Understanding Salary Structure and its Components

In India, the topic of salary is often shrouded in secrecy, rarely broached in conversations. [“In India, people do not usually talk openly about how much money they earn. It is a secret topic that is rarely discussed.”] 

 There’s still a sense of unease with discussions about money. Many factors contribute to this negative feeling. Maybe it comes with a sense of inferiority about one’s earnings. Another reason could be that traditional Indian values often emphasise modesty and humility. Talking about one’s salary openly can be perceived as bragging or showing off, which goes against these values. 

For newbies like you entering the workforce though, understanding and discussing salary structures is important to avoid unwelcome surprises!  

Do this exercise: Ask any seasoned professional about their first pay cheque and what surprised them. They will likely say that the deductions from their salary caught them off guard.

 

So, we’re here to help you properly understand the different components of your salary, and what their implications are. Basically, we’re here to help you avoid any unpleasant surprises when you receive the final salary. 

Unravelling the Discrepancy: Salary on Paper vs. Salary in Hand 

While the salary on paper represents the gross amount agreed upon, the salary in hand is the net amount received after deductions like taxes, insurance, and other contributions. It’s important to consider these factors to accurately assess your take-home pay and manage your finances effectively. Also, we don’t want you to encounter any unpleasant surprises when you receive your first pay cheque. 

So, here are the major components of a salary breakup 

1. Basic salary

Your basic salary is the bedrock of your earnings, before any benefits or allowances are added. It provides the groundwork for calculating all additions like bonuses, commissions, and the deductions. In essence, it’s the cornerstone of your overall package.

Now, the basic salary usually forms the premise for all your future revisions — most companies use this as the benchmark to calculate your increments. So, if you’re aiming to see bigger bumps in your compensation, a robust basic salary can really help.

2. Allowances

Allowance are the additional benefits that are added above and beyond your basic salary. They’re tailored to cover specific expenses and bestow certain perks, ensuring a harmonious work-life balance. Examples of common allowances include Dearness Allowance (DA), which helps employees cope with the rising cost of living, House Rent Allowance (HRA), which assists with accommodation expenses, and Transport Allowance, which helps cover commuting costs.

These allowances vary based on company policies, norms, and individual employee needs.
 

3. Deductions

As the name suggests, deductions are amounts subtracted from an employee’s salary to fulfil various financial obligations.

These are the common deductions:
 

Provident Fund (PF) is a retirement savings scheme, where a portion of the salary is contributed towards a fund

Professional Tax is a tax imposed by some state governments on salaried individuals

Income Tax is levied by the central government based on the employee’s income.

These deductions weave their way into the salary structure, reducing your net amount. Understanding the nuances of your deductions is crucial for financial planning and accurately estimating your take—home pay.
 

Other components

Other benefits encompass a range of additional perks included in the salary structure. These may comprise benefits like:
 

Medical insurance (provides coverage for healthcare expenses)

Gratuity (a lump sum payment made by the employer as a token of appreciation at the end of employment)

Employee provident fund (EPF) (contribute to a retirement savings fund)

These benefits enhance the overall compensation package and contribute to the financial security and well-being of employees.

Salary Structure Formats 

Salary structure formats vary across companies — usually from a set of three or four popular ones. These formats help organisations manage situations that are prevalent within their respective industries, which we will understand further below. Let’s explore some of these formats along with their respective pros and cons. 

For clarity, we have assumed a gross salary of Rs 5 Lakh Per Annum. 

1. CTC (Cost-to-Company) format: 

This format is popular in numerous sectors, particularly in the IT and software, and finance and banking industries, as well as in consulting services. Its popularity is owed to how it presents a panoramic perspective, summarising the expense incurred by an employee to the company. 

Pros 

Transparency: It provides a comprehensive view of the total cost of an employee to the company along with details of the components. This transparency fosters trust, enabling better financial planning.

Flexibility: It grants employees the opportunity to customise their compensation package within pre-defined guidelines. By allowing employees to personalise their salary structure, organisations can foster employee satisfaction and engagement. 

Cons 

Complexity: It can be complex to understand, due to the numerous components involved. Employees may require assistance or guidance from HR or payroll to grasp the intricacies and implications of the structure. Simplifying the communication and providing clear explanations can help alleviate the complexity.
 

Less take-home pay: The salary in-hand may be lower than the total CTC due to deductions and other components. It is essential for employees to understand these deductions to accurately gauge their disposable income and manage their finances accordingly

2. Fixed salary with basic and allowances format:

This format is commonly observed in traditional industries like manufacturing, public sector units, and academia. It offers a simple breakdown of the salary structure, making it easy to comprehend and manage. This straightforward format provides employees with clear visibility into the components of their salary. 

