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Salary Structure: Must-Know Terms To Avoid Confusion When Negotiating Salary

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A salary slip, also known as a payslip, is a monthly document issued by an employer to its workers. A pay stub is a quantitative breakdown of an employee's pay and deductions over a specific time span. Individuals who are looking for work or have recently been recruited should be aware of the basic terms and how they must be followed in order to negotiate a better wage. Every detail of the offered compensation, as well as the minute break-up of each part of the compensation, is referred to as salary structure. For those with no experience, terms like CTC, Net Pay, Gross Salary, Allowances, Prerequisites, Deductions, and Payslips may be confusing. Any changes to the pay structure may have an impact on things like tax deductions that the employee wants to assert.

 

Basic Salary

Basic Salary

The basic salary is a part of an employee's overall salary that accounts for 35-50%. It is a set amount that is paid before any bonuses, overtime, or allowances are deducted or increased. A basic salary is determined by the employee's position as well as the sector in which they work.

All of the other components mentioned on your payslips are based on your basic salary. They are measured as a percentage of the base salary.

Gross Salary

The sum measured by adding one's basic salary and allowances before taxes and other deductions is known as gross salary. Bonuses, overtime pay, holiday pay, and other differentials are included. Gross Salary = Basic Salary + HRA + Other Allowances

Net salary or take-home salary
 

Net salary or take-home salary

After deducting income tax at source (TDS) and other deductions as per the applicable company policy, the net salary or take-home salary is received.

Net Salary = Basic Salary + HRA + Allowances - Income Tax - Employer's Provident Fund - Professional Tax

CTC

The total amount that an organisation spends (directly or indirectly) on an employee is referred to as CTC. It refers to the employee's overall compensation plan. CTC includes monthly elements like standard pay, different benefits, reimbursements, and so on, as well as annual elements like gratuity, annual variable pay, annual bonus, and so on.

Allowances

Allowances

The key aim of allowances is to reduce the effects of inflation on employees. This stipend is based on the employee's cost of living and varies from one employee to the other. The following are some examples of common allowances:

House Rent Allowance: An employer may provide a House Rent Allowance to cover the cost of a rented house occupied by a person during his stay. Individuals who live in their own homes are not liable for any HRA deductions. In this scenario, the HRA would be completely taxable in the employee's position.

Medical Allowance: Medical allowance is a severance package provided by an employer to an employee, regardless of whether or not he requires medical care.

Conveyance Allowance: A conveyance allowance, also known as a transportation allowance, is provided to an employee to cover the costs of commuting from their home to work.

Dearness Allowance (DA) is a stipend paid to employees to help them deal with the consequences of inflation. It only applies to government employees, public sector workers, and retirees.

Leave Travel Allowance: A Leave Travel Allowance is an allowance provided by an employer to his employees for expenses incurred while on leave while travelling within the country.

Prerequisites

Prerequisites

Fringe advantages are referred to as perquisites. The majority of non-monetary benefits are offered based on an employee's official role in the company. They include companies that provide vehicle, phone, and Internet services, among other things. They aren't monetary rewards.

Deductions

In Indian Payroll Processing, deductions are added to the CTC to determine the employee's real take-home pay.

Form 16

The company issues a Form 16 that provides information about the employee's salary and the amount of tax deducted.

Each financial year, the taxpayer must file Form 16 to file their income tax returns. It serves as evidence of his or her earnings and tax payments to the government.

Employer Provident fund/EPF

Employer Provident fund/EPF

A provident fund is a monthly contribution made by both the employer and the employee, with the lump sum amount acting as a retirement benefits plan for the employee. Each month, 12% of the employee's basic compensation is deducted as a contribution to the Provident Fund, and the employer contributes an equal sum to the fund.

Professional Tax

A tax on employment, also known as professional tax, is imposed by various state governments. Employers subtract professional tax and pay it to the state government. The maximum amount of occupation tax that can be imposed is Rs. 2,500 a year, which can be deducted from the employee's wages while filing his tax return.

Gratuity

When an employee leaves a job, he or she receives a portion of his or her 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 institution after working there for at least five years. According to the Payment of Gratuity Act of 1972, the gratuity sum is estimated at 4.81 percent of an employee's basic salary.

Read more about: salary income tax
Story first published: Sunday, May 2, 2021, 14:50 [IST]
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