Introduction:

Are we aware about the actual salary components of our salary Package? Well, there are plenty of queries related to our salary and many times these are unanswered.

Before we start, we must know “what is mean by Salary?”

Salary is a monetary benefit that is provided by the employer to the employee in accordance with the services that are provided by the employee. In other words, it is an income earned by the employee for his services in the particular organization.

So, it becomes very important while we are getting a new job and we are unable to understand the whole salary structure. Therefore to understand actual salary components and their role in our Salary Package, we have to look at each one in detail

Also read: 8 Most Popular Free Job Portals in India

1. CTC

This is the main salary component of your salary structure which is mostly referred as Package .CTC refers to the Cost to company. It is the sum of all the components present in your salary structure

It is the total cost incurred to the employer to employ any employee at Particular Position. CTC is overall final figure of your salary structure which includes all the components such as basic salary, special allowances, HRA,Gratuity, ESIC,Employee provident fund & Professional Tax etc.

CTC = (Direct + Indirect) Benefits + Other Welfare Contributions

2. Gross Salary

The second Salary component is Gross Salary. It is the gross figure calculated before any statutory deductions like Provident funds, ESIC, Professional tax etc.

Gross Salary can be look in two ways.ie Employer Gross Salary and Employee Gross Salary.

Employer Gross Salary has all components of CTC before any statutory deduction which includes employer PF contribution, Gratuity Amount, ESIC Deductions.

Employee Gross salary has the necessary components of CTC except employer PF contribution, Gratuity Amount, ESIC Deductions.

3. Net salary

The third salary component is the Net salary which refers to the in-hand salary or net take-home salary after deduction of statutory deductions.

While joining any company, every employee is more concern about net salary to meet with his finances. Therefore he/she always trying to negotiate with the manager in such a way that net amount should be maximum.

4. Basic salary

Basic Salary is the primary and fixed salary component of your package. This means a basic income of an employee which he expects in a good proportion in overall Salary structure. This refers to an employee’s basic income for his services.

Basic salary will be different for each grade in every company. It is a remuneration paid by the employer on the basis of designation hierarchy, Qualification skills and your experience..

5. Allowances

This is another most important salary component. Allowances are paid to the employee to meet his salary look good .It is the remuneration paid to the employee in addition to basic salary for his services in entire tenure. Every company offers different allowances to the employee.

These allowances are covered in statutory norms and calculated according to the salary structure. There are different types of allowances mentioned in salary structure but we are looking common allowances among them.

These allowances are:

HRA-House Rent Allowance:

HRA as the name suggest, it is an allowance paid by the employer to an employee in occasion of  rented accommodation . It is major component of salary which is  paid to both private and govt employees

HRA  is the most important component of allowance for an employee who are not staying on their own house.HRA should not be more than 50% of Basic Salary + DA.

If you are not living on rented accommodation then this whole allowance can be taxable. HRA taxable amount can be calculated with below conditions.

A. Actual HRA Amount received from the company

B. 50% of [basic + DA] for metro cities and for non metro cities it is 40% of (Basic +DA)

C. Actual rent paid by Employee minus 10% of (basic + DA)

Example: Mr. Sheikh lives in Delhi drawing 30,000 Basic salary and paying monthly rent of Rs.10,000 

Salary Structure:

Basic Salary	Rs.30,000
HRA	Rs.13,000
Conveyance Allowance	Rs.2,000
Special Allowance	Rs.3,000
Leave Travel Allowance (LTA)	Rs.5,000
Total Earnings	Rs.53,000

A. Actual HRA Amount received from the company: 

Calculation: Total HRA received in Year 13000*12= 1.56Lakh

B. 50% of [basic + DA] for metro cities and for non metro cities it is 40% of (Basic +DA):

Calculation:50% of (Basic 30,000*12)= 1.80 Lakh

C. Actual rent paid by Employee minus 10% of (basic + DA): 

Calculation: Actual Rent Paid (10,000*12)-10% (30,000) =84000

From above calculation of all three conditions, Rs.84,000 is the lowest amount which is to be considered as tax exemption of Mr.Sheikh on HRA.

Dearness Allowance:

The Dearness Allowance is a kind of allowance that is paid to the govt sector, public sector employees, and pensioners in the calculation of inflation to maintain balance.

This is an essential part of the allowance which is associated with Basic salary and it is calculated accordingly.

Leave Travel Allowance:

This is another allowance which has major benefit to the employee. It is the essential part of total CTC.  Leave Travel Allowance is an allowance which is use to give benefit to the employee given to adjust to allowance of vacation cost.

Income tax has certain provisions against LTA which is beneficial to the employees. Employee can avail this benefit in the financial year against the bills, receipt which needs to submit to the employer for exemption.

Conveyance Allowance:

It is another kind of allowance which has the directly benefit to the employee. Conveyance allowances are allowances which is paid to employee to meet travel cost.

Conveyance allowance is varied as per the employer’s travel policy. Many employers declare it in the CTC structure. On the other hand, some employers do not declare in CTC structure.

Medical Allowance:

Medical Allowance is a fixed allowance that is an essential part of salary components. It is paid to the employee to meet the medical expenses. 

Every standard salary structure, Medical Allowance amount can be mentioned as salary component but it is varied as per the company policy

6. Employee Provident Fund

Employee provident fund is an important salary component when it concern to the deduction in the salary. We must understand this because employee are mostly confused about the deduction part from the salary and it’s later benefit.

