The gross and in-hand pays are unclear to employees. A salary breakup structure or CTC allows direct computation of the various factors which affect the Net Salary to an employee.
CTC refers to the total cost to the company for the expense of an employee. There may be several components involved like the basic pay, provident fund, allowances, etc. Factors that affect the salary structure of an employee
The following factors predominantly influence an employee's salary structure:
Education and experience: The company generously compensates educated and experienced employees. The company prioritizes highly educated and experienced employees.
Industry and Significance of Work: The industry an employee works in and the significance of the work done influence their salary.
Location: The location and the cost of living is a significant determinant of salary. Jobs in Urban areas provide higher compensation for the same job than rural ones.
Skill Set: An employee's skill set is also influential in determining compensation. Some skill sets are applicable for a variety of roles in an organization, and are more valued.
Demand and Supply: The demand and supply of talent in a specific field and location are the main factors. The employee with experience in a specific field in a specialized industry is hugely in demand and highly paid.
Components of Salary Breakup Structure
Basic Salary
It is the fixed component of your compensation. Typically representing 30-50% of the CTC, its significance lies in its tax implications and potential impact on PF liabilities. Balance is the key to not running into tax complications or minimum wage norms.
Allowances
It is the sum granted to the employee for fulfilling the conditions regarding his or her services. The amount of allowance varies from company to company. The popular types of allowances are as follows:
House Rent Allowance: It is an allowance pertaining to the rent of an employee's dwelling.
Leave Travel Allowance: It is the amount granted by the company for domestic traveling.
Conveyance Allowance: This allowance is granted to an employee for the expenses of daily commutation.
Dearness Allowance (DA): This allowance is given to the employee to lighten the burden of inflation.
Reimbursements
Allowances are often confused with reimbursements. Allowances are given to support the expenses of an employee, while reimbursements are the amount repaid to an employee according to accurate bills and receipts.
Statutory Bonus or Performance Bonus
The company offers a bonus as a reward, either for an employee's good performance or in appreciation of the company's overall success. It is paid to motivate employees under the Payment of Bonus Act 1965.
Gratuity
After five years of service in the company, employees receive a lump sum known as gratuity, calculated as 4.81% of their basic pay according to the Payment of Gratuity Act, 1972.
Employment Provident Fund (PF)
This is another employee welfare scheme where a provision fund, often called PF, is done jointly. Employees contribute 12% to the PF, and in most cases, the company contributes 13%.
An amount can be withdrawn after unemployment of the employee for over a month. It is offered to an employee as a source of benefit at retirement.
ESI
This was, thus the basis on which financial provision under the Employees State Insurance Act 1948 started being formed so as to cover the social and health security of the employee. Both the employees and the employer contribute fixed percentages according to regulations in order to add to the ESI fund.
This act ensures that employees get medical, sickness, maternity, disablement, funeral expenses, and rehabilitation benefits. If the employees, as well as their family members, are undergoing treatment under ESIC-empanelled hospitals and clinics, all hospitalization and surgery related expenditure will be borne by it.
Form 16
The Employer provides Form 16, as a proof which contains remunerations earned by the Employee and the tax amount drawn.
The taxpayer submits Form 16 as proof of income and the amount of taxes he has paid to the government for filing his Income Tax returns every year.
Taxes and Liabilities
Income and Professional Tax is adjusted from the salary after deducting allowances, PF, gratuity, and bonus by the company. The amount of taxes to be paid is calculated based on the slab rates applicable in the given slab.
The central government charges Income tax on the income earned by individuals during the fiscal year as per the income slab rates. The employer deducts tax from the employee's salary before depositing it into their bank account. This process is known as Tax Deduction at Source (TDS). While the state government charges Professional tax on the income earned by individuals during the fiscal year as per the applicable income slab rates. The maximum amount payable per year is INR 2,500. The professional tax charged varies from state to state.
New Income Tax Slabs for FY 2023-24 (below 60 years):
Insurance
Companies usually offer life and health insurance to the employees and add the premium to the CTC. When computing the in-hand salary, this amount is deducted from the basic pay.
Deductions
They are usually categorized under the following heads:
Gross Salary
It is the total pay before adjusting any of the deductions. It is the sum of the basic salary, HRA, LTA, DA and other allowances, and Bonus.
Gross Salary = Basic salary + Allowance + Bonus
Net or In-Hand Salary
After all the adjustments made to the basic pay, the amount left is the In-Hand salary of the employee.
Net Salary = Basic Salary + Allowances - (PF + Gratuity + Income Tax +
Professional Tax)
Here is an example of an employee's Salary Breakup
Having a clear and detailed breakdown of salaries helps both employers and employees understand the remuneration at hand and promotes a happy working environment and financial stability. Ensuring that the nature of employment and labor law is continually updated to keep structures fair, competitive, and complaint with the regulatory standards is very fundamental. In today's dynamic professional landscape, knowing the salary breakup will be important for employers in the attraction of top talent and for employees in their finance planning, besides that it helps attract and retain talent, playing a significant role in one's financial planning. The structure comprises various components such as Basic Pay, House Rent Allowance, Provident Fund, Gratuity, and so forth. Each component forms part of the total compensation package and needs to be understood in terms of how the salary is composed. Thus, it becomes important for both parties to understand the salary breakup.
Frequently Asked Questions
1. What is a salary slip?
A salary slip is a document that the employer gives to the employees, indicating all the salary components such as basic pay, bonuses, and deductions. Since the company issues payslips every month, it provides employees with hard or soft copies. All details of the salary structure can be seen in a payslip at a glance.
2. What is gratuity, and how is it calculated?
The employer, as envisaged by The Payment of Gratuity Act, 1972, pays a gratuity, once, to the employee who leaves his services after working for five years. Formula to calculate gratuity is as under:
Gratuity = [ (Basic salary per month + D.A) x 15 days x Number of years of service ] / 26
3. What is difference between CTC and in-hand salary?
CTC (Cost to Company) is the total amount an employer spends on an employee, including allowances and deductions. An employee receives an in-hand salary after adding allowances and bonuses while deducting taxes and provident funds.
4. Why is Form 16/16A important?
Form 16/16A is crucial for employees and employers as it provides detailed information on TDS/TCS transactions between the deductee and deductor, facilitating the filing of accurate Income Tax Returns.
5. What are the two types of salary structures?
Two types of salary structures are followed in India by employers.
Bottom-Up: Add the gross total salary and divide the items.
Top-Up: Use different items and add the items to the gross total salary.
6. What is the difference between a Financial Year and an Assessment Year?
Financial Year (FY): April 1 to March 31: Accounting and taxation.
Assessment Year (AY): Comes after the FY when people submit their Income Tax Returns.
Example:
FY 2020-2021 is equivalent to AY 2021-2022
FY 2022-2023 is equivalent to AY 2023-2024
7. What is the difference between Gross Salary and Net Salary?
The company starts by adding all allowances to the basic salary in order to determine the gross salary. Then, they make the necessary deductions from the basic pay to come up with the net salary, which is the amount left after taxes and other deductions have been taken out. This way, the employees get a fair and accurate calculation of their earnings.
8. What are the components usually included in a salary breakup?
The usual components of a salary breakup include Basic Pay, House Rent Allowance (HRA), Dearness Allowance (DA), Provident Fund (PF), and other allowances.
9. How is Basic Pay calculated?
Basic Pay is generally 30-50% of the CTC. All allowances and benefits are calculated based on basic pay.
10. What are the tax implications of various salary components?
Different components of the pay would have different tax implications, such as HRA being tax-exempt up to a certain limit, while other components, such as bonuses, could be taxable.
