Structuring the employee salary is one of the key issues that an employer has to cope with. It is important to have a well planned salary structure to ensure the salary amount for a range of jobs is competitive both internally and externally.
In other words, it must be designed in such a way that it serves a win – win arrangement both for the employer and its employees.
A competitive salary structure helps the employer in:
- meeting his company needs
- attracting quality candidates for various job positions
- rewarding employees for performance and offering incentives for further improvement in employee performance
- making changes in the salary rates easily in response to the change in the market rates
On the other hand, the employees also get aware of the various components that constitute their salary. This further helps them in understanding the tax exemptions that they can avail and the amount they are able to save in the form of Employees Provident Fund (EPF) etc.
This article talks in detail about the various components of an employee’s salary slip.
1. Basic Salary
Basic Salary is the amount paid to an employee before any reduction or increase in salary as a result of allowances, Bonus, Overtime etc. This is the fixed portion of an employee’s salary. Thus, basic salary is typically based on the designation of the employee in the organization.
Basic Salary is paid to the employee in lieu of the work done by him or her for the employer. It does not include any bonus, benefit or any other compensation from the employer. Further, the basic salary varies from industry to industry.
Thus, deciding the amount of basic salary as a part of the Cost to Company (CTC) is an important decision to be taken by the employer. This is because it is fully taxable and higher amount of basic salary would mean increased tax liability for the employee.
Therefore, the type of employee to whom the salary is paid must be kept in mind while deciding the basic salary portion of CTC. A junior employee would need a higher take home salary but would not want to take higher tax on the same.
Hence, lower basic pay with allowances such as House Rent Allowance (HRA), Medical Allowance, etc would be a favorable salary structure for such an employee.
Whereas, senior employees would prefer saving on tax liability over a high monthly payout. And hence a higher basic payout would be a favorable pay structure for senior employees.
Allowances are the fixed amount of money given by the employers over and above the basic salary. Such allowances are given to the employees so that they can meet their particular expenditures. These expenditures include entertainment, medical expenses, hostel expenses, travel expenses etc.
As per the Income Tax Act, these allowances are added to the basic salary of an employee and are taxable under the head “Income From Salaries”. These allowances can be further divided into three categories:
- Fully taxable
- Partially Taxable
- Fully Exempt
These are the allowances which are completely taxable under the Income Tax Act. Such allowances include:
- Dearness Allowance – Paid to combat the effect of inflation
- Entertainment Allowance – Paid to meet the expenditure towards employees entertainment while dealing with business clients such as hotel, food etc
These are the allowances that are partially taxable. In other words, some portion of such allowances is fully exempt or non-taxable. These partial allowances are deducted and the remaining amount of allowance is taxed under the Income Tax Act. These include:
- House Rent Allowance – Paid to meet the house rent expenditure for the accommodation taken on rent.
- Hostel Allowance – Granted to an employee to meet the hostel expenditure of his child. Further, upto Rs 300 per month per child for a maximum of two children are allowed as a deduction. And the remaining amount over and above such a deduction is taxable under the Income Tax Act.
These are the allowances which are not liable to income tax. In other words, these are non-taxable and employees are not liable to pay any tax on such allowances. Such allowances include:
- Allowances To High Court Judges – Any allowance paid to the judge of High Court is fully exempt.
- The Allowance Received From United Nations Organization (UNO) – Any allowance granted by UNO to its employees is non-taxable.
Perquisites, also known as Fringe Benefits, are nothing but the extra benefits provided by the employer to the employee. These benefits are provided over and above what is legally due to be paid to the employee as a part of the contract. These benefits are given on account of the position that the employee enjoys in the company.
Further, Perquisites can be provided both in cash or kind. These become taxable only when such benefits have a legal origin. Any undue advantage taken by the employee without the employer’s consent is not considered as Perquisite.
In addition to this, perquisites are divided into three categories:
Perquisites Taxable in Case of all Employees
1. Rent Free Accommodation/Concession in Rent
Value of the rent free accommodation given by the employer to the employee or value of concession in rent with regards to such an accommodation.
2. Payment in Respect of an Obligation of an Employee
Amount paid by the employer with regards to an obligation which otherwise would have been paid by the employee.
The Perquisites Exempt from Tax in Case of all Employees
1. Telephone Facility
Telephone given by an employer to an employee at his residence.
2. Transport Facility
Transport facility given by an employer who is involved in the business of carrying passengers or goods to his employees. This facility is given either free of cost or at a concessional rate.
Perquisites Taxable only in the Hands of Specified Employees
This section covers any perquisite or benefit provided at a concessional rate or free of cost and not covered in the two sections mentioned above. Further, these perquisites are taxable only in the hands of specific employees. Such perquisites include:
- Using a motor car
- Free or concessional tickets
- Concessional or Free educational facilities
Gratuity is the amount of money given by the employer to the employee in lieu of services provided by him during his period of employment. It is typically paid at the time when the employee retires from the company.
However, it can be paid even before the retirement. Provided certain conditions are met by the employee.
Further, the employee is eligible to get gratuity amount only if he completes at least five years of service with a company. However, there are exceptions to this rule.
According to such rules, Gratuity can be paid even if the employee has not completed five years with the company. This is so in case of the death of employee or his disability on account of an accident or a disease.
In addition to this, Gratuity is calculated differently for both private and government organizations.
Therefore, an employee working with a private organization comes under the Gratuity Act. Provided he works with an organization that employs a minimum of 10 persons on any single day in the previous 12 months.
Further, once a private organization comes under the purview of Gratuity Act, it remains covered under the same. This is despite the fact that the number of employees fall below 10 at any time.
5. Employee Provident Fund
Employee Provident Fund (EPF) is nothing but a retirement benefit scheme that allows for saving of a part of the employee’s salary each month. Organizations employing 20 or more persons are covered under the Employees Provident Fund and Miscellaneous Provisions Act, 1952.
As per this Act, the employee is required to pay a certain portion towards EPF. Furthermore, an equal amount of contribution is also made by the employer towards this fund. Thus, the employee gets the total lump sum amount including his as well as the employer’s contribution with interest at the time of retirement.
6. ESIC Scheme
Employees State Insurance Corporation (ESIC) Scheme is a social security scheme designed to provide protection to the employees. Such a benefit is given in respect of events such as sickness, maternity, disablement, and death on account of employment injuries.
ESIC Scheme is applicable to factories and establishments like shops, restaurants etc. that employ 10 or more persons. Further, employees with a salary of less than Rs 21,000 per month are eligible for this Scheme.
7. Professional Tax
Professional Tax is a tax charged by the State Government on the income of salaried employees as well as professionals like Chartered Accountants, Lawyers etc. The amount of such a tax and the method of calculating Professional Tax varies from state to state.
However, the maximum amount of professional tax that can be paid in a year is Rs 2,500. The employers collect such a tax from the monthly salary of the employee and pay the same to the government.
Thus, failure to pay or collect such a tax amounts to penalties imposed on the employer.