Understand Your Salary Structure

We hear of people getting Rs.10,00,000 as Cost to Company (CTC). Some people get

Rs.15,00,000 as gross salary. Others talk about net salary. There are so many terms and many of us are overwhelmed by these terms to completely understand the salary structure. Here is our attempt to simplify the remuneration structure -

The total cost to company of an employee can consist of the following components -

Component	Definition	Taxable
Basic Salary	It is the base income of the total remuneration. It is around 40% of the  total remuneration.	Fully Taxable
Dearness Allowance	The component that takes care of the cost of living depending on the city where one works. It is usually paid in the Government sector	Fully Taxable
House Rent Allowance	Amount paid to an employee to take care of his housing needs.	The least of the following can be claimed as deduction - - Actual HRA - Actual rent paid – 10% of Basic salary + Dearness Allowance - 50% of Basic + DA for the 4 Metro cities and for all other places 40% of Basic + DA
Leave Travel Allowance	Allowance given to an employee for a trip with parents, siblings, spouse and children within India. It can be availed twice in a block (specified) of 4 years.	Tax-free
Perquisites	Some companies give perquisites such as interest free loans, subsidised education, food coupons or car.	Monetary value is fully Taxable in most cases. In some cases, it is exempt up to a certain amount.
Bonus	Amount given based on performance of the employee and company	Fully Taxable
Employee Provident Fund	12% of basic salary is deducted as a monthly contribution to Employee Provident Fund. An equivalent amount is contributed by the employer to the fund. For new women employees, the contribution from salary is 8%.	NA
Superannuation Benefits	A retirement benefit fund in which the employer and employee contribute and it earns interest.	Additional amount contributed by employee is eligible for deduction under Section 80C. Interest earned is tax free. The 1/3rd amount withdrawn at the time of retirement is tax free but amount withdrawn before that is taxable unless it is due to death/injury.
Gratuity	Amount received by employee for 5 years or more of continuous service unless the employment terminates due to death or disablement.	Depends on where the employee is working and the amount of gratuity.
Medical/ Health Insurance Premium	Employers pay premium for insurance cover of health for employees and immediate family.	Tax-free if employer pays directly. It can be claimed as deduction if employee pays from own pocket.

Why should you attempt to understand your salary structure?

• You know your total income and take-home salary.
• You can structure it in a manner that it is most tax-efficient.
• You can create an appropriate financial plan and investment portfolio based on your financial capacity.

Understand the salary structure and if possible engage with your HR department to get a tax efficient salary.