Payroll calculation can be a complicated process if it isn’t streamlined. While the payroll processes for calculating salary structure in India vary from one business to another, there are specific components that remain constant, such as standard deductions and taxes.
Moreover, various laws specific to the location such as the Minimum Wages Act, Labour Welfare Act, and Payment of Salary and Wages Act needed to be implemented along with other Indian salary structure components like Basic, HRA, and DA.
A Revised Code on Wages, 2019 has been proposed with the purpose of improvising the existing wage and remuneration paid by government and private companies to their employees. The change is most likely to come into effect from 1st July 2022.
This article aims to inform you about the revised salary structure for FY 2022-23 as per the new wage code to be implemented.
Salary Structure in India: All You Need to Know 2022-23
As a layman, often employees struggle to understand the salary structure format implemented by their organisation. This leads to miscommunication and often leaves employees irate and disgruntled about the deductions.
However, if the salary structure becomes clear, employees would not only be able to clear the confusion on their own, but also be able to save unnecessary hassles of exchanging emails with the payroll department.
Given below is a detailed breakdown of the standard salary structure format:
|Fixed Salary Component||CTC (Up to 5 Lakhs)||CTC (From 5 to 10 Lakhs)||CTC (Above 10 Lakhs)||PF||PT||ESIC||LWF|
|Basic (Revised)||Taxable (50% of CTC) or set minimum wage||Taxable (50% of CTC)||Taxable (50% of CTC)||Yes||Yes||Yes||Yes|
|HRA||Taxable (50% of Basic)||Taxable (50% of Basic)||Taxable (50% of Basic)||No||Yes||Yes||Yes|
|Education Allowance||200 Fixed||200 Fixed||200 Fixed||Yes||Yes||Yes||Yes|
|LTA||15% of Taxable||15% of Taxable||15% of Taxable||Yes||Yes||Yes||Yes|
|Phone & Internet Reimbursements||1000 (Fixed)||2000 (Fixed)||3000 (Fixed)||No||No. But calculated for the unclaimed figure taxable.||No||No|
|Vehicle Reimbursement (Applicable to those who own car)||Not Applicable||Not Applicable||Fuel – 10000 Fixed||No||No. But calculated for the unclaimed figure which is taxable.||No||No|
|Driver Reimbursement||Driver – 8000 Fixed|
|Meal Coupon||Not Applicable||2000 Fixed||2000 Fixed||NA||Not Applicable||NA||Not Applicable|
|Books & Periodicals||Not Applicable||1000 Fixed||2000 Fixed||No||No. But calculated for the unclaimed figure taxable||No||No|
|PF (Employer)||₹1800 per month||₹1800 p.m.||₹1800 p.m.||NA||Not Applicable||NA||Not Applicable|
|ESIC (Employer)||4.75% of Total Salary||Not Applicable||Not Applicable||NA||Not Applicable||NA||Not Applicable|
How to Calculate Salary Structure for Employees in India?
If you’re looking to create an accurate salary structure, three things should be kept in mind which are:
- Reduce the liability of the employer
- Should be compliant with norms like minimum wages, PF laws
- The total salary amount should be divided in a way that it is tax efficient
The salary structure in India of every employee in a company is unique. There are several factors based on which the salary structure of an employee is defined. Some of these factors are:
- Skill set that the employee possesses
- Location of the job and the cost of living in a town
- Prevailing market rate
- Industry/sector that they belong to
- Years of experience in the industry
- Talent supply and demand in a given area
Keeping the above mentioned factors into mind, the general formula used for calculating pay structure in India is as follows:
Pay Structure = Basic Pay + HRA + Overtime Pay + Dearness Allowance (DA)
Here is, however, a detailed breakdown of the salary components for a better understanding:
- CTC = Gross Salary + Health Insurance + EPF
- Basic = 40% of CTC amount
- DA = 55% of basic salary
- HRA = 50% of basic salary in metro city
- Health insurance
- Total Allowances = HRA + medical + transport allowance + LTA + special allowance
- Gross Salary = Basic salary + allowances
- TDS = 10% of gross salary
- EPF = 12% of (basic salary + DA)
- Total deductions = Professional tax (₹200 per month for salaries above ₹20,000 = ₹2,400 per year) + TDS (10%) + EPF employee contribution (12%)
- Net salary = Basic salary + allowances – deductions
Salary Deductions for FY 2020-21
Deductions from employee salary is where most of the confusion arises. But if you know about all the standard salary deductions in India, this can easily be avoided. Have a look at the salary deduction format given below, to know more:
|Deductions||How is it calculated?||Whom does it apply to?|
|Provident Fund (PF)||Both employee and employer contribute 12% of Basic Salary + DA + Special|
(However, employers can fix their contribution as ₹1,800/month, for employees drawing more than ₹15,000)
|Organizations that consist of 20 employees or more. It is compulsory for employees whose Basic, DA and Special allowances amount to less than ₹15,000 per month.|
|Employees’ State Insurance Corporation (ESIC)||Employer Contribution of 4.75% of Gross Salary; Employee Contribution of 1.75% of Gross Salary||Organizations that consist of 20 employees or more, with their respective gross salary of below ₹21,000 per month, then it’s applicable to all employees.|
|Professional Tax||Varies from one state to another||All employees|
|Labour Welfare Fund||Varies from one state to another||All employees, based on designation|
Salary Breakup Structure 2021
Salary format for employees have various components that need to be kept in mind while processing payroll. Some of these remain constant while others may vary depending upon factors such as days worked, salary bracket and regions. Here are all the main components that are implemented while calculating salary:
Cost to Company (CTC) is the net amount that an organisation invests on an employee. It comprises of the net payroll package of the particular employee.
