Basic Salary

Basic salary is the base income of an individual. Basic salary is the amount paid to employees before any reductions or increases due to overtime or bonus, allowances (internet usage for those who work from home or communication allowance).

What is Basic salary?

Basic salary is a fixed amount paid to employees by their employers in return for the work performed or performance of professional duties by the former. Base salary, therefore, does not include bonuses, benefits or any other compensation from employers. As the name suggests, basic salary is the core of the salary of an employee. It is a fixed part of the compensation structure of an employee and generally depends on her or her designation. If the appointment of an employee is made on a pay scale, the basic salary may increase every year. Else, it remains fixed.

Basic Salary in India
Basic Salary

According to experts, the basic salary differs according to the type of the industry. For instance, employees in the information technology industry prefer take-home salary (since the staff turnover is high) while employees in the manufacturing companies get more fringe benefits.

Money Makes the World Go Around :

If you believe in the adage, ‘money makes the world go around’, salary is the most important aspect of your job profile. It is an indicator of your position, growth and success in the company and will, in many cases, determine the course of your career. If you wish to change your organization, your prospective employees will place you in their company structure primarily on your remuneration. In government services in India, there is a pay grade depending on the designation of the employee. But what does a salary exactly constitute? You would do well to have a clear understanding of what the terms basic, gross and net salary mean.

What does ‘Salary’ Mean?

The word ‘salary’ originates from the Latin word 'salarium'. It was the quota of salt given to Roman soldiers in addition to their pay. When the officers found it cumbersome to transport and preserve the huge bulk of salt, they began offering a sum of money instead of the commodity. The money received was referred to as 'salarium' or salt-money which soon came to be known as ‘salary’ in modern English. Although the word ‘salary’ is, in many cases, used interchangeably with the word ‘wages’, in strict technical terms, they are not the same.

How to Calculate Basic Salary?

Given that it is the base income, basic salary is used to calculate other constituents of the salary. Several components of a salary package may be calculated based on the basic salary amount (on the basis of the grade of an employee within a company’s salary structure). It is important to note that the amount of money that an employee earns working overtime does not, in any manner, raise his or her basic pay amount. If an employee receives an incentive bonus in a year, it will not increase his or her basic salary. The basic pay, therefore, does not change, unless an employee negotiates with her or her employer.

Calculation of Basic Salary from Gross Salary

Gross salary = Basic salary + HRA (House rent allowance) + DA (dearness allowance) + MA (medical allowance). On an excel sheet, the formula is =SUM(D2:G2)

Below is a table showing different components of a salary including CTC break-up. CTC includes both monetary and non-monetary items. All allowances and cash reimbursements are part of the package in addition to long-term and retirement benefits such as provident fund and gratuity.

Items   Amount Exempt Taxable
Basic Salary   4,80,000.00   4,80,000.00
Monthly Allowances        
HRA 2,40,000.00     2,40,000.00
Dearness Allowance 40,000.00     40,000.00
Conveyance 36,000.00   9600 26,400.00
Entertainment 18,000.00     18,000.00
Overtime 11,000.00     11,000.00
Medical Reimbursement 15,000.00 3,60,000.00 15000 -
LTA   60,000.00   -
Social Security        
Medical Insurance 9,600.00     9,600.00
PF 12% of Basic 50,400.00 60,000.00 50,400 50,400.00
Gross Salary   9,60,000.00   8,75,400.00
Annual Bonus   2,40,000.00   2,40,000.00
CTC   12,00,000.00   11,15,400.00

Basic Salary Tax Liability

Basic salary is always taxable and should, therefore, not be more than 40% of the cost to company. However, it should also not be kept too low since it will then result in reduction in the other constituents of the salary. According to experts, employees at a junior level usually have a higher amount as basic salary compared to senior level employees. If an employee has a high basic salary, he or she will have to pay tax on it.

