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Pay Structure in India

What is Salary Structure?

Salary Structure is an important aspect for a salaried individual, as it gives clarity to the individual about tax savings and the take home amount.

Cost to Company (CTC) is generally divided in to following parts: -

  • Basic Salary.
  • Allowances.
  • Perquisites.
  • Retirement benefits or PF contributions.

Each part of CTC has an important role to play, in taxation in India and also tells an individual about his/her take home salary.

What is Basic Salary?

  • Basic salary is the base income of a salaried individual.
  • It is the gross salary paid to a person before any kind of tax deductions or additions.
  • Basic salary is a fixed amount, that is paid to the employee as the base of their salary.
  • It basically decided, depending on the designation or the experience of the person.
  • The base income is the amount, that is exclusive of any kind of bonus, tax benefit or any other compensation applicable to the employee.
  • If the employee is appointed on Pay Scale basis, then his/her Basic Salary can increase every year.
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What is my Tax Liability on my Basic Salary?

  • On a salary slab, the basic pay is always taxable.
  • Since the basic pay is taxable, its rate is usually 40% of the CTC.
  • If at all, the basic pay is given at a lower percentage, then it will result in tax deduction from other constituents of the salary.

What is Dearness Allowance (DA)?

  • Dearness Allowances is that section of the pay structure and its motive is to reduce the burden of inflation on the salaried employees.
  • The Dearness Allowance is generally 5% of the total CTC and similar to the basic component, Dearness Allowance also affects Provident Fund (PF), Employee’s state Insurance Corporation (ESIC) etc.

How to decide amount for Basic Pay and DA?

In case of Higher Percentage of Basic Salary and DA
  • If the basic pay and Dearness Allowance have higher percentage, then in such a situation the tax liability of the employee may also increase, as these two factors of salary are completely taxable.
  • A higher percentage of basic salary and DA will also influence the tax liability of the employer, as the employer will have to pay higher contributions for PF, ESIC etc in such cases.
In case of Lower Percentage of Basic Pay and DA
  • If the percentage of Basic Pay or DA is quite low, then in such a situation, the employee will not be able to fulfil the minimum pay norms set by the Government of India.
  • As minimum wages get updated on regular intervals, the employee will be at a risk of falling below the set wage limit.

How House Rent Allowance affects Salary Structure?

  • House Rent Allowance is an important part of Salary Structure, which helps an employee to claim Tax Exemptions, if they stay in rented accommodation.
  • The taxpayers, who stay in metropolitan cities can claim tax deductions up to 50% on their basic pay and this limit is 40% for the non-metropolitan cities.
  • House Rent Allowance for salaried people is provided under Section 10 (13A) of the Income Tax Act, 1961.
  • Self-employed individuals are not eligible for HRA exemption under the above-mentioned section, but they can claim it under section 80GG, of the IT Act.
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How Leave Travel Allowance Influences Pay Structure?

LTA or Leave Travel Allowance is a reimbursement, which an employee gets for his/her travel expenses. This reimbursement is provided to the employee for travelling within one’s own country.

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Under LTA, an employee can claim tax benefits for the travel expenditure made during the holiday, for self as well as his/her family.

You can claim Tax Benefits under LTA in certain situations: -

  • Under LTA you can only cover your travel expenses, other expenses like lodging and boarding must be taken care by you.
  • You will only get a reimbursement of the travel expenses, when you are traveling within India. You cannot get any reimbursement, if you are travelling abroad.
  • Your LTA policy is applicable for only those family members, who are directly related and dependent on you.

How Conveyance Allowance affects Salary Structure?

  • Conveyance Allowance is a major part of pay structure, as it is given to the employee to meet his/her travel expenses, while travelling from home to workplace and from workplace to back home.
  • The maximum that is exempted is Rs. 800 for normal individual and it goes up to Rs.1600 for differently abled employees.
  • An employee can claim conveyance allowance only when, the organisation in which he/ she is working does not provide transportation. If the employer provides pick and drop service to its employees, in that case employees cannot claim Conveyance Allowance and you will get it as a part of your net salary.

