How to design a salary structure according to compensation rules?

COMPENSATION RULES AND DESIGN GUIDELINES 

Following are the components of Monthly salary according to different compensation rules:

Basic Pay: This is the most important part of salary structure. As per Bombay Chamber of Commerce guidelines Minimum Basic figure for skilled, semi skilled and unskilled employees should be minimum of Rs.2650, 2950 and 3250/-. However to be on safer side, companies should not keep Basic figure less than Rs.3500/- p.m. There is no maximum limit of basic pay

Income Tax Benefit is NIL on Basic Pay.

Dearness Allowance: The Dearness Allowance (DA) is a cost of living adjustment allowance paid to Government employees, Public sector employees (PSU) and pensioners. Dearness Allowance is calculated as a percentage of an Indian citizen's basic salary to mitigate the impact of inflation on people. Indian citizens may receive a basic salary or pension that is then supplemented by a housing or a dearness allowance, or both. The guidelines that govern the DA vary according to where one lives (for example, whether rural or urban). For central government employees and pensioners, DA is 100% of basic pay.

House Rent Allowance (HRA) : This is an another most important component of a salary structure. Maximum limit for the HRA is 50% of basic pay in Metro cities or in case of non metro cities it should be 40%  of basic pay.

There is a provision of Income Tax Benefit according to the HRA. Excess of Actual rent paid over 10% of Basic salary OR Maximum HRA allowed  (50% or 60% of basic) OR Actual Rent Paid, whichever is lower is Exempt from Income Tax. 

For example. 

If the Basic Pay is Rs.20000/-  and the HRA is Rs.10000/-  and a Person is paying the Actual house Rent of Rs.8000/-  then the Excess of actual rent paid over 10% of  Basic which is Rs.6000 

Hence max exemption allowed is lowest i.e. Rs.6000/- Therefore the subject to Rent Receipts of Rs.6000/- only .

Transport Allowance : Transport Allowance is Supposed to be conveyance allowance meant for transportation between office and residence only. 

There is a provision of Income Tax Benefit on Transport Allowance which is Exempt maximum up to Rs.800/- per month and their is No proof required. Maximum Limit of TA is Rs.800/-

Children’s education allowance: Companies can provide Maximum of Rs 200/- per Month for the children's education.

Income Tax Benefit: 

Rs.100 per child subject to max 2 children. Hence maximum Rs.200/- is exempt 

Special Allowance Balancing figure – after choosing all the above components with respect to their maximum limits absorbed, remaining amount can be named as Special Allowance. It is fully taxable. 

Medical Reimbursements: It Can be given against bills or without bills does not matter. Some companies give it monthly, some quarterly, half yearly or yearly also. Some companies give it only against medical bills, some do not ask for bills, rather bills are only demanded for Final Tax Computation at the end of the year. No thumb rule about it. Preferred to pay monthly, without bills and ask bills as per your wish, quarterly, half yearly or at the end of the year. Do not choose to give it against bills only, there is no rule for the same…It only makes salary processing a cumbersome process. 

Income Tax Benefit: Maximum Rs.1250/- p.m. (Rs.15000 p.a.) is exempt only if Original Bills are provided. 

Food Coupons: Food coupons are the Non cash component, exempt up to Rs.1000/- p.m. 

Provident Fund: Employer’s contribution (this is given to RPFC directly. However employee’s contribution is deducted from his Monthly salary above and sent to RPFC. Hence total deduction works out to be 12+12 = 24% of Basic. 

Income Tax Benefit: Employee’s contribution of 12% is eligible for Deduction from Taxable income. It can be treated as exempt investment. 

Gratuity: It is an annual component but since it is retrial benefit, it is included here. 15 days monthly basic per year. 