Cost to Company is the combination of monthly components like basic salary, allowances, reimbursements, etc. along with annual components like annual variable salary, gratuity, annual bonus, etc.
An employee’s CTC structure in India is never the same as his/her take-home salary. There are several of variable components in CTC that aren’t included in their monthly take-home package.
CTC = Gross Salary +PF + Gratuity + Other Indirect Benefits
Here are the other components of salary used while calculating payroll.
Basic salary of an employee is their base income. It is a fixed component of an employee’s payroll package. The employee’s basic salary will vary depending on his/her industry and particular designation in the organization.
Gross salary refers to the sum of an employee’s basic salary and various allowances, calculated before tax and other deductions. It includes bonuses, over-time, and other allowances.
Gross Salary = Basic Salary + HRA + Other Allowances
Gross Salary = CTC – Gratuity – EPF (Employer Contribution)- ESIC (Employer Contribution) – Other Indirect Benefits
Take-home salary is calculated by deducting tax deductions at source (TDS) and other such deductions in accordance to the company policies.
Net Salary = Gross Salary – Professional Tax – Income Tax – Employer’s Provident Fund
Allowance is the sum received by employees for meeting job requirements. Allowances are additional financial benefits included with the basic salary and differ from one company to another. A few standard types of allowances covered under the latest salary components is India are:
- House Rent Allowance (HRA): This is provided to employees for expenses if they live in a rented establishment.
- Leave Travel Allowance: LTA is the sum paid by the organisation to compensate for domestic travel expenses of employees. It generally doesn’t include expenses on food, accommodation, etc. incurred while travelling.
- Conveyance/Commutation Allowance: This is given to employees to compensate for their regular commutation expenses to the workplace.
- Dearness Allowance: DA is paid to employees to subdue the effects of economic inflation. It’s applicable to public sector employees, government employees, and pensioners.
- Other allowances such as medical allowance, special allowance, and other incentives.
Sometimes, employees are provided various types of reimbursements such as phone bills, medical treatments, office stationery and newspaper bills, etc. The amount is not included in the pay, but compensated after bills, of specific acceptable instances are provided by an employee.
Employer Provident Fund/EPF or Provident Fund
Provident fund is an accumulated investment which is contributed by both the employee and the employer every month, the total amount of which is known as employee’s retirement benefits.
Provident fund is mandatory for either of
the following instances:
Instance 1: Basic salary < ₹15000 p.m.
12% of the basic salary
Basic salary > ₹15000 p.m.
In this case the organisation has the option to either contribute 12% of ₹15,000 or 12% of basic.
It is directly deposited in the PF account of the employee. It is mandatory for all government organisations.
Public Provident Fund or PPF
Not to be confused with employer’s PF contribution, PPF is a voluntary contribution by an employee. The employer doesn’t have anything do with PPF.
Gratuity is the amount that an employee receives as appreciation for the cumulative service offered to him/her upon leaving the job.
Although gratuity is only paid after an individual completes 5 years or more in an organisation and decides to leave, it is deducted every year.
Many organisations provide health, and life insurance plans to the employees. Its premium is borne by the employer and is a part of CTC. Therefore, it is deducted when calculating the take-home salary.
The tax imposed on a professional’s income is known income tax. Generally, employees get their salary after income tax have been deducted by the organisation. This is called Tax Deduction at Source (TDS). The deducted tax is paid to the government.
Professional tax is levied by state governments to let a professional practice a his/her profession. The maximum amount payable per year is ₹2,500. It depends on the employees monthly pay and the state in which they work in. Professional tax levied differs from one state to another.
However, professional tax is not applicable in some states and UTs such as:
Andaman & Nicobar, Arunachal Pradesh, Chandigarh, Daman & Diu, Delhi, Dadra & Nagar Haveli, Goa, Himachal Pradesh, Haryana, Lakshadweep, Uttarakhand, Jammu & Kashmir, Punjab, Nagaland, Rajasthan, and Uttar Pradesh.
What Is Salary Breakup Calculator?
A salary breakup calculator is a tool that calculates your take home salary automatically. It is the total salary you will get after all the necessary deductions. The salary calculator consists of a formula box wherein you can enter your CTC and bonus included in your CTC.
The CTC take home salary calculator will resolve all your worries around the salary. It will show you the deductions such as employer and employee provident fund, employee insurance, professional tax and the take home salary.
How Does Salary Breakup Calculator Work?
