Salary and Reimbursement Structure in Inida
What is Salary?
A Salary is a fixed amount of compensation paid to an employee by an employer in return for work performed. Salary is commonly paid as monthly payments in India. The amount to pay is mutually agreed prior to joining organisation and them documented in the employment contract.
Every month net salary amount is paid to employees post statutory deduction, like Provident fund, ESIC, Income Tax, Professional Tax, and LWF. This deduction is subject to the applicability of the law to the employer.
What is CTC?
CTC means Cost-To-Company. The total cost that an employer would incur, on an employee in a year is called CTC. Every month salary and other benefits that the company pays on an employee is actually a cost to the company. CTC package is a term often used by private sector Indian companies while making an offer of employment.
What are the components of CTC and Salary?
CTC contains all taxable, non-taxable, and statutory contribution amounts paid and payable on-behalf of the employee. All the below mentioned are a part of the in-hand salary, and therefore, is the part of the CTC;
Basic, HRA, LTA,Education Allowance, Special Allowance, Telephone/Internet Reimbursement, Car & Petrol Reimbursement, Meal Coupon, Book & Periodicals Reimbursement.
Apart from the above, the statutory contribution and retiral benefit comprises a major part of CTC with which the employee knows how much deduction and benefits will he gets.
On what date should you pay salary to employees?
•Usually, most companies pay salaries on the 30th or 31st of every month, but as per the Code of Wage Act, it should be paid by the 7th of next month if employee strength is up to 1000 and for those above can pay till the 10th of next month.
•To meet the statutory deadline, it is always preferred to pay a salary before the 7th of next month since the salary tax payment deadline is the 7th of next month and thereafter 15th for PF and ESIC.
What points to considered while designing a new CTC?
•An employee’s salary is determined by several parameters like employees’ profession, skillsets and years of experience, location of the profession, salary structure.
•The Basic salary amount should be equal or greater than the state minimum wage rate.
•Statutory contribution should be applied based on central and state law which is applicable to the organisation.
•Allocate tax-friendly components which result in an increase in employees monthly take-home salary
Some of the various components of salaries with applicable statutory limit are as follows
Basic Salary
Basic Salary
- Type: Monthly Fixed Allowance
- About:
Basic + DA forms the core of the salary structure. Usually, Basic should be 50% of CTC. Some of the other components are dependent on Basic, which are Gratuity, Leave encashment, Overtime, and Statutory bonus. Also, the Basic should never be lower than the minimum wage amount. So utmost care should be taken while allocating the Basic component.
- Limit: 50% of CTC
- PF Applicable:
- 12% of Basic salary, or
- If Basic is below Rs.15,000 pm then total up all fixed allowance maximum up to Rs.15,000.
Note: As per PF notification dated March 2019, all fixed allowances except HRA will form a part of PF contribution up to a limit of Rs.15,000 pm (15,000 * 12% = 1,800 pm).
Applicable Taxes and Contributions
- ESIC Applicable: Yes
- Professional Tax Applicable: Yes
- LWF Applicable: Yes
- Gratuity Applicable: Yes
- Income Tax Applicable: Fully Taxable
House Rent Allowance (HRA)
- Type: Monthly Fixed Allowance
- About:
- HRA usually to be set at 40% or 50% of the Basic salary.
- Salaried individuals, who live in rented houses, can claim the House Rent Allowance (HRA) to lower their taxes – partially or wholly. The allowance is for expenses related to rented accommodation. If you don’t live in rented accommodation, this allowance is fully taxable.
- Limit: 50% of Basic for Metro City and 40% of Basic for Non-Metro City
- Income Tax Applicable: Tax exemption is based on declaration and proof submitted by the employee to his employer.
Applicable Taxes and Contributions
- PF Applicable: No
- ESIC Applicable: Yes
- Professional Tax Applicable: Yes
- LWF Applicable: Yes
- Gratuity Applicable: No
Leave Travel Allowance (LTA)
- Type: Monthly Fixed Allowance
- About:
Employees can claim an exemption under Income Tax for expenses incurred for traveling when on leave anywhere in India along with dependent family members. Many factors need to be kept in mind before planning the travel for the purpose of claiming LTA exemption. Income tax provision has laid down various rules with respect to claiming exemption of LTA.
- Limit: Maximum up to 10% of Basic
- Income Tax Applicable: Tax exemption is based on declaration and proof submitted by the employee to his employer.
Applicable Taxes and Contributions
- PF Applicable: Yes
- ESIC Applicable: Yes
- Professional Tax Applicable: Yes
- LWF Applicable: Yes
- Gratuity Applicable: No
Education Allowance
- Type: Monthly Fixed Allowance
- About:
For some salaried individuals, payment of education or school tuition fees for children can be part of their salary structure for availing tax benefits.
- Limit:
- Children’s Education Allowance: Rs.100 per month per child up to a maximum of 2 children.
- Hostel Expenditure Allowance: Rs.300 per month per child up to a maximum of 2 children.
- Income Tax Applicable: Tax exemption is based on declaration and proof submitted by the employee to his employer.
Applicable Taxes and Contributions
- PF Applicable: Yes
- ESIC Applicable: Yes
- Professional Tax Applicable: Yes
- LWF Applicable: Yes
- Gratuity Applicable: No
Special Allowance (Balance)
- Type: Monthly Fixed Allowance
- About:
Special allowance will remain for allocation of balance remaining surplus after the above-fixed allowance allocation.
- Limit: Usually this will be used as a balancing component.
- Income Tax Applicable: Fully Taxable
Applicable Taxes and Contributions
- PF Applicable: Yes
- ESIC Applicable: Yes
- Professional Tax Applicable: Yes
- LWF Applicable: Yes
- Gratuity Applicable: No
Fixed Gross Salary
- Type: Total of all Fixed Allowance
- About:
This is the total of all fixed allowances which will be considered for various statutory calculations like ESIC wage, PT Wage, LWF Wage, and Income Tax, etc.
- Limit: Sum of all fixed allowances, from Point 1 to 5.
Mobile/Internet Reimbursement
- Type: Monthly Fixed Reimbursement
- About:
To avail tax benefit, the employer, based on level or designation, provides employees a monthly fixed amount, based on which employees will submit proof every month. For any period if proof is not or partially submitted, then the eligible unclaimed amount will be paid and considered under taxable income.
- Limit: Rs.500 to Rs.2,000 per month (only for one mobile or telephone number)
- Income Tax Applicable: Tax-free subject to proof submitted; for balance proof not submitted, it will be considered for taxation.
Applicable Taxes and Contributions
- PF Applicable: No
- ESIC Applicable: No
- Professional Tax Applicable: No
- LWF Applicable: No
- Gratuity Applicable: No