Salary Structuring

About Salary Structuring

Salary structure refers to the division of the entire pay received by an employee into various parts like basic pay, HRA, Allowances etc. Proper salary structure facilitates better payroll management for any business organization, while the employees will also be able to know more about their salary breakdown and other deductions.

CA Surya Prakash Associates offers Salary Structuring services that can help any business organization come up with a salary structure in accordance with their payroll needs, employee benefits, taxes etc. This guide will provide you with all the details regarding the various elements of salary structure in India.

What Is Salary Structuring?

The salary structure involves splitting the compensation of an individual into several components including the basic salary, House Rent Allowance (HRA), allowances, bonuses, employer contributions and other benefits that may apply. Salary structure helps to define the allocation of an employee's CTC and tax treatment of the salary components.

If well designed, the salary structure has many advantages in terms of salary transparency, efficient payroll management, and making employees familiar with their gross salary and net salary among other things. However, the salary structure is always developed in accordance with company policy and taxation rules.

Why Salary Structuring is Important for Businesses and Employees

A good salary structure is advantageous to both the employers and the employees. To employees, it ensures that there is a clear understanding of how the CTC is allocated to various salary components, bonuses, and allowances. In addition, it will enable employees to be able to understand how the various components of their salaries are taxed under the relevant tax system. To business organizations, it makes it easier for them to process salaries for their employees.

Key Components of a Salary Structure

A salary structure comprises various components that combine to make up the overall remuneration of an employee. These components and the ratio in which they occur may differ based on the policies of the employer, type of employee, etc.

Common salary components include:

• Basic Salary: A fixed component of an employee's salary that may be considered for certain statutory contributions and benefits.
• House Rent Allowance (HRA): An allowance provided by employers to eligible employees towards house rent, subject to applicable conditions and tax provisions.
• Special Allowance: A salary component used to structure the remaining portion of compensation according to the employer's salary policy.
• Employer Contributions: Contributions such as employer PF and applicable retirement or statutory benefits may form part of CTC.
• Reimbursements and Benefits: Certain eligible reimbursements and employee benefits may be included depending on company policy and applicable tax rules.
• Bonus and Incentives: Variable components may be provided based on performance, role, company policy or employment terms.

Difference Between CTC, Gross Salary and In-Hand Salary 

CTC, gross salary and in hand salary are three different concepts pertaining to the payment of salaries to an employee. Knowing the difference between them will help employees get clarity about how their annual package is calculated into monthly salary.

The actual in-hand salary varies according to several aspects, such as employee contribution, taxes and others.

How Salary Structuring Works in India

A salary structure is built up from knowing the complete CTC of the employee and then dividing it amongst various elements of compensation. The salary structure takes into account the nature of the job, company policies, the benefits, and tax aspects as well.

The process generally involves:

1. Determine the total CTC: Establish the annual compensation offered to the employee.
2. Decide salary components: Allocate the CTC among basic salary, HRA, allowances and other applicable components.
3. Consider employer contributions: Include applicable employer contributions and benefits in the overall CTC.
4. Review tax treatment: Check the applicable tax treatment of different salary components.
5. Calculate gross and in-hand salary: Determine expected deductions and the amount payable to the employee.
6. Review compliance: Ensure that the structure is aligned with applicable payroll, tax and labour requirements.

Salary structure needs to be reviewed when there are major changes in compensation, tax benefits, or compliance matters.

Benefits of Effective Salary Structuring 

Getting this right brings real, practical value to an employee's monthly take-home pay, often without costing the company a single extra rupee more than the original CTC. A properly built Tax Efficient Salary Structure can truly save thousands of rupees in tax every year for employees who choose the old regime and use their eligible components well.

Key benefits include:

• Better understanding of salary components and CTC
• Clearer salary breakup for employees
• More organized payroll processing
• Better compensation planning for businesses
• Proper consideration of applicable employee benefits
• Easier management of salary revisions and promotions
• Better understanding of applicable tax treatment
• Improved payroll and statutory compliance
• Greater transparency between employers and employees

Factors to Consider While Designing a Salary Structure

Some elements need to be taken into consideration during the design and review of salary structure for employees. A certain structure that might work for one business or employee might not be right for others.

