Salary structure: terms to know to avoid confusion when negotiating a salary

Base salary

Base salary is a portion of an employee’s overall salary that represents 35-50%. This is a fixed amount that is paid before bonuses, overtime or allowances are deducted or increased. A base salary is determined by the position of the employee as well as the sector in which he works.

All other items listed on your payslips are based on your base salary. They are measured as a percentage of base salary.

Gross salary

The sum measured by adding his basic salary and allowances before taxes and other deductions is called gross salary. Bonuses, overtime, vacation pay and other differentials are included. Gross salary = Base salary + HRA + Other allowances

net salary or net salary

After deducting withholding tax (TDS) and other withholdings in accordance with applicable company policy, net pay or take-home pay is received.

Net salary = Base salary + HRA + Allowances – Income tax – Employers’ provident fund – Business tax

CTC

The total amount that an organization spends (directly or indirectly) on an employee is called CTC. It refers to the employee’s overall compensation plan. CTC includes monthly elements such as standard salary, different benefits, reimbursements, etc., as well as annual elements such as gratuity, annual variable remuneration, annual bonus, etc.

Allowances

The main objective of allowances is to reduce the effects of inflation on employees. This allowance is based on the employee’s cost of living and varies from employee to employee. Here are some examples of common allowances:

Housing allowance: An employer can give a rent allowance to cover the cost of a rented house occupied by a person during his stay. People who live in their own homes are not liable for HRA deductions. In this scenario, the HRA would be fully taxable in the employee’s position.

Medical allowance: Medical pay is severance pay paid by an employer to an employee, whether or not they need medical attention.

Transportation allowance: A transportation allowance, also known as a commuting allowance, is paid to an employee to cover travel expenses between home and work.

High cost allowance (DA) is an allowance paid to employees to help them cope with the consequences of inflation. It only applies to government employees, public sector workers and pensioners.

Travel leave allowance: A leave travel allowance is an allowance given by an employer to its employees for expenses incurred while on leave while traveling within the country.

Preconditions

Fringe benefits are called perquisites. The majority of non-monetary benefits are offered based on an employee’s formal role in the company. These include companies that provide vehicle, telephone and internet services, among others. These are not monetary rewards.

Deductions

In Indian Payroll Processing, deductions are added to the CTC to determine the actual net salary of the employee.

Form 16

The company issues a Form 16 which provides information on the employee’s salary and the amount of tax deducted.

Each fiscal year, the taxpayer must file Form 16 to file their income tax return. It serves as proof of his income and tax payments to the government.

Employer/EPF pension fund

A provident fund is a monthly contribution paid by both the employer and the employee, with the lump sum acting as a pension plan for the employee. Each month, 12% of the employee’s basic salary is deducted as a contribution to the Provident Fund, and the employer contributes an equal sum to the fund.

Professional tax

An employment tax, also called business tax, is imposed by the various state governments. Employers subtract business tax and remit it to the state government. The maximum amount of occupancy tax that can be imposed is Rs. 2,500 per annum, which can be deducted from the employee’s salary when filing his tax return.

Tip

When an employee leaves his job, he receives part of his salary as a gratuity from the employer for the services rendered. This is a lump-sum retirement bonus paid to employees who are about to leave an establishment after having worked there for at least five years. According to the Payment of Bonuses Act 1972, the sum of bonuses is estimated at 4.81% of an employee’s basic salary.