Example of Total Reward Management

Salary
The salary consists of following parts.
Basic Salary: As the name suggests, this forms the very basis of salary. This is the core of salary,
and many other components may be calculated based on this amount. It usually depends on ones
grade within the companys salary structure. It is a fixed part of ones compensation structure.
Allowance: It is the amount received by an individual paid by his/her employer in addition to
salary to meet some service requirements such as Dearness Allowance(DA), House Rent
Allowance (HRA), Leave Travel Assistance(LTA) , Lunch Allowance, Conveyance Allowance ,
Childrens Education Allowance, City compensatory Allowance etc. Allowance can be fully
taxable, partly or nontaxable.
Perquisite: Is any benefit or amenity granted or provided free of cost or at concessional rate
such as Rent free unfurnished house, Rent free furnished house, Motor car facility,
Reimbursement of Gas, Electricity & Water, Club facility, Domestic Servant Facility, Interest
Subsidy on Loan, Reimbursement of medical bills, Reimbursement of Hospital bills,
Reimbursement of telephone bills, Benefits derived by employee stock option, and so on.
How are perquisites taxed?
Since these are non-cash components, they cannot be taxed directly. So the income tax laws
attach a certain value to each of these components and charges a tax on them. The calculation of
this value varies from category to category. Nevertheless, the thumb rule across all categories is
that only those benefits that you use for personal purpose will be considered as perquisites.
Deductions: Two type of deduction are made from salary

Compulsory deduction such as Provident Fund, Income tax, Professional Tax (where

applicable) .
Optional deduction such as recovery for advance or loan if taken, voluntary

contribution to P.F etc

Provident Fund Contribution
Provident fund contribution has two sides the employers contribution and employees
contribution. This is usually 12 per cent of the basic salary. However, this contribution is not
paid out . It is directly deposited in Provident Fund (PF) account and paid to employee when he
retires or resigns.There is also employees contribution to PF. This amount is deducted from his
monthly salary and deposited in his PF account. For details on provident fund you can
read Provident Fund (PF) and Voluntary Provident Fund (VPF)

Different types of salary

Gross Salary: is the amount of salary paid after adding all benefits and allowances and before
deducting

any

tax.

Net Salary: is what is left of your salary after deductions have been made.
Take Home Salary: Is usually the Net Salary unless there are some personal deductions like
loan

or

bond

re-payments.

Cost to Company: Companies use the term Cost to Company to calculate the total cost to to
employ . i.e. all the costs associated with an employment contract. Major part of CTC comprises
of compulsory deductibles. These include deductions for provident fund, medical insurance etc.
They form a part of your compensation structure but you not get them as a part of in-hand salary.
As such, although it increases your CTC, it does not increment your net salary.
Example

Lets see an example explaining the salary. An arbitrary salary break up is given below (Note:
salary structure varies from one company to another):
Component of Salary(per annum or p.a)

Amount

Basic Salary

480,000

Dearness Allowance

48,000

House Rent Allowance

96,000

Conveyance Allowance

12,000

Entertainment Allowance

12,000

Overtime Allowance

12,000

Medical Reimbursements

15,000

Gross Salary
6,75,000
Benefits vary from company to company. Example of benefits for the above employee is:
Medical insurance

2000

Provident Fund (12% of Basic)

57,600 (12% of 4,80,000)

Laptop

50,000

Total Benefits

109600

Cost to Company=Gross Salary + Benefits

6,75,000 + 109600=7,84,600
Benefits would also vary from company to company. In some Laptop may not be provided. In
some cost of cubicle would be added. For example: If rent of office space is Rs 200 per sq ft and
then a cubicle of 6 feet by 8 feet (i.e48 square feet) would cost Rs. 9,600 per month, or Rs.
1,15,200 per year. Which can be added to your CTC. Please note CTC varies from company to
company. How tax affect the various components of salary
Component

of

Salary(per annum or

Taxable

p.a)

Amount

Tax

Amount

Basic Salary

480,000

Full amount is taxable

480,000

Depends on company policy. Mostly fully

Dearness Allowance

48,000

taxable.

