50,000 bonus from the company each year.
Furthermore, their gross pay will be:
Gross Salary = CTC – yearly bonus
INR 8 lakh – INR. 50,000
Gross Salary = INR 7,50,000
Subsequently, subtract the 2,400 INR annual professional tax.
Following this, subtract the EPF payment, which equals 12% of the monthly salary cap of INR. 15,000, or INR. 1,800 per month or INR. 21,600 annually. Currently, the employee contributes INR. 21,600 to the EPF annually, and the employer’s contribution is INR 21,600
Considering the deducted are INR 3,000 for employee insurance and INR 33,946 for income tax, your total deductions will be:
Total Deductions= INR 2,400 + INR 21,600 + INR 21,600 + INR 3,000 + INR 33,946
Total Deductions = INR 82,546
Therefore, your net salary will be:
Take Home Salary = Gross Pay – Total Deductions
INR. 7,50,000 – INR 82,546
Net Salary = INR. 6,67,454
5. Allowances and benefits
Allowances are the compensation paid to employees to cover costs related to accomplishing service requirements, usually, in addition to the base pay. The amount of taxation varies depending on the type of allowance. The allowances offered, and the related limits can vary depending on the regulations of the organisation. The typical allowances offered to employees are as follows:
House Rent Allowance
House Rent Allowance (HRA) is an addition to an employee’s base salary to assist with housing costs. Tax benefits are provided when an employee contributes a specific amount toward housing while renting a home in the location where the firm is based, as HRA is not fully taxable. The lowest of the three is what the employees can claim:
- The aggregate value that was paid by the employer during the fiscal year as HRA.
- Actual rent paid in the year – 10% of the basic salary in the year.
- Depending on whether you’re residing in a metro area or a non-metro area, the monthly declaration can either be 50% or 40% of your basic annual salary.
Leave Travel Allowance
If an employee travels domestically while on leave, they can be offered to be compensated for their travel expenses. Tax relief is obtainable for leave travel expenses, however, it only covers the travel cost and not accommodations and can be claimed only twice in four years.
Conveyance allowances
As part of their salary, employees can be offered a conveyance allowance, sometimes known as a transportation benefit, which can assist them in covering the cost of travelling to and from work.
Medical allowance
The purpose of a medical allowance, as the name implies, is to pay employees for any medical expenses they may incur during their employment. It can be set by your company and is exempt from tax to an extent.
Variable bonus
This is a predetermined financial reward provided to workers who have been employed by the company for a set period, such as quarterly or annually.
Performance-based increments
Employees can be offered this benefit as an incentive for delivering exceptional work. The sum of compensation offered is proportional to the overall performance.
6. Employee Provident Fund (EPF or PF)
EPF or PF is a component of the company’s retirement benefit program and is typically 12% of the base pay. This portion is deducted from the employee’s basic salary monthly from their CTC and added to the PF account. However, the organization also needs to contribute the same amount to this fund, typically divided between EPF and EPS (Employee Pension Scheme). Following one month without employment, the employee is authorized to withdraw the entire amount.
7. Insurance
Life and health insurance are generally provided to employees by most organizations. The cost of life insurance is an annual fee paid by the employer to cover the employee’s health. A certain amount is deducted from the in-hand salary of the employees, even if it is incorporated in the CTC.
8. TDS
Tax deducted at source is the amount deducted before processing the income to the employee’s account, depending on the salary of the employee. For employees to understand the breakdown of tax deductions, you can provide them with Form 16.
Tax slabs
Annual Income Up to 2.5 lacs
New Tax Regime – Exempt
Old Tax Regime – Exempt
Annual Income 2.5 lacs – 5.0 lacs
New Tax Regime – 5%
Old Tax Regime – 5%
Annual Income 5.0 lacs 7.5 lacs
New Tax Regime 10%
Old Tax Regime 20%
Annual Income 7.5 lacs 10.0 lacs
New Tax Regime 15%
Old Tax Regime 20%
Annual Income 10.0 lacs – 12.5 lacs
New Tax Regime 20%
Old Tax Regime 30%
Annual Income 12.5 lacs – 15.0 lacs
New Tax Regime 25%
Old Tax Regime 30%
Annual Income Above 15.0 lacs
New Tax Regime 30%
Old Tax Regime 30%
9. Professional Tax
The monthly tax levied by the state government on all working individuals is known as a professional tax, which is often Rs 200. Though the exact amount to be deducted may differ across states, it can not exceed Rs 2,500 a year.
10. ESI
A company should register with ESIC if it has more than 10 employees overall earning below the salary cap of INR 21,000. According to the ESI Act of 1948, the employer’s contribution to this program is set at 3.25% of the salary, while the employee’s percentage contribution is set at 0.75% of pay.
11. Gratuity
As a token of appreciation for their contributions throughout their term on the job, employees are awarded a one-time gratuity when they leave. Only organizations with a minimum of 10 employees are subject to this law.
The gratuity Tax Act states that a company is required to pay an amount equal to 15 days of the employee’s most recent paycheck as gratuity for each year the employee has worked in the organization. However, the employee is eligible to receive a gratuity only after five years of full-time employment with a company.
Factors to consider when creating a salary structure
The following three factors must be taken into account when creating an ideal salary structure:
Location
The location of the company is an essential aspect of any pay structure. If your business is situated in a metropolitan area, the standard of living and transportation is going to be comparatively higher than say for example your competitor which is based in a rural area. Thus, it would be reasonable to structure the salary package according to this.
Tax-efficiency
An efficient salary structure should allow employees to make the most significant tax savings feasible. Divide the salary package in a way it benefits employees with fewer tax deductions.
Legal compliance
It is important to ensure that everyone who works in your company is offered an equal opportunity. Therefore, consider compliance standards, including minimum salary, PF requirements, and bonuses, when creating the salary structure.
Substantial pay
To attract and keep expertise in different sections of your organization, make sure you have a competitive salary system. There are numerous strategies to recruit talent, ranging from innovative ways of rewarding them, and investing in their personal development to securing their future.
A transparent breakup of salary provides a more perceptible career ladder and reassures employees that they are being paid adequately according to their skills and marketplace. By building a structured salary format with competitive perk plans and pay scales, employee consistency and equitable compensation practices by law are ensured.
