Explanation on Salary Structure and Salary Components
In order to ensure that the employees are paid fairly and in accordance with applicable regulations, businesses typically apply a salary structure when determining employee pay. It ensures that employees working in the same role and position are paid similarly to one another.
You will be able to determine the minimum and maximum earning potential for a certain job function and make smarter decisions about your career if you have a solid understanding of how firms utilize such a system to organize payments. In this post, we will define what a salary structure is, demonstrate how to build one, explain how to calculate one, look at the many components that go into a salary structure, and so on.
1) What Is a Salary Structure?
A salary structure is a component of a complete compensation package that an employer provides to an employee. It is made up of several parts of the total compensation package. To figure out how much of the employee’s wage the company is obligated to pay them, the corporation consults a salary structure. Pay grades may be included in a salary structure, each with their own minimum, middle, and maximum income ranges.
To a certain extent, an employee’s pay grade can be determined by a number of criteria, including their educational qualifications, talents, amount of work experience, and job duties. Employees are in a better position to negotiate their salaries and find out how much they have the potential to earn when they are aware of salary structure for the role they hold.
2) What are the Components of a Salary Structure?
Companies are able to provide the appropriate compensation to their workforce with the assistance of the components of a salary structure. It’s possible that they’ll be different for each employer, but here are some of the more common ones:
Cost to Company (CTC):
The total amount that a firm spends (either directly or indirectly) on an employee is referred to as the CTC, which stands for “cost to company.” It is a reference to the whole amount of the employee’s compensation package. The total cash compensation (CTC) is comprised of both monthly and annual components. Monthly components include things like basic pay, various allowances, reimbursements, and so on. Annual components include things like gratuity, annual variable pay, annual bonus, and so on.
CTC is never equal to the amount of compensation that an employee actually receives in their bank account. There are several parts of the CTC that are not included in the amount of money that is actually brought home by the employee.
CTC = Gross Salary + PF + Gratuity
Basic salary is an individual’s basic income. It is a fixed portion of one’s total compensation. It represents the employee’s primary income before any allowances or deductions. The basic salary is predominantly determined by the designation and industry.
Gross salary is the total amount of money you earn from your job before any taxes or deductions are taken out. It includes your basic salary, any extra payments like bonuses or overtime, and other allowances you might receive, like housing allowance (HRA) and other perks.
Gross Salary = Basic Salary + HRA + Other Allowances
What an employee actually brings home at the end of each month is their “net salary,” which is often referred to as their “take-home” salary. The figure takes into account the employee’s base income as well as any allowances they may receive. However, it does not take into account any deductions for taxes or other fees.
Net Salary = Basic Salary + HRA + Allowances – Income Tax – Employer’s Provident Fund – Professional Tax
An employee is eligible for a certain amount of compensation, known as an allowance, if they fulfil certain service standards. Allowances are paid to employees in addition to their regular income and can range significantly from one employer to the next. The following is a discussion of some popular types of allowances:
House Rent Allowance (or HRA): It is a sum of money that is given to workers by their employers to help with the costs that are associated with rented housing.
Leave Travel Allowance (LTA): LTA is for leave travel allowance, and it refers to the sum of money that an employer provides to an employee in order to cover the costs of domestic travel. It does not include the costs incurred for things like meals, lodging, and transportation while on the trip.
Conveyance Allowance: Employees are eligible to receive a conveyance allowance, which is intended to help them cover the costs of traveling from their homes to their places of employment.
Dearness Allowance (DA): It is a form of living allowance that is provided to workers as a means of mitigating the effects of inflation. Only people who work for the government or the public sector, as well as retirees, are eligible for this benefit.
Other such allowances are the children education allowance, medical allowance, phone reimbursement, special allowance or allowances for car maintenance, driver salary and books and periodicals, etc.
In addition to their base pay, an employee who has demonstrated very high levels of productivity at work may be eligible to receive a bonus of either a fixed or variable sum. It’s possible that various businesses will provide different incentive amounts at various time intervals.
Sometimes workers are eligible to get payment for a variety of expenses, including medical treatments, phone bills, newspaper costs, and so on. The sum is not included in the salary; rather, reimbursement is provided in exchange for the presentation of receipts and bills. In most cases, there is a maximum amount that can be claimed under any given category of reimbursement.
