Although salaries are part and parcel of any business, often employers aren\u2019t aware of the technicalities involved. While it may not seem important to some, structuring salaries correctly, reduces your liability as an employer as well as an employee.<\/p>\n
For instance, allotting a large portion of the salary to the \u201cBasic\u201d component means your liability towards provident fund or ESIC contributions are also going to be higher. For startups, getting this right in the early stages could save you the trouble later.<\/p>\n
Objectives of the perfect salary structure<\/strong> A deeper look into each component<\/strong> Basic Salary + Dearness allowance<\/strong> Dearness Allowance (DA) was introduced as part of the salary as a means to reduce the burden of inflation on salaried employees. This amount is usually set to about 5% of the total CTC and like the Basic component it also has an effect on PF, ESIC etc.<\/p>\n You should keep the following in mind while setting the amounts for Basic and DA:<\/p>\n House Rent Allowance (HRA)<\/strong> Leave travel allowance (LTA)<\/strong> Conveyance Allowance<\/strong> It\u2019s also important to note that this component is only tax deductible if an organisation does not have its own means of transport for employees. If the organisation has made arrangements to ferry employees to and from work, then conveyance allowance cannot be claimed for tax benefits.<\/p>\n Medical Allowance<\/strong> In case the Rs. 1,250 isn\u2019t claimed in one month, then this amount is carried forward to the next month. This means that a cumulative amount of Rs. 15,000 can be claimed at the end of the year. This is also the recommended amount that organisations usually allot to this component of the salary structure.<\/p>\n
\nWhile creating the ideal salary structures, there are three things you should keep in mind<\/p>\n\n
\nLet\u2019s take a deeper look into the various components that make a salary. What do they mean and how are they calculated?<\/p>\n
\nThe Basic component is the primary component and the core of the salary structure. It is usually the largest component of the CTC making up for 40-50% of the total CTC. The basic plays an important role in defining the salary as other components like Provident Fund, Gratuity and ESIC are dependent on it.<\/p>\n\n
\nThe House Rent Allowance, as the name suggests is a component that employees can leverage if they are living in rented accommodations. The amount that you can claim as tax deduction under HRA cannot be more than 50% of your basic in a metro or 40% of your basic in a non-metro. Hence, depending on where your workplace is located, this salary component will usually be set at 40% or 50% of the basic salary.<\/p>\n
\nLeave travel allowance (LTA) remunerates employees for their travel within the country. This component is widely used by employers due to the tax benefits associated with it. An employee can claim tax benefits for the fare expenses paid for his\/her family when they take a holiday. However, there are restrictions to what you can claim as tax benefits:<\/p>\n\n
\nThe conveyance component of the salary structure is paid to employees for their travel expenses between their homes and workplaces. The maximum amount that is tax deductible under this component is Rs. 1,600 a year or Rs. 19,200 a year. Hence, this is also the recommended limit that most organisations would use for conveyance allowance.<\/p>\n
\nMedical allowance is paid as a reimbursement for medical expenses borne by employees. This amount is tax deductible up to Rs. 15,000 a year or Rs. 1,250 every month. In order to claim tax benefits under this component, employees need to submit proof of their medical expenses.<\/p>\n