Understanding the subtlety of a compensation package is important for employers and employees. Taking the most basic components such as Basic Pay to more complex ones like Provident Fund and Gratuity into consideration will help an individual plan his finances as well as talent retention.

Factors Influencing Salary Structure

The following are the influential factors on a salary structure offered to an employee:

• The level of education, experience and skill set of an employee
• Industry of work and the importance of the work being done by the employee
• Geographic location of the workplace and the cost of living
• Supply and demand of talent for a position in one location

Parts of Salary Breakup

Basic Salary

An employee gets a fixed percentage (usually 30-50%) of the CTC offered by a company. This is known as Basic Salary. The government taxes basic pay based on the percentage received by the employee. Too high a percentage incurs high taxes, while too low a percentage falls below minimum wage.

Allowances

Allowances: Different kinds of allowances are given to support employees’ expenses. Few examples of this would include HRA, LTA, Conveyance Allowance, Dearness Allowance, and Medical Allowance.

Gratuity

After having served for five years at the same company, they award the employees a sum that they need to disburse to their workers. In this context, it forms Gratuity and falls within the provisions of Payment of Gratuity Act 1972.

Bonuses and Incentives

An employee receives a bonus at the end of the year in case he or she gives satisfactory performance. The corporations also provide bonuses to employees in case the overall performances of the business are satisfactory. Bonus is a percentage of basic pay.

Tax and Liabilities

The central and state governments deduct all the necessary deductions from an employee’s income and then charge taxes. The professional tax is charged by the state government, which varies from state to state, while the income tax is charged by the central government. The relevant slab rates are applied to calculate the tax.

Tax Slabs for FY 2023-24 (New Regime)

Insurance

Companies typically give employees life and health insurance. The premiums for this insurance are part of an employee’s CTC. The company deducts this premium before calculating an employee’s take-home salary.

ESI

The Employees State Insurance Act 1948 mandated employers to implement Employee’s State Insurance, a social and welfare scheme. Both employer as well as employee contributes ESI at a fixed amount. Under ESI disability, maternity, sickness medical, rehabilitation benefits and funeral are given to the employee.  Provident Fund (PF)

A Provident Fund or Employee Provident Fund is a government-managed savings and retirement fund. Salaried employees and employers make equal contributions to this fund (12%). An employee can access this fund if he/she retires or is unemployed for one month.

Reimbursements

Reimbursements are different from allowances. Reimbursements are repayments given to employees for specific bills and receipts. Companies usually have upper limits on reimbursements.

Deductions

These are classified into following subcategories:

Gross Salary

All the basic pay and allowances such as HRA, LTA, conveyance, dearness and medical are added up to come up with a gross salary of an employee.

Gross Salary = Basic Salary + Allowance

Net Salary

After deducting all sorts of PF and gratuity from the base pay and after collecting all sorts of relevant taxes, an employee gets his net or take-home salary.

Net Salary = Gross Salary – (PF + Gratuity + Income Tax + Professional Tax)

For example: 

Frequently Asked Questions

Q.1 Are all elements of Cost to Company taxable?

Not all of the elements of a CTC are taxable. Some allowances and reimbursements may be exempt from taxation.

Q.2 What is the difference between Cost to Company and Take-Home salary?

Cost to Company (CTC) is the total expense that a company incurs for an employee, inclusive of allowances and deductions. The employee gets a take-home salary by adding the allowances and bonuses but deducting the taxes and provident fund.

Q.3 Can an employee bargain over the salary breakup?

The employee can bargain for a few aspects in his salary breakup, namely allowances and benefits. He usually does this during hiring and performance reviews.

Q.4 What is HRA?

The House Rental Allowance is an allowance provided by companies to employees so that they can pay their rental. Geographical location and cost of living determine the amount of allowance provided to the employee.

Q.5 What are some of the most common mistakes made by the employees regarding salary breakup?

They might miss the tax implications, not negotiate for the better salary structure, and not understand the full benefits available.

Q.6 Are there regional differences in salary breakup components?

Salary breakup components may vary region-wise. Allowances and reimbursements may be different based on the region, such as the costs of living in a particular place or state-specific rules.

Q.7 How do deductions such as Provident Fund (PF) and Professional Tax affect salary breakup?

Provent Fund (PF) and Professional Tax are deducted by the government compulsorily. A PF will be contributing to an employee’s long-term savings. Professional Tax is state-specific. All these deductions go on to reduce the amount an employee can take home, reducing his or her net salary.

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