What is salary revision?
Salary revision is the process of changing the entire payment system, including all major components of the salary. This is where it is different from the salary increment that includes all primary salary components. Salary revision is done to make a position market competitive. For example, a 20% salary revision implies a 20% hike in all components of the salary. Whereas, a 20% salary increment relates to a 20% hike in one component.
Salary revision is a broader term. There are five key things affecting it.
Business Impact
An employee’s extraordinary efforts can lead to a positive business impact. Their contribution like getting new contracts, or achieving the set targets of revenues shows how beneficial they are to the company. Such efforts compel the company to salary revision.
Promotion
Whenever an eligible employee is promoted, salary revision is also done according to the pay band.
Additional responsibilities
If an employee gets additional responsibilities, some companies may consider salary revision.
Serving long-term
Organisations sometimes consider revising the salary of an employee who is serving the company for the long term. This is done to solve the issues of pay parity with the market standard or inflation.
Extra qualifications
When an employee gains extra qualifications or skills, it leads to better results for the company. In such cases, organisations encourage employees for career advancement with salary revision.
Why do organisations make salary revisions?
Salary revisions is crucial to match the job market standards and better workplace satisfaction. Every employee wants recognition for their work and better pay for their performance. Employers should consider revising the salary when needed to show value to their employees.
Reasons for salary revisions
- When the salary structure is very old and does not match the job market’s competitive standards.
- On the successful completion of a probation period, a previously agreed new pay structure is implemented.
- To afford the cost of living and inflation, the company sometimes considers revising salary.
- When an employee is promoted to a new role, salary revision is done according to the pay band.
Do’s during salary revision discussion
There are certain things an employer should keep in mind while holding a discussion for salary revision.
- Always do proper research on the industry salary rates.
- Hold discussions on how evaluations and salary increments are done in the very beginning.
- Always provide a detailed breakup of the revised salary.
- Be open to the opinions and suggestions of the employees.
- Consider the non-salary incentives, Work from home, and remote opportunities.
What is salary arrear?
After an annual appraisal, the question of what is a salary arrear always arises in mind. Most of the time, salary arrears are confusing for employees. Arrears are the wage increases that were carried over from prior months and are due in the current month. If a payment that was due in the current month is made later, it is seen as having been made in arrears.
For example, Ramesh’s salary is ₹10,000 in March, and he gets a hike of ₹5,000 in April. The increased salary is reflected in June for Ramesh. Salaries get revised in April but received in June. As a result, in addition to the amended wage, the June salary slip will also include salary arrears for April and May. For these two months, the total arrear will be ₹10,000.
Practical scenarios of salary arrear payments
There are many scenarios in which salary arrear payments can be done.
Missed payment- Sometimes HR department makes mistakes while calculating the salary. It may cause you to miss some payments. This type of payment is mostly done in arrears.
Attendance mistakes– If due to some reason the attendance is not marked properly or not approved by the manager in time, the salary gets deducted. In such case, that amount is paid as arrears in the next month.
Bonus not credited– Every year there are some bonuses like performance and festival bonuses are given in the salary. If the amount is not approved by the manager on time, it is adjusted as arrears in the next month.
Reimbursements were not claimed on time– Some employees are entitled to travel, food, stay and fuel reimbursement for the expenses related to the office. If the bills were not submitted on time, their payment is made in arrears.
Revising the salary- The pay commission can suggest revising the salary in the public sector and government organisations from an earlier date. In such cases, the increased salary for the previous months is paid as arrears in the next month.
Calculating salary arrears
Paying staff in arrears has many benefits. It allows for better cash flow management and more equitable, equal, and precise payment. To calculate salary arrear payment employers should do these things:
- Start calculating the usual monthly salary of the staff.
- Calculate the amount starting at the end of the month before the effective arrears date.
- Subtract the amount you have already paid up to the day the arrears become due.
- The rest amount is the salary arrears portion.
- Include all bonuses, overtime, or incentives.
Income tax on salary arrears
Income tax is calculated on the entire income received during a fiscal year. If the taxpayer’s total income includes any past dues paid in the current year, they are worried about more tax getting deducted on such arrears.
Employees are entitled to some tax reduction under section 89 (1) if they received any portion of the salary in advance or in arrears or the family pension in arrears. Due to the fact that the delay in payment is not their fault, income tax laws provide some relief in the cases of arrears.
An employee does not need to pay more taxes if there was a delay in the payment. Also, if the employee was in a lower tax bracket for the year, money was received.
What is a salary revision letter?
A salary revision letter is a letter sent to the employee for notifying them about salary revision. Salary revision letters may include increments and other benefits and bonuses from the company. This letter contains the rules and policies which the company follows. It gives the employee a summary of the position and the relationship between employment and the company.
A salary revision letter also notifies about some critical clauses. Employees should read them carefully as they need to be compliant with them. It is a critical document that the employee signs during their entry into a company. It also provides details of all the salary components that have changed. This letter is very important for the employee when they change jobs, as this acts as proof of employment.
Payment of Bonus Act, 1965
The Government of India requires businesses to give their employees annual incentives as per the legislation. The payment of Bonus Act, of 1965 was formed with the objective of rewarding employees for their good work. This act is for the payment of bonuses to the employees. It is a method to share the profits earned by the company with the employees. This reward is linked to their productivity.
- This act is applicable in the entire India.
- It is applicable to any organisation with 20 or more employees or any factory with 10 or more employees.
- Employees receiving no more than ₹ 21,000 per month (basic plus DA, minus any allowances) are eligible. According to the 2015 amendment, the bonus is paid on the higher of a salary over ₹ 7000 or the government-set minimum wage.
- Bonus will be paid at the minimum rate of 8.33% and a maximum at the rate of 20%.
Salary revision in simple words is revising your salary. This can be done anytime irrespective of the time of the year. Salary adjustments are made individually and do not affect the entire organisation. Salary arrears are the hiked salaries, that are carried forward from the previous months to be paid in the current month. There are various reasons for salary revision. It is done primarily to meet the standards of the employment market. Salary arrear payments have many scenarios, salary revision being one of them. As per law, arrears are also taxable but some relief is given under section 89(1).
