Salary Structure (India): Wages and Statutory Deduction
Salary includes all kind of emoluments and benefits extended to employees by the employers for the services rendered by them. It consists of both monetary payments as well as non-monetary facilities. Monetary payments refer to components such as basic salary, bonus, commission, allowances, & similar. At the same time, Non-monetary facilities mean benefits like housing accommodation, medical facility, interest-free loans, cab facility, & similar.
The breaking down of salary into individual, separate items or various components is termed as Salary breakup. It gives the onlooker a better picture of what constitutes the salary. Breaking down is advantageous in two ways. One, both the employer & employee know what a specific portion of a salary comprises. Two, a well-structured salary helps in utilizing maximum benefits provided by the taxation law and thereby minimizing the tax impact.
So, let us now look into the Salary Structure adopted in India. In an era of Global Market, there is no one blanket structure which can accommodate all industry standards. However, we shall discuss components which are more often included across varied sectors. Employers can accordingly modify them to suit specific business requirements.
Components of Salary structureComponents of Salary structure include-
- Basic pay
- Statutory fund contributions
- Other payments (incentives, bonus, commission, & similar)
Basic pay is the minimum sum of earnings that an employee stands to receive in terms of employment. Also, most of the other salary components are computed as a percentage of this base pay. Therefore, though it is the basic level of income of an employee, it forms a significant part of the total salary. The new wage code, once into force, will ensure a minimum of 50% of the full salary as the base pay. Basic salary is determined based on the employee’s designation and the industry in which one works. In terms of Income-tax, this amount is fully taxable.
Allowances are paid to employees to meet specific expenses. Exemptions are available against few making them partially taxable whereas the rest are fully taxable.
House Rent Allowance
HRA is a special allowance specifically granted to an employee by his employer towards rent for the employee’s residence. This allowance generally forms a significant portion of allowances, ranging between 24% to 50% of Basic pay & Dearness Allowance. Salaried individuals residing in rented homes can claim tax exemption against HRA receipt. For further information on conditions attached and level of exemptions, refer our article HRA (House Rent Allowance)
Special allowances to meet expenses relating to duties or personal expenses
Daily allowance/Per-diem allowance - any allowance to meet the ordinary daily charges incurred by an employee on account of absence from the regular place of duty.
Dearness Allowance - this allowance is calculated as a percentage of basic salary to mitigate the impact of inflation.
Children Education Allowance - allowance granted to meet the expenditure incurred on the education of children.
Children hostel allowance - allowance granted to employees to meet the hostel expenditure of their children undergoing the education.
Transport allowance - Transport allowance granted to an employee to meet the expenditure for the purpose of commuting between the place of residence and the place of duty is now fully taxable. However, in the case of blind, deaf, dumb, and orthopedically handicapped employees, the exemption is available. Refer
Conveyance Allowance - allowance granted to meet the expenditure incurred on conveyance in performance of duties.
Helper Allowance - allowance granted to meet the expenditure incurred on a helper where such helper is engaged in performing the duties.
Research allowance - allowance granted for encouraging the academic research and training pursuits in educational and research institutions.
Uniform Allowance - Allowance granted to meet the expenditure on the purchase or maintenance of uniform for wear during the performance of duties.
City compensatory allowance - City Compensatory Allowance is normally intended to compensate the employees for higher living costs in cities.
Entertainment allowance - This allowance is given to employees to meet the expenses towards hospitality in receiving customers, and similar.
For more information, refer
Perquisites refers to benefits in addition to the amount that may be legally due by way of contract for services rendered. Perquisite may be provided in cash or kind. However, reimbursement of expenses incurred in the official discharge of duties is not a Perquisites.
Certain perquisites provided by employers are:
- Rent Free Accommodation
- Concession in rent
- Insurance premium met by the employer
- Sweat equity shares allotted or transferred
- Amount of any contribution to an approved superannuation fund
- Fringe benefits such as interest-free or concessional loan, free or concessional food, use of movable assets etc.
Statutory fund contributions
Employee Provident Fund:
An Employee Provident Fund is a retirement benefits scheme that is meant for salaried employees. Every month, a portion of the salary is contributed to the fund [maintained & regulated by the Employees Provident Fund Organization of India (EPFO)]. Every establishment must register themselves under PF if the number of employees in the establishment at any time during the previous year reaches 20 or more. (5 in case of seasonal employers). For further information, refer our article EPF (Employee Provident Fund)
Employee State Insurance:
Employees’ State Insurance is a self-financial contributory fund scheme intended to provide Social protection towards workers and their dependencies. The scheme protects employee interest in uncertain events such as an injury during employment, temporary or permanent physical disability, sickness, maternity, and similar. The scheme provides both healthcare benefits and cash benefits. For further information, refer our article ESI (Employees’ State Insurance)
Gratuity is a lump sum benefit paid by employers to employees in gratitude for the services rendered by them during the period of employment. Hence, this token of appreciation is paid when the employees retire from the organization. However, it is only payable to those who have completed minimum service of 5 years or more with the company. This payment is governed by The Payment of Gratuity Act, 1972.
This category includes miscellaneous payments that have not been included above. They are monetary in nature. Payments such as incentives, bonus (annual, festive or interim), commission, and similar fall in this category. They can be classified based on a fixed or variable basis, calculated on turnover achieved or targets met, periodicity being bi-weekly, monthly or annual.
As discussed earlier, a well-structured salary helps in utilizing maximum benefits provided by the taxation law and thereby minimizing the tax impact. Refer our tool Structure Optimizer at no cost to find a payout that best suits your requirement.