Although salaries are part and parcel of any business, often employers aren\u2019t aware of the technicalities involved. While it may not seem important to some, structuring salaries correctly, reduces your liability as an employer as well as an employee.\r\n\r\nFor instance, allotting a large portion of the salary to the \u201cBasic\u201d component means your liability towards provident fund or ESIC contributions are also going to be higher. \u00a0For startups, getting this right in the early stages could save you the trouble later.\r\nObjectives of the perfect salary structure\r\nWhile creating the ideal salary structures, there are three things you should keep in mind\r\n\r\n \tIt should be tax efficient: This means that it should give employees the opportunity to save as much tax as possible.\u00a0 Salary amounts should be divided into components giving the employee the opportunity to avail as much tax deduction as possible.\r\n \tReduce the employer\u2019s liability: The salary structure should reduce the liability of the employer.\u00a0 The employer\u2019s contribution to PF, Gratuity etc. should be kept as low as possible.\r\n \tIt should be compliant: Compliance norms like minimum wages and PF laws should be kept in mind while drafting the salary structure.\r\n\r\nA deeper look into each component\r\nLet\u2019s take a deeper look into the various components that make a salary. \u00a0What do they mean and how are they calculated?\r\nBasic Salary + Dearness allowance\r\nThe Basic component is the primary component and the core of the salary structure.\u00a0 It is usually the largest component of the CTC making up for 40-45% of the total CTC.\u00a0\u00a0 The basic plays an important role in defining the salary as other components like Provident Fund, Gratuity and ESIC are dependent on it.\r\n\r\nDearness Allowance (DA) was introduced as part of the salary as a means to reduce the burden of inflation on salaried employees. \u00a0This amount is usually set to about 5% of the total CTC and like the Basic component it also has an effect on PF, ESIC etc.\r\n\r\nYou should keep the following in mind while setting the amounts for Basic and DA:\r\n\r\n \tIf it\u2019s too high, it will increase the tax liability of the employee since this component is fully taxable. It also affects the liability of the employer since higher contributions would be required for PF, ESIC etc.\r\n \tIf it\u2019s too low, then you may not be able to meet the minimum wage norms set by the respective state government. Since minimum wages are updated regularly, you would run the risk of falling below the recommended wage limit.\r\n\r\nHouse Rent Allowance (HRA)\r\nThe House Rent Allowance, as the name suggests is a component that employees can leverage if they are living in rented accommodations. \u00a0The amount that you can claim as tax deduction under HRA cannot be more than 50% of your basic in a metro or 40% of your basic in a non-metro.\u00a0 Hence, depending on where your workplace is located, this salary component will usually be set at 40% or 50% of the basic salary.\r\nLeave travel allowance (LTA)\r\nLeave travel allowance (LTA) remunerates employees for their travel within the country.\u00a0 This component is widely used by employers due to the tax benefits associated with it.\u00a0 An employee can claim tax benefits for the fare expenses paid for his\/her family when they take a holiday.\u00a0 However, there are restrictions to what you can claim as tax benefits:\r\n\r\n \tOnly fare expenses are covered: Only the travel fare expenses can be claimed. Stay and food on your trip aren\u2019t covered.\r\n \tTravel must be within India: If you travel to a foreign country, the expenses aren\u2019t tax deductible.\u00a0 Only travel within the country is covered.\r\n \tWhat counts as family: Immediate family that are mainly dependant on the employee are covered under LTA.\r\n\r\n\u00a0Conveyance Allowance\r\nThe conveyance component of the salary structure is paid to employees for their travel expenses between their homes and workplaces.\u00a0 The maximum amount that is tax deductible under this component is Rs. 1,600 a year or Rs. 19,200 a year.\u00a0 Hence, this is also the recommended limit that most organisations would use for conveyance allowance.\r\n\r\nIt\u2019s also important to note that this component is only tax deductible if an organisation does not have its own means of transport for employees. If the organisation has made arrangements to ferry employees to and from work, then conveyance allowance cannot be claimed for tax benefits.