48,000

Applicable if living in a rented house. Minimum

House
Allowance

Rent

of three amounts (Note:Calculation shown

96,000

below)

52,800

Conveyance allowance of Rs 9,600 per annum is

exempted from tax. If salary component is more
Conveyance

than 9,600, the remaining part is taxable.In this

Allowance

12,000

Entertainment

case:12,000-9600=2400

2,400

Depends on company policy. Mostly fully

Allowance

12,000

taxable.

12,000

Overtime Allowance

12,000

Fully taxable

12,000

Medical

If substantiated with bills, are exempt to a limit

Reimbursements

15,000

Gross Salary
HRA

6,75,000 Gross Taxable Salary

The

of

a.

minimum
Actual

HRA

of Rs 15,000 annually

the

allowance

three
in

amounts
the

0
6,07,200
Calculation
will

salary

be

package,

exempt
that

is

from
Rs

tax:
96,000

OR
b. HRA received less 10 per cent of salary and DA, that is 43,200 (96,000 10% of 528,000)
OR
c. If you live in metropolitan (Delhi, Chennai, Bombay and Calcutta), 50 per cent of salary and
DA However, if you live in any other city, it is 40 per cent of salary + DA. So, in this case it
would

be

Rs

2,11,200

(40%

of

528,000)

So HRA will be minimum of ( 96,000; 43,200; 2,11,200) which is 43,200 which will be
exempted.
So the portion that will be taxed in this example is = 96,000 43,200 = 52,800
Tax
As Gross Taxable Salary 6,07,200 falls in the highest tax bracket. This tax amount includes
education cess too. Assumption: Employee does not make any tax saving investment. Tax based
on Assement Year 2011-2012 : 57,103. For tax estimator Tax Calculator from AY 2010-11 is is
very helpful.
Tax

57,103

Employee PF contribution(12% of Basic)

57,600

Professional Tax

2400

Total Deductions

1,17,103

Net Salary = Gross Taxable Salary Tax

=6,07,200- 1,17,103=4,90,097

Net Monthly Salary

Can Take Home salary be increased?

=490097/12=40,841.41

Yes it is possible and that too legally. An employee can plan taxes and increase the take home. If
employee invests Rs 1, lakh in tax saving instruments, Section 80C such as PPF, Equity Linked
Saving Scheme(ELSS) etc he can save taxes. So now employee in above example will be taxed
on 6,07,200- 1,00,00 = 5,07,200.
Amount to be taxed

5,07,200

Tax

33,413

Employee PF contribution(12% of Basic)

57,600

Professional Tax

2400

Total Deductions

93,413

Net Salary = Gross Taxable Salary Tax

=6,07,200- 93,413=5,13,787

Net Monthly Salary

=513787/12=42,815.58
Tax saving instruments under section 80C, 80G, House loan etc are beautifully depicted in
thisinfographic. Optimum Salary Structure Maximum In Hand Salary Or Minimum Tax
Liability explains how restructuring the salary would increase the take home
PaySlip
A paycheck is a document/record issued by an employer to an employee which shows how much
money an employee have earned and how much tax or insurance etc. has been deducted. .It will
typically detail the gross income and all taxes and any other deductions such as retirement plan
or pension contributions, insurances, garnishments, or charitable contributions taken out of the
gross amount to arrive at the final net amount of the pay. One can read format of payslip or see
a sample here.
Form 16
If you are salaried employee in an organization, then you get the salary after deducting tax by the
employer. This process is called as Tax Deduction at Source (TDS). Company must issue a
Form 16 which contains the details about the salary earned by that employee and how much tax
deducted. The Tax deducted is paid to government by the company. Form 16 is the proof of

employees income and tax paid to the govt. It is issued under section 203 of Income Tax Act
for Tax. Tax payer has to use the Form 16 to file the Income Tax return every financial year.
One can read Understand Your Form 16
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the content, the web site or the author shall not be held responsible for any loss caused to any
person whatsoever who accesses or uses or is supplied with the content (consisting of articles
and information).Do you know the biggest employers in the world. Wal-Mart , a chain of
department stores across the globe, employs 2.1 million employees worldwide. The Indian
State Railways which has 1.42 million employees, is largest employer in India.Ref: Salary
Income Tax Heads of Income: Salary Understanding CTC and Your Salary Breakup, Tax
implications of salary components, All you wanted to know about CTC
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