Salary Breakup: Understanding Salary Structure, Components, Calculation & More
- Rajesh Kumar Kar
- Sep 17
- 8 min read
Creating a salary structure that works is essential for all payroll and human resources professionals. It is crucial not only for the employees' just compensation but also for adherence to industry standards, statutory requirements, and employee satisfaction. For this reason, understanding the answer to the query, "What is salary breakup?" is crucial. The Indian wage system will be broken down and its components explained in this post. You may develop a fair compensation breakdown structure that satisfies employee expectations and corporate policy by having a solid understanding of these fundamentals. In compliance with tax regulations, this aids employers in making transparent and tax-efficient payments.
Table of Contents
Take-Home/In-Hand Salary
What is Salary Breakup?
A salary breakup structure, also known as a cost-to-company (CTC) breakup structure, is a framework that breaks down the CTC into different parts to determine an employee's take-home pay. The overall compensation package that a business gives a candidate throughout the hiring process is known as the cost-to-company, or CTC. That being said, it is crucial to remember that CTC is never equivalent to the monthly take-home pay. CTC is the entire amount of money that a business spends, directly or indirectly, on an employee. Basic pay, provident fund, allowances, and other elements are all included. Some businesses figure it out by adding the employer's gratuity and PF (Provident Fund) contributions to the gross salary.
Components of Salary Breakup Structure
Basic Salary
This is the set portion of the pay that does not include any perks or benefits. Depending on the industry, designation, and job location, it may differ. It is fully taxable and makes up between 40 and 60 percent of the CTC. Therefore, if the basic salary is kept too low, it may not meet minimum wage standards, and if it is too high, it may lead to higher tax and PF obligations.
Allowances
This is the cost incurred by the employer to allow you to provide the necessary services. These benefits, which are given above and beyond the base pay, are contingent on your job function, location, and classification. The specific company policies determine the amount of the allowance. The most popular types of allowances are listed here.
Employee Provident Fund
An employee retirement benefit offered by the employer is called a provident fund. Every month, a part of the basic salary for employees is set aside from their CTC. Also, the employer adds a share of the monthly contribution to this fund. After one month without a job, an employee can withdraw this sum. This is typically computed at 12% of the base pay and is a component of the company's retirement benefit plan.
Gratuity
It is a one-time payment made to staff members of the company upon their completion of five years of employment. As the name implies, it is the sum given to the employee as a token of appreciation for their commitment and diligence throughout the years of employment. According to the Payment of Gratuity Act of 1972, the gratuity is computed at 4.81% of the base pay.
Statutory/Performance Bonus
When an employee does very well, the company rewards them with a statutory bonus. In accordance with the Payment of Bonus Act of 1965, it is paid to employees as an incentive in addition to their base pay. Depending on the company's policies, the bonus amount is stated as a percentage of the base pay.
Insurance
Individual or group life insurance policies are provided by some companies to ensure health coverage for employees. Each month, a modest sum is deducted from their CTC in lieu of premium payment.
Taxes
The remaining sum after deducting bonuses, gratuities, PF, and allowances from the salary is considered taxable. The applicable slab rates are used to determine the amount of tax owed by employees, and they can choose between the old and new tax regimes.
Old Tax Regime
Income Slab (Rs.) | Tax Rate (%) |
Up to 2,50,000 | Nil |
2,50,001 – 5,00,000 | 5% |
5,00,001 – 10,00,000 | 20% |
10,00,001 and above | 30% |
New Tax Regime
Income Slab (Rs.) | Tax Rate (%) |
Up to 2,50,000 | Nil |
2,50,001 – 5,00,000 | 5% |
5,00,001 – 7,50,000 | 10% |
7,50,001 – 10,00,000 | 15% |
10,00,001 – 12,50,000 | 20% |
12,50,001 – 15,00,000 | 25% |
Above 15,00,000 | 30% + Surcharge + Cess |
Gross Salary
It is the entire salary before other deductions are implemented. The sum of basic salary, HRA, bonus, and allowances makes the gross salary.
Take-Home/In-Hand Salary
The in-hand or take-home salary is the sum left after the adjustments are made, leaving this amount that goes to employees’ bank accounts at the end of each month.
Net Salary = Basic Salary + Allowances – (Provident fund + Gratuity + TDS + Professional Tax)
Calculation of Salary Breakup Structure
If an employee’s CTC is Rs. 7,00,000 per year, then his salary breakup is as follows:
Basic Salary: Rs. 4,20,000
HRA: Rs. 1,20,000
Conveyance Allowance: Rs. 60,000
Other Allowances: Rs. 47,100
Provident Fund: Rs. 50,400 (12% of basic salary)
Professional Tax: Rs. 2,500
Step 1: Calculate Gross Salary
Gross Salary = Rs. 4,20,000 + Rs. 1,20,000 + Rs. 60,000 + Rs. 47,100 = Rs. 6,47,100
Step 2: Calculate Deductions
Total Deductions = Rs. 50,400 (PF) + Rs. 44,200 (TDS) + Rs. 2,500 (Professional Tax) = Rs. 97,100
Step 3: Calculate Net Salary
Net Salary = Gross Salary – Deductions = Rs. 6,47,100 – Rs. 97,100 = Rs. 5,50,000
Taxability of Salary Components
The tax on each and every pay component must be understood by both the employer and the employee. The following explains the most prevalent elements under salary in India:
Fully-Taxable Components
Basic Salary: Subject to full taxation according to the employee's income bracket.
