For every HR and Payroll professional, structuring salary is an inevitable task.Despite the significance of the task, professionals are often uninformed of the technical and best practices of a drafting a complete and efficient salary structure.
Whether you are working in Talent Acquisition, Generalist or payroll profile, you should know how to make a Salary Structure or commonly referred to as CTC Structure. A competitive CTC Structure in Talent Acquisition may lead an applicant to accept or reject your offer. Similarly, for both generalist and payroll processing, it is critical.
Terms like CTC, basic salary, gross salary, allowance, reimbursements, tax deductions, provident fund, insurance, etc. often create confusion. Through this article, we have tried to define the various components of a salary structure for everyone to understand easily.
What is CTC or Cost to Company?
CTC or Cost to Company is the total amount that a company spends (directly or indirectly) on an employee.
This includes components such as basic pay, various allowances, reimbursements, etc. and annual components such as gratuity, annual variable pay etc.
CTC is never equal to the amount of take-home salary of the employee because there will be other deductions and the take-home salary is going to be different from the CTC.
CTC = Gross Salary + Gratuity + Employer Contributions (PF /ESIC)
What is Gross Salary?
Gross salary is the sum of the basic salary, allowances, bonus, over time etc. before deduction of income tax and other deductions.
Gross Salary = Basic Salary + HRA + Bonus + Other Allowances
What is Net Salary or Take-Home salary?
Net salary is commonly called take-home salary. It is the income that an employee take home after Income tax, PF and other deductions.
Net Salary = Gross Salary – Income Tax – PF – ESIC – Other Deductions
Let us now discuss various components in salary structure:-
Basic salary is the primary component of CTC and should not be less than respective state minimum wages.
It is usually 40% to 50% of CTC and is fully taxable. Based on this amount, statutory components such as PF, bonus, gratuity, and LTA are calculated. As a result, an employee’s CTC may be impacted by an increase or decrease in basic salary.
House Rent Allowance
House Rent Allowance is paid to an employee for the expenses of paying a home rent. Companies normally keep it around 40% to 50% depending on where you live. If you live in metro cities, HRA will be 50% of basic salary and if you live in non-metro cities then HRA will be 40% of the basic salary.
Conveyance Allowance is the amount paid to an employee against expenses incurred while travelling from home to office. Conveyance Allowance limit is Rs.1600 per month. (Note: Conveyance Allowance & Medical Reimbursement have been replaced by a Standard Deduction of Rs.40,000 w.e.f. FY 2018-19).
Leave Travel Allowance
Leave Travel Allowance is paid to cover travel expenses incurred by employee within country.
LTA is 8.33% of Basic, it can be fixed depending upon grade and native place of an employee by company.
Statutory Bonus is an additional payment to employees with the intention of motivating them under Payment of Bonus Act 1965. Bonus is 8.33% of Basic and it can be paid either monthly or annually.
Mobile Allowance is paid to employees against expense incurred in using mobile for official purposes. The employer can fix an amount for such reimbursement as per company policy
Books and Periodicals
It shall be paid to an employee to cover expenses incurred for buying books and periodicals related to their work profile. It is non-taxable if bills are submitted.
Other Allowance / Special Allowance
This allowance is the balancing component of the salary structure. It is usually used as the leftover of the CTC when the rest of the components have been paid out.
Provident Fund (PF)
Provident Fund is an investment in which employee and employer, both make each month towards employee’s retirement. The employee contribute at 12% of Basic while the employer contribute at 13% of Basic (Incl. 1% Admin Charges).PF is applicable to companies who have 20 or more employees on their payroll.
Employees State Insurance Corporation (ESIC)
ESIC Deduction are mandatory for employees whose gross salary is less than Rs.21,000.Employees have to make a contribution of 0.75% of the gross salary and employers have to make a contribution of 3.25% of the gross salary.
Life Insurance / Mediclaim
Many companies provide health insurance and life insurance to their employees, the premium for which is borne by the employer and is included in the CTC. Hence, it is deducted while calculating your take home salary. If an employee is not covered under ESIC, company should provide Mediclaim insurance.
Professional tax is the tax charged by the certain state government on salaried employees and professionals. The amount of deduction varies from state to state where they are applicable.
Gratuity is a reward paid to employees who have provided continuous service for at least 5 years. It is a form of monetary gratitude from the employer to the employee for the services rendered.
Although an employee will only be able to receive the gratuity payment after 5 years, the employer will deduct it from your CTC at 4.81% of Basic.
What is the ideal salary structure?
We have put together a table of common components for a salary structure and also added recommended amounts to each components to help you build an ideal salary structure.
|1||Basic||40% of CTC|
|2||HRA||50% of Basic|
|3||Bonus||8.33% of Basic|
|4||LTA||8.33% of Basic (optional)|
|5||Books and Periodicals||Fixed Amount (As per company policy)|
|6||Mobile Allowance||Fixed Amount (As per company policy)|
|7||Other Allowance||Balancing Figure|
|8||Gross Salary||SUM of all Above ( A )|
|9||ESIC||0.75 % of Gross Salary|
|10||Mediclaim||Fixed Amount (As per company policy)|
|11||Employee PF||12% of Basic|
|12||Professional Tax||As per Statewise Slabs|
|13||Total Deduction||SUM of all Above ( B )|
|14||Net Salary||( A ) – ( B )|
|15||Employer ESIC||3.25% of Gross Salary|
|16||Employer PF||13% of Basic|
|17||Gratuity||4.81% of Basic|
|18||Employer Deduction||SUM of Above ( C )|
|19||Monthly CTC||Gross + ( C )|
|20||Annual CTC||Monthly CTC * 12|