To calculate the take home salary using salary calculator, you must enter the CTC and the bonus, if any, in the formula box. The formula used to obtain Gross Salary is:
Gross Salary = CTC – Bonus
However, in order to land up at the total deductions in your salary, you need to deduct the yearly professional tax from your gross salary. Please note here that the professional tax amount varies from state to state.
Further, the contribution of both the employer and employee towards the Employee Provident Fund (EPF) is deducted. EPF is calculated on your basic salary which translates to 12% of your base salary.
In addition, if your basic salary is INR 15,000 or less, deduction of PF amount is mandatory. However, if it is above this limit, then the PF deduction is optional. The rules further vary from organization to organization.
Here is a detailed demonstration of how you can calculate your take home salary. (Note: We have taken INR 15,000 as the base salary amount)
So, your Monthly EPF contribution = 12% of INR 15,000 = INR 1800
Yearly EPF Contribution = INR 1800 x 12 = INR 21,600
In addition, employee insurance amount is also deducted.
Hence, Total Deductions = Professional tax + EPF (Employee Contribution) + EPF (Employer Contribution) + Employee Insurance.
Take Home Salary = Gross Pay – Total Deductions
Doing these calculations manually can be quite confusing. But, with the help of salary calculator, you can easily calculate your take home salary amount in a matter of seconds. Here is how you can use salary calculator.
- Enter your CTC amount and bonus as included in the CTC as a percentage or amount
- The salary calculator will then show you the total gross pay and performance bonus
- It also demonstrates the employer PF, employee PF, professional tax, the take home salary and employee insurance amount
What are the new rules for salary breakup in India?
The government is bringing out some changes in wage rule across the nation which will affect your basic salary and allowances. Set to be implemented from 1st July 2022, the new guidelines will cap the allowances to a maximum of 50% of your overall package.
This rule will change the calculation of salary component in India. Employees as well as employer’s contribution to the provident fund (PF) and ESIC would increase. Would this impact be positive or negative, we discuss below.
Impact of New Salary Structure Implemented in India
The standard salary structure has been rejigged in such a manner that your contribution to provident fund would substantially increase. This would be beneficial for you in the long run as PF income is non-taxable.
But at the same time, your in-hand salary will take a hit as employer’s contribution to PF would also increase which will then be balanced by reducing your in-hand salary.
Why Such a Change is Being Made to Salary Components In India?
The recent updates to salary breakup in India has got everyone talking. Officials have said that these changes in salary components in India are being made to ease out different regulations for wages in India.
A new salary structure in India would also result in private companies better treating their employees. Certain companies prefer keeping the percentage of basic pay lower to around 30-40% of the complete compensation while covering the remaining amount in other allowances. Now with these new guidelines, they would have to amplify this percentage.
But some people have criticised this move to upgrade the standard salary structure in India. Both employer and employee diverting more money to PF would mean that the government would have more money at its disposal.
According to critics, this money might be used to close in on the fiscal deposit. Whether or not these new rules of salary structure in India turn out the way they are being projected, only time can tell.
Conclusion: Understanding Salary Components
Once you understand all the salary components and the overall structure, you can check your payslip without assistance. However, some of these components such as professional tax is conditional, while TDS depends on the organisation.
Hence it will be ideal if you first verify all the components with your payroll manager. You can also check for the payroll calculating software to ease your work.
- What is CTC in salary?
Cost to Company (CTC) is a term used for the direct compensation paid to an employee. It is calculated by including the total amount of direct and indirect costs (salary and additional benefit that the employee receives) associated with paying an employee in a year.
- What is best salary base?
Base salary or pay is the minimum initial compensation amount that an employee is guaranteed to make per year. Your base salary depends on numerous factors like work location, total years of experience in the industry, prevailing market rate and so on.
- What is variable pay in CTC?
A variable pay in CTC is basically employee compensation that is not fixed. It may includes commission, bonuses or incentives that an employee is eligible for. As this portion of compensation is determined by employee performance, it is also known as performance linked pay.
- Why is take home salary different from CTC?
CTC is the total of direct and indirect benefits. The take home salary, on the other hand, is the final amount after PF, TDS, and other deductions that are deposited in the employee’s bank account.
- How to calculate basic salary from CTC?
Basic salary is the total pay given to an employee against his/her performance. This does not include additional components like bonuses, benefits or compensation. The simple formula for calculating the basic salary is:
Annual basic salary: Monthly basic salary x 12 months
However, the method may differ from company to company. Some of the other formulas used by companies are:
Basic salary: Percentage of the CTC pay or gross pay
Basic salary: Gross pay – total allowances (HRA, DA, etc.)
- What is fixed salary?
Fixed salary is the guaranteed amount that an employee earns monthly. This salary type is mentioned in the salary slip with allowances like DA, HRA, TA, etc. So, the fixed monthly salary includes basic monthly salary and fixed monthly allowances.
- What are the types of salary structure?
Types of salary structure depends on how you want to break up and define your CTC. The two main types of salary structures are:
1. Top-down: In this type of salary structure, you mention the amount for different salary components and add up the total as gross amount.
2. Bottom up: Unlike top-down, in this salary structure, you define the total gross and divide the amount between different components.