Dearness Allowance (DA): Only central government employees are eligible, although it is fully taxable.
Medical Allowance: Regardless of the amount of medical expenses incurred, the medical allowance is fully taxed.
Overtime and Project Allowances: Depending on the length of the project or the additional hours worked, overtime and project allowances are fully taxable.
Partially-Taxable Components
House Rent Allowance: Section 10(13A) only partially exempts the House Rent Allowance (HRA), which is determined by the employee's base pay, the amount of rent paid, and the city.
Leave Travel Allowance: Within India, leave travel allowance (LTA) is free, although there are restrictions on its use, including its frequency and the people who can use it.
Children's Education Allowance: For up to two children, this is exempt up to Rs. 100 per month.
Non-Taxable Components
Under reasonable restrictions based on real expenses, reimbursement for phone and internet bills is exempt.
Books, journals, and gadgets that are used for work-related reasons and are supported by bills are exempt from taxes.
Determination of Salary Structure
The compensation structure in India is determined by a number of factors and differs depending on the industry and job type. The following are some of the most crucial factors taken into account when deciding on the structure:
Education and Experience: Experience combined with advanced education typically yields high compensation. A postgraduate with over five years of experience, for example, will command a higher, more competitive salary than a recent graduate.
Industry: Employees in certain sectors, such as financial services or information technology, will receive better compensation than those in sectors with less market demand. One of the elements that determines the pay range for positions with comparable duties and responsibilities is industry trends.
Skillset: It has also been observed that workers with expertise in blockchain, AI, or machine learning typically earn more since companies respect such abilities. This may result in more perks and a larger compensation package.
Location: Due to a higher cost of living than in rural areas, occupations in larger cities like Delhi or Mumbai typically pay more. This element has also been slightly changed by remote employment, which emphasises role-based compensation over location-based disparities.
Conclusion
A grasp of numerous components, tax classifications, and statutory duties is necessary to establish a pay structure that is both compliant and equitable in India. With a clear compensation breakdown structure, modern payroll technologies may help guarantee transparency and employee happiness. In addition to assisting in luring and keeping talent, a clear pay structure guarantees adherence to established financial and legal requirements. Payroll managers and HR specialists can develop a sensible pay structure that benefits both the business and its workers by following the procedures described in this article.
FAQs
Q1. What is a basic salary?
The foundation of an employee's pay is their base pay, which often accounts for 40–50% of their overall remuneration. It is the sum that is entirely taxed and excludes any bonuses or allowances.
Q2. What is the difference between gross salary and net salary?
The gross salary is the entire amount of money earned before any deductions for bonuses, allowances, or other perks are made. The amount an employee receives each month after all potential deductions is known as their net salary.
Q3. What is CTC (Cost to Company)?
CTC is the entire amount of money an organisation spends on one employee over the course of a year. This includes basic pay, benefits like insurance, provident fund payments, and gratuities. Since CTC includes both direct and indirect benefits, it cannot be compared to net compensation.
Q4. What are flexible salary components?
Flexible compensation components allow employees to select the portion of their pay that they would like to use for leave travel allowances, lunch vouchers, transportation allowances, or something else entirely. Additionally, this approach offers employees flexibility and pay that is tailored to their individual preferences and tax savings.
Q5. How are bonuses taxed in India?
In India, bonuses are subject to full taxation under the Income Tax Act. They will be added to the employee's income and calculated using the income tax rates in effect for the fiscal year in which the bonus is received.
Q6. How is House Rent Allowance (HRA) calculated?
Depending on the employee's rent and whether they live in a metro or non-metropolitan area, HRA, which is computed as a percentage of the base pay, may be partially tax-exempt. Actual HRA received, 50% of the base salary (for metro areas), or actual rent paid, less 10% of the base income, are the three lowest requirements that establish the exemption.
Q7. What is a salary slip?
A salary slip refers to a document that every employee receives from their employer. It is a monthly statement that includes information on every aspect of the salary. A payslip or salary slip lists every component of the payment breakdown, including the deductions. It gives a quick overview of the salary's intricate structure.
Q8. What is the key difference between CTC and in-hand salary?
The amount that you actually receive in your bank account after deductions is known as your in-hand salary, whereas CTC is the sum of all the elements of the salary breakdown structure.
Q9. What is the best salary structure?
Certain allowance components are eligible for a variety of tax deductions. Make sure the pay is set up to take into account a number of pertinent tax deductions and benefits that will help your finances.
Q10. What is CTC, and what is the breakup?
The overall cost to an organisation of hiring or keeping an employee is known as the cost to the company, or CTC. Benefits and the employee's gross salary are included.
Q11. What is the difference between CTC and take-home salary?
CTC, which stands for "Cost to Company," is the entire amount of money that the company spends on paying you for your work. On the other hand, the term "take-home salary" describes the actual amount of money that an employee receives each month in their bank account.
Q12. How is the LTA CTC breakup calculated?
Employees who travel within the country are compensated with Leave Travel Allowance. LTA, which is 8.33% of Basic, can be set by the employer based on an employee's grade and country of origin.
Q13. Is PF calculated on gross salary?
For those employed in the private sector, the contribution is often calculated based on their base pay. For example, if your basic monthly salary is Rs. 30,000, you and your employer would both contribute Rs. 3,600, which is 12% of your basic salary. Either 50% or 60% of the gross compensation is the basic percentage.
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