What is Basic Salary?
Basic salary is the base income of an employee in an organization. Every organization pays a fixed amount of money to its employees mostly every month for the services they offer. This income has several components in the Indian payroll.
Basic salary is the income that does not contain any type of bonus or deductions. It is the fixed amount paid to employees. Mostly it comprises 35-50% of the total calculates salary of an employee.
How is Basic Salary calculated and paid?
Basic salary is usually fixed and is determined annually. If the employee was hired on a pay grade basis, the basic salary may increase yearly. Basic salary is generally calculated by taking a percentage of the gross earnings.
In India, the basic salary is calculated by taking 40-50% of CTC. The amount is calculated on an annual basis, but it is paid monthly to the salaried employee.
Basic Salary Calculation Formula
Basic salary = Gross salary – Total allowances (Dearness allowance + medical allowances + conveyance + other allowances)
For example, if an employee’s gross salary is ₹6,00,000 after deducting Provident Fund and Gratuity, the basic salary would be ₹6,00,000 – ₹35,000 (Total allowances). The annual basic salary is ₹5,65,000.
What are the additions and deductions in salary?
Additions are extra financial compensation benefits added to the basic salary. They include overtime pay, bonuses, gratuity, allowances, incentives, commissions, tips, back pay, and severance. Deductions are expenses that are subtracted from an employee’s gross income to reduce the amount that is subject to taxation. Deductions include Provident Fund (PF), ESIC, professional tax, and Labor Welfare Fund.
Components of Basic Salary
The components of basic salary are gross salary, overtime payment, bonus, dearness allowance, house rent allowance, and special allowances.
1. Gross salary
Gross salary is calculated from the CTC of an employee. After deducting PF (Provident Fund) and Gratuity from CTC, the remaining amount is called Gross salary. It is used to calculate the basic salary.
2. Overtime payment
Overtime payment is paid to an employee for working outside the usual work hours. This is added to basic salary.
A bonus is an additional payment made to the monthly compensation by the employer. They are rewards shared among the employees after the company has earned profits.
4. Dearness Allowance (DA)
Dearness Allowances are paid so that workers can adjust to the changing cost of living due to inflation. It is one of the additions to basic salary.
5. House Rent Allowance (HRA)
House Rent Allowance is an allowance provided by employers to their employees to assist them with paying for rental accommodation. This allowance is calculated by taking a percentage of the salary of the employee depending on factors such as the employee’s location, cost of living, and the employer’s policies.
6. Special Allowances
Special allowance is a fixed amount offered as a benefit besides the salary. They fulfill personal or official requirements of the employees.
How to Track Salary using HR Software
To pay salaries of employees, it involves many activities like calculating bonuses, Provident Fund, tax, allowances, contribution to social security schemes, etc., that are part of the employee’s salary. It is subject to many errors and complications. The process also includes attendance and leave data, adherence to policy, salary revision, shift data, and many more. Some companies process their payroll manually but it’s an impractical and overwhelming process as it is prone to compliance issues and large errors.
Keka’s payroll software can simplify the process as it tracks working hours easily and makes any changes instantly ensuring there are zero errors. The main features are:
1. Integration with Time and Attendance
Processing time and attendance manually is time-consuming and results in inaccuracies at the time of payroll. There are various parameters like overtime, leave, break hours, shifts, etc., and having a proper system to record them is important as any errors may lead to dissatisfaction in the employees. Keka’s payroll system integrates with time and attendance software seamlessly and ensures there are no errors. Attendance and leaves are tracked in real time and Keka removes the need for manual entries.
2. Travel and Expense Management
HR software can automate the process of travel and expense management, which reduces manual work and saves time. The software can streamline the process of creating and submitting expense reports, processing reimbursements, and tracking travel expenses. It can also integrate with other systems like travel booking tools, credit card providers, and accounting systems. This integration can make the process more efficient by automatically importing data from different sources, reducing the chances of errors, and speeding up the reimbursement process. With Keka’s travel desk, the travel bookings are made simpler. It also tracks mileage based on the attendance punches of the employees along with seamless integration with payroll.
3. Compensation Management
HR software is a useful tool for managing compensation in several ways. Firstly, it can automate many of the compensation management processes, such as calculating salaries, bonuses, and benefits. This can save time and reduce errors in the compensation process. It also enables you to carry out data analysis, which allows HR managers to identify trends and patterns in compensation data. With this information, they can make informed decisions about compensation policies and ensure that employees are being paid fairly.
4. Easy Pay Slip Generation
Payroll management system releases pay slips in various formats. They can be released digitally on Keka’s mobile app, email, SMS, etc., or print them.
5. Automated Compliance
Making sure both local and national compliance requirements are fulfilled. It enables automatic compliance for provident fund, ESI, and tax.
6. Tax Filings
Apart from ensuring compliance with tax & automatically deducts tax, creates TDS filing statements, labor welfare fund contributions, etc.
1. Is Basic Salary Taxable?
Basic salary is fully taxable. The tax deduction could be either 40% or 50% depending on the location of the taxpayer. The allowances added to basic salary can be fully taxable, partially taxable, or fully exempted. Allowances include Dearness Allowance, House Rent Allowance, Leave Travel Allowance, Medical, Transport, etc.
2. Can Basic Salary be changed?
Basic salary can be changed if an employee negotiates with his employer. A new wage code Act 2022 states that basic salary cannot be 50% less than the CTC. Basic salaries are generally 40 to 50% of the CTC.
3. Is overtime pay part of the basic salary?
Overtime pay is one of the additions to the basic salary. The overtime pay is calculated based on the number of hours an employee has worked outside the work hours. Overtime pay is added as a compensation benefit along with allowances, bonuses, incentives, commissions, back pay, etc.
4. Is it good to have a low basic salary?
There may be state-specific minimum wage norms that have to be met by the companies in that location. While low basic salary has tax-saving benefits, it also means lesser benefits, increments, bonuses, and allowances.
5. Is Basic Pay part of the CTC?
Basic pay is around 35-50% of the CTC. It is the compensation an employee receives in exchange for their work. After making the necessary compensation additions and deductions to the basic pay, the amount is called gross pay.
6. How is DA calculated in Basic Salary?
Dearness Allowance (DA) is calculated as per the increasing cost of living due to inflation. Currently, the Dearness Allowance is calculated at 50% of the basic salary. As per rules, DA will be merged with basic salary when it crosses the 50% mark.