When hiring and retaining employees, private companies in India must balance compliance with tax and labor laws while also presenting attractive compensation packages. Salary structures usually follow common patterns that combine fixed, variable, and statutory elements.
Core Components of Salary
Basic Salary
The Basic Salary is the foundation of compensation. In most private companies, it makes up 40–50% of the total Cost to Company (CTC). Basic pay is fully taxable and forms the basis for calculating statutory benefits like provident fund, gratuity, and bonus.
House Rent Allowance (HRA)
HRA is one of the most common allowances provided to employees who live in rented accommodation. Employers typically set HRA at:
- 50% of Basic Salary in metro cities, or
- 40% of Basic Salary in non-metro locations.
HRA Tax Exemption (Section 10(13A))
Employees can claim tax exemption on HRA. The exempt amount is the least of:
- Actual HRA received
- Rent paid minus 10% of Basic Salary
- 40% (non-metro) or 50% (metro) of Basic Salary
Dearness Allowance (DA)
Dearness Allowance is meant to offset inflation. While it is a standard component in public sector and government jobs, it is rarely used in private sector salary structures. When included, it is generally a small percentage of Basic Salary.
Other Allowances
Private companies often use allowances to balance the salary structure. Common examples include:
- Special Allowance: A flexible component that adjusts the overall CTC. It is fully taxable.
- Leave Travel Allowance (LTA): Covers travel costs within India, subject to conditions.
- Children's Education Allowance: Exempt up to ₹100 per month per child for two children.
- Medical and Conveyance Allowances: Previously tax-efficient but now largely replaced by the standard deduction.
Variable Pay and Bonuses
Many companies include a performance-linked pay element, which may range from 5–30% of CTC. This is not guaranteed and depends on both company and employee performance. It is typically paid quarterly or annually.
Statutory Contributions and Deductions
Apart from the core components, salary structures must comply with mandatory statutory requirements:
- Employee Provident Fund (EPF): Both employer and employee contribute 12% of Basic Salary (plus DA, if applicable).
- Employee State Insurance (ESI): Applicable to employees earning up to ₹21,000 per month; employer contributes 3.25% and employee 0.75%.
- Gratuity: Payable after five years of continuous service, calculated as part of CTC.
- Professional Tax and Labor Welfare Funds: State-specific deductions that employers must account for.
Example: A Typical Private Sector Salary Breakup
For an employee with ₹7,00,000 per annum CTC, a company might structure the salary like this:
| Component | Approx. Share of CTC | Notes |
|---|---|---|
| Basic Salary | 40–50% | Taxable, basis for PF/Gratuity |
| HRA | 40–50% of Basic | Partly tax-exempt, subject to conditions |
| Special Allowance | Balance of CTC | Fully taxable |
| Other Allowances | Nominal | Includes LTA, education allowance, etc. |
| Variable Pay / Bonus | 5–30% | Performance-linked, not guaranteed |
| Employer PF Contribution | 12% of Basic | Statutory, part of CTC |
| Gratuity / ESI | As applicable | Statutory benefits |