Employees' State Insurance Scheme of India:   Employees’ State Insurance Scheme of India, is a multidimensional social security system tailored to provide socio-economic protection to worker population and their dependents covered under the scheme. Besides full medical care for self and dependents, that is admissible from day one of insurable employment, the insured persons are also entitled to a variety of cash benefits in times of physical distress due to sickness, temporary or permanent disablement etc. resulting in loss of earning capacity, the confinement in respect of insured women, dependents of insured persons who die in industrial accidents or because of employment injury or occupational hazard are entitled to a monthly pension called the dependents benefit. ESIC is deducted by the salaries of those employees whose gross salary is not more than 15,000.00/month. Both Employee & Employer has to contribute in ESIC. Employee Contribution is 1.75 % and Employer Contribution is 4.75% of gross salary.

For Senior Management Employees only PERQUISITES GUIDELINES AMOUNT (Per Year) For senior management employees following components can be added to their salary structure:

Rent Free Accommodation: Owned or Managed by the Employer - (Includes Flat, Hotel, Farmhouse, Guest House, Caravan, etc.) 

Income Tax effect: Taxable perquisite – Value of rent free accommodation considered taxable for the period of house occupied is either of the following: 

For Private Sector Employees 10% of Salary (for metro cities) or (7.5% for non metro cities) + Excess of Fair Rent Value (market rent) over 60% of salary (i.e. Market Rent – 60% of salary) = Total taxable value of rent-free accommodation. 

For PSU and Semi-Govt. employees 10% of Salary (for metro cities) or (7.5% for non metro cities) OR Fair Rent Value whichever is lower is Taxable. The term ‘Salary’ will include total of the following: Basic, All Allowances & Reimbursements (excluding Med. Reimb.), Bonus received, any commission, fees etc. Fair Rent will be considered as the Market Rent or Municipal Valuation of Rent, whichever is Higher. 

Car: (For personal) Owned by the Employer 

Income Tax effect: Taxable Value will include the following – Actual Running & Maintenance expenditure incurred by the employer + Driver’s Salary + Depreciation – any amount charged by employer to employee for personal use of the car. 

Employee Stock Option Plan: Employee exercises his option by buying out the shares during the exercise period however tax liability occurs only when an employee sells the shares on the value of 

sale made under the Capital Gains head of income. 

OTHER BENEFITS OUT OF CTC STRUCTURE BUT STILL FORM PART OF 

COMPENSATION 

Insurance Schemes – employees can be covered under following two schemes. The policy covers may be kept between the range of Rs.100000 to Rs.500000/- depending upon the hierarchies or grade system in your company. 

• Personal Accident Insurance Scheme (for employee only) 

• Medical Insurance Scheme (For employee & dependents which can be spouse, first two children, parents or in-laws (either of them) etc. Some companies do  not cover parents/in laws, some insurance companies do. 

• Maternity Benefits – Some companies have their own maternity benefit schemes for their female employees and some companies don’t have, rather the depend on Maternity Benefit Act provisions. . Having companies own scheme helps a lot because under the Act govt. procedures to claim benefits are always tedious one. 

VARIABLE PAY / PERFORMANCE PAY / Incentives etc : This is not a salary. The objective of this is purely different than salary i.e. you perform; we pay you accordingly. Whereas objective of Salary is to ‘Regularly’ compensate an employee with a ‘Regular’ figure against the services extended by him towards the organization. Hence there is no Performance consideration in Salary or CTC, so there is no logic to include this in CTC structure. VP is purely performance driven and is not regular or fixed amount. Hence it should always be kept out of main Salary Structure. Although most of the companies prefer to include this figure in CTC however it gives vague and unrealistic impression of Salary. Because individual’s expectations from Salary as terminology differs than Incentives/ Variables etc 

Rather an independent and attractive Variable Pay or Incentive Structure can be designed and should be a part of Rewards & Awards Strategy of the organization. 

PERFORMANCE LINKED INCENTIVE PLAN 

The Performance Linked Incentive Plan will be based on employee’s Performance Ratings during our Annual Performance Appraisal Plan in the month of March / April each year. Each employee would be eligible for a performance based incentive plan based on following guidelines. 

(Incorporate any one of the following) 

Maximum Potential Incentives under PLIP will be 30% of Total Monthly Salary. OR up to Rs.75000/- p.a.