Employee Provident fund (EPF) is simply a benefit scheme for any employee for his work ideal for his retirement . It is statutory deduction from the salary which is deposited to PF account of the employee. Same account has to deposit by an employer to employee account.

We are very much aware about the portion of deduction i.e. Amt=12% from Employee + 12 % from Employer

• Employee

12% of Employee contribution is calculated as per the recent Employee Provident Fund (EPF) amendment

for employees having basic salary less than INR 15000 per month, the EPF contribution for both employer & employee is calculated on Basic + Special+ Monthly LTA , subject to maximum deduction of INR 1800/- pm.

For all others, EPF deduction remains at 12% of basic salary.

• Employer

12 % of Employer contribution is calculated as per the recent Employee Provident Fund (EPF) amendment

for employees having basic salary less than INR 15000 per month, the EPF contribution for both employer & employee is calculated on Basic + Special+ Monthly LTA , subject to maximum deduction of INR 1800/- pm.

For all others, EPF deduction remains at 12% of basic salary.  Furthermore, the contribution can be deposited in two ways i.e PF fund and Pension scheme.  Its contribution percentage rates are as follows.

• Employee’s Provident Fund (EPF): 3.67%
• Employee’s Pension Scheme (EPS): 8.33%

Note: When we considering Basic salary, it means to basic salary + Dearness Allowances

Therefore Employee Provident fund EPF is one of the easiest schemes to save your money for your future. Also you get the tax benefits on the PF amount.

6.ESIC

ESIC Stands for Employee State Insurance Corporation. It is the statutory and autonomous body of the Indian Government whose major focus is to provide Social security and health insurance scheme for employees.

As per the recent amendments, any employee whose monthly gross salary is under Rs.21000 is eligible and covered under ESIC. Earlier this limit was Rs.15,000.

Total contribution rate for ESIC is 4 % which was earlier 6.5 %. Employer share is 3.25% and Employee share is 0.75% on Gross Salary. This is statutory deduction by an employer and fund is managed by ESIC Corporation. It is an employer responsibility to avail this benefit to employee and get registered under ESIC.

ESIC card is issued once an employee registered under ESIC. An employee can avail following benefits which are covered under ESIC.

• Sickness Benefit
•  Medical benefit
•  Funeral Expenses benefit
• Dependants benefit
• Disablement benefit
•  Maternity benefit

Therefore when we are discussing about salary components the ESIC is very important salary component and we need to understand its benefits and contribution rate.

7. Gratuity

Gratuity is an important salary component which is actually retirement benefit to an employee.

It is a reward paid by the employee to an employee for his long term services in the company. Employee is eligible for the gratuity if he complete minimum 5 years of service in the same company but in certain conditions it can be paid early as well like disablement or death.

It is paid by employer considering Payment of Gratuity Act, 1972.

Formula: 15/26* Last drawn Basic +DA * No of Years completed

Where 15- half month and 26- is all working days in month

Example: Mr.Mahesh has tenure of 5 years with basic salary is 30,000 ,so his gratuity will be

  15/26*30,000*5= Rs .86,538

Note: Company which are not covered under Payment of Gratuity Act 1972, can be consider 30 days in month instead of 26.

This is a lump-sum retirement benefit paid to employees who are on their way out of an organization, after having spent a minimum of 5 years within the company. The gratuity amount is calculated at 4.81% of an employee’s basic salary, as per the Payment of Gratuity Act, 1972.

9. Professional Tax

The next salary component is Profession tax which is the standard statutory deduction in the salary structure

Basically, it is the tax that is charged by the state government for the salaried professionals or the services which are practiced like CA, lawyer, or doctors.

It is the indirect tax and calculations can be varied from one state to other. Maximum limit is set up to 2500 per year.

Professional tax is mentioned as fixed salary component in your salary structure and it is the responsibility of the employer to pay the tax amount to the state government for each employee.

10. Incentive

An incentive is an additional monetary benefit which is over and above fix salary of an employee

Technically incentive is referred as a motivational factor in order to do something in desired way. Every organization has its financial goals that they want to achieve through assigned targets.

These targets could be monthly quarterly or yearly. In every organization employee wants an opportunity to earn more money therefore he can earn through hard work and gets his reward in terms of incentives.

Incentives is a variable part when it concern as salary component but it’s limits can be adjusted by the company which can be depend on grades and target achievements. Therefore whenever we get an offer from the employer ,you must consider incentive as earning opportunity.

11.Bonus

Bonus is a beneficiary part of salary component. Bonus is a additional amount paid to an employee as a monetary benefit based on company turnover, profits gain etc.

It is paid to the employee to have better faith towards company image and increase morale toward duties. Usually bonus is varied but it can be declared as salary component in your salary package.

12. Perquisites

Perquisites are nothing but the nonmonetary fringe benefits which are paid to the employee. These are not directly mentioned in CTC as salary component.

This is depends on the position which you are holding within the company. These are commonly refers as perks. Some of the common examples includes, free company car, rent free company accommodation, company mobile   etc.

Conclusion

From above we have discussed all the important salary components in detail. We have tried to give you a fair idea about all the salary components and its implications. Hoping there won’t be any confusion anymore.