Employee Provident Fund (EPF) or Provident Fund:
A provident fund is an investment that is made each month by both the employer and the employee, and the total amount that is contributed each month serves as the employee’s retirement benefits program.
This applies to companies with more than 20 employees and to employees whose basic salary, DA, and special allowance are less than ₹15,000 per month. Companies are required to participate in the EPF if they have more than 20 workers. Every month, 12% of the employee’s base pay, DA, and special allowance must be contributed to the employee’s Employee Provident Fund (EPF) account by both the employee and the employee’s employer.
Contributions to the provident fund are required in either of the following two scenarios:
Case 1: A monthly basic wage of less than ₹15,000
12% of the salary’s base amount
Case2: The individual’s monthly basic wage is greater than ₹15,000
In this scenario, the employer has the choice of making a contribution equal to 12% of the basic wage or 12% of the employee’s total annual compensation.
It is directly deposited in the employee’s PF account.
The employee puts in 12% of their basic salary, and the employer also adds another 12%. You can usually find the employer’s contribution mentioned in your job offer letter, but it won’t show up on your pay-slip. The part that comes from your salary is called EPF, and you can see it listed on your pay-slip. Indian companies are required by law to set aside a portion of their employees’ salary into the provident fund.
Public provident fund or PPF:
PPF is a voluntary contribution by the employee and is completely controlled by him/her. The employer has nothing to do with a PPF account.
This amount is not mentioned in CTC or pay slips, however, if an employee presents it as an investment for tax saving purpose, it will be shown on Form 16.
People open PPF account for two main reasons – one is for tax saving purpose and second for long-term investment. PPF provides 7.6% per annum (compounded annually) and more importantly, both the contribution and maturity amount are tax-free.
Do not confuse this with Employer’s PF contribution.
The company gives the employee a Form 16 that has information about their pay and how much tax was taken out.
Every year, the taxpayer has to send in Form 16 to make their Income Tax returns. It shows that he or she makes money and pays taxes to the government.
Employees’ State Insurance Corporation (ESIC):
It is mandatory for employers with 10 or more employees who receive than ₹21,000 in gross salary every month. Employers are required to contribute 3.25%, and the employees require contributing 0.75% of the gross salary for the ESIC.
Labour welfare fund:
Both employers and salaried employees need to give some money for worker welfare. How much they give can change depending on the state they’re in.
Gratuity is a portion of an employee’s compensation received from the employer in exchange for services rendered upon leaving the employment.
Though an employee can only get the gratuity amount after 5 years, it is deducted by the company every year and so taken from your CTC.
Life insurance and health insurance:
There are many companies that offer their workers benefits like health insurance and life insurance, the premiums for which are often paid for by the employer and are factored into the CTC. As a result, it needs to be subtracted off whenever your take-home pay is being computed.
Professional tax is the tax charged by the state government in order to let an individual practice a certain profession. The employer deducts a professional tax at the prescribed rate from the employee’s salary and pays it to the state government. The annual professional tax amount cannot exceed ₹2,500.
Professional tax is not applicable in the following states and union territories:
Arunachal Pradesh, Andaman & Nicobar, Chandigarh, Dadra & Nagar Haveli, Daman & Diu, Delhi, Goa, Haryana, Himachal Pradesh, Jammu & Kashmir, Lakshadweep, Nagaland, Punjab, Rajasthan, Uttarakhand, and Uttar Pradesh.
Income tax is the tax you have to pay on your earnings. Normally, your employer takes this tax out of your salary before giving it to you. This is called Tax Deduction at Source (TDS), and your employer sends the deducted tax to the government.
In the complicated world of work, it’s important to know how salary systems work and what goes into them. These frameworks are more than just a bunch of numbers; they also affect how employees are paid and how companies find and keep good workers.
Every part, from the basic salary to the allowances for housing, travel, and education, has a reason. Bonuses and reimbursements add more worth to the pay package, making it better.
Employees can better plan their funds when they know how taxes will affect them. The end pay is affected by things like income tax, contributions to a provident fund, and professional tax.
For employers, clear salary systems build trust and show that they care about the well-being of their employees. Open dialogue about parts and why they are there helps people understand and reduces confusion.
In a nutshell, understanding salary structures gives both employees and managers the tools they need to make clear decisions about pay. This makes sure that everyone gets what they deserve and that workplaces are thriving.