Table of Contents
Salary Structure and Salary Components
As any successful business organization out there would agree, Payroll plays a pivotal role in their success. This due to a basic fact, whether you like it or not, that everyone is ultimately working for the money! It serves as an important criterion to measure the trust and appreciation that the organization has for an employee (though it is not true always, however, employees tend to think otherwise). Salary motivates employees to work more efficiently and accurately; this is a cold fact!
However, understanding the salary structure and different components is certainly a complex task at times. On manier occasions, if not all, even the seasoned employees find it challenging to understand the payroll jargon. In this piece of information, we will attempt to understand the salary structures, components, and meaning of commonly used terms.
Understanding Commonly used Salary Terms
Cost to Company (CTC)
As the names suggest, CTC refers to the sum total of money that an employer spends on an employee. It comprises of several components such as Basic Salary, House Rent Allowance, Dearness Allowance, Bonus, etc. which are paid directly to employees and also includes components (like PF employer, ESI employer contribution, medical insurance etc) which shall not be paid to the employee, but to the Government authorities or third party directly.
Gross Salary
It is the total amount of money earned by the employee during the whole year including elements like basic salary, holiday pays, bonuses, House rent allowance, Conveyance and every other allowance. It is the total salary that is calculated before any deductions like Provident Fund, Medical Insurance and Income Tax. This is a sub set of total CTC.
CTC minus Components paid directly by the employer to Government authorities/Third parties = Gross Salary
Take home / In hand Salary
It is the final salary that an employee receives after deducting Income tax, Medical insurance expenses, contribution towards PF, ESI, professional taxes and other deductions, if any. In other words, this the amount that gets credited the bank account of employee.
Gross salary-Income tax- Contributions towards the PF- Medical insurance expenses.
.....Let's see an example to understand this better
| PARTICULARS | AMOUNT (Rs.) |
|---|---|
| Basic Salary | 6,00,000 |
| House Rent Allowance | 3,00,000 |
| Special Allowance | 3,00,000 |
| GROSS SALARY (A) | 12,00,000 |
| Employer Contribution to Provident fund (an equal amount would be deducted as employee contribution) | 21,600 |
| Medical Insurance Premium | 15,000 |
| Cost to Company (CTC) | 12,36,600 |
In the above example, Basic Salary, House Rent Allowance, Special Allowance, Employer Contribution to Provident Fund, etc. are individually called the “Salary Component.” The last row of the table represents the total Cost that a Company would incur to hire an employee. However, out of this, the salary components – employer contribution to Provident fund and medical insurance premium would not be paid to an employee directly. They would be paid to Government and third-party insurers, respectively.
Thus, expecting CTC/12 to be paid into your account would be entirely WRONG! (Sorry, if that shattered your dreams.) The question arises, then what would be “in hand” salary in this case? Let’s see :
| PARTICULARS | AMOUNT (Rs.) |
|---|---|
| Gross Salary | 12,00,000 |
| Less : Employee Contribution to Provident Fund | 21,600 |
| Less : Tax deducted at Source (TDS) | 1,00,000 |
| Net Salary / Take Home / In hand salary | 10,78,400 |
Ouch! That must’ve hurt. I know, after seeing the CTC section in the offer letter, most of you would’ve taken that you would be getting CTC/12 per month in your account (in this case Rs.1,03,050/- ). Well, as you see above, that’s not the case. In hand, salary is the net of gross salary minus deductions (statutory or otherwise).
I am sure the next question that would have come to your mind is, “Oh! Wait, I never saw that in my offer letter“. As a common practice, most of the offer letters do not show the take-home salary. This is due to the simple fact that no Company would like to scare you upfront!
Now you know, what is that you need to keep in mind while negotiating a better pay!
Understanding the meaning of different salary components
Basic salary is the minimum amount that the employer pays to the employee. Several other components are calculated basis this. For the calculation of minimum wages, only the basic salary is considered. Basic salary is calculated as a percentage of CTC and this varies from employer to employer (usually 30% to 50%. This Component is completely taxable.
House rent allowance (HRA) is a portion of the salary that is given to employees to meet their house rent expenses. So, does that mean, if you own your house, you would not be given HRA? Well no! you would still be given HRA. Then why the bifurcation at all? For now, let’s just say, it could help you save taxes (we will read the .
HRA is usually calculated at 40% or 50% of Basic Salary.
As the names themselves suggest, these are allowances given with specific intent. For example, Children education allowance is given to meet the education cost, telephone, internet allowance is given to meet telephone and internet allowances. There could be a number of different allowances that an employer may give to employees. However, these allowances would be paid to you, even if you do not have such expenses to meet. Again the question arises if it is to be paid anyway! Then why the bifurcation at all? The answer remains the same (as mentioned in HRA), the bifurcation is done to help employees save taxes. More details soon!
By textbook, this is an allowance given to employees to meet various needs. In real life, this serves as a balancing figure. More often than not, this is taxable.
These are salary components that are not fixed in nature and largely depend on the performance of the employee or a promise made by the employer to employee. These components are taxable.
House rent allowance (HRA) is a portion of the salary that is given to employees to meet their house rent expenses. So, does that mean, if you own your house, you would not be given HRA? Well no! you would still be given HRA. Then why the bifurcation at all? For now, let’s just say, it could help you save taxes (we will read the .
HRA is usually calculated at 40% or 50% of Basic Salary.
As the names themselves suggest, these are allowances given with specific intent. For example, Children education allowance is given to meet the education cost, telephone, internet allowance is given to meet telephone and internet allowances. There could be a number of different allowances that an employer may give to employees. However, these allowances would be paid to you, even if you do not have such expenses to meet. Again the question arises if it is to be paid anyway! Then why the bifurcation at all? The answer remains the same (as mentioned in HRA), the bifurcation is done to help employees save taxes. More details soon!
By textbook, this is an allowance given to employees to meet various needs. In real life, this serves as a balancing figure. More often than not, this is taxable.
