How to Calculate Salary Structure for Freshers

As a fresher, you should understand the details of a salary being offered to you. You should be acquainted with various breakups and components of your compensation or pay package. Salary Structure is basically a set of parameters that define your salary.

Terms like CTC, basic salary, gross salary, allowance, reimbursements, tax deductions, provident fund, insurance, etc. often create confusion for employees. In this article, we have tried to define all the salary associated terms as simply as possible for freshers to understand.

Also read: Top 15 Highest Paying Jobs in India for Freshers

CTC or Cost to Company

CTC or Cost to Company is the total salary package and benefits of an employee per year. It is basically the amount that a company or employer is willing to spend both directly and indirectly on you as it’s employee.  CTC is inclusive of monthly components such as basic pay, various allowances, reimbursements, etc. and annual components such as gratuity, annual variable pay, annual bonus, etc. In India, CTC is widely used in the private sector to show total remuneration of a person.

CTC does not indicate an employee’s take-home salary. There are many components within the CTC which are over and above one’s take home salary. In an ideal scenario, the formula for CTC would be:

CTC = Gross Salary + [Direct Benefits + Indirect Benefits + Savings Contributions] (or Deductions)

Components of CTC

Some components of CTC are Gross Salary which comprise of Basic Salary, HRA or House Rent Allowance, Conveyance Allowance, Entertainment Allowance, Overtime Allowance and Medical Reimbursements. Then there is Benefit which comprises of Provident Fund of PF and Medical Insurance. Hence CTC is a sum of Gross Salary and Benefits.

On the other hand, the Deduction bit comprises of Professional Tax, TDS or tax deducted at source and PF/EPF contributions. So we can represent CTC as a sum total of Earnings and Deductions.

CTC = Earnings + Deductions

Here, Earnings = Basic Salary + Dearness Allowance + House Rent Allowance + Conveyance Allowance + Medical Allowance + Special Allowance. Given below is a simple example of a salary slip showing all the basic breakups under two heads, earnings and deductions. Further below is an image of an actual salary slip picked from Google images, which depicts the net (or take home) salary of a fresher. This is the closest examples to a real corporate salary slip which you will receive from your employer.

Image Source: Ask.careers showing the salary breakup and salary structure in a salary slip

Now lets deep-dive into each and every terminology related to your take home salary.

Basic salary

Basic salary is the exact money paid to an employee before any extra addition or payment deduction. It is always less than gross salary. Entire basic pay is a part of take home salary and this component is 100% taxable. Hence, basic salary is the core of a salary structure, which comprises of 40-45% of total CTC.

Gross salary

Gross salary is the monthly or yearly salary before any deductions are made from it. It is the amount calculated by adding up one’s basic salary and special allowances, before tax and other deductions.

Gross Salary = Basic Salary + HRA + Special Allowance + Education Allowance + Conveyance Allowance + Medical Allowance + Leave Travel Allowance

Net salary or take-home salary

Net salary is commonly called take-home salary. It is the income that employees take home after tax, PF and other deductions.

Net Salary = Gross Salary – Income Tax – PF – Professional Tax

Net Salary is usually lower than gross salary. In case tax is 0 as per government’s tax slabs and there is no PF contribution, net salary becomes equal to gross salary.

Allowances

It is the amount paid to an employee to meeting service requirements. These are on top of basic salary and vary from company to company. Some common variants of allowances have been listed below:

• HRA or House Rent Allowance: It is a major salary component paid to an employee to meet accommodation expense.
• Leave Travel Allowance (LTA): LTA is an amount paid to cover domestic travel expenses. It may not include food and accommodation expenses during the course of the travel.
• Conveyance Allowance: It is the amount paid to an employee to meet travel expenses incurred while travelling to and from work.
• Dearness Allowance: DA is a living allowance paid to employees to tackle the effects of inflation. This allowance is applicable to government employees, public sector employees, and pensioners. Private sector employees are not eligible for dearness allowance.
• Other allowances covered in CTC are the special allowance, medical allowance, incentives, etc. Each has a purpose to serve as each helps the employee bear a certain type of expense.

Reimbursements

Reimbursement amounts are included in the CTC of an employee. Employees are entitled to several reimbursements like medical reimbursement, food coupons, telephone reimbursement, fuel reimbursement, etc. Employees can claim this amount only after they spend it. They need to produce necessary bills to prove that they have spent the necessary amount on such heads, in order to receive this payment.

