Salary structure in Indian payroll is a ceaseless process. Activities in Payroll Management are never marked as done. Every month the same set of tasks come in front of the screen and again the same obstacles are encountered. However, organizations are now shifting to cloud-based payroll management software solutions for perfect processing of every month’s payroll.
Salaries are paid by an employer to the employees in exchange for the services delivered by them. The process of Payroll calculation can be hectic if not streamlined. While the payroll processing varies from company to company and depends on their work culture, the salary elements remain the same in India.
Terms like CTC, Net Pay, Gross Salary, Allowances, Prerequisites, Deductions, and Payslips can be difficult and might create confusion for a person with less accounts experience. In payroll processing, it’s important to understand salary structure and elements associated with the same.
Recommended Read: Payroll processing in India- A complete step by step guideline
What constitutes Salary in Indian Payroll Processing?
CTC full form is the cost to the company, the total amount spent by the company on its employees. It refers to the total salary package of an employee. CTC is inclusive of all monthly components such as “Basic Salary” “ Allowances”
“ Perquisites” Mandatory or retirement contributions. CTC is never the take-home salary of an employee.
- CTC=Gross Salary + Gratuity + PF
Gross salary is the amount calculated by adding up one’s basic salary and allowances, before deduction of taxes and other deductions. It includes bonuses, overtime pay, holiday pay, and other differentials.
- Gross Salary = Basic Salary + HRA + Other Allowances
Net Salary/Take Home Salary
Take-home Salary or Net Salary is the amount calculated after deducting income tax at source (TDS) and other deductions as per the company’s HR policies.
- Net Salary = Gross Salary – Professional Tax – Public Provident Fund – Income Tax
These are the monetary benefits provided over and above the basic salary, which may be partially or fully taxable or are completely exempt from tax. Common ones include;
House Rent Allowance (HRA)
A house rent allowance is that component of the salary which is paid to employees for meeting the cost of renting a home. It offers tax benefits to the employees for the sum that they pay towards their accommodation every year.
- 40% of basic (non-metros)
- 50% of basic (metros).
Medical allowance is a fixed allowance paid to the employees of an organization to meet their medical expenditure.
Leave Travel Allowance (LTA)
Leave travel allowance is eligible for tax exemption. It is offered by employers to their employees to cover the latter’s travel expenses when he or she is on leave from work. The amount paid as leave travel allowance is exempt from tax under Section 10(5) of Income Tax Act, 1961. Leave travel allowance only covers domestic travel and the mode of travel needs to be air, railway or public transport.
Conveyance allowance, also known as transport allowance, is a kind of allowance offered by employers to their employees to compensate for their travel expenses to and from their residence and workplace.
Children education allowances
Employees are given a certain amount to educate their children in India. Any sum spent more than the provided limit of INR 100 per month per child for a maximum of two children, is taxable.
Dearness Allowance (DA)
Dearness allowance is a certain percentage of the basic salary paid to employees, aimed at mitigating the impact of inflation. It is paid by the government to employees of the public sector and pensioners of the same.
Perquisites refers to fringe benefits. Mostly non-monetary benefits provided on the basis of an employee’s official position in the organization. They include companies providing car, phone, Internet services etc. They are non-cash benefits.
In Indian Payroll Processing, deductions, when applied to the CTC give you the actual take-home salary that an employee gets. Here are some of the most common deductions:
Provident Fund (PF)
Employee Provident Fund is an employee benefits scheme where investments are made by both the employer and the employee each month.
- How is it calculated? – Both employee and employer contribute 12% of Basic Salary + DA + Special
- To whom does it apply to? – Organizations with a strength of 20 employees or more. It is compulsory for employees whose Basic, DA and Special allowances amount to less than ₹15,000 per month
Employees’ State Insurance Corporation (ESIC)
As per the ESI Act, 1948 in Indian Payroll Processing, if a company has 10 or more employees (20 in case of Maharashtra and Chandigarh) whose gross salary is below Rs. 21,000 per month, then the employer is required to avail ESIC scheme for such employees.
How is it calculated?
- Employer’s contribution; 4.0% of gross salary
- Employees’ contribution; 1.0% of gross salary
Whom does it apply to?
- The firm should have at least 20 employees whose gross salary does not exceed Rs.21, 000 p.m. It is applicable to all such employees.
Professional tax is a tax levied on the income earned by salaried employees and professionals, including chartered accountants, doctors and lawyers, etc. by the state government. Different states have varying methods of calculating professional tax.
How is it calculated?
- Varies from one state to another
Labour Welfare Fund
Labour welfare fund is a statutory contribution managed by individual state authorities. The state labour welfare board determines the amount and frequency of the contribution. The contribution and periodicity of remittance differs with every state. Labour welfare is an aid in the form of money or necessities for those in need.
National Pension Scheme (NPS)
National Pension Scheme or NPS scheme is an initiative of the government of India. It is a contribution-based pension scheme that allows a person to create a retirement corpus. Men and women can use it as a saving-investment or post-retirement tool.
How is it calculated?
- Employer’s contribution – Max. of 10% of basic salary
- Employee contribution – a minimum of INR 6000 up to INR 50,000 pa
Two basic types of salary structuring
The two basic types of structuring salary involve how we want to break up and define CTC. There are two ways to this:
In this type, you define the amount for different salary components and add up the total as gross. For example Basic – 5000, DA – 5000 = Gross – 10000.
In this type, you define the total gross and then divide the amount between different components. For example, Gross = 10000; Basic is 40% of gross, DA is 60% of gross. (as per the sources)
Other Elements of Salary:
Payslip/ Salary Slip
A salary slip is a document issued by an employer to an employee. It contains a detailed description of the employee’s salary components like HRA, LTA, Bonus paid etc. and deductions for a month. It is issued every month by an employer either in the form of a printed hard copy or an electronic copy.
Form 16 is a certificate issued by an employer and it contains the information you need to prepare and file your income tax return. Employers must issue it every year on or before 15 June of the next year, immediately after the financial year in which the tax is deducted.
Reimbursement is the amount paid by the employer to an employee for the official expenses such as; official phone calls, taxi trips for travel to client locations, meals at client location or hotel stay for official trips. These reimbursements are usually on an actual basis and payment is made after the submission of bills. This reimbursement is not taxable to the employee.
Bonus and Incentives
An incentive is a program set up with specific goals to be met. A bonus is a form of award and usually isn’t dependent on reaching quantitative goals.
Ad hoc Components
Ad hoc items are those infrequent payments that you have to make on payroll. Adjustments are a great example of an ad hoc item. Every time you do an adjustment you are making it to fix a specific error or issue.
The tax levied on one’s personal income is called income tax. Usually, an employee gets his or her salary after the tax deduction by the employer. This process is called Tax Deduction at Source (TDS). The deducted tax amount is paid to the government by the company.
Employee Investment declarations
Investment declaration has to be done in the beginning of a financial year. Your employer asks you to declare your tax-saving investments for the year to be able to deduct tax accordingly from your monthly salary. Investment declaration is important for you because it can lead to a higher in-hand salary.
Gratuity is the part of the salary that is received by an employee from the employer for the services offered by the employee upon him or her leaving the job. Though an employee can receive the gratuity amount only after 5 years, it will be deducted by the employer every year and hence it will get deducted from your CTC.