Salary Structure & Components
It is important to understand the various salary components that forms your salary structure. Most of the times when we negotiate terms of employment, we focus on getting a higher CTC without giving much attention to the compensation structure and components involved. Although higher CTC is important part of salary negotiation, but it doesn’t always means that a higher CTC will ensure a higher in-hand salary as well.
Thus, if you have the flexibility to decide the compensation structure, it is important to structure it efficiently to maximize net salary and minimize tax burden.
Components in any salary structure can be broadly divided into 5 segments:
- Basic: This forms the base of salary and other components like HRA, PF, etc are calculated on this.
- Allowances: House Rent Allowance (HRA), Dearness Allowance (DA), Conveyance Allowance, etc.
- Variable Components: Performance Bonus, Sales Incentives, etc.
- Contributions: Provident Fund (PF), Employees’ State Insurance (ESI), Statutory Bonus, etc.
- Perquisites: Benefits received by a person as a result of his/her official position and are over and above the salary or wages.
Basic:
Basic is usually 40%-50% of the Gross Salary or CTC (Cost to Company). Since the Basic salary is fully taxable, it is very crucial to decide what percentage of your Gross or CTC will form Basic salary. If the Basic is high, the tax liability will be high as well.
Also, other salary components such as HRA and PF, that can get you tax exemptions, are calculated based on your Basic salary.
It is recommended that employee with lower CTC should opt for a lower Basic salary since this is going to get them higher monthly net pay.
Allowances:
Certain allowances are exempted at source, as per The Income Tax Act. The total tax liability of an individual of an employees can come down to a great extent if these allowances are included as part of salary structure. These components can be added to all salary structures (lower or higher CTC).
In most of the cases, your employer might require you to submit bill at the end of financial year against these allowances to get tax exemption. In case you fail to provide bills for these allowances, the total allowance amount becomes taxable.
Here are example of few allowances, along with exemption rules/limits:
House Rent Allowance (HRA)
Tax Exempted Amount will be least of the 3:
- Actual HRA received
- Location Based HRA (40% – If staying in Non-Metro, 50% – If staying in Metro)
- Rent paid less 10% of basic salary
Medical Allowance/Reimbursement
Tax Exemption up to Rs 1,250 per month Rs 15,000 per annum
Conveyance/Transport allowance
Tax Exemption up to Rs 1,600 per month or 19,200 per annum
Leave Travel Allowance (LTA)/Leave Travel Concession (LTC )
Actual travel cost can be claimed for tax exemption twice in a block of four years (u/s. 10(5))
Uniform Allowance/Attire Allowance
Tax Exemption can be claimed on the actual expenditure incurred (u/s. 10(14))
Children’s Education Allowance
Tax Exemption up to Rs 100 per month per child, for up to 2 children, i.e. maximum of Rs. 200 per month
Children Hostel Allowance
Tax Exemption up to Rs 300 per month per child, for up to 2 children, i.e. maximum of Rs. 600 per month
Professional Pursuit/Research Allowance
Tax Exemption can be claimed on the actual expenditure incurred
Food Coupon/Meal Voucher
Tax Exemption claimed at Rs 50/meal for up to Rs 2,200 per month
Mobile Reimbursement/Telephone Reimbursement
Tax Exemption can be claimed on the actual expenditure incurred
Books & Periodicals
Tax Exemption can be claimed to the extent of actual expenditure towards purchase of books and periodicals
List of all benefits available to Salaried Persons »
Variable Components:
Many companies include variable component as part of employee’s CTC, and pay it out (total or part of it) based on the performance of employee (a.k.a. Performance Bonus). Since variable pay is dependent on company’s performance along with employee’s performance, companies are willing to pay employees if the business is profitable. Variable pay/Bonus is fully taxable.
Contributions:
Contributions such as Provident Fund & ESI are made by employer for employees’ long term saving schemes and social benefits. Since these are long-term savings, they are not paid out to the employees immediately. Contributions can affect an employee’s net salary package and thus it is important to have the right ratio of these contributions as part of your package. Contributions do have some extent of tax exemptions associated to them.
Provident Fund: Employer makes a contribution (12% of Basic salary) against EPF (Employee’s Provident Fund). It is statutory obligation on part of the employer. Employee’s PF deduction is tax exempted u/s. 80C of income tax.
ESIC (Employee State Insurance Corporation): ESI is applicable for employees whose gross salary is less than Rs. 21,000. Employee needs to make a contribution of 1.75% of gross salary, whereas, employer needs to deposit 4.75% of gross salary.
Statutory Bonus: It is statutory bonus which is paid to employees whose basic is less than or equal to Rs 21,000. Bonus payable is capped at Rs 7,000 per month. Statutory Bonus is fully taxable.
Perquisites:
Perquisites are perks/benefits received by an employee over and above the salary. For example, car or house provided by employer which is over and above person’s salary. These perks/benefits might attract perquisite tax since these benefits are provided by employer over and above employee’s salary. These perks/benefits or perquisites can be taxable or non-taxable depending upon their nature.
- Taxable Perquisites: Rent-free accommodation, Salary of servant employed by employee, Supply of gas, electricity or water for household purposes, ESOP/ Sweat Equity Shares, etc.
- Exempted Perquisites: Travel allowance, Interest free loan or Loan at concessional rate of interest, Computer or laptop provided for official use, Refreshment provided during office hours, Use of health club and/or sports club, etc.
Perquisites taxable only by employees: Car owned by company but used by employee, Education facility, Service of domestic servant, etc.
List of all benefits available to Salaried Persons »
Use the above mentioned components smartly in your salary structure and you will be able to lower the tax liability and increase you net package.
Related:
What is meant by Tax exempted allowances?
What is Provident Fund (PF)?
What is ESI?
What is the current maximum gross salary eligible for ESI?
How is ‘total taxable income’ calculated?
How do I submit claims for tax exemption on salary allowances (e.g. Medical Allowance)?
What is Professional Tax (PT)?
What is the difference between Allowance, Reimbursable Allowance and Recurring Deduction?
What is Gratuity?
How do I assign benefits to employee?
In case you need help with creating a salary structure for your employees, write to support@keka.com.