Payroll calculation can be a complicated process if it isn’t streamlined. While the payroll processes 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 salary structure components like Basic, HRA, and DA.
Salary Structure in India: All You Need to Know
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||Taxable (40% of CTC) or set minimum wage||Taxable (40% of CTC)||Taxable (40% 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|
Salary Deductions for FY 2019-20
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||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
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 is never the same as his/her take-home salary. There are a number of variable components in CTC that aren’t included in their monthly take-home package.
CTC = Gross Salary + Gratuity + PF
Let’s have a look at the salary components while calculating payroll.
2. Basic Salary
Basic salary of an employee is their base income. It is a fixed component of an employee’s payroll package. Basic salary of an employee varies according to his/her designation and industry the company falls in.
3. Gross salary
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
4. Take-Home Salary
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.
8. 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.
8. 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.
9. Form 16
Form 16 is issued by the organisation and
contains the salary details of an employee along with the tax deducted.
A taxpayer needs to submit Form 16 in order to file IT returns every year. It is also a proof of the employee’s income and tax.
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.
12. Income Tax
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.
13. Professional Tax
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.
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.