In a world that runs on money and has a constant give and take from so many perspectives, it becomes difficult to track and trace how to structure the salary break up of your employees, what will their CTC and their in-hand salary be? What deductions must be made and what allowances must be given? So, it is necessary to have a clear idea as to what constitutes a salary structure in order to avoid any sort of confusion.
What is a salary structure?
A salary structure is a breakdown or rather a defined arrangement of how your employee’s salary is to be compartmentalized in the many ways before the employees receive it. Salary structuring is an unavoidable task to be done by any business owner or their HR department. However, many professionals have very little technical knowledge about the process and best practices in salary structuring.
One of the most important objectives of a stipulated salary structure is to reduce the liability of the employer. It is important that you, as business owner, incorporate and follow the compliance norms like PF laws and minimum wages and a salary structure is very important to keep a check on that.The government has recently brought out some changes in the wage norms that will impact the basic salary and allowances. The new guidelines limit allowances to a maximum of 50% of your whole package. In India, this rule will affect the way wage components are calculated. Employees’ and employers’ contributions to the provident fund (PF), as well as the gratuity given to employees at the end of their employment, would be impacted.
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Salary structure Breakup
There are many components that come into play while creating a salary structure for your employee. One needs to look out for factors like the amount, the merits being offered, evaluation of the current salary structure and so on. However, the few common and necessary components while making a salary structure are as follows:
- CTC – The net amount that an organisation invests in an employee is known as the cost to company (CTC). The net payroll package of a certain employee is included. The cost to the company is made up of monthly components such as basic salary, allowances, reimbursements, and so on, as well as yearly components such as annual variable compensation, gratuity, and annual bonus, among other.
- Gross Salary – The gross salary includes an employees basic salary and various allowances and is calculated prior to tax or any other deductions.
- Basic salary + Dearness Allowance – Basic salary and dearness allowance usually go hand in hand in most salary structures. As mentioned, it includes the fixed amount that an employee is paid during a certain period of time. This amount is generally fixed but can increase or decrease depending on bonuses or allowances respectively or even gradually over time. The basic salary is the income that the employee receives from his company which makes up to 35% – 40% of the total salary. The basic salary generally does not exceed over 40% of the entire salary structure and is the very base as well as the taxable component of the salary structure.
- Allowances – Allowances are a familiar concept to many. It refers to the various compensations or aids given by the company to the employees. These may or may not be taxable and vary from company to company. A few of the very common and important forms of allowances given are ‘House Rent Allowance (HRA)’, ‘Leave Travel Allowance (LTA)’, Medical Allowances and so on. These are designed to help at the time of need or to assist on a regulatory basis as a merit provided by the company for the employee. Again, the percentage of the salary structure that the various allowances take up depends on the number of allowances given by the company
- Professional Tax and other taxes – These are in other words the tax payable to the state government for practising a particular profession. Again, this varies from company to company and depends on the amount received by the employee as well as the state. Certain states do not take these taxes but on the whole, these taxes are applicable and 2500/- is generally the maximum amount. There are other taxes too that are deducted from the salary which are common for most companies like the income tax also known as Tax Deduction Source (TDS) for example, which is paid to the government
- Reimbursements– These are generally amounts paid to the employees as a sort of a refund to compensate for losses that could take place with regard to business. It is basically the repayment given to the employee to cover up for all they have spent out of their pockets. This can be of various kinds like business reimbursements, tax refunds and so on.
- Labour welfare fund – This is another part of the salary structure which is mandatory for government organisations. The labour welfare fund is controlled by the state government and is a contribution made by the employees for the others in need. It is used to assist those requiring security, medical necessities, to improve working conditions and so on. This again is deducted from the salary but is mostly a comparatively smaller amount taken from each employee ranging from Rs.5 to Rs.20 of the total.
- Provident fund – Also known as the employee’s retirement benefits, this refers to a scheme designed for the aid or benefit of the employee. It requires that the employer as well as the employee, both invest a particular amount which allows the employee to have some sort of savings. This takes place each month up to the period the scheme exists or until the employee retires and this amount is directly deducted from the employee’s salary. Generally, around 12% is deducted which is also to be counted in the total salary structure as it goes into the form of savings for the employee. This is compulsory for all government organisations.
- ESIC – Employee State Insurance (ESI or ESIC) is a contributory fund that receives contributions from both the employer and the employee, allowing Indian employees to participate in a self-funded healthcare insurance. It is mandatory to make ESIC deductions for employees whose gross pay is not more than Rs.21,000. It only applies to organisations with 20 or more employees earning a gross wage of Rs.21,000 or more. Employees are required to contribute 1.75 percent of their gross salary, while employers are required to contribute 4.75 percent of their salary.
- Insurance– There are many companies that offer many insurance policies and plans for the employees with regard to life, health, medical, security and so on. These insurance policies again include the part of the amount taken from the employee’s salary.
Having a constructive salary structure in place is extremely beneficial to break down the total and have in-depth knowledge of the allowances and deductions in your employee’s salary. It also puts your employees in a position to save as much tax as possible and also reduces your liability as an employer.