How my Medical Allowance influences my Salary Structure?

  • It is the reimbursement given to the employee for his/her medical expenses.
  • The amount which is given as medical Allowance is Rs. 15,000 per year, which is Rs. 1,250 per month.
  • If an employee wants to claim tax benefits under medical allowance, them the employee must submit a proof of the medical expenses.
  • When an employee doesn’t claim Medical allowance for a particular month, it is carry forwarded to the next month.
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How can I claim Child Education Allowance?

  • This Allowance is provided to an individual as a part of net salary and this is paid to him/her for the tuition fees of his/her children.
  • The amount that is allotted to the educational fee of maximum two children is Rs. 100 each per month, which sums up to Rs. 2,400 per year.

Other than the above-mentioned allowances, there are special allowances too, which are taxable.

Common Deductions on Salary

Provident Fund (PF)

PF contribution is defined as a savings policy where 12% of the Basic Salary of an employee and an additional 12% is contributed from the employer’s side, the amount is then deposited in the employee’s PF account. The whole of an employee’s 12% contribution goes into the EPF account, with that 3.67% of the employer’s contribution also goes into EPF account and the remaining balance i.e. 8.33% goes into your EPS (Employee’s Pension Scheme). PF funds also generate an interest of 8% - 12%, depending on the rate assigned as per the government and the Central Board of Trustees.

When an employee joins a new company then it is important that the employee provides his/her EPF number to the new employer and make sure that EPF details are updated as per the new company’s credentials.

Employees State Insurance Corporation (ESIC)

When an employee earns a gross salary of more than Rupees 15,000 then deductions towards ESIC are mandatory. ESIC deduction is applicable only for companies with more than 20 employees whose gross salary falls within the Rupees 15,000 bracket. The employee must contribute 1.75% of the gross salary while the employer contributes 4.75% of the gross salary towards the employee’s ESIC.

Professional Tax

The government in certain states of India imposes Professional Tax upon salaried employees. The list of states where Professional Tax is imposed are; Karnataka, Bihar, West Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Odisha, Tripura, Madhya Pradesh and Sikkim. The amount deducted against Profession Tax varies from one state to another.

Labour Welfare Fund

Labour Welfare Fund is a contribution made towards benefiting the labour class citizens by salaried employees. Labour Welfare Fund is deducted in states like; Karnataka, West Bengal, Maharashtra, Andhra Pradesh, Kerala, Goa, Delhi, Punjab, Haryana and Madhya Pradesh. Both the employer and the employee make contributions towards Labour Welfare Fund, but the employer contributes twice the amount contributed by the employee.

Frequently Asked Questions

Q. What are Perquisites?
Perquisite is defined as any sort of benefit or facility provided free of cost or at a certain rate by an employer to the employee, such as:
  • Company apartment or flat.
  • Company vehicle.
  • Reimbursement of gas.
  • Free electricity and Water provision.
  • Club membership.
  • Domestic help service.
  • Interest subsidy on loan.
  • Medical insurance etc.
Q. Are perquisites taxable?
Perquisites are not cash benefits which is why it cannot be taxed directly. The Income Tax Acts have instead proposed certain value attached to the perquisites and taxes are charged on it. The rate of tax liability varies from one perquisite category to another.
Q. What deductions are made on my salary?

There are two type of deduction made from the salary of an employee:

  • Compulsory deduction: It includes deductions such as Provident Fund Contribution, Income Tax, Professional Tax (if applicable).
  • Optional deduction: Optional deductions include deductions like Recovery for Advance, Interest paid on Loan and Voluntary Contribution to Provident Fund.

In the News

  • All India ITR offers free income tax filing assistance for personnel of armed forces

    The Economic Times Wealth: Vikas Dahiya, founder and chief of tax compliance platform, All India ITR announced a free of cost tax returns solution for members of the Indian Armed Forces. Due to their disciplined schedules, annual tax returns become a hectic chore for servicemen. They need to repaid for their services to millions of citizens and this initiative will go a long way to alleviate the stresses in their service conditions.

    18th July 2017