How a Salary Structure Format look like in India

One of the fondest memories in everyone’s mind is of the day they got their first salary. However, the salary structure format with numbers which comes along with the salary serves as an eye opener for many people. There are many components of salary structure in India which might be new to you.  There is a difference between Cost to Company (CTC) and Take home salary Therefore it is important to understand what each component in the CTC Salary slip which translates into in financial terms.

Salary Structure Format in India

Let us look at a similar basic CTC salary structure format for companies like TCS, Infosys and BHEL

In the above salary slip the earnings represent cost to company. After you deduct all the above mentioned deductions, what you get is salary in hand. This is also called nett pay. There are two basic reasons because of which your salary may get reduced. These are:

1. Taxation: the salary is taxable as per the income tax rules. Some part of the salary could be tax exempt and on the rest you could save tax by submitting requisite proofs.
2. Deductions: this could be in form of PPF deductions which is your contribution towards savings for the future and retirement funds

Now if we look at the earnings side of the CTC salary structure in India, we see a number of entries. The allowances and bonus in the earnings are a reflection of variability in your salary. Simply put, your salary is a cumulative figure that consists of two parts- a fixed component and a variable component.

Variable pay is employee compensation which changes unlike the salary. It is paid in proportion to the salary earned. Variable pay depends on a host of factors like the employees performance, his contribution to the company’s profits, team work, quality etc. Variable pay could be paid in terms of bonuses, shares, holiday bonus, cash, goods and services and deferred compensation. Even though variable pay is not a new concept, but it has been introduced in India gradually over a period of time. The move was most likely triggered by the increasing sense of competitiveness, both for more business as well as for better talent.  It helps both the employer and the employee. For the employee it is an incentive to perform well which translates into goals achieved for the employer. So both the parties are happy. Variable pays are also important to retain talent and keep them interested in working for your organisation.

The ratio of fixed vs. variable pay depends on your role and its importance in the organisation. They are directly proportional to each other. In most cases in sales jobs, in India fixed vs. variable pay can be in up to a ratio of 60:40. For other jobs this ratio could be 80:20.

Variable pay not only serves as a motivation for the employee but also helps him save tax. Following are the guide lines for taxing variable pay of an individual:

1. Any Conveyance / Transport Allowance given to an employee is tax free up to Rs. 9,600 /- (No Supporting Bills required)

2.  Medical Allowance – Any Medical Allowance given to an employee is tax free up to Rs. 15,000 /- (Supporting Bills required)

3. HRA – Any House Rent Allowance (HRA) given to an employee is tax free up to the minimum value of the following conditions (subject to – when an employee can produce rent paid receipts from landlord for the period and if the employee has not availed of tax exemptions for home loan interest / principal repayment):

a) 50% of Annual Basic (40% of Annual Basic in case of non-metros)

b) Actual HRA received

c) Rent Paid – (10% of Annual Basic)

4. Professional Tax – Any Professional Tax deducted from an employee’s salary can be reduced from the annual salary income to arrive at taxable salary

5. Provident Fund – Provident Fund contributions (under section 80 C and subject to an overall investment limit of Rs. 1,00,000 ) deducted from an employee’s salary are tax exempt.

6. Education Allowances – Education allowance of Rs. 50 per month per child for up to 2 children of the employee is exempted. In case the children are in hostel, the exemption available is Rs.150 per month per child for up to 2 children. However, under section 80E deduction is allowed for repayment of interest component of Higher Education loan. All education after Class 12 is allowed, either vocational or Fulltime. But it should be from a school/institute/university recognized by the government.

7. Entertainment Allowance – Any amount received by the employee, as entertainment allowance is taxable as salary

After careful negotiation with the employer, you can choose to take a part of your salary in the form of any of the above allowances to save on tax.  Thus, by proper management an employee can optimise his salary structure in India and take maximum benefits out of his variable pay

 

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