Pros 

Simplicity: It is designed with simplicity in mind, offering a straightforward breakdown that is easy to comprehend. It facilitates effective financial planning and empowers individuals to have a clear understanding of their overall compensation package.
 

Predictability: It is predictable, giving employees a clear picture of how their monthly income will look like. With a well—defined structure, individuals know exactly what to expect in terms of their earnings, providing consistency, stability and confidence in financial planning. 

Cons 

Less flexibility: It may offer less flexibility, limiting the opportunity for employees to adjust components of their salary package according to personal needs or for tax planning purposes. This reduced flexibility can impact the ability to optimise their earnings based on specific requirements or financial goals.
 

Limited benefits: This format often has limited benefits. While it provides a straightforward breakdown, it may not incorporate certain incentives like the opportunity to benefit from performance-based rewards or ownership stakes in the company.

3. Gross Salary Format: 

This format is widely adopted across different industries, particularly in startups and small businesses, where straightforward and transparent payroll management is essential. This format suits organisations that focus on facilitating smooth payroll operations. 

Pros:  

Clarity: It provides a clear and transparent depiction of an employee’s earnings before deductions. Employees can easily understand and ascertain the amount they earn without the impact of various deductions, such as taxes and other contributions. 

Ease of calculation: It offers ease of calculation and helps employees assess the impact of deductions on their income. It contributes to enabling individuals to manage their finances more efficiently and accurately. 

Cons: 

Less detail: It provides minimal detail regarding the various components of the salary, which could be relevant for tax planning and understanding the comprehensive range of benefits offered by the employer. Employees may need to seek additional information or clarification to fully comprehend the complete structure and make informed decisions.

4. Salary structure with grades or levels format: 

*Assuming that there are 3 levels within this salary range: 

This format is frequently employed in older corporations and government organisations characterised by well-defined hierarchical structures, and clear organisational frameworks. It is prevalent in sectors such as civil services, military, public sector units, and multinational corporations.  

The format aligns with the needs of these industries, enabling standardised and structured compensation systems that account for job grades, levels, and scales. This facilitates consistency and fairness in remuneration across various positions and departments within these organisations. 

Pros 

Clear progression: The defined levels or grades in this format provide clear visibility of salary progression and promotion opportunities within the organisation. This clarity helps individuals chart their career paths and set realistic expectations for their future growth within the organisation. 

Fairness: It promotes a sense of fairness by ensuring that employees in the same grade or level receive the same salary. It establishes a standardised structure where compensation is based on predefined criteria, such as job roles, qualifications, and experience. It also minimises potential disparities. Employees can have confidence that their compensation is determined objectively and consistently.

Cons

Less flexibility: Like the fixed salary format, it offers less flexibility to adjust salary components according to personal preferences. It follows a rigid and standardised approach which restricts optimising earnings based on personal circumstances. 

May not reflect performance: Here, salary increases are typically tied to moving up a level or grade focuses on hierarchical progression, which may not always accurately reflect an employee’s performance or contribution. It can result in a potential mismatch between salary advancements and the recognition of exceptional performance or contributions. 

In conclusion, understanding the intricacies of salary structures is essential for you to accurately assess your take-home pay and effectively manage your finances. By differentiating between the salary on paper and the salary in hand, you can avoid any unpleasant surprises when receiving your pay cheques. 

FAQs on Salary Structure in India

Q1. What is Basic Salary Structure in India? 

Ans: Salary structure in India varies from company to company and industry to industry. But most salary structures will comprise of some standard components like basic salary, allowances (like dearness allowance, house rent allowance, travel allowance, etc.), deductions (like provident fund, professional tax, income tax, etc.), and other components like medical insurance, gratuity or employee provident fund (EPF)
 

Q2. What is Gross Salary? 

Ans: Gross salary is the monthly or annual salary paid to an employee before any deductions are made and including bonuses, overtime pay, allowances, and other perks. 

Q3. What is Net Salary? 

Ans: The net salary is the total salary paid to an employee after accounting for deductions from the gross salary. 

Q4. What is Form 16? 

Ans: Form-16 is the TDS (Tax Deducted at Source) certificate issued by and employer when they deduct TDS. TDS is a part of the income tax that is levied with every pay cheque an employee receives. 

Q5. What is meant by allowances in Salary Breakup? 

Ans: Allowances are components of a salary that are added for additional benefits. These benefits cover specific expenses for an employee, such as Dearness Allowance (DA) — for employees to cope with the rising cost of living; House Rent Allowance (HRA) — for accommodation expenses; and Transport Allowance — to cover commuting costs.

These allowances vary based on company policies, and individual employee needs.