Important factors include:

• Total CTC and salary budget
• Employee's job role and level
• Company compensation policy
• Basic salary and applicable allowances
• Employee benefits and reimbursements
• Applicable employer contributions
• Tax treatment of salary components
• Applicable payroll and labour requirements
• Employee location, where relevant
• Fixed and variable compensation
• Salary revisions, promotions and incentives
• Changes in applicable tax or compliance provisions

The salary structure of businesses needs to be reviewed at intervals to ensure relevance.

Salary Structuring for Startups, MSMEs and Large Companies

Various organizations may require various approaches to salary structuring based on organizational size, number of employees, pay policy, and payroll considerations.

Professional salary structuring can assist organizations in achieving consistency but with sufficient flexibility for various employee positions and compensation packages.

Common Mistakes to Avoid in Salary Structuring

A few repeated errors show up again and again in poorly built salary structures. Keeping basic pay too low reduces PF and gratuity benefits over time. Forgetting to update structures when tax rules change is another common slip.

Common mistakes include:

• Keeping basic salary artificially low without considering its impact on applicable contributions and benefits
• Failing to review salary structures after changes in tax or payroll rules
• Ignoring the applicable tax regime while reviewing salary components
• Using the same salary structure for every employee without considering role and compensation level
• Not updating salary structures after promotions, increments or changes in employee responsibilities
• Providing unclear salary breakups to employees
• Failing to review payroll deductions and statutory contributions regularly

Salary Structuring and Payroll Compliance

Getting the structure right is only half the job; running it correctly every month matters just as much. Best Payroll Management Services ensure PF, ESI, professional tax and TDS are all calculated correctly based on the agreed structure without errors as employees join, leave or get promoted.

Sample Salary Structure with Example

Let us assume the salary of an individual to be ₹10,00,000 per year.

CTC may have many different components such as basic pay, HRA, company contribution, gratuity, and various others.

For example:

This is just an indicative payroll package. There can be many variations in terms of CTC depending upon the policy of the organization, perks of the employee, and so forth.

One cannot simply deduce the salary of an individual from CTC. Several other considerations are required as well.

How Professional Salary Structuring Services Can Help

There are Professional Salary Structuring services which will help the organizations develop a practical and realistic structure according to their workforce and payroll needs. Rather than following the same template for all employees, one can look into the right components in accordance with the employee's position, CTC, etc.

Professional support can help with:

• CTC and salary breakup planning
• Review of basic salary and allowances
• Employee compensation planning
• Tax treatment of applicable salary components
• Employer contribution planning
• Payroll compliance review
• Salary structure revision
• Support during employee promotions and increments
• Regular review of salary structures when applicable rules change

It will help HR and the finance department in handling the salary structure of the employees.

Why Choose CA Surya Prakash Associates for Salary Structuring?

Picking the right partner for this work matters, since a poorly built structure can quietly cost employees money every single month. Our team brings genuine, hands-on Salary Planning experience across many different industries and company sizes.

CA Surya Prakash Associates provides Salary Structuring support with a focus on:

• Customized salary structures based on business requirements
• Clear CTC and salary breakup planning
• Review of applicable salary components
• Tax and payroll-focused guidance
• Support for startups, MSMEs and established businesses
• Assistance with salary revisions and compensation planning
• Payroll and statutory compliance considerations
• Regular review when applicable tax or compliance requirements change

Our approach will concentrate on the development of the salary structure that would be easy to use for both parties.

Get Expert Salary Structuring Services from CA Surya Prakash Associates

Having a well-defined salary structure will make it easy for companies to deal with issues such as employee salaries, payroll, and all other compliance-related matters. It also ensures that employees know their CTC and salary structure.

At CA Surya Prakash Associates, we offer our Salary Structuring services customized as per your business and employee requirements. We will assist you in planning a good salary structure irrespective of whether you are making payroll structure for a new business or reviewing your existing CTC and salary structure. Get in touch with us for your salary structuring requirements at +91-9506666255.