PC: Saral Paypack

Employer Provident fund and Provident Fund (EPF & PF)

Employees Provident Fund (EPF) is a statutory retirement benefits scheme under the Employees Provident Funds and Miscellaneous Provisions Act, 1952. The Employees Provident Fund Organization (EPFO) administers the EPF scheme. The employee and the employer contribute to the EPF scheme on monthly basis in equal proportions of 12% of the basic salary and dearness allowance (DA). Out of the employer’s contribution, 8.33% is directed towards the Employee Pension Scheme (EPS).

12% Employer’s contribution = 3.67% EPF + 8.33% EPS

EPF Interest Rate FY 2021-22

The interest rate on EPF is reviewed annually. EPF interest rate for FY 2021-22 is 8.10%. Once EPFO notifies the interest rate for a financial year and the year ends, interest rate is calculated for the month-wise closing balance and accordingly for the entire year.

EPF Interest Rate Calculation:

Image Source: Paisabazaar.com

The balance calculation for the next month, i.e., May needs to be done in the following manner:

• Balance carried forward from April 2021= Rs. 2,350
• Interest earned for the month of April 2021 = Rs. 15.86
• Balance at the end of May 2021 = Rs. 2,350 + Rs. 2,350 = Rs. 4,700

Public provident fund or PPF

PPF is a Govt. savings scheme. It is a voluntary contribution made by the employee and not mandatory. Employers do not make any contributions towards a PPF account. This amount is not mentioned in CTC or pay slips. In case an employee presents it as an investment for tax saving purpose, it will be shown on Form 16.

People open PPF account for two main reasons – one is for tax saving purpose and second for long-term investment. PPF provides 7.6% per annum (compounded annually) and more importantly, both the contribution and maturity amount is tax-free.

Do not confuse this with Employer’s PF contribution. Below is an info graphic to help you understand the prerequisites of a PPF account.

PC: Paisabazaar.com

The PPF is a highly popular savings scheme as it is a super safe investment. Indian Govt. guarantees investments in the fund asma result of which PPF offers 7.6% interest, compounded annually. This interest is set on a quarterly basis by the government. PPF scores over many other investment options mainly because your investment is tax exempt under section 80C of the Income Tax Act (ITA) and the returns from PPF are also not taxable.

Form 16

It is a certificate issued by the employer containing details about salary earned and the data needed to prepare and file your income tax return. It is issued every year before June 15, right after the financial year. Form 16 comprises of two components namely Part A and Part B. Components of Part A are Name and address of the employer, TAN & PAN of employer, PAN of the employee and a Tax Summary of deductions & deposits quarterly, duly certified. Part B of Form 16 is an annexure to Part A. It comprises of detailed breakup of salary, detailed breakup of exempted allowances under section 10 and deductions allowed under the income tax act (under chapter VIA).

Gratuity

Gratuity is the sum of money paid to an employee for services rendered in the company, provided they complete 5 or more years with the company. It is payable under Payment of Gratuity Act 1972. To get gratuity, you should meet the eligibility criteria i.e. you should be eligible for superannuation, you should have retired from one job, you should have resigned 5 years with the company, or in case of your death/disability/sickness/accident. 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.

ESIC

Employees who have a gross salary below Rs. 21,000 per month, are eligible for ESIC scheme through the employer. The employer’s contribution will be 4.75% of gross salary, whereas the employee’s contribution will be 1.75% of gross salary.

Perquisites

These are fringe benefits or non-cash benefits given to employees. This is given as a result of an employee’s official position. These are over and above a cash salary. For instance, provision of a car with driver for personal use, rent-free accommodation, paid holiday, etc. All perquisites have a monetary value that gets added to the salary and tax is paid on them by the employee.

Professional Tax

Any salaried person with an income or anyone practicing a profession like a Chartered Accountant, Company Secretary, Lawyer & Doctor must pay professional tax. The method of calculating professional tax varies from state to state. Maximum amount payable in a year is Rs. 2,500. An employer must deduct professional tax at prescribed rates, from the salary paid to employees, and only then pay it on the State Government’s behalf.

Did we miss the definition and meaning of some terms related to your salary structure? Leave us a comment so that we can address the same in our next article. 🙂

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