\r\nMedical Allowance\r\nMedical allowance is paid as a reimbursement for medical expenses borne by employees.\u00a0 This amount is tax deductible up to Rs. 15,000 a year or Rs. 1,250 every month.\u00a0 In order to claim tax benefits under this component, employees need to submit proof of their medical expenses.\r\n\r\nIn case the Rs. 1,250 isn\u2019t claimed in one month, then this amount is carried forward to the next month. This means that a cumulative amount of Rs. 15,000 can be claimed at the end of the year. \u00a0This is also the recommended amount that organisations usually allot to this component of the salary structure.\r\nChild Education Allowance\r\nThis component is paid out towards tuition fees of employees\u2019 children and is tax deductible up to Rs. 100 every month for a maximum of two children.\u00a0\u00a0 Hence, this amount is usually set to not more than Rs. 2,400 a year for an employee.\r\nSpecial Allowance\r\nSpecial allowance is the balancing component of the salary structure. \u00a0It is usually used by organisation as the leftover of the CTC when the rest of the components have been paid out.\u00a0 This component is fully taxable and is also taken into account for the calculation of Provident Fund.\r\nDeductions\r\nDeductions are elements of the salary that are part of the CTC but are deducted from the in-hand salary that employees receive. Let\u2019s take a deeper look at some of the most common salary deductions and what they mean.\r\nProvident Fund\r\nProvident Fund (PF) is calculated at 12% of Basic + DA + Special Allowance.\u00a0 The employer and the employee both make an equal contribution of 12% each.\u00a0 This is applicable to companies who have 20 or more employees on their payroll.\u00a0\u00a0 If an employee\u2019s Basic + DA + Special Allowance are less than Rs. 15,000 then it is mandatory for Provident Fund to be deducted.\u00a0 Other employees can opt out by filling form 11 or can choose to have PF deducted on the ceiling of Rs. 15,000 which would be Rs. 1,800 monthly.\r\n\r\nYou can find all the information you need about Provident Fund in our in-depth article.\r\nEmployees State Insurance Corporation (ESIC)\r\nDeductions towards ESIC are mandatory for employees whose gross salary is not more than Rs. 15,000.\u00a0 It is only applicable in companies where there are 20 or more employees within the Rs. 15,000 gross salary bracket.\u00a0 Employees have to make a contribution of 1.75% of the gross salary and employers have to make a contribution of 4.75% of the gross salary.\r\nProfessional Tax\r\nProfessional tax is the tax levied by Governments of certain states on salaried employees. The states where professional tax is applicable are Karnataka, Bihar, West Bengal,\u00a0Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Gujarat,\u00a0Assam, Chhattisgarh, Kerala, Meghalaya, Odisha,\u00a0Tripura, Madhya Pradesh, and\u00a0Sikkim.\r\n\r\nThe amount of profession Tax that is deducted varies from state to state where they are applicable.\r\nLabour Welfare Fund\r\nLabour Welfare Fund, as the name suggests, is a contribution made by salaried employees for the benefit of the labour class. \u00a0This contribution is applicable in the states of Karnataka, West Bengal, Maharashtra, Andhra Pradesh, Kerala, Goa, Delhi, Punjab, and Haryana & Madhya Pradesh.\r\n\r\nThe contribution amount varies from state to state and is relatively small. The employer and the employee both make contributions and the employer pays approximately twice the employee contribution. The payments are made semi-annually in the months of June and December.\r\n\r\nLike Professional Tax, Labour Welfare Fund contributions also vary from state to state where they are applicable.\r\nWhat\u2019s the ideal salary structure?\r\nSo what\u2019s the best way to draft salary structures?\u00a0 To answer this, we\u2019ve put together a table of the common components that make up a salary.\u00a0 We\u2019ve also added recommended amounts to each component that should assist you in drafting an ideal salary structure.\r\n\r\n\r\n\r\n*Note 1: The PF Employer Contribution also bears additional administrative charges\r\n\r\nNote 2: Feel free to use components like Child Hostel and Child Education; since they are small, we have ignored in our structure.