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Guide

Salary Breakup Component

Salary Breakup is a necessary responsibility for all HR and payroll professionals. Despite the importance of the task, professionals frequently lack the knowledge needed to develop a thorough and effective salary structure.

Regardless of your position—talent acquisition, generalist, or payroll profile—you should be able to create a salary Breakup, also known as a CTC structure. An applicant may accept or decline your offer based on the competitive CTC structure in talent acquisition. Similar to generalist processing, payroll processing also depends on it.

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Confusion is frequently caused by CTC, basic salary, gross compensation, allowance, reimbursements, tax deductions, provident fund, insurance, etc. For everyone to readily comprehend the many parts of a salary structure, we have attempted to define them in this post.

What does Cost to Company, or CTC, mean?

The total sum a business invests in a worker (directly or indirectly) is known as CTC or Cost to Company.

This contains monthly components like base salary, various reimbursements, allowances, etc. and annual details like gratuities, variable yearly compensation, etc.

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Because there will be additional deductions and the take-home compensation will differ from the CTC, the CTC will never be identical to the employee’s take-home pay.

CTC = Gross Salary + Gratuity + Employer Contributions (PF /ESIC)

What is the gross salary?

Before income tax and other deductions, the gross salary is the total of the basic salary, allowances, bonuses, overtime pay, and further compensation.

Gross Salary = Basic Salary + HRA + Bonus + Other Allowances

What is Take-Home Salary or Net Salary?

Take-home salary is another name for net salary. It is the employee’s take-home pay after deductions for income tax, PF, and other expenses.

Net Salary = Gross Salary – Income Tax – PF – ESIC – Other Deductions

Let’s now talk about the many elements of the Salary Breakup:

Basic Salary

The basic salary, which makes up the majority of CTC, should not be less than the applicable state’s minimum wage.

It is taxable and comprises 40% to 50% of CTC. Statutory components like PF, bonus, gratuity and LTA are computed based on this sum. Therefore, a change in basic pay may affect an employee’s CTC.

House Rent Allowance

An employee receives a House Rent Allowance to cover the cost of renting a property. Typically, businesses keep it between 40% and 50%, depending on where you live. If you reside in a metro area, your HRA will be 50% of your base pay; if you live in a non-metro area, it will be 40% of your base pay.

Conveyance Allowance

The money given to an employee to cover costs spent while travelling from home to work is known as a conveyance allowance. The monthly maximum for a conveyance allowance is Rs. 1600. (Note: As of the fiscal year (FY) 2018–19, Conveyance Allowance and Medical Reimbursement have been replaced by a Standard Deduction of Rs. 40,000.)

Also Read: “Why Should We Hire You” 

Leave Travel Allowance

A leave travel allowance is given to employees to help with domestic travel costs.

LTA is 8.33% of Basic; a corporation may modify it based on an employee’s grade and country of origin.

LTA Rules: 

  • A worker cannot get an LTA exemption for travel before October 1, 1989.
  • If an employee does not claim LTA in a particular block, he may carry it over to the following block and use it in the first year of the next block.
Statutory Bonus

According to the Payment of Bonus Act of 1965, statutory bonuses are additional payments to motivate employees. Bonus is paid monthly or annually, equaling 8.33% of Basic.

Mobile Allowance

Employees are given a mobile allowance to cover the costs associated with using a mobile device for work. According to corporate policy, the employer may set a dollar amount for such reimbursement.

Medical Allowance

It is a set sum that the employer gives to the employee regardless of the actual costs of medical care.

Books and Periodicals

Employees will receive payment to reimburse their costs for purchasing books and magazines relevant to their line of work. If bills are submitted, it is not taxed.

Other Allowance / Special Allowance

The compensating element of the wage structure is this allowance. After the other components have been paid out, it is typically used as the CTC’s leftover.

Provident Fund (PF)

Employer and employee jointly contribute money to the Provident Fund each month to invest for the employee’s retirement. Employee contributions are 12% of Basic, and employer contributions are 13% of Basic (1% Admin Charges included). Companies that pay wages to at least 20 employees are subject to PF.

Employees State Insurance Corporation (ESIC)

Many businesses offer their employees life and health insurance, the cost of which is covered by the employer and is factored into the CTC. As a result, it is subtracted from your take-home pay. The employer should offer Mediclaim insurance if an employee does not have ESIC coverage.

Professional Tax

A particular state government levies a tax on professionals, and others who earn a salary are known as professional tax. Where they are applicable, the deduction amount varies from state to state.

Gratuity

Employees who have worked continuously for at least five years receive a gratuity as a reward. It is an expression of monetary appreciation from the employer to the worker for the work done.

The employer will take the gratuity payment from your CTC at 4.81% of Basic, even if you can only get it after working for the company for five years.

Which Salary Breakup plan is ideal?

To assist you in creating the ideal salary structure, we have put up a table of standard salary structure components and recommended values for each element.

S.No Components Recommendation
1 Basic 40% of CTC
2 HRA 50% of Basic
3 Bonus 8.33% of Basic
4 LTA 8.33% of Basic (optional)
5 Books and Periodicals Fixed Amount (As per company policy)
6 Mobile Allowance Fixed Amount (As per company policy)
7 Other Allowance Balancing Figure
8 Gross Salary SUM of all Above ( A )
9 ESIC 0.75 % of Gross Salary
10 Mediclaim Fixed Amount (As per company policy)
11 Employee PF 12% of Basic
12 Professional Tax As per Statewise Slabs
13 Total Deduction SUM of all Above  ( B )
14 Net Salary ( A ) – ( B )
15 Employer ESIC 3.25% of Gross Salary
16 Employer PF 13% of Basic
17 Gratuity 4.81% of Basic
18 Employer Deduction SUM of Above ( C )
19 Monthly CTC Gross + ( C )
20 Annual CTC Monthly CTC * 12

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