“What is the need of the Salary Break Up? Why can’t I get the entire package in hand?”
This is each employee’s basic thought always after we get our monthly salary, which is divided into bits and pieces to different sectors.
When you release an offer letter, how many of the candidates look into the salary breakage part?
I am sure 80% of candidates focus on increasing CTC while negotiating terms with you, without paying much attention to the salary structure.
And you know they are looking at it in a wrong perspective, but you are not being able to make them understand that. And hence, they are backing out quite often from the salary negotiation part.
Maybe it’s time you start talking about the CTC less and all the extra beneficial part of the salary structure more!
Though a higher CTC is an important aspect when it comes to salary negotiation, structuring it well to maximize the take-home and minimize the tax outgo is similarly important.
While you may not have the complete control over the way a candidate’s salary is structured, but employers today are flexible enough to design it in the candidate’s way. You can help them in doing that.
But before you approach them to do so, let’s go through all the basics you need to know to calculate your salary once again!
What is your CTC consists of?
CTC or Cost To Company is the total amount a company spends on an employee per annum. It refers to the total salary package of the employee.CTC is inclusive of monthly components like basic pay, allowances, reimbursements, and annual components like gratuity, annual bonus, etc.
The take-home salary of an employee and his CTC is never the same. Some components of CTC are not included in the take-home salary.
Let’s take a look at the common salary components now.
Basic salary is the base income of an individual. It is a fixed part of one’s compensation package.
A basic salary depends on the employee’s designation and also the industry in which the employee works.
Gross salary is the amount calculated by adding up one’s basic salary and allowances, before deduction of taxes and other deductions. It includes bonuses, overtime pay, holiday pay, and other differentials.
Gross Salary= Basic Salary + Allowances + HRA
Net Salary Or Take Home Salary:
Net Salary is also called the take-home salary. That implies, how much do you exactly get in hand after all the deductions.
Net salary or take-home salary is obtained after deducting income tax at source (TDS) and other deductions as per the relevant company policy.
Net Salary = Basic Salary + HRA + Allowances – Income Tax – Employer’s Provident Fund – Professional Tax
Now, how can you structure the allowances and deductions? Of course, there are some rules. But what are they?
Let’s have a look at that too.
An allowance is an amount received by the employee for meeting service requirements. Allowances are provided in addition to the basic salary and vary from company to company. Some common types of allowances are discussed below:
- HRA or House Rent Allowance: It is an amount paid out to employees by companies for expenses related to rented accommodation.
- Leave Travel Allowance (LTA): LTA is the amount provided by the company to cover domestic travel expenses of an employee. It does not include the expenses for food, accommodation, etc. during the travel.
- Conveyance Allowance: This allowance is provided to employees to meet travel expenses from residence to work.
- Dearness Allowance: DA is a living allowance paid to employees to tackle the effects of inflation. It applies to government employees, public sector employees, and pensioners only.
- Other such allowances are the special allowance, medical allowance, incentives, etc.
Don’t you think once you talk about all the allowances the organization is providing, not only the candidate will be interested, but it will help you improve your employer branding as well?
Occasionally, employees are entitled to several reimbursements like medical treatments, phone bills, newspaper bills, etc. The amount is not received in the salary, but on submission of the bills, reimbursement is given. Generally, there is an upper limit for every category of reimbursement.
Employer Provident Fund or Provident Fund:
Provident fund is an investment both by the employer and the employee each month, the lump sum amount of which acts as an employee’s retirement benefits scheme.
Provident fund contribution is mandatorily either of the following:
Case 1: Basic salary < 15000 (per month)
12% of the basic salary
Case 2: Basic salary > 15000 (per month)
In this case, the company has an option to either contribute 12% of 15,000 (i.e. 1800) or 12% of Basic salary.
It is directly deposited in the employee’s PF account.
Hence, 12% of the basic salary get contributed by the employee and another 12% by the employer. Usually, the contribution from the employer can only be seen in your offer letter and not in the payslip. Contribution from your salary is called EPF and it can be seen in the payslip. Contribution to the provident fund is mandatory for Indian companies.
Gratuity is the part of the salary that is received by an employee from the employer for the services offered by the employee upon him or her leaving the job.
Though an employee can receive the gratuity amount only after 5 years, it will be deducted by the employer every year and hence it will get deducted from your CTC.
Many companies provide health insurance and life insurance to their employees, the premium for which is borne by the employer and is included in the CTC. Hence it has to be deducted while calculating your take-home salary.
Now, these were the components of the addition part of the salary you can consider once structuring the CTC. Now, let’s go through the deductions once!
The tax levied on one’s income is called income tax. Usually, an employee gets his or her salary after the tax deduction by the employer. This process is called as Tax Deduction at Source (TDS). The deducted tax amount is paid to the government by the company.
Professional tax is the tax charged by the state government to let an individual practice a certain profession. The maximum amount payable per year is INR 2,500. It depends on one’s monthly salary and also on the state in which one works. The professional tax levied varies from state to state in India.
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.
Now that you understand all the rules, it will be easy for you to tell the candidate about the way there CTC would be structured.
Still having a problem with that? Try this Online Salary Breakup Calculator to know more!