Difference Between Basic and Gross Salary

Basic salary is a rate of pay agreed upon by an employer and employee and does not include overtime or any extra compensation. Gross salary, however, is the amount paid before tax or other deductions and includes overtime pay and bonuses. For instance, if an employee has a gross salary of Rs. 40,000 and a basic salary is Rs.18,000, he or she will get Rs.18,000 as fixed salary in addition to other allowances such as House rent allowance, conveyance, communication, dearness allowance, city allowance or any other special allowance.

Net Salary

Net salary is the remainder after statutory deductions such as taxes are made from the gross salary. Net salary is the ‘take home’ salary of an employee.

Dearness Allowance

Dearness Allowance is cost of living adjustment allowance which the government pays to the employees of the public sector as well as pensioners of the same. DA component of the salary is applicable to both employees in India and Bangladesh.

Dearness Allowance can be basically understood as a component of salary which is some fixed percentage of the basic salary, aimed at hedging the impact of inflation. Since, DA is directly related to the cost of living, the DA component is different for different employees based on their location. This means DA is different for employees in the urban sector, semi-urban sector or the rural sector.

House Rent Allowance

HRA or House Rent Allowance is a salary component paid by employer to employees for meeting the accommodation expense of renting a place for residential purposes. HRA forms an integral component of a person's salary. HRA is applicable to both salaried as well as self-employed individuals.

HRA for salaried people is accounted for under section 10 (13A) of the Income Tax Act in accordance with rule 2A of Income Tax rules. Similarly, self-employed individuals are not considered for HRA exemption under this section but can claim tax benefits under section 80GG of the Income Tax Act.

How to Calculate HRA Exemption?

In the section below, the process of HRA exemption is described in detail. But before this, let us take a look at the factors that affect HRA calculation and tax exemption on it.

Factors that affect HRA Calculation :

  • Salary
  • HRA Received
  • Actual rent paid
  • City of residence (metro, non-metro or rural)

HRA Calculator

Let us take an example of Aakash who stays in Delhi and earns a salary of Rs.40,000 per month.

Aakash stays at a rented apartment for a rent of Rs.20,000 per month and is eligible for a HRA equal to 50% of the basic salary which amounts to 50% of Rs.40,000 = Rs.20,000.

Actual HRA he receives from his company is Rs.25,000

Excess of rent paid over 10% of total salary = Rs.20,000 - 10% of Rs.40,000 = Rs.20,000 – Rs.4,000 = Rs.16,000

Hence, net taxable HRA for Aakash = Rs.25,000 – Rs.16,000 = Rs.9,000

Here the value of net taxable HRA is Rs.9000 because of the following reason.

PF Contribution Limit

Employees’ Provident Fund is a retirement investment plan that every salaried individual opts for. Employee usually contributes 12% of their basic pay and employer contributes 13.61% towards the Employee Provident Fund.

If the employee wishes to contribute more than 12% of the basic pay, he or she can contribute more. Depending on the employee’s convenience, he or she can increase the contribution to 100%. But, it is not required by the employer to increase the contribution, it remains fixed.

From 1st September 2014, the EPFO has revised the basic wage limit on which PF contribution will be done from Rs.6500 to Rs.15000. Employers have to revise the PF deductions from September 2014 onward for all employees whose basic salary is less than or equal to Rs.15000.

Cost To Company - CTC

Cost to Company or CTC as it is commonly called, is the cost a company incurs when hiring an employee. CTC involves a number of other elements and is cumulative of House Rent Allowance (HRA), Provident Fund (PF), and Medical Insurance among other allowances which are added to the basic salary.

These allowances may often include free meals or meal coupons, such as Sodexo and the like, office space rent, cab service to-and-fro office, and subsidized loans et al. Basically, all these elements when combined together, form the entire Cost To Company.

To put it in simpler terms, CTC is basically a company’s spending on hiring and sustaining the services of an employee.

CTC is considered a variable pay as it varies based on various factors and thus when the CTC varies, the take home salary or net salary of the employee varies. This can be corrected by an individual by simply matching the CTC to the actual amount they are receiving.

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